Dealing with thieves

America has the wrong approach for dealing with thieves. Rather than "looking backwards" at their misdeeds and "punishing" them, we merely need to ask that they not misbehave in the future, then monitor their behavior.
Believe it or not, this is how congressional leaders are addressing the thievery of three little-known gangs. Congress' compassionate approach is not meant for common robbers. No, no — lawmakers are happy to punish them to the hilt. Rather, the kid-glove treatment is reserved for thieves named Moody's, Standard & Poor's and Fitch's — the Big Three credit-rating agencies that exist to evaluate the worthiness of corporate-issued bonds, assigning a grade (from triple-A to "junk") that helps investors know the risk involved in buying the bonds.
But the Big Three run a rigged game that robs our pension funds and other investors. Moody's, S&P and Fitch are not independent public regulators, but for-profit firms that are paid fat fees by the very corporations whose bonds they rate.
Yes, this is an inherent conflict of interest! It allows rating firms to profit by merrily putting smiley-faced grades on lousy bonds, thus deceiving (and robbing) the public. For example, the Big Three gave thumbs-up to the subprime housing bonds that turned out to be worthless, leading to trillions of dollars in losses for the public and crashing our economy.
Yet, our soft-on-corporate-crime congress critters have declared these finaglers "too big to jail." Rather than taking the Big Three off the street, Congress is coddling them, meekly freeing them to continue their corrupt, for-hire, monopolistic system of credit-rating flim-flammery.

Thieving Bastards

The Glass Bottle

The Commercial Court has ruled that developer Bernard McNamara must pay almost €63 million to a group of investors, who along with the Clare businessman, part funded the purchase of the Irish Glass Bottle Factory site at Ringsend in Dublin.
The court also granted the investors summary judgement of €98m against Donatex Limited, a company owned by Mr McNamara, in relation to the same deal.
However, a stay has been put on the decisions until January so that an affidavit can be prepared in relation to what was described as Mr McNamara's deteriorating financial circumstances.
The claim arose in relation to a 2007 guarantee given by Mr McNamara over a loan advanced by the investors, through their Jersey registered company, Ringsend Property Ltd, to help the financing of the purchase of the site.
It was bought that year for a record €412m. The site is now estimated to be worth in the region of €60m.
In an affidavit, Mr McNamara alleged that the investors behind Ringsend Property Ltd include well-known businessmen Lochlann Quinn, Martin Naughton, Kieran McLaughlin and Barry O'Callaghan.
The investment opportunity was described at the time as a transaction offering 'the opportunity of participating with one of the most prolific and successful developers in the country in the development of the largest and most high profile property to become available in Dublin 4 for decades.'
Ringsend Property Ltd is seeking the repayment of its loan, because it claims a key clause of the loan agreement had been breached.

RTE

Shadow Land

Shadowland examines the future for Ireland’s built environment in the shadow of NAMA.
The Shadowland exhibition takes place in the City Wall Space in the new Wood Quay Venue, Dublin City Council Civic Offices, from Monday 14 to Friday 18 December 2009.
A response to the current economic crisis, Shadowland highlights the lack of ideas and imagination in planning and construction over the last twenty years, which has left a legacy of half-finished projects, ghost housing estates and land zoned for development in inappropriate locations.

Shadow Land

Into The Bog

In a week when Greece and Spain both saw their credit ratings under attack (see article), the budget at least gave the government an opportunity to reassure international investors that Ireland, unlike some other EU countries, is serious about controlling its budget deficit and public-debt burden. Mr Lenihan has done this with the toughest budget in his country’s history. Public servants face pay cuts of 5-8% on salaries up to €125,000 ($190,000); higher earners (who will include the prime minister) will see their pay cut by 15% or more. Unemployment and welfare benefits have also been cut, though not pensions. Next year’s budget deficit, at around 11.6% of GDP, will be similar to this year’s.
The budget came against the background of a sharp contraction in economic activity, far greater than that experienced in other euro-area countries. GDP is projected to decline by 7.5% in 2009 and a further 1.3% in 2010. An unemployment rate of 12% this year is at least showing some signs of stabilising. But consumer confidence remains weak and households continue to save more and to spend less, thereby depressing tax revenues. Next year, almost half of all income earners will pay no tax. In an effort to widen the tax base, the government proposes to introduce a new property tax.
The budget will put the government into direct conflict with trade unions for the second time this year. The pension levy may have been accepted by the general public, but the unions still protested vociferously. In pre-budget talks, the government noted a hostile public reaction to the unions’ proposal for a temporary pay cut for public-sector workers and a promise of big public-sector reform. It chose a permanent pay cut instead.
These measures mark the end of two decades of social partnership, based on a consensus approach to pay bargaining between government, employers and unions. Whether this will usher in a long period of industrial conflict will become clearer in the coming weeks. Public-sector unions are already giving warning of a sustained campaign of strikes. But in these hard times they may not win much support from the Irish public.

The Economist

Ireland's economy goes bust

Dub Bye

Like many he bought a flat off-plan in what was a red-hot property market. Today he is trapped, his passport confiscated until he repays bank loans he used to invest in a property that may never exist. If his work dries up before he can clear his debts he will go to jail.

We met at a coffee shop in Dubai’s vast Mall of the Emirates. Around us were some of Britain’s most familiar high street names — Next, Debenhams, Virgin, Costa Coffee and Harvey Nichols. For now trade is still brisk. “I’m struggling to know what to do really,” he said.

Borrowing from family to supplement his savings, Ross, in his early thirties, moved with his family to Dubai from South London in late 2006, put down a £60,000 deposit and arranged a £30,000 loan to help to cover the initial instalments on a £350,000 two-bedroom apartment in the Dubai Sports City development.

“The plan was to let the place out to cover the loan and mortgage but it was scheduled for completion by the end of 2008 and they haven’t finished the ground floor yet,” he said. Without the apartment to boost the family’s income, the high cost of living forced them back to Britain. The debts became overwhelming in a city where non-payment is a criminal offence. Ross returned for some contract work but he was held on arrival at the airport by the police.

The Sports City developer, Middle East Development, told him that work on his property will restart before the end of the year but will take at least 18 months to complete without any further delays. Even if it were to meet this schedule it will be three years late.

Ross’s options are stark. He must keep working to pay off the bank, borrow from his family, leave Dubai illegally and lose the apartment or go to jail. “The worst-case scenario is that I have to lean on friends or family to get the money together. It’s that or jail — it’s a no-brainer really.” For now he is looking no further than Christmas, trying to decide whether to fly his wife and three children out to Dubai for the holiday.

He is far from alone. The handful of cars dumped by expatriates at the airport each week bear testament to that, and talk of a speculative property market gone sour.

The scale of overbuilding in Dubai, paid for by a phenomenal debt binge facilitated by British and international banks, is hard to conceive until you see it. The world’s tallest building, the 2,600ft Burj Tower, is due to open next month. Its spectral presence looms over the city, its pointed top a needle to the bubble.

Sunday Times

Docklanders

While there were positive developments for the Authority during 2008, given the challenges faced then,and which still continue, it would be disingenuous to dwell on them. The fact is that 2008 was an exceptionally difficult year for the Authority.
On its own, the collapse of the Irish property market during 2008 – and with it the value of the assets held by the Authority on behalf of the Irish taxpayer – would have posed huge problems. However, the Authority also lost a very significant Court case relating to execution of its statutory planning powers. Together these two
developments will have a profound impact on the Authority and how we conduct our business and fulfil our mandate for years to come.
The financial challenge posed to the Authority by the collapse of property values will require ongoing work as we have to adjust to what will essentially be a new business model. This will result in a delay in completing some of
our projects and a more conservative approach to progressing our mandate.
The impact of the lost Court case will also be significant. As a result of the ruling in that case, and a request from the Minister for the Environment, Heritage and Local Government, the Executive Board has initiated a number of reviews of our practices, policies and procedures to ensure that we are fit for purpose and, most importantly,to ensure that we abide by best practice in respect of corporate governance. I know I speak for the Minister and all my colleagues on the Executive Board when I stress that there is absolutely no room for compromise or ambiguity in this regard. The Executive Board, Council and Executive face into an ongoing, uncertain economic climate. It is a challenging time for all concerned. Tough measures are required to restore the Authority to financial stability, to rebuild
its reputation and to ensure it operates within its available resources without recourse to the Exchequer.The Executive Board is determined to take the necessary corporate restructuring steps, with speed, to return the Authority to its important mission of the physical, social, economic and cultural regeneration of the Dublin
Docklands Area, on a sustainable basis. The Docklands project and the people of Docklands deserve no less.I would like to thank the Minister for his support since my appointment and my colleagues on the Executive Board for their hard work and support.The staff of the Authority have worked tirelessly in difficult circumstances and I want to acknowledge their critical contribution. I look forward to working with local community leaders, our Council, Executive Board, Staff and other
stakeholders to continue delivering on the imperatives of the project ensuring the Docklands is a great place to live, work and visit.

Docklander

Elizabeth Warren on the economy

That Elephant again

But that is to ignore the elephant in the living room:

namely, that the property developers continued to borrow huge sums from banks to buy development sites and build apartments because they believed that consumers could continue to shoulder ever higher property prices.
The main reason consumers were able to pay more each year for houses was because the Financial Regulator failed to stop banks from selling them unsuitable products.
Property developers came to believe that consumers had endlessly deep pockets because bankers continued to refill the consumers’ pockets with buckets of borrowed money.
When the consumer could no longer afford a property by borrowing the traditional, prudent two-and-a-half times his income, the bankers gradually relaxed the criteria to the point where it was considered normal at the peak of the boom for a borrower to take a mortgage of five or six times his income.
When the consumer could no longer afford the mortgage repayments spread over the traditional, prudent 20 years, the bankers devised new products to allow the borrowers spread the payments over first 25 years, then 30 years, then 35 years and, in some cases, 40 years.
When the consumer couldn’t afford to save the traditional, prudent deposit, the bankers came along and offered 100 per cent mortgages.
When the consumer still couldn’t afford the mortgage repayments, the bankers increasingly offered reckless ‘buy now, pay later’ products with low introductory rates leaving the consumer to face higher interest repayments when the introductory offer expired.
The bankers even launched interest-only mortgages under which the borrower paid only interest and no capital for an initial period and in some cases for a full 20 years.
As revealed in The Sunday Business Post last weekend, as many as 53,000 borrowers, many of them buy-to-let investors, took out such interest only mortgages in the last five years of the boom.
It would appear the only way many of those borrowers could ever have repaid those loans was by selling the property, an option which is no longer open to many of them as house prices have fallen to the point where a sale would lock in a massive capital loss, assuming a buyer could be found in the current market.
Finally, in 2006 and 2007, Irish bankers began to copy what was happening in the US and began selling subprime mortgages to consumers who would previously have been considered too risky under traditional bank lending criteria.
The only thing that prevented the sub-prime mortgage problem becoming a bigger problem in Ireland was not the intervention of the Financial Regulator, but the arrival of the international credit crunch which prevented our bankers from raising the funds that they would otherwise have recklessly lent to borrowers.
When consumers on average incomes still couldn’t afford houses, when interest rates rose after all those risky products had been unleashed, when even the banks recognised that the limits of what they could lend to consumers had been reached - or more accurately breached - the developers in early 2007 began to see the writing on the wall as consumers balked at the prices for homes and began to walk away from the property market even before the credit crunch hit hard.
The developers then leaned on the government to fund so-called affordable housing schemes using taxpayers’ money to help prop up prices. But the amount of taxpayers’ money made available was not enough to prevent the dike from bursting and pretty soon the banks found out that the developers couldn’t afford to repay their loans because they couldn’t find buyers for their developments.

Kathleen Barrington

China's empty city

The Wise WAN

The dog ate it

For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.
In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests.
But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.
Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.
So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.
The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

The New York Times

House Trap 2

It’s a debilitating condition that will soon affect one in four Irish households. Thousands of people suffering from the disorder don’t even realise it yet. But by the end of next year, up to 350,000 families could be stricken by the disease if property prices continue to plummet, the Economic and Social Research Institute (ESRI) calculated last week.
It is negative equity, which arises when the mortgage on a property exceeds its value. And it’s contagious: once one house on your street contracts it, the spread is unavoidable. Symptoms include stress and a loss of mobility.But the situation is worse for a couple living in a one-bed apartment who want to start a family, says Derek Brawn, author of Ireland’s House Party. “The social consequences of negative equity will only become apparent over the next few years. There is a huge over-supply of one-bedroom apartments in Dublin and if you bought one to live in during the last four or five years, then get comfortable,” he advised.
Brawn should know. In September 1992, he bought a one-bedroom flat off Tower Bridge Road in London, thinking prices had bottomed out in the then stagnant UK property market. “Three months later, a neighbour in my block of 25 apartments panicked when interest rates started to rise and handed her keys back to the bank,” he said. “They sold the flat quickly, accepting a low bid, and overnight, prices in the development were effectively set at that price. Overnight my home was worth 35% less than I had paid for it three months earlier.”
Brawn estimates that one-in-four Irish households will experience this sinking feeling by the turn of 2011. The ESRI estimates that more than 150,000 households are already in negative equity, while Goodbody stockbrokers estimates that, given the range of property values, the average household owes €43,000 more than their homes are worth.

But as long as you’re happy where you are, so what? Right?


BRAWN finally sold his London flat six years after he bought it, securing the same price he had paid originally as he cashed in on an upswing in the property market. But he had grown to resent his home for “trapping him in limbo”.
“Negative equity has a pernicious psychological effect. At one point, the pump that controlled the water pressure in the shower in my flat broke, but for six months I refused to fix it. I couldn’t bring myself to pay €200 or €300 to a plumber,” he said. “I didn’t see the point of putting money into a property that had been devalued so much.”
This is a common response to the burden of owning a home that is worth less than their mortgage. David Duffy, a researcher with the ESRI, discovered a similar phenomenon in America, where research has shown that “owners with negative equity behave more like renters and re-invest less in their properties”.
The social consequences of negative equity are manifold, he points out. “It affects consumer spending as people feel less wealthy. Those in negative equity tend to increase precautionary saving, taking money out of the economy,” he said.
Negative equity can also adversely affect people’s ability to obtain credit. “In my experience, a lot of people only realise that negative equity is affecting them when they look for a loan to extend their house or for a car, and realise that their credit rating has been affected,” said Brawn.
Those in negative equity, typically first-time buyers in their 20s and 30s, are also unable to move location quickly to take advantage of job offers.
Leo Varadkar, 30, a TD, recently wrote to the National Asset Management Agency (Nama), a bank set up for bad loans, asking it to purchase his apartment. “I was only half-joking,” he said. “I bought it for €350,000 in 2004 and now I estimate that it’s not worth much more than €250,000. I had planned to move in four or five years but I’m going nowhere now.”
Varadkar said that his age group has been deeply affected by the slump because they took out 100% or interest-only mortgages, or stretched them over 35 years.
Brawn said: “On a standard 25-year mortgage, you don’t start paying off any capital until after about five years. On a 100% mortgage, or a 35-year one, it takes longer. If you have one of these, you’re likely to be in deep negative equity.”

The Sunday Times

Life after the bubble

Debt: Life in Oregon after the bubble

The nation is now living through a vast deleveraging. A huge bubble of borrowing, enabled by the financial industry's "don't ask, don't tell" lending policies, is a thing of the past.
The end of the bubble has enormous ramifications for individuals and families struggling with job losses, salary cuts and restive creditors. But it may have even greater significance for the U.S. economy, which some economists argue had come to rely on an artificial and unsustainable surge in consumer debt for much of its growth.
A new era of forced austerity arrived almost overnight last year when lower consumer spending pushed dozens of retailers into crisis. That led to further problems for the commercial real estate sector and banking industry, which in turn led to greater job losses and more mortgage defaults.
So if much of the economic growth of the past 15 years was illusory, fueled by injections of high-octane debt, what happens now that the tank is empty? We could be entering a wrenching adjustment period of lower spending, slower growth, perhaps a lesser standard of living.
"We're not going back to those growth rates; that was a dream world," said Kevin Lansing, an economist with the Federal Reserve Bank of San Francisco who for years has tracked consumer debt. "There could be 10 years where you're going to have this drag on the economy. ... People's living standards are not going to be improving the way they were. It will place a new strain on government as their tax revenue falters."

Household debt doubles
The current economic wreckage has its roots in a sweeping change in American behavior dating to the late 1980s.
Between 1965 and 1985, household leverage -- measured by the ratio of debt to personal disposable income -- hovered between 55 to 65 percent. It more than doubled in the ensuing years, reaching a zenith of 133 percent in 2007, according to a paper issued in May by Lansing and Reuven Glick, economists at the Federal Reserve Bank in San Francisco.
For people who wondered how their friends and neighbors afforded their McMansions, BMWs and high-end club memberships, it may well have been courtesy of their always-obliging debt merchant.
Much of the debt was mortgage-related, the loans backed by escalating home prices. In 1995, Americans took out $3.3 trillion in mortgage and home equity loans. Ten years later, the total topped $10.4 trillion.
The surge in debt is attributable, in part, to what Lansing politely calls "credit industry innovation and product development."
Translated, that means that some lenders dropped any pretense of cautious loan underwriting. In an era when most lenders simply bundled their loans and peddled them to the secondary market, a buyer's ability to make mortgage payments seemed of minor importance. No one could lose, as long as home values were going up every year by double digits.
Many borrowers eagerly joined the free-ride parade, fabricating loan transactions and working with unscrupulous brokers to extract the easy money from lenders.
As Americans borrowed and spent more, they saved less, culminating in the infamous "negative" savings rates of 2005 and 2006.
Some went on buying binges, but millions needed the money just to get by. The huge increase in debt stemmed in part from years of flat incomes and the simple fact that life got more expensive. Even people who took the historically intelligent steps of buying a home or getting a college degree had little choice but to take on increasing debt.

OREGON BUSINESS NEWS

Austria’s very own subprime invention

It all started innocuously enough in the late 1980s. Many of Vorarlberg’s residents worked in neighbouring Switzerland and earned Swiss francs. So it seemed sensible enough to borrow in the same currency; Swiss interest rates were, after all, lower than those in Austria. Once the idea took off it spread fast and far. By the end of 2007 almost one-third of Austrian household borrowing was denominated in foreign currencies with low rates.
This rapid take-up was repeated and exceeded as Austrian and other Western banks moved into central and eastern Europe. The IMF reckons that Polish households took on mortgages denominated in Swiss francs that were worth about 12% of GDP in 2008. In Estonia foreign-currency mortgages accounted for about 80% of household borrowing last year (see chart); in Hungary almost 85% of new mortgages were in Swiss francs in recent years.
This borrowing primed a bomb that still threatens some emerging-market economies and their bankers. The most exposed of all is Latvia, where more than 80% of all household borrowing is denominated in foreign currencies, mainly euros. That seemed to pose little danger as long as Latvia could credibly keep its currency pegged to the euro. But with its economy mired in a deep recession and the country dependent on outside lenders’ money, there are increasing doubts about Latvia’s ability to maintain the peg. Devaluation might help exports but would also make it harder for households to pay back their foreign loans. On October 6th the Latvian government said it was drafting a law limiting the liability of mortgage borrowers to the (reduced) value of their homes, not the value of the original loan, a move that would make devaluation less painful and that would saddle banks such as Swedbank and SEB of Sweden with big losses.


The Economist

House proud

The global economic crisis was accompanied by a collapse in house prices in most rich (and some not-so-rich) countries around the world. The IMF has compared house prices in the first quarter of this year with their level a year ago in 52 rich and emerging housing markets. It found a median house-price decline of 7%. The figures drive home just how savage the falls in house prices have been in many countries.

America’s housing bust may be close to the global average but the declines in some countries are mind-boggling. Latvia, with a wrecked economy propped up by emergency IMF funding, saw an annual decline in house prices of nearly 60% to the end of the first quarter. During that period Estonia and the United Arab Emirates also saw collapses of nearly 40%. In Britain they fell around 20%.
All of this prompts the question of how much further prices have to fall. Are the slight rises of recent months a sign of broader recovery, or blips on the way to further pain. The IMF’s analysis of past housing cycles provides some clues. On average house prices in rich countries rise for around six years by around 50%, before falling for five years by 24%. But this time around, the boom was twice as long and prices rose by more than twice as much as during past upturns. The IMF argues that although house prices have already fallen by 20%-close to the historical average–“there could still be significant corrections to come”. This conclusion will not please those hoping for a sharp recovery.

Of course, there will be plenty of variation across countries. The IMF has tried to see how much of the increase in house prices in various countries over the past decade cannot be explained by increases in disposable incomes, the working-age population, credit, equity prices, interest rates and construction costs. The results suggest that house prices still have some way to fall before they hit bottom in Ireland, Italy, and Britain. But the bleeding may nearly over in America, Germany, and South Korea.

The Economist

Logicomix

There is one serious misstep, though. It has to do with the notorious paradox that Russell discovered in the spring of 1901: the paradox of the set of all sets that don’t contain themselves as members. (Think of the barber of Seville, who shaves all men, and only those men, who do not shave themselves. Does this barber shave himself or not? Either possibility yields a contradiction.) The authors have fun unpacking Russell’s paradox, but they exaggerate its fallout. The paradox did ultimately doom Russell’s (and Frege’s) project of reducing mathematics to pure logic. However — and this is something that Russell himself failed to realize, along with the authors — it left mathematics pretty much undisturbed. When Cantor heard of Russell’s paradox, he did not react like a madman, the way ­“Logicomix” caricatures him. He calmly observed that it did not apply to his own theory of sets, which evolved into the present-day foundation of mathematics.
It is true that Cantor did suffer fits of madness (the magus of infinity died in a mental asylum), as did many other figures in this story. Frege, the consummate logician, ended up a foaming anti-Semite. Kurt Gödel, who proved that no logical system could capture all of mathematics, starved himself to death out of a paranoid fear that people were poisoning his food. Russell maintained his own grip on sanity, but his fear of hereditary madness was borne out when his elder son became schizophrenic and his granddaughter, also schizophrenic, committed suicide by setting herself afire. Russell’s philosophical confidence, however, was shattered by his onetime pupil Ludwig Wittgenstein, who made him realize that he had never really understood what logic was.
Is it madness to be driven by a passion for something as inhuman as abstract certainty? This is a question the four creators of “Logicomix” ponder as, in a beguiling coda, they make their way through nighttime Athens to an open-air performance of the “Oresteia.” Oddly enough, Aeschylus’ trilogy furnishes the concluding wisdom, which, at the risk of triteness, I’ll condense into a mathematical inequality:

New York Times

Ignorance and Arrogance

People are generally ignorant of their own country’s history of financial crises and debt default. In the course of their research, Professor Reinhart and Professor Rogoff found that even government officials were blissfully unaware of such basic information as their country’s domestic debt records or recent housing market prices. In many cases, the authors (two veterans of the International Monetary Fund) said, national records simply do not exist.
Despite (or perhaps because of?) these huge memory lapses, both private investors and public officials, again and again, insist that the fundamentals of whatever financial bubble they happen to riding at any given time are sound, even indestructible.
When such hubris is eventually proven wrong, and whole economies are brought to their knees, investors finally realize how big their blind spots really were. In response they demand all sorts of new transparency rules, official investigations and investor protections — responses that eventually coax investors into a renewed feeling of omnipotence over the market, which again leads to a new underestimation of risk and, eventually, a new crisis.
In fact, until the current crisis, economists for years had been bragging about “ The Great Moderation,” the idea that technocrats had finally tamed the business cycle. New ways of pooling risk in the form of snazzy financial products had virtually eliminated all risk — or so everyone thought before Lehman sought bankruptcy protection.
This pattern of events has a long history. Even back in 1929 there was a false sense of security over new-found mass financial “sophistication.”
In their book, Professors Reinhart and Rogoff reprinted a gem of an archived advertisement. It tells, condescendingly, of the irrational exuberance that had plagued an earlier, more benighted species of investor:

FAMOUS WRONG GUESSES IN HISTORY
when all Europe guessed wrong

The date — Oct. 3, 1719. The scene — Hotel de Nevers, Paris. A wild mob — fighting to be heard.

“Fifty shares!” “I’ll take two hundred!” “Five hundred!” “A thousand here!” “Ten thousand!”

Shrill cries of women. Hoarse shoats of men. Speculators all — exchanging their gold and jewels or a lifetime’s meager savings for magic shares in John Law’s Mississippi Company. Shares that were to make them rich overnight.
Then the bubble burst. Down went the shares. Facing utter ruin, the frenzied populace tried to “sell”. Panic-stricken mobs stormed the Banque Royale. No use! The bank’s coffers were empty. John Law had fled. The great Mississippi Company and its promise of wealth had become but a wretched memory.

Then, the advertisement proudly promises:

Today, you need not guess.

History sometimes repeats itself — but not invariably. In 1719 there was practically no way of finding out the facts about the Mississippi venture. How different the position of the investor in 1929!

Today, it is inexcusable to buy a “bubble” — inexcusable because unnecessary. For now every investor — whether his capital consists of a few thousand or mounts into the millions — has at his disposal facilities for obtaining the facts. Facts which — as far as is humanly possible — eliminate the hazards of speculation and substitute in their place sound principles of investment.

The ad — for a company called Standard Statistics, whose address has since been turned into a Chipotle Mexican Grill — ran on Sept. 19, 1929, about a month before the market crashed.

Any of this sound familiar?

New York Times

Bank Bailout Reject Embraced by Declawed Tiger

Pricing Pickle

Recall that Paulson first proposed that the Troubled Assets Relief Program buy toxic assets from banks. The idea was that TARP would unclog balance sheets and revive lending. That’s also the stated purpose of the Irish plan.
Price proved to be the sticking point in the U.S. last fall. Pay too much for the assets and it’s a stealth recapitalization of banks, and their shareholders, using taxpayer money. Banks, on the other hand, didn’t want to sell at low prices for fear that resulting hits to profit and equity might wipe them out.
The issue was never fully resolved as the U.S. Congress needed two tries to pass the plan. Then Paulson did an about- face and decided to use the $700 billion in TARP funds to purchase equity in banks. Since then, the idea of the government buying assets from banks has fizzled.
Ireland is following the original TARP blueprint. Irish Finance Minister Brian Lenihan last week announced that a special agency would buy 77 billion euros ($113 billion) of assets from five lenders. In doing so, the government would pay about 70 percent of the assets’ carrying value, or about 54 billion euros.

No Good Options

While that seems like a big haircut, the price might be as much as 15 percent above the assets’ estimated market value of about 47 billion euros.
The Irish government has maintained that it has few other options. It believes that forcing losses upon bank creditors would hamper the government’s own ability to raise funds.
The government also sees the plan, which has yet to be approved by the Irish parliament, or Dail, as a back-door way to borrow money to absorb losses. After exchanging bank assets for government-backed bonds, banks can pledge the bonds to the European Central Bank in return for cash.
The catch is that taxpayers may be paying even more than a 15 percent premium for the assets -- and so taking on more risk -- if the current market values still have room to fall. The government doesn’t think that’s the case; it is counting on Irish property values rising 10 percent over the next decade, allowing the plan to break even.

Celtic Tiger Boom

That may prove tough. Ireland’s property market became wildly overvalued during the so-called Celtic Tiger boom of this decade. Home-price appreciation outpaced the rate of growth seen in the U.S. Overdevelopment was rampant, even in rural areas.
Today, the Tiger has been declawed. Ireland is undergoing the worst recession of any industrialized nation since the Great Depression, according to the Economic and Social Research Institute in Dublin. Unemployment is at 12 percent and rising, while emigration is on the upswing.
The real-estate industry prognosis is bleak. “There is still no evidence of a recovery in the housing market -- either in building activity or demand,” analysts at BNP Paribas wrote in a report earlier this week. “Residential property prices will likely fall for the foreseeable future.”
As Bloomberg News’s Dara Doyle reported last week, the office vacancy rate in Dublin is more than double that of other European capitals, while as many as 35,000 new homes may be vacant across the country. That has created what are being dubbed ghost villages consisting of newly built and still unoccupied homes.

Bloomberg

The Elephant

This Bubble Is Different

This time is different.

That’s what people argue every time a bubble inflates, and what they think every time they are chastened by its popping. But century after century, decade after decade and year after year, human beings irrationally exuberate all over again.

Not long ago, the housing bubble burst and brought the global economy to a standstill. Now economists, recognizing that bubbles tend to come in bunches, are on the lookout for the next market to fizzle. They say that governments, central banks and international bodies should scrutinize a few markets that look likely to froth over in the next few years, like capital markets in China, commodities like gold and oil, and government bonds in heavily indebted countries like the United States.

“Globally, a lot of money is now seeking higher returns once again,” said Rachel Ziemba, senior analyst at RGE Monitor. The steadying of the economy, liquidity injections by governments and big returns reaped early this year by investment banks are encouraging more traders to dip their toes back in the water in search of the next big thing.“As long as compensation and bonuses are based on short-term performance in the market,” she said, “that’s going to encourage risk-seeking behavior.”

Bubbles are episodes of collective human madness — euphoria over investments whose skyrocketing values are unsustainable.

They tend to arise from perceptions of pending shortages (as happened last year, with the oil bubble); from glamorized new technologies or investment frontiers (like the dot-com bubble of the 1990s, the radio bubble of the 1920s or the multiple railroad bubbles of the 19th century); or from faddish cultural obsessions (like the Dutch tulip bubble of the 17th century, or the more recent Beanie Babies bubble).

The New York Times

Wall Street’s Math Wizards Forgot a Few Variables

IN the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.
The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.
That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.
“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”
In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.
The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.
Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.
Financial markets, like online communities, are social networks. Researchers are looking at whether the mechanisms and models being developed to explore collective behavior on the Web can be applied to financial markets. A team of six economists, finance experts and computer scientists at Cornell was recently awarded a grant from the National Science Foundation to pursue that goal.
“The hope is to take this understanding of contagion and use it as a perspective on how rapid changes of behavior can spread through complex networks at work in financial markets,” explained Jon M. Kleinberg, a computer scientist and social network researcher at Cornell.
At the Massachusetts Institute of Technology, Andrew W. Lo, director of the Laboratory for Financial Engineering, is taking a different approach to incorporating human behavior into finance. His research focuses on applying insights from disciplines, including evolutionary biology and cognitive neuroscience, to create a new perspective on how financial markets work, which Mr. Lo calls “the adaptive-markets hypothesis.” It is a departure from the “efficient-market” theory, which asserts that financial markets always get asset prices right given the available information and that people always behave rationally.
Efficient-market theory, of course, has dominated finance and econometric modeling for decades, though it is being sharply questioned in the wake of the financial crisis. “It is not that efficient market theory is wrong, but it’s a very incomplete model,” Mr. Lo said.
Mr. Lo is confident that his adaptive-markets approach can help model and quantify liquidity crises in a way traditional models, with their narrow focus on expected returns and volatility, cannot. “We’re going to see three-dimensional financial modeling and eventually N-dimensional modeling,” he said.
J. Doyne Farmer, a former physicist at Los Alamos National Laboratory and a founder of a quantitative trading firm, finds the behavioral research intriguing but awfully ambitious, especially to build into usable models. Instead, Mr. Farmer, a professor at the interdisciplinary Sante Fe Institute, is doing research on models of markets, institutions and their complex interactions, applying a hybrid discipline called econophysics.
To explain, Mr. Farmer points to the huge buildup of the credit-default-swap market, to a peak of $60 trillion. And in 2006, the average leverage on mortgage securities increased to 16 to 1 (it is now 1.5 to 1). Put the two together, he said, and you have a serious problem.
“You don’t need a model of human psychology to see that there was a danger of impending disaster,” Mr. Farmer observed. “But economists have failed to make models that accurately model such phenomena and adequately address their couplings.”

New York Times

Whitney on Rebuilding Credit Markets

House Trap

This is about I/O loans in the US, As far as I know the Central Bank do not give any info on I/O loans here.

Edward and Maria Moller are worried about losing their house — not now, but in 2013.
That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.
Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.
It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.
With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.
The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

New York Times

Humor

Irish humor and wit are unique.
This comment on a very serious subject had me in stitches.

Currently Smokin Hopium

Repeat in your mind ten times

DEBT IS WEALTH

Then

LIES ARE TRUTH

Then

NAMA GOOD
NAMA GOOD

Then line up for your shearing....

NaaaaaMaaaaa
NaaaaaMaaaaa
NaaaaaMaaaaa

Bob the Builder and Ba-NAMA

Something has been bothering me about this whole NAMA concept.

So lets start with the NAMA FAQ. In it we find the following statement.
NAMA will then manage these loans so as to obtain the best achievable return from them. In the meanwhile, it will collect interest due and pursue debts so as to ensure its own income stream and to recoup the Government investment over time.NAMA in effect puts itself in the place of the bank that originated the loan, and will have all the same rights to pursue debts, where necessary. Borrowers who continue to meet their contractual obligations, of course,have no reason to worry – their rights are fully protected.

So let's begin this Kiss exercise.
Kiss = Keep it simple stupid.

In 2006 Bob the Builder was doing very well for himself. He had just sold all of the house's he had built in a commuter town 30 mile's outside of Dublin. He then decided to get another loan from the bank to buy another site and build an estate of 30 new home's. Roll on to 2009 and Bob has completed the estate but has been unable to sell any of the house's because the market has tanked, and he can't find any suckers to pay the asking price he needs to break even on the deal. The banks have been helpful and have rolled up the intrest for Bob so that he can sell the houses when the market recovers. Effectively Bob is bust, but Bob the Builder is Bob The Builder LTD. So the bank now hands the loan over to NAMA, Bob can't pay the intrest on the loan and goes into liquidation. NAMA now seize's Bob the Builders assets. So now NAMA owns a completed empty housing estate in a town 30 miles from Dublin. An empty housing estate can not be left sitting for year's. There are 2 options (A) sell at the current market clearing price or, (B) Secure the the estate by hiring Bob the Builder to caretake the site for 10+ years until the market recovers. Multiply by a couple of thousand times.

This NAMA plan is a complete Joke.

Where it all began

Just as worrying is the possible recurrence of “payment shock” as interest rates on adjustable-rate mortgages reset higher. Resets on subprime loans have mostly taken place, but the worst is yet to come for some other loans, especially the “Alt-A” category between prime and subprime and a nasty type of mortgage called an “option ARM” (see chart 3). The impact may be muted, but only if the Fed can keep short-term rates very low for the next couple of years—or if the borrowers can refinance as the reset approaches.

Given these downside risks, the recent pop in house prices will probably fizzle. Most economists expect them to fall by a further 5-10 percentage points, to their long-term trend line at roughly 40% below their peak, and not to reach bottom until some time in 2010. The pessimists predict they will go crashing through the trend-line to as little as half their 2006 high.

Analysts at Goldman Sachs, no fools when it comes to housing, hint at several years of stagnation. They argue that the rate of home ownership, currently just over 67%, will fall back to the 64-65.5% level that prevailed before prices took off in the mid-1990s, cutting deeply into demand for properties. This view is supported by a recent Fed study, which found that more than half of the boom-era rise in ownership was due to “innovative” mortgage products, many of which are now history.

It could be even worse. Now that the myth of ever-rising house prices has been shattered, it may be time to embrace another inconvenient truth: that prices can take decades to recover, at least when adjusted for inflation. A study in June by the Federal Housing Finance Agency, a regulator, pointed out that in parts of Texas house prices still languish some 30% below their 1982 peaks in real terms. Mr Hefner may not have got such a bad deal after all.

The Economist

The Chinese Bubble

Kaput-Thing-Bank

Irish Banks Have no Subprime Paper

Click on the Image for a sharper view

I seem to recall that Mr Cowen assured us that Irish banks were not exposed to any Subprime / toxic paper.Well the AIB 2009 Interim report would suggest otherwise.
I would really like to know what is buried in the nationalized Anglo Irish Bank

AIB Interim Report 2009
Warning this is a pdf file.

The details are on page 19.

Steve Keen

Shadow Banking

What is NAMA

Brian Carey in the Sunday times pretty much nails it on the head.

It is not available online so I am going to summarize it here.
NAMA is not a taxpayer bailout for the banks, or a Fianna Fail bailout for their builder buddies.

NAMA is the European Central Bank's carefully structured rescue of the Irish Economy.
The difference between Iceland and Ireland are four letters N.A.M.A.
This is Quantitative easing via the ECB.
When NAMA takes over the €90 billion of dud property loans from the banks. It will deposit in
return €60 billion of NAMA bonds with irish banks that can be exchanged in frankfurt for ECB funds. This is what bankers call liquidity. To us it is money injected into the economy.
Who will be the ultimate arbiter's of the pricing mechanism on the loans to be transferred to NAMA? Answer The ECB.

A lesson from Iceland

Kaupthing's loan book, which was leaked on to the internet last week, shows that around one third, or €6bn (£5.1bn), of its €16bn corporate loan book was going to a small elite of men connected to the bank's owners and management.

Several investigations into Kaupthing centre on share ramping, where the bank would allegedly give loans with no interest or security in order to buy shares in that same bank – boosting the share price.

One particularly murky incident revolves around the acquisition of a 5pc stake in Kaupthing by a company called QFinance linked to Mohammed bin Khalifa Al-Thani, the Sheikh of Qatar. Several weeks before the banks collapsed, a press release stated that the transaction showed that "Kaupthing's position is strong and we believe in the bank's strategy and management."

Only after the bank collapsed several weeks later did it emerge that the Qatari investor "bought" the stake using a loan from Kaupthing itself and a holding company associated with one of its employees. The bank appears, in effect, to have been purchasing its own shares, which does not seem to be uncommon; investigators are also looking at a similar purchase of a 2.5pc stake in Kaupthing by London-based property entrepreneurs Moises and Mendi Gertner.

Officials have also questioned why loans to senior Kaupthing employees to buy shares in the bank were allegedly written off days before the collapse.

Companies connected to Exista, the Gudmundsson brothers' opaque investment vehicle that owned their stake in Kaupthing, received €1.86bn in loans. Their close business associate, Mr Tchenguiz, appears to have personally borrowed €1.74bn in loans to fund his private investments e_SEnD from stakes in Sainsburys to Mitchells & Butlers. Mr Tchenguiz is now being sued by Kaupthing's administration committee for the return of £643m.

Kevin Stanford, co-founder of the Karen Millen retail chain and one of Britain's wealthiest retailers, also got €519m in loans and was Kaupthing's fourth biggest shareholder. His company's purchase of credit default swaps in the bank is also under scrutiny, though there is no suggestion of wrongdoing his or his companies' part.

According to the leaked document, many of these loans carried little or no security and were listed as belonging to Kaupthing's "exception list" – seemingly those who received banking services on favourable terms.

The loan books of Landsbanki and Glitnir remain in the hands of their administration committees – to the frustration of many Icelanders who fear they may yield equally unusual surprises.

Telegraph

Easy Money

When the scheme faltered Law resorted to a number of rescue packages, many of which have their echoes 300 years later. One was for the bank to guarantee to buy shares in the Mississippi company at a set price (think of the various government asset-purchase schemes today). Then the company took over the bank (a rescue along the lines of Fannie Mae and Freddie Mac). Finally there were restrictions on the amount of gold and silver that could be owned (something America tried in the 1930s).

All these rules failed and the scheme collapsed. Law was exiled and died in poverty. The French state’s finances stayed weak, helping trigger the 1789 revolution. The idea of a “fiat” currency was perceived to be the essence of recklessness for another two centuries and the link between money and gold was not fully abandoned until the 1970s, when the Bretton Woods system expired.

Of course, the parallels with today are not exact. Law’s system took just four years to collapse; today’s fiat money regime has been running for nearly 40 years. The growth in money supply has been less excessive this time. Technological change and the entry of China into the world economy have generated growth rates beyond the dreams of 18th-century man. But one lesson from Law’s sorry tale endures: attempts to maintain asset prices above their fundamental value are eventually doomed to failure.

The Economist

Abandoned House's

100abandoundedhouses.com

TARP,PPIP,NAMA spot the difference

The Rating Game

Visit msnbc.com for Breaking News, World News, and News about the Economy

Charlie's Holiday

As a crew of about a dozen young men tore away at the home, Radio Telefis Eireann reporter Charlie Bird marveled at the numerous vacant homes that dotted the neighborhood near Burgess and Pickford on the city's northwest side.
Bird and his crew are spending 2009 examining various issues affecting cities in America for a three-part documentary that will air in Ireland.
"It is unbelievable," Bird said as he surveyed the numerous burned and boarded up houses in the neighborhood. "I have never seen anything like this."
Motor City Blight Busters staff and volunteers were tearing down a house that caught fire recently and was too damaged to renovate, said the group's founder John George. The nonprofit has a $100,000 contract with the state to tear down 10 vacant buildings in the neighborhood. State housing department money is covering the work.
They have until the end of the year, but have razed nine buildings since June 1, George said. He expects to raze the last house by the end of the month.
Once the structures have been razed and hauled off, George said he plans to install a community garden and park in their place. This way the empty lots do not become a haven for illegal dumping or for stripping stolen cars, he said. Plans are still in flux.
"What it won't be is a magnet for crime," George said. "We are going to replace the negativity with something positive."
Bird said he hopes the images show his viewers what residents in the United States are up against and how they cope with such issues.
"We are telling people in Ireland what America in 2009 is all about," he said

Detnews.com

We are where we are

Well where exactly are we??

Nama is the new fantasy property game. Nearly all the usual players are rolling up their sleeves and joining in.
The pitch has been well watered to suit the establishment, not the taxpayer. It seems to have been seeded with magic mushrooms.
The mandarins of the Department of Finance love Nama; Brian Cowen loves it; the Financial Regulator loves it; the banks love it; accountants love it. They are all on the mushrooms.

And next month, the Nama game will be endorsed by the Dail and the Seanad. The majority of Ireland's oligarchs will line out to play the Nama fantasy game.
On Thursday evening -- as the Nama document was being launched -- all the interested parties were ecstatic. The mushrooms were working -- we will pay billions for assets which would fetch zero on the open market, assets that no one else wants.
Quite a mug's game, you might think. And you would be dead right.

It seems the Europeans never heard of the way we do these things in Ireland. We have invented a unique monopoly -- a fantasy monopoly, unheard of in the history of commerce. A monopoly that screws itself, not the customer; a monopoly that is programmed to make a loss. Our special monopoly pays too much, not too little.
Fine thoughts, but there is a small problem: there is no reason on God's earth for believing that property prices will rise even as high as the fantasy "long-term" prices to be paid by the taxpayer. They are equally likely to continue falling.

Not so, say the fantasists. The valuations will be "through the cycle" valuations, which is more mumbo-jumbo for pretending that prices will climb over time.
Every powerful property player was being swept along in the property fantasy game. All the banks were waiting for Nama to rescue them. They refused to force any developers to pay back any money. They failed to take them to court. Bankers and developers agreed a standoff. Bankers did not want their money back.
If the judge blinked at the plan he must have swallowed hard when he heard that part of Carroll's master strategy was to draw down an €8m loan from none other than Anglo Irish Bank. More fantastic still was the purpose of the loan: to complete the bankrupt bank's state-of-the-art new headquarters in Dublin's Docklands.

Activity at Anglo is at a standstill. Staff are twiddling their thumbs up at their Stephen's Green headquarters. In a short period of time the business of Anglo could be confined to the square footage of a telephone box.
Yet the men on the magic mushrooms are still pretending that a bankrupt bank should be lending millions to an insolvent builder for a headquarters they will never occupy.
On Friday afternoon Judge Peter Kelly refused the application for an examiner. The first sign of sanity was restored to the Nama game.

The Sindo

forbearance

The plan involved “extraordinary” forbearance by the group’s banker creditors in agreeing to a two year moratorium on interest payments and effectively refraining from calling in massive loans. This forbearance was “remarkably absent” when the banks were dealing with smaller borrowers, he remarked.

“In truth the banks can do little else but forbear because if they take action to recover the monies due to them by these companies, they will bring about a collapse of the house of cards that is the petitioner, the related companies and indeed the wider group that is associated with them.”

The banks had therefore stood back and not only took no steps to recover the monies but some banks actually advanced more sums to pay off the companies unsecured creditors.

“It is sometimes said that when small or modest borrowers encounter difficulties in repaying their loans, then such borrowers have a problem. For those with larger borrowings, it is the banks who have a problem,” he said. “If ever a case demonstrated the accuracy of that proposition, it is this one.”

He had the “gravest reservations” about the projections on which the independent accountant relied given the extraordinary collapse of the property market and little of no indication of a revival in its fortunes.

The projections were based on discussions with the companies management and out of date valuation reports by two firms - CBRE and Hooke & McDonald, who could not be considered fully independent having worked for the group in the past.

The propsed survival scheme was also most unusual as it would not require any investment in the companies or a write down of debts. One or both such elements figure in practically all schemes relating to companies in examinership, the judge noted noted.

No investment was required because the banks would continue to provide funds towards development of the lands and no write down was envisaged because the banks were the only creditors, he noted.

In all the circumstances, he was not satisfied the companies had a reasonable prospect of survival. Even if so satisfied, he would exercise his discretion to refuse protection because there was “something artificial” about what was proposed.

The only creditors involved are the banks and they would be able in any event to take steps to reclaim their debts and deal with the property involved, he noted. They would be expected to maximimse its value as they saw fit.

The Irish Times