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