Saturday, October 9, 2010

2008 redux (updated)

I won't make a habit of posting on weekends but this is important.

Grain markets are dislocating upwards. Oil has surged 14% in two weeks. The Aussie is threatening parity. Gold is rocketing to new highs. Everyone is on one side of the emerging markets trade. The Dow is powering on easy money. BHP is in the midst of a huge debt-funded monopoly play. US housing is in trouble and its structured finance complex is threatened again (see today's links).

The parallels are disturbing.

As Felix Salmon of Reuters said, it is very difficult to know where the "foreclosuregate" scandal will lead but it looks insurmountably complex. In an echo of the 07/08 securitisation freeze, this blog fears it will have a corrosive effect on confidence in US bank accounting.

To offer some insight into what to look for and what to ignore, find below Chapter 6: Things Fall Apart from The Great Crash of 2008, this blogger's co-authored book with Ross Garnaut.

Don't miss "Foreclosure fraud for dummies" at Rortybomb. Having read that, and realised the depth of the debacle will be determined by the (in)competence of the mortgage originators through the last cycle, read at least the first few pages of the below chapter. Be afraid.
Chapter 6- Things Fall Apart


The Lorax said...

Seems more like 2007 than 2008, when news of a mysterious thing called "sub-prime" was beginning to leak out.

In you humble opinion, does Foreclosure-gate have the potential to trigger another crisis? If the banks can't foreclose, is that really a problem?

David Llewellyn-Smith said...

Felix Salmon puts it best:

"The big-picture consequences here are by their nature unpredictable, as no one has a clue how this might all play out. But I can think of a few themes:

Bond investors, who have seen the value of their mortgage-backed debt rise impressively over the past 18 months, could find themselves unable to find any kind of bid at all. The paper will still be cashflowing, but those cashflows will be surrounded by enormous uncertainty, and no one’s going to want to buy them except at extremely deep discounts until the mess is cleared up.
Mortgage servicers will go from being assets to being liabilities, and banks which own mortgage servicers could find themselves on the hook for substantial losses.
The time from default to foreclosure will become indefinite, and as a result there will be a significant uptick in strategic defaults, especially in states with judicial foreclosures.
The “shadow inventory” of houses which aren’t on the market but will eventually be sold once the bank gets around to foreclosing will grow substantially from its already-enormous level.
All of this is going to be very costly and very unpleasant for all concerned; the only winners I see here are the lawyers. Add in possible securities-fraud charges against investment banks which underwrote a lot of these bonds, and the end result is a level of legal chaos I can barely imagine, in both the civil and criminal courts. And I see no easy way out at all."

homes4aussies said...

Perhaps this is the real reason for the cancelled "inevitable" October rate rise by the RBA???? As I said on Bubblepedia, it was especially unusual that the statement was atypically short - as if a few paragraphs were hastily omitted and the decision reversed from a draft prepared prior to the meeting???? They could well have caught wind of this and decided to see how things develop, especially its affects on international credit markets, in the runup to the next meeting....

David Llewellyn-Smith said...

Perhaps H4A,

But they have never impressed me with their outward focus. They're obsessed with China now but well after the fact...