Market Meltdown

This is a synopsis mid mortem of what transpired to bring financial chaos to the world markets. The early beginnings happened on Tuesday, August 7^th in Europe. In late afternoon in Frankfurt, Germany, after the European Central Bank (ECB) had doled out $292.5 billion Euros for its regular weekly re-finance operations, money market rates suddenly began to rise. This signaled that the short term money lenders were less willing to lend to the commercial paper markets. The next day continued the strong flow of money into short term parking obligations and tension built up in the commercial paper market. By Thursday, August 9^th the ECB announced it was injecting $92.5 billion Euros in one-day funds into the market. The announcement sent a panic wave through Europe and spread quickly to U.S. markets. The U.S. financial community was surprised the problem started in Europe but European investors had purchased huge blocks of mortgage backed securities, many with high percentages of sub-prime loans that [were] among the first to default.

On Wednesday, August 15, 2007, several things happened:

A real estate affiliate of Wall Street buyout king Kohlberg Kravis Roberts & Co. asked investors to accept a six-month delay in repayment of $5 billion in commercial paper.

On Wednesday evening, Countrywide Financial, the largest maker of mortgages in the U.S. notified its bankers that it was going to draw down on its pre-arranged credit lines. This happened right after a respected stock analyst announced Countrywide was in danger of bankruptcy.

Earlier, a big Canadian bank announced it had to rescue faltering issuers of $130 billion in Canadian commercial paper.

On Thursday, August 16^th:

In London $45.5 billion in Euro commercial paper was maturing and needed to be rolled over. Traders normally would have buyers secured by lunch time (7 am in New York). At the end of the day, only half of the commercial paper had been sold.

At 7:30 am in New York, Countrywide Financial, the largest maker of mortgages in the U.S. announced they were drawing down $11.5 billion in a bank line of credit to fund their operation. They had been unable to fund themselves through short-term commercial paper.

In Japan, there was a run on the yen against the U.S. dollar; exposing investors that were playing the “spread” and making them unwind transactions as the yen unexpectedly shot up in value. As the US dollar lost value the yen went up and investors had to bail out of trades.

The same scenario happened in Australia as the normally higher valued Australian dollar lost value against the yen and caused Japanese investors to bail out. The Australian central bank had to intervene to restore order for the first time in 6 years.

The Fed continued to conference with its members and key advisors for possible scenarios which would be dramatic enough to shore up confidence while avoiding a cut in the Fed’s main interest rate; the Federal Funds Rate. They didn’t want to broadcast the signal of a bailout, which they felt would encourage a continuation of the reckless practices that caused the crisis in the first place.

Since then the feds(http://www.federalreserve.gov/monetarypolicy/fomc.htm) have been slow to respond. Their next meeting on September 18th is likely to have a .25 percent rate cut. The current market is pricing in at least that much relief. The senators are looking around to find who dunnit. In my opinion we have the nexus of two events, that together, brought unprecedented chaos to the financial and housing markets.

To start, all things are cyclical, life death, the up and downs of the housing and stock markets as well. The Santa Cruz, California, has been on an uptrend since the late 90's. The constant upward movement created, in the public eye, and in eyes of investors, was that all things went up all the time. The Santa Cruz real estate market, while not as glamorized and thus not as victimized, as those who bought into the ever upward prices vision, has its problems too. Our Watsonville area is, and will continue to be, one of the hardest hit regions in Santa Cruz County. Many other areas of the state and nation will face a far greater impact.

The market forces responded to the pent up housing demand and builders built up willy nilly. The western region has poster children of Las Vegas, Sacramento and Stockton, Modesto and Merced to name a few. These areas were easy to bulldoze down more desert or farmland build more homes for the eager buyers. In part much of the problem in areas such as Las Vegas was due to speculators. Programs like Flip this House glamorized the renovation process and helped fuel the idea of fast easy money. While there is value in renovating and learning how to fix things, which I think is great, people begin to think there is no risk. Many speculators bought new houses before they were built often realizing big financial gains and then reselling. While this easy money lasted for a time, many of us remember the tech stock melt down of the late 90's. This problem has the same type of mentality as then. I, like many, bought things for more than they were worth without a regards to why they were going up. Many made a ton of money during this time and probably a greater amount lost a lot of money. When the masses believe that it always goes up, and forget the why it is going up, therein lies the problem. Real estate is an investment, not a speculative product that you buy and quickly sell. I believe real estate for the vast majority should be a 5-10 year investment. In the Santa Cruz real estate market, homeowners and investors have done quite well holding for those time periods.

Banks bought into the housing market always going up, and created the sub prime mortgages. Banks saw a need as buyers were clamoring to by homes. This desperation of the buyers was fueled by the increase of housing. The realization that they could not earn enough in raises to match the annual increases in value, lead to this desperation. The mentality of buying at any cost became prevalent. So you have desperate buyers, lending institutions with all sorts of rookie loan officers, tons of new realtors and a marriage of disaster. These rookies on both sides, the lenders and the agents all bought into the vision of values always going up. The banks in large part created their problem. It was their monetary policies that loosened up the qualifying process such that if the borrower could fog a mirror, they could get a loan. The loan qualifying teaser rates started to adjust to actual rates after 2 years and the high payments, got higher. Since most all of these loans were 100%, they borrower had little risk, they had no real investment in the home.

So there you have it, borrowers with poor credit histories and income, given hundreds of thousands of dollars in mortgages, by banks and loan officers who should have known better and not sold these. That coupled with improper risk evaluation of the underlying securities, lead to the mess we are in. The banks brought the sub prime mess upon them selves and I think the feds rightly so, should let them suffer the consequences of their greed. The overbuilding is a symptomatic problem of supply and demand. More supply, in theory reduces prices, but until the demand for new homes was met, didn't have a downward effect on prices. It does now, and we will see a wave of foreclosures in large number as we saw in the 80's and 90's. This time the problem was not due to national economic health, but due good old desperation and greed. The good of this is that if a portion of these sub prime are able to hang on, they will be able to own a home they would never before been able to. In the meantime there are some great buying opportunities here by the ocean. To see more go to www. Propertyinsantacruz.com

Date: 2007-09-14 13:49:41
Views: 115

Market Meltdown

On Wednesday, August 15, 2007, several things happened:

A real estate affiliate of Wall Street buyout king Kohlberg Kravis Roberts & Co. asked investors to accept a six-month delay in repayment of $5 billion in commercial paper.

On Wednesday evening, Countrywide Financial, the largest maker of mortgages in the U.S. notified its bankers that it was going to draw down on its pre-arranged credit lines. This happened right after a respected stock analyst announced Countrywide was in danger of bankruptcy.

Earlier, a big Canadian bank announced it had to rescue faltering issuers of $130 billion in Canadian commercial paper.

On Thursday, August 16th:

In London $45.5 billion in Euro commercial paper was maturing and needed to be rolled over. Traders normally would have buyers secured by lunch time (7 am in New York). At the end of the day, only half of the commercial paper had been sold.

At 7:30 am in New York, Countrywide Financial, the largest maker of mortgages in the U.S. announced they were drawing down $11.5 billion in a bank line of credit to fund their operation. They had been unable to fund themselves through short-term commercial paper.

In Japan, there was a run on the yen against the U.S. dollar; exposing investors that were playing the “spread” and making them unwind transactions as the yen unexpectedly shot up in value. As the US dollar lost value the yen went up and investors had to bail out of trades.

The same scenario happened in Australia as the normally higher valued Australian dollar lost value against the yen and caused Japanese investors to bail out. The Australian central bank had to intervene to restore order for the first time in 6 years.

On Thursday, August 16^th: