Mucking Through The Mortgage Middens
Why does "Wall Street" exist?
Looking down from the bozosphere where theories live, its function is to finance innovation in exchange for higher average returns. Dig deep in the trenches, though, and you savvy up fast. You realize Wall Street's real job is to generate the most important thing in the universe: your bonus. Which should be an ample bounty borne on a padded carpet of minimal risk. That's what Wall Street is from the inside, when it works: a carpet ride designed to cushion you from banality, from boredom, and from risk while fleecing insufferable suckers.
People who want to live large are constantly seeking to engineer a popular sting, to hucksterize a wave of investors into waddling in and parting with their dough. Part tent revival, part holy temple, once a good scam is rolling, nothing can stop Wall Street from riding the wave until it really starts to crash. When the bodies pile up and the cops start to show up. Then the perps go look for a new wave. A lot of Wall Street types should be looking for a new wave right now, because like the S&L, junk bond, and dot-com crazes did before, the beautiful mortgage pipeline is going banzai.
The mortgage craze differs from the priors in an important respect. This time, they got people to bet their houses. Although the easy credit climate wasn't confined to housing, not hardly, housing is more or less the basis of broad prosperity. So when I hear the Fed say yet again that subprime write-offs won't spill over into the general economy, I think, "Hahahaha! These jokers should die."
Like ships with too little ballast, borrowers relying on top-heavy ARMs and exotic new payment schemes are more prone to capsize. Many mortgages are already "upside down," or value-negative, and exponentially more go upside-down every day. As credit naturally tightens across all borrowers, and banks have less money to lend because they've lost it, the process becomes self-accelerating. Even in a white-hot market like the San Francisco Bay Area, easy credit is gone: it takes $175k in household income to buy a million-dollar house, as it always should have. The problem, to quote (via Herb Greenberg) veteran mortgage salesman Mark Hanson, "...we have 90% fewer qualified buyers for 5 times the number of homes." 50x more homes on sale for every qualified buyer in the Bay Area. That's some powerful negotiating leverage.
Union Bank of Switzerland just wrote off $10 billion in quarterly losses and went to Singapore, the government of, for a cash infusion. 6,000 people in Cleveland just showed up to apply for 300 Wal-Mart jobs. These events are connected as directly as strands stretch across a spider's web.What we're staring down isn't a subprime crisis. It's not even a housing loan crisis. It's a systemic global credit crisis, a cancer on the entire financial body which cannot be excised, but can only be induced to recede by either steady or severe credit adjustment. How bad? Hard to tell. At least property has implicit value, unlike many of the financial instruments based upon home mortgage loans. But even in relatively unscathed Seattle, my house's real value could drop up to 50%. The bright side? We like the neighborhood.