Avoid Wall Streets Riptide
Andrew Waite
November 11, 2008
THE HOUSE BEHIND THE HEDGE
Wall Street just laid one giant goose egg while entrusted with the nations´ nest egg. Our national reputation and your wealth and retirement have been harmed.
The convenient excuse for "the brightest guys in the room?" The housing market lost value and Wall Street and major financial institutions got caught holding bad residential loans. Well, maybe?
WHAT IS AN INVESTOR TO DO?
Don´t panic. This is not a housing crisis. It is a Wall Street credibility crisis, which precipitated their liquidity crisis, then our credit crisis.
If you are one of the 93.6 percent of Americans with a current mortgage and a workable budget, keep doing what you are doing. If you have a pension plan or IRA dominated by stocks and bonds, now is not the time to bail out with losses. If you must get out of traded assets, consider moving to a self-directed IRA that invests in assets like titled real estate, the family business, recourse loans to family members, or private placements. History shows real estate is not as volatile and is a real tangible asset.
CHICKEN SOUP INDEED
Wall Street sold their credibility selling paper described as "mortgage-backed securities." Some of this paper was about as close to housing as the chicken´s bathwater is to chicken soup.
Wall Street wins on market movement, up or down. Transactions, not the asset values, drive fees. Real estate is a multi-trillion dollar, non-traded market. It is not immediately liquid, so does not lend itself to financial management by licensed securities professionals. A dollar in real estate is beyond Wall Street´s control; finding a way to monetize and trade real estate instruments has been many a trader´s Holy Grail.
To America´s credit, owning a home is considered a worthwhile goal. Fannie Mae and Freddie Mac were started to securitize mortgages and further homeownership. In the last decade, Fannie and Freddie evolved into investment bankers. Wall Street has repeatedly failed to completely privatize and trade these companies and their instruments. If you can´t beat ´em, join ´em took hold and Wall Street launched their own securitization and mortgage trading.
The next buzz-phrase to join the media real estate lexicon will be "unitary files." This means one loan on one property, with a chain of paper work between a borrower and a lender, secured by one title. The fact that this definition is necessary emphasizes the maniacal world that Wall Street constructed for marketing and trading mortgage-derived, mortgage-backed "securities."
Problems arise when an artificial device, such as legislation or financial gymnastics, tries to defy economic gravity. Policies or trends are often driven worthy goals but flawed implementations like incentives that made homes affordable to the financially unfit. The result is artificial or extortionist, and an over stimulated, thus excessively fragile market.
ONE MORTGAGE BECOMES MANY
Wall Street found spectacular money and fees in mortgage-backed securities. They found more than the natural housing market could absorb. So try unnatural; from overly lenient loan qualifications, inflated sales commissions, and pitches, to the mortgage aggregation and derivative sales engines. Eureka — the mortgage-backed securities mother lode!
In the secondary market, a mortgage is not just a mortgage, it´s one in a pool of mortgages. At least five different components can be sliced off and sold as part of a separate fund to different entities and investors: the servicing rights, the rights to principal repayment, the interest, and the long and short risks these would, or would not, be paid. Separate fees were made for derivatizing (packaging and slicing) and conduiting (marketing and selling) each bond tranche (French word for "slice" or "portion" used to describe a security that can be split up into smaller pieces and subsequently sold) to investors.
As each fund was prepared for sale, the credit agencies rated the soundness of the underlying assets. This is simple when mortgages are unitary files representing prime mortgages. But as an insatiable appetite grew for mortgage-backed securities paper, Wall Street alchemy turned real estate secured bonds into a house of paper mirrors. Like a recipe from a Chinese nutrition chemist´s playbook, they learned to "tart up" the quality of these bond funds by adjusting the ratio of prime to subprime paper with the same toxic effect as melamine in baby milk.
Credit rating agencies Standard & Poor´s, Fitch, and Moody´s learned that good ratings were necessary to sell these bonds and keep earning their fees; like the conflicted home inspector who ignores problems for the sake of the sale and future business. Concurrently, Moody´s warned on housing, then rated mortgage-backed securities funds and bond insurers as sound.
FULL TILT BOOGIE TO FUNERAL DIRGE
Meanwhile major national and international financial institutions drank the mortgage-backed securities Kool-Aid. Bear Stearns was the first to crack. A few investors read newspaper headlines and asked if their mortgage-backed securities funds held housing based assets. If so, what was their value if housing was in trouble? Per margin call rules, they had a right to immediate repayment. The music stopped and the mortgage-backed securities and secondary mortgage market started to unravel.
If you are on Wall Street, a bank, or an investor who gorged on mortgage-backed securities, it is bad. What are these instruments worth? Sarbanes Oxley valuation "mark to market" rules dictated these securities were worth zero; (as we go to press suspension is being discussed,) the damage to investor confidence has already occurred. This is not the case for funds with mortgages in unitary files, but it will be a nightmare to unwind the commoditized, derivatized and conduited mortgage-backed securities slices to recover the underlying housing asset. Fortunately, this will only occur in a fraction of cases and Treasury knows this.
Then there is the China Syndrome. We are furious at the Chinese over sending us a billion dollars worth of toxic toys, tainted with lead paint. They have a right to be even more furious at a trillion dollars of toxic paper they bought from the U.S. as securities. If this wasn´t so politically dangerous, this would be funny.
REAL ESTATE MORTGAGE REALITY
Blaming the housing business is a stretch as data from the Mortgage Bankers Association and National Association of Realtors put the total percentage of foreclosures against 128,000,000 units of American housing stock at one percent! Admittedly a tragedy for an individual or family, but hardly a national meltdown.
Assume the market is twice as bad, it is still less than 2 percent. Then each default is secured by titled real estate so has fungible value.
PERSONAL IMPACT & RECOVERY
If you are part of the $18 trillion in traded-asset IRA and retirement accounts invested with Wall Street, and can no longer stomach their loss of value, consider balancing some of this investment into real estate and alternative investments. Look at the self-direction article and self-directed IRA or Safe Harbor© alternatives (see www.personalrealestateinvestormag.com) Wall Street is feeding you inaccurate data. We will discuss the S&P Case/Shiller, and other index inaccuracy, in our nest issue.
If you own a home and real estate investments, and do not plan to sell anytime soon, you are doing fine. When the dust clears, your properties will be fine and will inexorable appreciate. Don´t take a needless "haircut" by being swept up and selling during this Wall Street confidence crisis. Life goes on.
November-December 2008 issue www.personalrealestateinvestormag.com
Wall Street just laid one giant goose egg while entrusted with the nations´ nest egg. Our national reputation and your wealth and retirement have been harmed.
The convenient excuse for "the brightest guys in the room?" The housing market lost value and Wall Street and major financial institutions got caught holding bad residential loans. Well, maybe?
WHAT IS AN INVESTOR TO DO?
Don´t panic. This is not a housing crisis. It is a Wall Street credibility crisis, which precipitated their liquidity crisis, then our credit crisis.
If you are one of the 93.6 percent of Americans with a current mortgage and a workable budget, keep doing what you are doing. If you have a pension plan or IRA dominated by stocks and bonds, now is not the time to bail out with losses. If you must get out of traded assets, consider moving to a self-directed IRA that invests in assets like titled real estate, the family business, recourse loans to family members, or private placements. History shows real estate is not as volatile and is a real tangible asset.
CHICKEN SOUP INDEED
Wall Street sold their credibility selling paper described as "mortgage-backed securities." Some of this paper was about as close to housing as the chicken´s bathwater is to chicken soup.
Wall Street wins on market movement, up or down. Transactions, not the asset values, drive fees. Real estate is a multi-trillion dollar, non-traded market. It is not immediately liquid, so does not lend itself to financial management by licensed securities professionals. A dollar in real estate is beyond Wall Street´s control; finding a way to monetize and trade real estate instruments has been many a trader´s Holy Grail.
To America´s credit, owning a home is considered a worthwhile goal. Fannie Mae and Freddie Mac were started to securitize mortgages and further homeownership. In the last decade, Fannie and Freddie evolved into investment bankers. Wall Street has repeatedly failed to completely privatize and trade these companies and their instruments. If you can´t beat ´em, join ´em took hold and Wall Street launched their own securitization and mortgage trading.
The next buzz-phrase to join the media real estate lexicon will be "unitary files." This means one loan on one property, with a chain of paper work between a borrower and a lender, secured by one title. The fact that this definition is necessary emphasizes the maniacal world that Wall Street constructed for marketing and trading mortgage-derived, mortgage-backed "securities."
Problems arise when an artificial device, such as legislation or financial gymnastics, tries to defy economic gravity. Policies or trends are often driven worthy goals but flawed implementations like incentives that made homes affordable to the financially unfit. The result is artificial or extortionist, and an over stimulated, thus excessively fragile market.
ONE MORTGAGE BECOMES MANY
Wall Street found spectacular money and fees in mortgage-backed securities. They found more than the natural housing market could absorb. So try unnatural; from overly lenient loan qualifications, inflated sales commissions, and pitches, to the mortgage aggregation and derivative sales engines. Eureka — the mortgage-backed securities mother lode!
In the secondary market, a mortgage is not just a mortgage, it´s one in a pool of mortgages. At least five different components can be sliced off and sold as part of a separate fund to different entities and investors: the servicing rights, the rights to principal repayment, the interest, and the long and short risks these would, or would not, be paid. Separate fees were made for derivatizing (packaging and slicing) and conduiting (marketing and selling) each bond tranche (French word for "slice" or "portion" used to describe a security that can be split up into smaller pieces and subsequently sold) to investors.
As each fund was prepared for sale, the credit agencies rated the soundness of the underlying assets. This is simple when mortgages are unitary files representing prime mortgages. But as an insatiable appetite grew for mortgage-backed securities paper, Wall Street alchemy turned real estate secured bonds into a house of paper mirrors. Like a recipe from a Chinese nutrition chemist´s playbook, they learned to "tart up" the quality of these bond funds by adjusting the ratio of prime to subprime paper with the same toxic effect as melamine in baby milk.
Credit rating agencies Standard & Poor´s, Fitch, and Moody´s learned that good ratings were necessary to sell these bonds and keep earning their fees; like the conflicted home inspector who ignores problems for the sake of the sale and future business. Concurrently, Moody´s warned on housing, then rated mortgage-backed securities funds and bond insurers as sound.
FULL TILT BOOGIE TO FUNERAL DIRGE
Meanwhile major national and international financial institutions drank the mortgage-backed securities Kool-Aid. Bear Stearns was the first to crack. A few investors read newspaper headlines and asked if their mortgage-backed securities funds held housing based assets. If so, what was their value if housing was in trouble? Per margin call rules, they had a right to immediate repayment. The music stopped and the mortgage-backed securities and secondary mortgage market started to unravel.
If you are on Wall Street, a bank, or an investor who gorged on mortgage-backed securities, it is bad. What are these instruments worth? Sarbanes Oxley valuation "mark to market" rules dictated these securities were worth zero; (as we go to press suspension is being discussed,) the damage to investor confidence has already occurred. This is not the case for funds with mortgages in unitary files, but it will be a nightmare to unwind the commoditized, derivatized and conduited mortgage-backed securities slices to recover the underlying housing asset. Fortunately, this will only occur in a fraction of cases and Treasury knows this.
Then there is the China Syndrome. We are furious at the Chinese over sending us a billion dollars worth of toxic toys, tainted with lead paint. They have a right to be even more furious at a trillion dollars of toxic paper they bought from the U.S. as securities. If this wasn´t so politically dangerous, this would be funny.
REAL ESTATE MORTGAGE REALITY
Blaming the housing business is a stretch as data from the Mortgage Bankers Association and National Association of Realtors put the total percentage of foreclosures against 128,000,000 units of American housing stock at one percent! Admittedly a tragedy for an individual or family, but hardly a national meltdown.
Assume the market is twice as bad, it is still less than 2 percent. Then each default is secured by titled real estate so has fungible value.
PERSONAL IMPACT & RECOVERY
If you are part of the $18 trillion in traded-asset IRA and retirement accounts invested with Wall Street, and can no longer stomach their loss of value, consider balancing some of this investment into real estate and alternative investments. Look at the self-direction article and self-directed IRA or Safe Harbor© alternatives (see www.personalrealestateinvestormag.com) Wall Street is feeding you inaccurate data. We will discuss the S&P Case/Shiller, and other index inaccuracy, in our nest issue.
If you own a home and real estate investments, and do not plan to sell anytime soon, you are doing fine. When the dust clears, your properties will be fine and will inexorable appreciate. Don´t take a needless "haircut" by being swept up and selling during this Wall Street confidence crisis. Life goes on.
November-December 2008 issue www.personalrealestateinvestormag.com
Print
Share
Email
