What a Difference a Fortnight Makes
Keith Hazelton
August 06, 2007
Pop. That would be the sound of a bubble bursting. From gushing liquidity to credit crunch in two weeks.
Thursday, July 19th, Wall Street celebrated a closing Dow Jones Industrial Average above 14,000, concluding a four-month, 2,000 point run-up.
Private equity fund and hedge fund managers were riding a tsunami of global liquidity with which no takeover deal would be left behind and every opportunity would be leveraged to the hilt.
Friday, August 3rd, as the Dow was plunging 280 points in the wake of Bear Stearns' CFO proclaiming bond market turmoil the worst in 22 years, fears of a global credit crunch gained traction.
From “What, Me Worry?” in mid-July to CNBC clown prince Jim “Boo-Yah” Cramer Friday afternoon screaming the Fed had to “do something” to keep the liquidity engine from seizing.
Cramer effectively was lobbying for a federal bailout of Bear Stearns and Countrywide Financial and other lenders, and for the Fed to lower rates to lower interest rates on the ridiculous premise that lower rates would allow troubled mortgages to be refinanced, ending the sub-prime mortgage meltdown.
If the Federal Reserve lowers rates,” according to Cramer, “people will refinance, the liquidity will come back, and not only will this problem go away, but we'll (the Dow) will go up a thousand points. (See it here.)
Please note, Mr. Cramer, sub-prime and Alt-A homeowners granted “liar loans” for overpriced real estate using dubious, or outright fraudulent, documentation will NOT be able to refinance their mortgages under any conditions which would allow them to keep their homes.
That's how the mortgage bubble was created, by tricking ordinary working people into thinking they could afford a 1,900 square foot, nothing down, $400,000 home with a payment of only $1,000 a month for the first year.
That's the essence of the sub-prime mortgage meltdown: the point at which teaser-rate mortgage payments “reset” at higher, market interest rates, which make the monthly payments unaffordable. The meltdown is the aftermath of homeowners in arrears, in default, being foreclosed, or, more likely, just returning the door keys to whichever company services their loans.
That popping sound, audible apparently only to some of us the last year or two (see anything on iTulip or Doug Nolan's Credit Bubble Bulletin as well as my own commentaries), perhaps now has become loud enough to be heard by the most disconnected, delusional bubble economy cheerleader.
Larry Kudlow heard it Friday, parroting Cramer by calling for Ben Bernanke's Fed to reaffirm its traditional role as lender of last resort and "reassure the world it is on top of the situation." (See it here.)
Are you kidding me? Wall Street, the mortgage industry and major banks made BILLIONS of dollars in the last six years on the backs of these people, providing them, if only temporarily, a seat at the table of the American Dream.
Now Cramer and Kudlow think the Fed, or worse, taxpayers – including some of who had their seats forcibly removed from the table – should shoulder the burden? I think not.
Keep in mind we only are at the beginning of what may be a long period of shocks and aftershocks including the very real likelihood of economic recession, as The Maestro, Alan Greenspan, predicted, giving one-in-three odds in March for a downturn by year-end.
As you will recall when the last bubble popped, the stock market peaked in March 2000 and didn't bottom for more than two and a half years (October 2002).
Soon it will become a issue in the 2008 presidential campaign, as candidates become forced to address the economy in debates and press conferences. Whomever is elected in November 2008 may inherit a real mess.
Bear Stearns likely will not survive the aftermath of what it, and many others, have wrought, having become the poster child for the excesses of this decade's credit intoxication bubble.
Exceedingly well-paid and lavishly bonused executives may find the next several years somewhat leaner.
Bear Stearns eventually will be the maiden sacrificed to appease this volcano, much the way Prudential-Bache/Prudential Securities became known for the excesses of the 1980s limited partnership fiasco and ultimately disappeared into Wachovia Securities after sticking parent Prudential Insurance with a many billion dollar tab.
Bear Stearns also likely will not survive intact.
It becomes obvious once again our entire financial system is based on confidence. Confidence in prices, assets values, interest rates, solvency.
When confidence falters, as it officially now has, investors begin a rush for the exits. Until Friday, August 3rd, the move was mostly slow and orderly. Now it will be a stampede. Cramer will not see a thousand points up from here, Fed rate cut or not.
What do I know? Send me an email. --KH
Thursday, July 19th, Wall Street celebrated a closing Dow Jones Industrial Average above 14,000, concluding a four-month, 2,000 point run-up.
Private equity fund and hedge fund managers were riding a tsunami of global liquidity with which no takeover deal would be left behind and every opportunity would be leveraged to the hilt.
Friday, August 3rd, as the Dow was plunging 280 points in the wake of Bear Stearns' CFO proclaiming bond market turmoil the worst in 22 years, fears of a global credit crunch gained traction.
From “What, Me Worry?” in mid-July to CNBC clown prince Jim “Boo-Yah” Cramer Friday afternoon screaming the Fed had to “do something” to keep the liquidity engine from seizing.
Cramer effectively was lobbying for a federal bailout of Bear Stearns and Countrywide Financial and other lenders, and for the Fed to lower rates to lower interest rates on the ridiculous premise that lower rates would allow troubled mortgages to be refinanced, ending the sub-prime mortgage meltdown.
If the Federal Reserve lowers rates,” according to Cramer, “people will refinance, the liquidity will come back, and not only will this problem go away, but we'll (the Dow) will go up a thousand points. (See it here.)
Please note, Mr. Cramer, sub-prime and Alt-A homeowners granted “liar loans” for overpriced real estate using dubious, or outright fraudulent, documentation will NOT be able to refinance their mortgages under any conditions which would allow them to keep their homes.
That's how the mortgage bubble was created, by tricking ordinary working people into thinking they could afford a 1,900 square foot, nothing down, $400,000 home with a payment of only $1,000 a month for the first year.
That's the essence of the sub-prime mortgage meltdown: the point at which teaser-rate mortgage payments “reset” at higher, market interest rates, which make the monthly payments unaffordable. The meltdown is the aftermath of homeowners in arrears, in default, being foreclosed, or, more likely, just returning the door keys to whichever company services their loans.
That popping sound, audible apparently only to some of us the last year or two (see anything on iTulip or Doug Nolan's Credit Bubble Bulletin as well as my own commentaries), perhaps now has become loud enough to be heard by the most disconnected, delusional bubble economy cheerleader.
Larry Kudlow heard it Friday, parroting Cramer by calling for Ben Bernanke's Fed to reaffirm its traditional role as lender of last resort and "reassure the world it is on top of the situation." (See it here.)
Are you kidding me? Wall Street, the mortgage industry and major banks made BILLIONS of dollars in the last six years on the backs of these people, providing them, if only temporarily, a seat at the table of the American Dream.
Now Cramer and Kudlow think the Fed, or worse, taxpayers – including some of who had their seats forcibly removed from the table – should shoulder the burden? I think not.
Keep in mind we only are at the beginning of what may be a long period of shocks and aftershocks including the very real likelihood of economic recession, as The Maestro, Alan Greenspan, predicted, giving one-in-three odds in March for a downturn by year-end.
As you will recall when the last bubble popped, the stock market peaked in March 2000 and didn't bottom for more than two and a half years (October 2002).
Soon it will become a issue in the 2008 presidential campaign, as candidates become forced to address the economy in debates and press conferences. Whomever is elected in November 2008 may inherit a real mess.
Bear Stearns likely will not survive the aftermath of what it, and many others, have wrought, having become the poster child for the excesses of this decade's credit intoxication bubble.
Exceedingly well-paid and lavishly bonused executives may find the next several years somewhat leaner.
Bear Stearns eventually will be the maiden sacrificed to appease this volcano, much the way Prudential-Bache/Prudential Securities became known for the excesses of the 1980s limited partnership fiasco and ultimately disappeared into Wachovia Securities after sticking parent Prudential Insurance with a many billion dollar tab.
Bear Stearns also likely will not survive intact.
It becomes obvious once again our entire financial system is based on confidence. Confidence in prices, assets values, interest rates, solvency.
When confidence falters, as it officially now has, investors begin a rush for the exits. Until Friday, August 3rd, the move was mostly slow and orderly. Now it will be a stampede. Cramer will not see a thousand points up from here, Fed rate cut or not.
What do I know? Send me an email. --KH
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