By Alan Abelson
Crises of any kind inevitably bring out the best and the worst in people. They inspire the too few voices of reason as well as the predictable strident expressions of hysteria. And especially intriguing perhaps are the unexpected revelations they offer. The current credit crisis, still fermenting and gathering toxicity, is plainly no exception.
The cries of the dispossessed -- and the multitudes about to be -- resound pitiably throughout the land. What for so manyyears had been a roaring seller's housing market is with breathtaking rapidity turning into a buyer's dream. Except that it's fast becoming easier to get your kid into Harvard than to get a mortgage on an abode no matter how humble.
The climate for borrowers has turned inhospitably chilly and downright frigid for wannabe homeowners. No mystery why. As the trusty data collectors at Federal Deposit Insurance Corp. observe in their latest communique, delinquent loans grew a monster $6.4 billion in the second quarter of this year, paced by -- what else? -- overdue mortgage payments, a leap of 10%, the greatest quarterly increase since the final three months of 1990, when, as you graybeards may remember, the listing economy was mired in recession. Actual foreclosures, by RealtyTrac's count, are a startling 93% higher than a year ago.
Where, oh where, are those ingenious inventions, the fruits of a brilliant collaboration between banks and brokers (both of the real-estate and securities persuasion), that made sure that everyone would become a man (or, lest we be unjustly accused of gender bias, a woman) of property? Those marvelous loans that effortlessly did away with anything that threatened to deprive virtually anyone, so long as they were endowed with even a suspicion of competence, of the joys of home ownership.
We're talking -- need we say? -- of the no-problem mortgage, which came in any number of enticing flavors. Don't have even a modicum of a down payment? No problem. Don't earn enough to meet the monthly mortgage tab? No problem. At best, you confess, you can beg, borrow or steal the dough to cover only a small fraction of the interest, much less any of the principal? No problem. It was the golden age of improvidence.
And it was all true. Except that now there is a problem and -- sigh! -- a big one. Not only for the poor souls who are going to have to say goodbye to their houses but for the knaves who suckered them into making commitments they couldn't in three lifetimes fulfill (real-estate agents are being laid off by the thousands) and for the crafty money magicians whose deviltry made it all possible.
But that's all water over the dam (or is it damn water under the bridge?). Our point is not to grieve for the dispossessed or castigate the greedy demons who enticed them into foolhardy and ruinous action. It is, as we intimated, to note that any serious crisis yields both admirable and bitter responses and, most interestingly, unexpected revelations.
On the last score, for example, Henry Paulson, known affectionately as Hank, has viewed the insidious spread of the credit collapse with estimable aplomb. That's a tribute, obviously, to Mr. Paulson's measured view of the world. Yet -- and we don't think this disclosure in any way diminishes his cool comportment under fire -- it emerges that Mr. Paulson does not have a subprime mortgage.
By the same token, Roger Stone's bizarre behavior may seem inexplicable, but we suspect he is suffering from a severe case of subprime syndrome. Mr. Stone, a seasoned political operator, until quite recently was a consultant to the Republican members of the New York Legislature, despite the fact that he has no experience in criminal law. Indeed, Mr. Stone enjoys a sterling reputation burnished by the fact that he accepts only lovable people as clients -- role models like Al Sharpton, Donald Trump and Richard Nixon.
Alas, Mr. Stone has been accused of making a threatening phone call, rich in invective, to Gov. Eliot Spitzer's 83-year-old father, who suffers from Parkinson's disease. (The governor is a -- and we hesitate to use the expletive in a family magazine -- Democrat.) Mr. Stone vehemently denies doing so and says he was at the theater when the phone call was made. Some cynical types point out that there was no performance of the play the night he purportedly saw it. We don't know whether or not Mr. Stone made the call to Mr. Spitzer's father, but if he did, it's most likely because he was distraught at being dunned for a mortgage payment he was unable to meet (and no wonder; the skinflint Republicans were paying him a measly $20,000 a month).
What makes such tales of stoicism and woe particularly affecting is that the greatest agglomeration of leverage ever witnessed in the long and tortuous history of this planet has only just begun to unwind. There are over $1 trillion of securitized low-grade mortgages outstanding and nearly three-quarters of a trillion dollars worth of mortgages whose adjustable rates are slated to rise over the next year, a heap of them sooner rather than later. That alone assures an appreciably larger magnitude of pain in the months ahead.
Moreover, as Merrill Lynch's David Rosenberg astutely reminds us, there's something like $300 billion in debt sitting on banks' balance sheets pledged to fund the last gasp of the M&A boom, commitments made when junk bonds were priced much more attractively. And we still can look forward, biting our lips as we do, to the doleful impact of hedge funds dumping assets to meet what could easily prove a mighty rush of redemptions.
Happy as we are to see the market, after some seriously rocky going, demonstrate last week that it hasn't lost all of its zaniness (what would we write about it if it ever did?), we think it's merely a matter of time -- and not very long, either -- before it suffers another spate of vertigo.
Not the least of the reasons we have such a melancholy view of its prospects is that the market is discounting everything but the recession that lurks just around the corner. Fellow pessimist (by his own admission) Albert Edwards, who bears the weighty title of global asset allocator for Dresdner Kleinwort, in his latest commentary contrasts the insouciance of the market, which he says "is still attaching a minimal probability" to recession, with his firm's view of a 40% chance of such an outcome.
He allows that if the economy experiences only a bumpy landing, a possibility Dresdner Kleinwort leans toward, "financial markets might not move much." But if the economy does go into recession, he exclaims, it's a much different, much darker picture. Corporate profits could drop a whopping 35% -- especially, he stresses, financials -- which could easily translate into equity markets being cut in half. Federal funds and bond yields might fall below their previous cyclical lows of 1% and 3.1%, respectively, and there'd be "general carnage in leveraged risk investments."
Albert declares that analysts' earnings expectations, which in the main haven't changed with the sorrowful turn in the credit markets, are "still way too high." And that's because "analysts seem to have no comprehension of how the strong and steady growth rates in the U.S. are a Ponzi-like mirage built on an unsustainable mountain of debt." Too bad those Brits are so given to understatement.
It's all Merrill Lynch's fault! so spake Angelo Mozilo, the CEO of Countrywide Financial, the nation's biggest mortgage lender and, not coincidentally, a leading symbol of the troubles besetting virtually all such enterprises, courtesy of the sudden credit drought.
Mr. Mozilo's somewhat petulant irritation, voiced on CNBC, was occasioned by the Merrill analyst who followed his company having ventured to downgrade the Countrywide stock to a Sell (actually, the market, as usual, long before had beaten said analyst to the punch by nearly slicing in two the price at which the shares had opened the year). In explaining his bearish take, the Merrill man cited the risk that Countrywide might eventually go belly-up.
What strikes us is not Mr. Mozilo's fuming reaction, but the Merrill analyst's bravery in recommending that the stock be sold and, even more so, in offering an unvarnished reason.
In any case, Countrywide was in a bind, having great difficulties, like most of its rivals, in raising dough in an increasingly hostile environment for mortgage lenders. To the rescue comes Bank of America, $2 billion in hand. A generous gesture that followed hard on the news that Countrywide would draw on an $11 billion line of credit it already has negotiated.
Announcement of the $2 billion BofA infusion perked up Countrywide's shares -- briefly, anyway. As it turned out, Bank of America's generous gesture was not entirely altruistic. In return for the $2 billion, it got a preferred that paid 7.25%, a much heftier yield than the 2.5% to 3.5% converts issued by Countrywide a scant three months earlier. Moreover, the preferred sold to Bank of America is convertible at a surprisingly 20% below the then market price of Countrywide's common.
Whether or not, as Street gossips had it, the Fed was a stealth broker on the deal, we haven't the foggiest notion. Or, for that matter, whether, as also rumored, a sizable chunk of that $11 billion line of credit that Countrywide began to draw on was from Bank of America, we again cheerfully profess complete ignorance. As for Mr. Mozilo, he can take some solace in the $241 million, as calculated by InsiderInsights, that he netted over the past two years from sales of Countrywide stock.
But what we do know is that $2 billion is kind of like two bucks in Bank of America's scheme of things and, more than likely, it got a heck of a deal for being kind.
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