Jonathan Young: ‘It is no doubt true that the earth has warmed since the institution of DST, but it has also warmed since the laying of the first transatlantic telegraph cable in the nineteenth century. This is ‘correlation without causation’ at its best. I suspect that in this assertion and the companion sentence about the secret DARPA report there is some Tobias leg-pulling going on.’
Dick Theriault: ‘I mean, jeez, granted that your readers are by definition intelligent, still there may be some who trust you so much that they don’t realize your tongue is buried deep in cheek. Naughty boy. The sun is shining all the time. The Earth rotates all the time. Sunlight (and heat) is either falling or not falling on any given place on the earth undisirregardless of what the clocks say at that place. We don’t GET more sunlight with DST, we just move it to a different clock-time. And I know you know that.’
☞ Next you’ll be telling me Australians and South Africans AREN’T taller because they’re upside down.
LOWER INTEREST RATES
I assume the Fed is alarmed by the housing/mortgage mess – and that, quite appropriately, it will show no hint of alarm.
Except perhaps one: lower interest rates.
I could be wrong of course. And lowering short-term rates (the Fed has no real power to lower long-term rates) may not do the trick. But I can’t see how they won’t try to try to keep a tough situation from becoming a vicious cycle.
At the high end – the $15 million condos – things might not get bad. This has, after all, been a positively grand time to be rich and powerful in America. One of my business school sectionmates, I read this weekend, routinely pays himself $300 million a year (and the Republicans cut his taxes).
And even if things do turn south at the high end, and the place you bought for fifteen million only fetches nine (hey, rich people don’t want to be suckers; if they sense a buyer’s market, they’ll bid low), well, somehow – since you likely bought it for cash – I believe you will survive.
But the condos and homes owned by people who live in the real world? The world of trying to make ends meet on $79,000 or $36,000 or $127,000 a year? That market is where the economy lives, and the Fed will do what it can to keep things from getting too bad.
Speaking of which:
Fortune’s Bethany McLean writes (even the bolded parts may be dense, but you’ll get the gist):
Amid the chaos of the escalating subprime mortgage crisis, the three major credit-rating agencies – Fitch, Moody’s and Standard & Poor’s – have been voices of calm. They’ve downgraded only a sliver of the debt backed by such mortgages, and they say they expect the mess to stay safely confined to the subprime sector.
To appreciate the role that the rating agencies play in today’s housing market, you have to understand a piece of Wall Street alchemy: the process by which mortgages are combined, carved up, recombined and carved up again in almost endless permutations to create new forms of debt (which usually go by three-letter abbreviations).
A bank or brokerage bundles up hundreds of mortgages and sells investors debt that is backed by mortgage payments and secured with homes. These asset-backed securities – ABS’s, in Street parlance – are sold in slices [tranches], each of which carries its own theoretical level of risk, ranging from the supposedly invulnerable (AAA) all the way down to the bottom rung of investment grade and even past that, to a highly speculative unrated slice.
It’s possible to create a AAA-rated asset out of somewhat shaky collateral, because the first dollar of income goes to the securities with the highest rating, while the first dollar of loss is assigned to those with the lowest. The bottom layers provide a cushion that supposedly protects the higher-rated securities.
Lately much of the bottom rung of investment-grade ABS’s has been snapped up by another Street creation called a collateralized debt obligation (CDO), which, like an ABS, is sold in slices. A large chunk of a CDO that consists of barely investment-grade securities can still secure a coveted AAA rating – again, because any losses have to eat through the bottom layers.
These products exploded in popularity in recent years because investors – including pension funds and insurance companies, which must mostly buy investment-grade-rated debt – had a voracious appetite for them. That in turn encouraged a historic increase in subprime lending.
At Moody’s (the only one publicly traded), net income went from $159 million in 2000 to $705 million in 2006, in large part because of increases in fees from “structured finance,” the umbrella under which this mortgage alchemy falls.
Today all the rating agencies say they have scrubbed the numbers, and slices of debt that are rated investment grade will mostly stay that way, even if the collateral consists of subprime mortgages.
Janet Tavakoli, who runs Tavakoli Structured Finance, points out that AA-rated tranches of CDOs backed by subprime mortgage paper now yield far more than AA-rated debt backed by other assets – a sign that the market doesn’t trust the ratings. “No one believes the ratings have any value,” she says. Opined Grant’s Interest Rate Observer: “We are willing to bet that the agencies assigned too little weight to greed, ignorance, and soft criminality.”
All this has real-world implications. If the rating agencies do downgrade some of this paper, investors who can’t own non-investment-grade debt would be forced to sell in droves. The losses could affect the bottom line of an untold number of companies, including insurers and possibly even mutual funds.
And if CDOs stop purchasing mortgage paper, then a major source of liquidity will evaporate. That tightening of credit could affect the demand for homes, thereby turning the virtuous circle of recent years into a vicious one of falling home prices.
☞ The estimable Ms. Tavakoli, quoted above – and one of your fellow readers – had this letter in yesterday’s Financial Times. (Her point: what’s gone on with these over-rated subprime securities may even shake international faith in the relative reliability of our securities markets.)
ABSURDISTAN – (oopski)
Thoughtful pieces from Nicholas Kristoff and The Economist – here.
Quote of the Day
Money lost is bewailed with unfeigned tears.~Juvenal
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