Thursday, January 17, 2008

Tears on Wall Street

Asia Times

From the 4th paragraph "Since British house prices have only just begun to decline, and in London at least must have much further to fall than in any comparable region of the US, mortgage losses in the UK market are still hidden well below the surface, with only the tiniest fraction of the iceberg being visible. After all, even a 50% decline in top-end London house prices would still leave them excessive in terms of income levels - it must be remembered that Tokyo housing lost 70% of its value after 1990"

Posted by becky @ 10:31 PM (844 views)
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6 thoughts on “Tears on Wall Street

  • Good find, Becky! That’s an excellent (and very bearish) article. Looks like it was originally written for PrudentBear.com a couple of days earlier. I’ll be keeping tabs on that site in future.

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  • This won’t just be tears. It will blood, marrow, intestines and what’s left of the brain matter too.

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  • The article is very poorly written. Indeed, “quasi-fraudulent housing lender Northern Rock” might even be slanderous. Hutchinson fails to support the argument that “house prices have only just begun to decline, and in London at least must have much further to fall than in any comparable region of the US”, perhaps because such contention is unsupportable – the US and UK property markets are very different beasts and much of the US collapse is attributable to irresponsible lending on a scale and to a degree not seen in the UK market.

    Hutchinson continues with weak arguments – “mortgage losses in the UK market are still hidden well below the surface, with only the tiniest fraction of the iceberg being visible. After all, even a 50% decline in top-end London house prices would still leave them excessive in terms of income levels – it must be remembered that Tokyo housing lost 70% of its value after 1990.”. To reference London house prices in London to income levels is a flawed argument that prices are inflated – it assumes that for property prices to remain high, they must be affordable for those on average incomes to buy, ignoring the shift the market has seen towards buy-to-lets and renting. Whilst Hutchinson might not feel it is fair that a relatively small number of people own large numbers of properties whereas others can only afford to rent, his argument does not justify the contention that house prices are inflated, provided interest rates and borrowing rates remain relatively low (to the extent that rents are economically viable). Similarly, whilst we must not ignore the past and must learn from the lessons it affords us, comparisons to very different markets and very differnet economic climates (such as Tokyo in 1990) are unhelpful and are poor excuses for qualitative, considered argument.

    Part of Hutchinson’s problem is that he opines on the economy and finance, with little base knowledge, revealed by his belief that “leveraged buyout debt and emerging market debt all seem likely to leave their imprint on Wall Street’s balance sheets. In addition, there is a huge quantity of toxic waste from the derivatives and private equity businesses” – these broad-brush statements reveal Hutchinson’s ignorance of financial instruments. He talks of “leveraged buyout debt” and “toxic waste from…private equity businesses” as if they are different subjects. His contention that emerging market debt will affect the balance sheets of investment banks also shows a lack of research – most corporate or financial sponsor borrowing in recent years has been from entities in developed economies. The involvement of players in the emerging markets has involved comparatively low debt, with emerging market players cash-rich. Indeed, there are few signs that the emerging economies, and in particular, BRIC economies, are suffering at all – emerging market debt is possibly the safest of all. Very few of these economies rely exclusively on trade with the US or Western Europe and there is little to suggest that they will catch the cold of a transatlantic recession.

    Hutchinson’s article begins to lose any credibility with his claim that “[i]nstitutions like Goldman Sachs, that have so far held themselves haughtily superior to the write-offs of their competitors, are bound to suffer severely as these other losses appear” – Hutchinson does not appear to have made even the most rudimentary examinations of GS’s business practice and his flippant remark has no regard for GS’s hedging or risk strategy. He goes on to say “[t]he write-offs we have seen so far are probably only at most a fifth of the final total, which should exceed $500 billion.” – on what basis? Most people believe that the banks have tried to reveal the full extent of the losses in one short, sharp, burst of bloodletting, as Hutchinson himself argues (“Merrill Lynch … may wish to bring all the problems out up-front”) and yet, despite claiming that banks have already revealed the fullest extent of their losses, in contradiction, he believes that these represent one fifth of their losses.

    I can only congratulate Hutchinson for ending on a note consistent with the foregoing, “the bonuses of the last decade may have to support bankers for a great deal longer than they think!”. Such resentment and envy ignores the fact that, (i) on the whole, bankers bonuses will rise this year (albeit modestly); (ii) bankers, partly because they are in the business, and partly because they are wiser than the average journo, are adept at investing their bonuses well, to the extent that bonuses ought do more than just ‘last’ bankers; and (iii) notwithstanding everything else, the current price correction is unlikely to be haunting us into 2009……time for a nice long holiday.

    For those of you still banking on a house price crash, you might be disappointed when bonuses start rolling into bankers’ Coutts accounts (http://www.bankersball.com/2008/01/14/london-bankers-favor-real-estate-for-bonus-cash/).

    I’m off to spend my bonus cash in N1….shouldn’t all of you bears be hibernating?

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  • “The bonuses of the last decade may have to support bankers for a great deal longer than they think!”

    What about everyone else, who will suffer due to the criminal selfserving activities of the past 10 years. Their bonuses should be put into a large pot and divided equally to all who will be affected, then they should all be taken to court, refused bankrupcy and made to utilise their immense powers for making money to fix the hole they have dug in the fabric of our society for the rest of their days.

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  • N1. What a waste. I’d invest in a stab vest.

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  • Only just saw this. Fantastic argument Ibanker. Not that I agree with it but its good to see a bull dissecting a bearish article. Just how bullish are you – should we look to see continued double digit gains in London, and is London the only place in the UK thats immune or are you saying there will be no bear full stop? I have always contended that bankers are far from stupid and that they should be listened to (notwithstanding subprime – which in reality is a victim of its own snowballing effect). My question is also what deposit and reserve numbers for a retail bank would you be comfortable with, i suppose the answer is irrelevant if there is no fall in the value of the assets?

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