The Newswire

April 16, 2008

A few interesting items to pass along today.

The first is an interesting interview with an anonymous hedge fund manager (via JL). It’s a longish interview, but a good insider’s view on everything from the credit crunch to the downfall of Bear Stearns to the hedge fund business itself. A highlight:

Bear is not a commercial bank, it’s an investment bank: it doesn’t have these capital adequacy rules, it’s not regulated by the Fed, and Bear, if your average bank had a capital adequacy rate supporting 10:1 leverage, Bear is more like 30:1. And that is one of the reasons confidence evaporated so quickly: people looked at the balance sheet and realized that if assets have to be written down even a small amount, Bear can be insolvent. And that creates a panic.In reality I don’t think they had a solvency issue, but when the capital cushion is so small it creates instability.

The other investment banks are also levered in the 30:1 range, including Lehman/Merrill/Goldman. Bear was, in many ways, more vulnerable to a run on the bank, so to speak. But we’re not through the woods yet and bigger banks may fail.

That’s a good segue into two good articles on the cover of today’s WSJ. The first tells the story of Merrill’s misadventures in the CDO world. The second discusses LIBOR, the London Interbank Offered Rate, which is a benchmark rate banks charge each other for loans. The spread of LIBOR over U.S. Treasuries has been a remarkable barometer of market panic. That indicator, well, indicates that the worldwide financial system is still in trouble.

And as the WSJ article notes, there are those that think this rate (which is based on data self-reported by banks themselves) may be understated….


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[…] weeks ago, I said it. Now commentators are saying the same thing on the WSJ op-ed page and on (snippets […]

Posted by Option ARMageddon » Blog Archive » Calling the Bottom? | Report as abusive

[…] house prices over the last few years. The chart is similar to the NAR chart I reproduced in a post last week, though it doesn’t juxtapose prices with median […]

Posted by Option ARMageddon » Blog Archive » Huffington Post: Housing still heading south | Report as abusive

It seems to be that you overlooked one important point in your analysis, and I could be wrong but …

Inflation adjusted USD from your benchmark 1982 and 2001 we saw a USDX at roughly 120.
(source:  )
Since that time the USD has lost some 40% of its purchasing power. Cutting the interest rate to 6% and a home price $334,000, home prices would have to fall in line with 1982 levels of $133K in order to purchase the same value home.
Since the recent RE bubble produced many Mcmansions of emmense square footage and limited property I would guess this may be where the average house value will fall to and what the average house may look like. (peak to trough)

Thank you for your intersting consideration.

Posted by Joe Shwingding | Report as abusive

Thanks for the comment Joe. Actually I’m just doing a simple present value calculation, holding payment, future value, and number of payments constant. Then I test two different interest rates to determine present value of the home.

I’m looking at one theoretical house at a particular moment. Inflation is the impact of the dollar losing purchasing power over time. Since we’re only looking at how interest rates effect the house’s value at present, inflation shouldn’t be a factor.

Posted by RolfeWinkler | Report as abusive

You seem to be assuming that the average home buyer is making $6000. to $8000. a month. Forget the interest, forget the percentages, forget the inflation and indexes. The average person is making much less than $6000. a month (take home , after other monthly expenses)and should be able to afford a home. I might make around $2000. profit in good month yet I purchased a home in 1995 for about $35,000. and a second home in 2001 for about $80,000. Both were paid off quickly by selling off collections of items (I don’t buy anything new). Somewhere between those two numbers is where the price of homes should be and should stay. I have been offering between $40,000 and $65,000 for homes in my area and the asking prices have been falling from the $220,00 to $300,000. range down to the $80,000 to $160,000 range. Some have sold in the $70,000. to $100,000. range , so even if I’m low, I’m closer to the selling price than the original asking price is. Forget trying to make a bundle off your home and just live in it.

Posted by Henry Kinney | Report as abusive