Rolfe Winkler

The trailer for Oliver Stone’s sequel to Wall Street.

Great cast too…in order of sheer coolness: obviously Douglas, toss up between Frank Langella and Eli Wallach, Josh Brolin, and Shia LaBeouf.

Love the cell phone bit.

In response to “recent press reports” — probably this FT article — SEC Chairman Mary Schapiro sent an open letter to broker-dealer CEOs (see below) requesting them to be “particularly vigilant in ensuring that sales practices are closely monitored.”

It’s good to see her on record, though I suspect she won’t have any impact until she uses her power to make life miserable for shady brokerages.

She’s got good reason to be worried, of course. The FT article noted that happy days are here again if you’re a broker looking for a job:

Bank of America’s Merrill Lynch unit is offering signing packages greater than those handed out in the bull market of 2006 and 2007, as it ramps up its recruitment programme to replace many financial advisers who have left its “thundering herd” in the past year.

…Industry recruiters and people in the company say Merrill Lynch Global Wealth Management is offering signing bonuses of 140 per cent of the previous 12 months’ “production” to lure top advisers, and another 200 per cent over the next five years if the advisers hit aggressive growth targets.

“That’s more than they’ve ever offered,” said one recruiter. “It’s huge.”

Fat, commission-based pay packages will encourage brokers to churn accounts, put investors into unsuitable financial products and engage in other ethically-questionable behavior.

Writing this letter is a nice way to put people on notice, I guess. It can’t do much else.

(For easier reading, click “toggle full screen” top-right and then “+” to zoom in)

Today’s top NYT editorial is full of socialism and sophistry. House prices are falling but buyers aren’t yet returning to the market. This means prices may continue to fall. That could compound recessionary pressures that the housing sector is putting on the economy as a whole.

There’s only one solution: “foreclosure prevention.” And there is “no excuse for delay.”

Personally, I would argue there is a case for outright neglect. Let’s call “foreclosure prevention” what it really is: a bailout by taxpayers for homeowners and lenders that made bad decisions over the last few years. I don’t even know where to begin to pick this editorial apart. Perhaps I’ll leave it to my critical thinking readers to find all the holes in this argument.

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Following up on yesterday’s post regarding credit losses, here is an interview with Carlyle’s David Rubinstein from Bloomberg. The article notes that while credit losses have totaled $329b worldwide, banks have been able to raise $247b to offset those losses. Such capital raises dilute the shit out of common shareholders, though to the extent that those shareholders risk losing everything in bankruptcy if banks DON’T raise capital, a smaller share of ownership in the banks’ continuing earnings is an acceptable price to pay.

Incidentally, I was at the Credit Sights subprime conference two weeks ago (had big plans to live blog it, but there was no WiFi connection!) and heard an interesting tidbit from a hedgie:

You may have noticed that banks forced to raise capital see a temporary boost in their share price. See the uptick in WM from $10 to $12 a couple months back, for instance.

I wondered why that always happens since common stock is clearly worth less after being diluted so substantially. Sure capital raises are positive to the extent they help banks survive, but the guys trading in volume aren’t betting that these banks are threatened with bankruptcy just yet. So why the huge (20%?!) uptick in price?

“Because it’s an elegant way to cover your short.” All the guys short the financials have an opportunity to cover their positions buying newly issued stock at a slight discount to market. Interesting.

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Good to see the NYT jumping on board the argument I made in January on the op-ed page of the Baltimore Sun (hat tip JJW) (update: the CS Monitor is joining the bandwagon too–hat tip Patrick). A snippet from the NYT piece:

As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac— to keep the housing market afloat.

But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.

But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year. Fannie Mae is to release its latest financial results on Tuesday and Freddie Mac is to report earnings next week.

The companies are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.

And if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.

……

Tell you something you don’t already know, right? Though the conclusion has been stated often enough, it’s nice to see data to back up the story. For that, check out Hale Stewart’s latest article over at Huffington Post (via Patrick).

It includes the Case Shiller chart showing the run-up in 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 income.

Like I said last week, the path of house prices will definitely have plenty to do with interest rates. Homes remain overvalued relative to income, but with mortgage rates still near historic lows, folks that CAN get financing are still able to pay up for houses.

[Recall the math from last week: With a fixed rate 30-year mortgage of 18%, a $2000 monthly payment will buy $132,000 worth of home. Cut the interest rate to 6% and the same $2000 payment will buy $334,000 worth of home. Low interest rates support higher house prices.]

And since the threat facing the economy may be Japan-style deflation rather than U.S.-style stagflation, interest rates are likely to stay low for some time….

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