Saturday, June 23, 2007

Bear Stearns

The LA Times today has a good narrative of what's been going on at Bear Stearns. See also continuing coverage at Calculated Risk. Highlights:

Worries rise as fund crashes

Anxiety intensified Friday about the toll the sub-prime mortgage meltdown is taking on the financial industry at large, as Bear Stearns Cos. pledged to lend $3.2 billion to rescue a hedge fund battered by rising defaults on home loans. The jitters sent stocks tumbling across the board.

"We know that these holdings are not unique to Bear Stearns," said Drexel University professor Joseph R. Mason [...]

The hedge fund, which is managed by a Bear Stearns division, had taken in nearly $7 billion — $600 million raised from investors plus 10 times that sum borrowed from Wall Street firms. Such a great amount of leverage would sharply boost any profit generated — as well as any loss incurred. The fund invested mostly in bonds that paid generous yields and were backed by sub-prime mortgages.

But as the nation's housing market soured, setting off a wave of defaults on sub-prime loans, the securities held by the fund lost substantial value [...]

When will they say sub-prime loans were a cause of unsustainable prices?

One of the fund's lenders, Merrill Lynch & Co., this week seized a reported $850 million in assets that had served as collateral on its loans to the fund. Other lenders were threatening to do the same when Bear Stearns stepped in with a credit line to shore up the fund.

Bear Stearns moved to prevent the fund's dissolution "because there continues to be significant value in it," Sam Molinaro, chief financial officer of the New York-based investment bank, said in a conference call Friday.

Molinaro said the credit line would allow an orderly sale of assets, preventing "massive liquidations" at fire-sale prices.

The hedge fund's troubles, Molinaro said, "appear to be relatively contained."

But stock investors weren't comforted. The Dow Jones industrial average dropped 185.58 points, or 1.4%, to 13,360.26 [...]

The Dow is down 2.1% for the week.

Mason, the Drexel University professor, expressed greater concern about the potential damage from sub-prime mortgages.

Bear Stearns, he noted, is tying up its own capital on a bet that it can hold onto the risky investments until the market for them improves. Merrill Lynch made the same bet by auctioning off only a fraction of the assets it seized from the Bear Stearns hedge fund, he said.

The problem, he said, is that sub-prime woes will grow as home prices fall in many areas and monthly payments jump over the next year on almost $1 trillion in adjustable-rate mortgages.

The familiar chart of coming ARM resets:

What's worse, he said, is that the biggest investors in mortgage-backed debt are not hedge funds, whose investors are supposed to be wealthy enough to withstand losses. Instead, they are banks, asset managers, pension funds and insurance companies that serve mainstream Americans and have put their money at risk by buying exotic mortgage securities, he said. [...]

It's beginning to unravel. How can Westside house prices not fall?

31 comments:

dwr said...

Anyone else walking or driving on Ocean Park today? It was sign twirlers galore, all four of them for 417 Ocean Park, some decent looking townhouses in about the worst location possible. They also have the nerve to call the complex "OceanView" something or other. Maybe you can get a peek at the ocean- if you're on the roof. It seems like they've been trying to sell those units for at least six months. Here is a link to some of them:

http://www.lacondolifestyles.com/santamonica/condominiums.php?buildingMlsNumber=sea_colony_3

latesummer2008 said...

Tiny, Tiny, Tiny matchbox townhouses on a nice exit ramp up on to 4th street. I could only imagine a nice group of Harleys streaming by your quiet abode. Expensive to boot. INSANE.....

But it's a co-op..

Anonymous said...

I haven't been inside one, but have been walking by them for a few months. They are the oddest color...you can't miss them.

As for expensive, yes. But for Ocean Park condos, some of them are at the low end, believe it or not. I just think the location will negatively impact the final selling price. Ocean Park is loud and to be right above the underpass will only make it louder.

If you are interested in really expensive condos, take a gander at the three unit building on the 600 block of Pacific. I don't have the link handy, but they are $1.5M+ for a CONDO. It is insane. I don't know how they are going to sell those when you can get a house for the same amount.

Can anyone explain that to me? (I understand greed, but this is craaaaazy.)

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war chest said...

Wow,

Ok so I haven't had a chance to comment in a while but I just finished reading the comments from some of the past posts. Looks like we finally have someone lurking (and posting) who is bullish (or at least skeptical of the bearish case). It would be nice if they would stick around, create a name for themselves (anonymous can get confusing when there are so many) , and give us some firsthand info. As long as people can be civil, I think debate is good and having more data is always great.

I agree that right now the westside looks pretty much bulletproof. High end stuff is not falling, and in a lot of cases prices are going up. Wow!

However, I really don't see the fundamentals getting better and I don't see it possible for values to go up much further. I think there are cracks forming and it is just a matter of time before we see a shift in the westside market.

Anyone know how much the tear down on the 1000 block of 23rd went for?

Anonymous said...

"dwr said...
1639 Oak had its 4th (or 5th, I've lost count) open house today. As I mentioned a while back, two realtors bought this POS to flip it. No commissions, stuck with a flop, gotta love it."

It is in escrow and they should clear at list a $100K. Not bad for a flop, gotta love it.

dwr said...

"Looks like we finally have someone lurking (and posting) who is bullish (or at least skeptical of the bearish case)."

I'd bet the anon real estate clerk googled "1639 Oak" and these posts came up. Only here to brag about his "financial IQ" as a flipper, although I'd love to see where the IQ of a flipper takes him in a year or so.

Anonymous said...

dwr, why change the subject, the fact is that you were betting that 1639 Oak will flop and it didn't. Be a man and admit it that you were wrong.

war chest said...

Anon,

I am curious...who are the buyers for these places? Families? First time buyers? Foreigners?

What kind of financing are you seeing being used on these purchases? Have things tightened up at all or are you seeing cash purchases?

There is no denying that things are still selling (and often quickly and above list price) in Santa Monica...I'm just curious and would like to know more about who is buying and how they are doing so. Thanks

dwr said...

"dwr, why change the subject, the fact is that you were betting that 1639 Oak will flop and it didn't. Be a man and admit it that you were wrong."

I've learned not to expect much from real estate clerks, but even you should understand that being in escrow does not equal sold.

war chest said...

Re: 1639 Oak

"If you are considering buying or selling Santa Monica Real Estate, Pacific Palisades Real Estate... you owe it to yourself to interview any of the true professionals with The Anthony Hitt Group at Sotheby’s International Realty:
Anthony Hitt, Shawn Scott, Lori Long, Melanie Sommers, Gabriela Manakova, Anthony Ridino, Mike Olstedt."

Above is what is posted on the website for this group...Anthony Ridino and Gabriela Manakova are the two realtors involved with this flip on Oak (loan doc says "tenants in common").

They purchased the property with $280 dollars down...That is not a typo...so it looks like $0 down (or damn close) is still available for million dollar properties (flips).

I am posting this information because I think information is powerful and I think that there needs to be a lot more transparency in real estate. I won't sit here and call these agents names or whatever...I will say that I find it troubling that so much of the activity in Santa Monica is influenced by agents and investors. Ethics, fiduciary duty, etc all seem to have gone out the window in the hopes of making a quick buck. We could get more philisophical and talk about why it may be hurting the community when prices are bid up they way they have been...but that is not what I am focusing on here.

This is not the first property that these two agents have flipped together and it probably won't be the last. Each of them have also flipped condos and other units over the past few years.

When I think about it, most of the smart agents on the westside probably made more money over the past 6 years investing in their own projects rather than actually doing their jobs. If information was more readily available and there was more transparency, a lot of the advantages of realtors would be lost.

Maybe the westside won't go down if the agents just keep flipping to eachother?...I wouldn't bet on it.

Also saw that 1505 Oak is asking $1.05

lap2 said...

dwr, if that makes you feel good, you can call names (shows your real character and what you're made of). But that doesn't change the fact that the house is in escrow and they had more than one offer ( it is not an opinion but a hard cold fact). According to them, the accepted offer is pretty strong and they are not even looking for a back up. You got me here - in escrow, it doesn't necessary mean sold until it closes.
I know, it is hard for you to accept real facts and you would rather live in your imaginary world of hope for failure - you sound like a miserable and very unhappy individual searching for a way to lift your spirit at the expense of the mistakes of others, not in this situation and you'll just have to keep on looking. I am sure you'll find it - people that take risks, make mistakes and the hire the risk the hire the reward, it is a simple rule of business. Failure is not trying, losing and trying again but rather not trying or even trying only ones and then giving up. If Einstein or many other great minds would have your type of mentality, we would now live in dark ages. So, whatever it happens to that escrow, you have to give them the credit for having the guts to put their own (not your's) money in to it and taking the chance, that is what makes this great US of A wonderful. And if you don't have anything valuable to say, don't. This blog does provide interesting views and opinions but why realtor bashing?


warchest, lenders have really tightened up and most of the buyers have to come up with at least 20% down, but you can still see 10%, 5% and even 0% down and very few stated income loans. Buyers are diverse - 1st timers, relocation, downsizing, upsizing, the ones that really need to buy, etc. the only classes that are not really their anymore are the speculators, 2nd home buyers and wanna-be homeowners, you know, the ones that didn't care about the price of the house as their ARM payment was low at the time of the purchase. Foreigners were never a big factor. Hope this helps.

war chest said...

dwr,

What was/is the asking price of 1639 Oak? Who was the realtor(s) and what firm were they with? How much was done in terms of improvements on the place?

I would like to try to crunch the numbers and see how much profit could have reasonably been made (assuming escrow clears).

Also, I wanted to point out that in securities markets, when a broker is selling or buying on behalf of a client, there is a thing called priority of transactions...it is ILLEGAL for a broker to go in and buy a stock that he knows his client is about to have him buy. Clients always get priority/best execution.

I know that housing is different so it does not cross over perfectly to this "priority of transactions" rule but I thought it was an interesting concept. I guess it would apply a lot more if these two realtors were also the ones selling the place and directing thier own clients towards it...

war chest said...

lap2,

"you have to give them the credit for having the guts to put their own (not your's) money in to it and taking the chance"

I don't know how much was spent on upgrades or whatever...but they only put $280 dollars down. That is basically $0...but yes, holding costs apply as do property taxes, etc. Do you know how much was put into this place in order to resell it?

Also, if the realtors that owned it were also the ones selling, would they have to give thier firm its cut of the commission (even though they don't really pay it because they are selling for themselves)?

Finally, it is interesting to hear that lending has tightened up...if you need 20% down, that means $200K on an barely livable entry level home...wow! Crazy stuff out there. Thanks for the info, and any more that you can provide is appreciated.

lap2 said...

warchest - buyer's are realtors are from Sotheby's in SM - Gabriela Manakova and Anthony Ridino. Listing agent is Anthony Hitt from the same office. Securities analogy is not a good example here, real estate is not a fast moving market. While you can buy many shares in the same company while at the same time also selling shares of that same company to your clients (I believe it is called front-running), you can't do the same with a house. Only one buyer can buy that one house and each house is unique in its own way, which makes the price very subjective from buyer to buyer.

lap2 said...

"Do you know how much was put into this place in order to resell it?"

I don't know exactly, but I the word on the street is that they put in around $100K.

In the previous post I said that "buyers are", what I ment is that current owners are Gabriella and Anthony and I don't know who are new buyers that are currently in escrow.

Lionel said...

"If Einstein or many other great minds would have your type of mentality, we would now live in dark ages."

Lap2, in comparing realtors to Albert Einstein, you gave me the best laugh I've had all day. Thank you.

lap2 said...

lionel, comparing Einstein to realtors? Where did you get that idea? It can't be that this is what you understood from my post - r e a d b e t v e e n t h e l i n e s.

Oh well, I am speechless..... you compared it and than had a good laugh, good for you, laughing is healthy.

Lionel said...

Honestly, Lap, I have no idea what you're trying to say. It might be genius on par with James Joyce's finest work, or it might be complete gibberish.

What I do disagree with is the idea that merely taking a chance is what makes someone great. Hitler and Mussolini rolled the dice with the best of them, and I really wish they hadn't. Einstein wasn't great for merely taking risks, he was great for envisioning life and the cosmos in a singular way. Which is completely opposite from what you're praising people for. People flipping homes, taking risks right now, are part of the herd. They envision easy money, that's all. That's their goal. True, they might win out, but not because they're great people. If they win out, it's because they're part of the unthinking mass of humanity that has pumped this real estate bubble to its present absurdity. You might be kind to them; history will not.

dwr said...

"I am sure you'll find it - people that take risks, make mistakes and the hire the risk the hire the reward, it is a simple rule of business."

You are an imbecile.

If anyone wants some more laughs, check out the bio on Anthony. I do agree with one thing in his bio, Anthony is a very funny guy:

ANTHONY RIDINO serves as the Anthony Hitt Team secret weapon of finance and economics. Yes, he is a fantastically talented realtor with an outstanding resume under his belt. But the really interesting thing about Anthony is the fact that he could take over as head of the Federal Reserve Board if he really wanted to. If given the opportunity, Anthony would debate Ben Bernanke into a tailspin.


http://www.anthonyhitt.com/about_AnthonyRidino.aspx

lap2 said...

dwr - very mture.

What ever his bio says, he has made more money than you'll probably make over next five years, so what is your point - imbeciles make alot of money! (his bio is funny)

I think you're very misserable, unhappy and jelous individual. I bet your best friend is your computer and you probably still live with your parents. That is trully an achievement.
Good luck.

PS. You want to have a real laugh, read this http://www.anthonyhitt.com/about_Gabrielamanakova.aspx

dwr said...

"And if you don't have anything valuable to say, don't. This blog does provide interesting views and opinions but why realtor bashing?"

I guess I have a problem with parasites who lie for a living and then have the audacity to think they're professionals. The bio I mentioned above is a perfect example.

lap2 said...

dwr - you can apply that to any industry and any proffession, not only realtors. I am sure you'll agree that not all of us, realtors are bad. dwr, what do you do?

dwr said...

"dwr, what do you do?"

Something that pays more than what 99.9% of realtors make.

I have dealt with enough real estate clerks to know that the vast majority will do whatever they have to in order to close escrow. Have you ever uttered the following words "Buy now or be priced out forever"? How about "Real estate never goes down"?

lap2 said...

dwr, I am a realtor, proud of it and not afraid to say it. Why don't you say what is that you do? Are you ashamed of it? Don't hide, just come out and say it, otherwise it invalidates you.

""Buy now or be priced out forever"? How about "Real estate never goes down"?"

It sounds to me that you're trying to blame realtors for what the local news stations and LA Times articles headlined a while ago. Don't tell me you were so gullible to fall for that? And, by the way, which it is a fact for the time being and not a fiction, many people are priced out from certain areas (you're probably one of them), I don't know about forever, but for now for sure.

So, will you be a man enough to come out and say it what is it that you do or...........

Anonymous said...

Arguing on the internet is like the Special Olympics. Even if you win, you look retarded.

lap2 said...

anon,

"Arguing on the internet is like the Special Olympics. Even if you win, you look retarded."

You are correct. But I look at it as having a blog discussion and not a competition. No one here either wins or looses.

dwr said...

"It sounds to me that you're trying to blame realtors for what the local news stations and LA Times articles headlined a while ago."

Who were they quoting in each of those articles? A friendly local realtwhore.

"Don't tell me you were so gullible to fall for that? And, by the way, which it is a fact for the time being and not a fiction, many people are priced out from certain areas (you're probably one of them), I don't know about forever, but for now for sure."

You've been wrong with every one of your guesses about me, so please feel free to continue. But FYI I bought a home in Santa Monica in 2001.

lap2 said...

dwr,

What do you do for a living? Simple and sraight forward question. You must be really ashamed of your "achievement" career wise.

Anonymous said...

re : hedge funds and Real Estate,
see http://feeds.wsjonline.com/wsj/wealth/feed

"Why the Rich Are Bailing Out of Hedge Funds"

Read the last line:
...It’s also interesting that the wealthy seem to be taking money out of private equity firms, just as those firms (led by Blackstone) are going public. Perhaps Blackstone and others hope the broader investing public won’t see the same potential hazards wealthy investors have noticed.

That’s not to say big money is always the smartest money. The world’s millionaires may have taken their money out of alternatives in 2006, but they put most of it back into another wobbly asset class: real estate.

Anonymous said...

dwr,

As much as I am against realtors in today's market I have to say that dodging the question is so damn lame I can't even say. I am definately not on lap2's side but man it sure is easy to throw rocks from inside a tank.

P.S. I write software - who freakin cares...