If I had been drinking milk while watching this, I would have snorted out of my nose from laughter. Link to Youtube, in case embed gets disabled is here.
[youtube=http://www.youtube.com/watch?v=SJ_qK4g6ntM&rel=1&border=0]
I'm back
Sorry for the light (no!) posting recently. I have been on a wild amount of travel, first in Cyprus, then on a trip with some of our students to India and China. More on that later, but suffice it to say that my travel itinerary the week I got back was the following:
Beijing -> Bangkok -> Amman -> (reroute due to flight delays) Beirut -> Larnaca -> Athens -> New York -> Chicago -> New York.
For those keeping score at home, that was 25 hours of flight time and 25 hours of transit time in 1 week.
Merrill cleaning house
So after you let them spend $1.3B on a late to game acquisition
At Merrill, Mr. Kim and his team had overseen the $1.3 billion acquisition of First Franklin Corp., which specialized in subprime mortgages extended to the least creditworthy borrowers. Merrill has become a top underwriter of such mortgage-backed securities because of that deal, which was completed in January.
and I am sure give them their 2006 bonus and after they have found other jobs and you have lost $4B (!) of shareholder's money, then, you remember to fire them.
Merrill Lynch & Co., which is expected to join other investment banks reporting steep losses on assets linked to risky subprime mortgages later this month, yesterday began a housecleaning of executives who have left the firm with an outsize subprime exposure.
In making the moves, Merrill didn't disclose the extent of any likely write-downs. But the size of those losses may equal or exceed a $4 billion estimate made by one analyst last week, according to people on Wall Street. That could erase most or all of the firm's quarterly profit and leave Merrill the hardest hit of any U.S. securities firm.
Merrill ousted its global head of fixed income, Osman Semerci, as well as his deputy, Dale Lattanzio, co-head of fixed income for the Americas, and also showed the door to their former boss, Dow Kim, the former co-head of institutional securities.
Mr. Kim had announced plans to resign in May on an amicable basis, with plans to start his own hedge fund in which Merrill would invest. But Merrill no longer plans to make such an investment, and Mr. Kim left the firm abruptly this week, according to people familiar with the firm. Messrs. Semerci and Lattanzio didn't return calls, and a spokesman for Mr. Kim said he has been focused since May on his new hedge-fund group, Diamond Lake Investment Group.
Lou Ranieri on Mortgage
Long Lou Ranieri article on housing market from IDD
Ranieri's take on the current housing situation is pretty bleak, but it is a perspective that may have deeper resonance with investors and deal makers on Wall Street because Ranieri has seen previous real estate debacles, notably the real estate bust of the late 1980s that was felt into the early 1990's.
"When I look at the carnage in the housing market, the mortgage market looks like Berlin after the war," says Ranieri. "It is a pretty big mess. One that, I think, will take a number of years to work our way through."
Some of the problems, he says, are the lax lending standards at the mortgage banking firms, which initially, underwrote subprime or nonconforming mortgages using guidelines similar to those of the conforming loan market -- that is, home loans guaranteed by Freddie Mac and Fannie Mae.
In the early days, recalls Ranieri, "Even when you did a nonconforming loan, you always quoted Fannie Mae doc underwriting [standards] even though it was not [a conforming loan]. You wrote it to their specs and docs, their debt-to-income ratios and documentation. You had a standard for what is a good loan," he says. "When Fannie Mae and Freddie Mac got tied up in the politics of agency or no agency, or whatever, and the Street started to do more and more away from the agencies, one of the things that disappeared was this whole notion of standardization. That was the first series of things to go awry."
As Ranieri sees it, the current housing recession is being exacerbated by the mortgage crisis. "You were going to have a housing recession. What you're getting is a typical housing recession that is compounded by the mortgage crisis," he says. "But they are different. The overbuilding in Phoenix, Florida or Orange County has nothing to do with the mortgage crisis. Putting the two together, you get the hackneyed term of the perfect storm."
Ranieri adds that "the housing recession was not created by the mortgage crisis. It may have augmented it, but it was not created by it." The Root Markets chairman believes that the housing market was due for a correction because affordability for many buyers was "going out of the window."
Indeed, different measures of affordability, including one devised by a realtors' trade group, showed that fewer Americans in 2005 could afford homes amid the rapidly rising prices -- even though mortgage rates were low by historic standards.
Ranieri believes the current crisis differs from that of the early 1990s because the earlier one chiefly involved savings and loans. In that crisis, thrifts went broke, but in this case, families will feel the brunt of the crisis.
"Some people will argue, and to some degree fairly, that the financial technology pushed homeownership deeper into the population...than ever could have been done without it. That's fair. It's true. The trouble was some people took that same technology and in my opinion horribly abused it," says Ranieri.
Asked if the Federal Reserve should have raised rates earlier to temper the rise in home sales and the climb in home prices, Ranieri says "not necessarily. I am not sure that is the case."
Ranieri won't single out any mortgage industry professional for today's problems in housing finance. Instead, the blame falls on a wide range of participants in the mortgage industry, from brokers who underwrite the loans to firms that resell the loans into bonds.
For example, Ranieri notes that in recent years, bonds pooling home loans were created using less subordination -- so less of the monthly principle and interest payments that homeowners pay to bond holders were set aside for possible losses -- even as property prices rose and underwriting standards fell.
"The higher the property values, the more you used to beef it [subordination] up -- not the more you used to thin it," says Ranieri, adding that disclosure of risks in bond deals also has declined.