PS here's a good article ... about making money on the stock market.
Trader Made Billions on Subprime
John Paulson Bet Big on Drop in Housing Values;
Greenspan Gets a New Gig, Soros Does Lunch
By GREGORY ZUCKERMAN
January 15, 2008; Page A1
from
http://online.wsj.com/article/SB120036645057290423.html?mod=googlenews_wsj
Funds he runs were up $15 billion in 2007 on a spectacularly successful bet
against the housing market.
Now, in another twist in financial history, Mr. Paulson is retaining as an
adviser a man some blame for helping feed the housing-market bubble by
keeping interest rates so low: former Federal Reserve Chairman Alan
Greenspan.
Merely holding a different opinion from the blundering herd wasn't enough to
produce huge profits. He also had to think up a technical way to bet against
the housing and mortgage markets, given that, as he notes, "you can't short
houses."
His confidence rose in January 2006. Ameriquest Mortgage Co., then the
largest maker of "subprime" loans to buyers with spotty credit, settled a
probe of improper lending practices by agreeing to a $325 million payment.
The deal convinced Mr. Paulson that aggressive lending was widespread.
He decided to launch a hedge fund solely to bet against risky mortgages.
No, "I'm adding" to the bet, he responded, according to the investor. He
told his wife "it's just a matter of waiting,"
On Feb. 7, 2007, a trader ran into his office with a press release: New
Century Financial Corp., another big subprime lender, projected a quarterly
loss and was restating prior results.
Once-complacent investors now began to worry. The ABX, which had begun with
a value of 100 in July 2006, fell into the 60s. The new Paulson funds rose
more than 60%% in February alone.
In the fall, the ABX subprime-mortgage index crashed into the 20s. The
funds' bet against it paid off richly.
One concern was that even if Mr. Paulson bet right, he would find it hard to
cash out his bets because many were in markets with limited trading. This
hasn't been a problem, however, thanks to the wrong bet of some big banks
and Wall Street firms. To hedge their holdings of mortgage securities,
they've scrambled to buy debt protection, which sometimes means buying what
Mr. Paulson already held.
The upshot: The older Paulson credit funds rose 590%% last year and the newer
one 350%%.
Helping Homeowners
"While we never made a subprime loan and are not predatory lenders, we think
a lot of homeowners have been victimized," Mr. Paulson says. "Bankruptcy is
the best way to keep homeowners in the home without costing the government
any money."
Mr. Paulson has taken profits on some, but not most, of his bets. He remains
a bear on housing, predicting it will take years for home prices to recover.
He's also betting against other parts of the economy, such as credit-card
and auto loans. He tells investors "it's still not too late" to bet on
economic troubles.
At the same time, he's looking to the next turn in the cycle. In a recent
investor presentation, he said his firm would at some point "start
preparing" for opportunities in troubled debt.
[ a clever man yeah? ]
MORE?
The Wall Street Journal: Explain the thought process behind your bet against
the housing market.
Don Brownstein: At the end of 2006, we were thinking about the fact that
there was a stupendous amount of money in the financial system, even though
the Federal Reserve had begun tightening monetary policy in 2004. We thought
it was an unstable situation, and unsustainable.
WSJ: And you decided to focus on subprime mortgages?
DB: We looked for where the liquidity bubble might pop first, and we decided
on subprime. The boom in mortgage origination and housing had begun around
2000. This allowed people with good credit to buy all the houses they
wanted. When the market started to subside, every one who wanted a new house
had one. So the mortgage originators began to attack the less credit-worthy
sector of the market. By the end of 2006, people were buying houses that
were highly inflated. The least well-capitalized buyers were buying houses
at the top of the market, and money was being lent to them in the form of
these subprime mortgages. That was a recipe for disaster.
WSJ: So you bet on a drop in the ABX indexes that track subprime mortgage
bonds?
DB: We used a combination of the ABX and a basket of single name credit
default swaps, which we were short. We opened our fund in January 2007 and
hit the jackpot right off the bat.
WSJ: When do you think housing will rebound?
DB: I wouldn't be surprised if it takes a couple years. The question is what
the rate of decline is going to be over those years. The downturn is
accelerating, and that could mean it will be over sooner.
[ Hit the "jackpot" hey? -- why all these gambling terms being used in
regards to the stock markets all the time? mmmmmm lol]
WSJ: Do you expect the economy to enter a recession?
DB: I think we may already be in one. People think the aggressive action of
the Fed is going to keep us out of it, but I think it's going to take longer
than normal for the economy to rebound. For the Fed's aggressive response to
work its way through the system, the banking system has to begin lending
again. For the banks to do that, they need to recapitalize. That will take
some time. After the excesses of the subprime lending binge became apparent,
the banking regulators are taking a closer look at banking practices. But in
certain respects this works against the stimulative measures of easing. That
portends a deeper period of recession or stagnation.
WSJ: How does an investor make money during recessions?
DB: This is a cash-is-king moment. If you have cash on hand and you can
spend it, you can find bargains. You know those ads in the newspaper,
"moving, must sell dog." You get to buy a lot of cheap dogs - though we try
to avoid the dogs and concentrate on the goose that lays the golden egg.
----------------------------
Still ...... look at this from way back in JUne 2007
Foreclosures Rise As Subprime Mortgage Crisis Hits Minorities, Poor
Posted by Bill Bonner on Jun 21st, 2007
We have a feeling that the winds of financial climate change are blowing ill
to the United States of America. After the storm in subprime lending blew
through the United States in the spring, it looked as though the bad weather
was over. But there's more where that came from, reports USA Today.
Foreclosures in Minneapolis rose 100%% in 2006. And they're expected to rise
another 100%% in 2007.
More than a million houses may be foreclosed this year - of which, 60%% are
the victims of subprime mortgage lending. Nor is the damage expected to stop
when the New Year is rung in on January 1st, 2008. There will be even more
foreclosures next year, says the Mortgage Bankers Association. Bears Stearns
(NYSE:BSC) has got a fever in the subprime chill. Even Goldman Sachs
(NYSE:GS) has a few sniffles.
http://www.dailyreckoning.com.au/foreclosures-rise/2007/06/21/
woo hoo !!! :)
The best way to make money in the dotcom boom was, of course, not by buying
dotcom shares.but by selling them to the public. Likewise, the best way to
make money in the housing boom was not by buying a house.or even by buying
the shares of a mortgage lender. You would have done much better to start a
subprime lending business yourself and sell the shares to the public. The
secret was to get out fast.before the market crashed.and before the feds
came after you.
(There is something about being a member of the public.a card-carrying
member of the lumpen masses.a good citizen.a voter.that seems to doom a man
to a life of failure. We are working on some thoughts.)
Bill Bonner
The Daily Reckoning Australia
http://www.dailyreckoning.com.au/subprime-lending/2007/03/06/
------------ and another article
What Caused the Housing Bust
By Porter Stansberry
August 18, 2007
Reprinted with permission by DailyWealth
Today, we take a break from our normal format to answer in detail a question
regarding the current housing problem that must be on the minds of nearly
all of our readers, as expressed by paid-up subscriber David Walker:
What is so unusual about the current times that so many smart people could
be so catastrophically wrong?
Porter comment: What happened (and what is still happening) is simply
leverage in reverse, or what people used to call a "run on the bank."
For nearly 10 years, as interest rates fell from 1995 to 2005, the mortgage
and housing business boomed as more and more capital found its way into
housing. With lower rates, more people could afford to buy houses. That was
good. Unfortunately, it didn't take long for some people to figure out that
with rates so low, they could buy more than one. Or even nine or 10. As more
money made its way into housing, prices for real estate went up - 20%% a year
for several years in some places. The higher prices created more equity.
that could then be used as collateral for still more debt. This is what
leads to a bubble.
Banks, hedge funds, and insurance companies were happy to fund the madness
because they believed new "financial engineering" could take lower-quality
home loans (like the kind with zero down payment) and transform these very
risky loans, made at the top of the market, into AAA-rated securities. Let
me go into some detail about how this worked.
Wall Street's biggest banks (Goldman Sachs, Lehman Bros., Bear Stearns)
would buy, say, $500 million worth of low-quality mortgages, underwritten by
a mortgage broker, like NovaStar Financial. The individual mortgages -
thousands of them at a time - were organized by type and geographic location
into a new security, called a residential mortgage-backed security (RMBS).
Unlike a regular bond, whose coupon is paid by a single corporation and
organized by maturity date, RMBS securities were organized into risk levels,
or "tranches." Thousands of homeowners paid the interest and principal for
each tranche. Rating agencies (like Moody's) and other financial analysts,
believed these large bundles of mortgages would be safer to own because the
obligation was spread among thousands of separate borrowers and organized
into different risk categories that, in theory, would protect the buyers.
For example, the broker (like NovaStar) that originated the mortgages would
be on the hook for any early defaults, which typically only occurred in
fraudulently written mortgages. After that risk padding, the next 3%%-5%% of
the defaults would be taken out of the "equity slice" of the RMBS.
The "equity slice" was the riskiest part of the RMBS. It was typically sold
at a wide discount to the total value of the loans in this category, meaning
that if defaults were less than expected, the buyer of this part of the
package could make a capital gain in addition to a very high yield. Even if
defaults were average, the buyer would still earn a nice yield.
Hedge funds loved this kind of security because the yield on it would cover
the interest on the money the fund would borrow to buy it. Hedge funds could
make double-digit capital gains annually, cost-free and risk-free. or so
they thought. As long as home prices kept rising and interest rates kept
falling, almost every RMBS was safe. Even if a buyer got into trouble, he
could still sell his home for more than he paid or find a way to restructure
the debt. On the way up, from 1995-2005, there were very few defaults.
Everyone made money, which attracted still more money into the market.
After the equity tranche, typically one or two more risk levels offered
higher yields at a lower-than-AAA rating. After those few, thin slices, the
vast majority of the RMBS - usually 92%% of the loan package - would be rated
AAA. With an AAA rating, banks, brokerage firms, and insurance companies
could own these mortgages - even the exotic mortgages with changing interest
rates or no down payments. With the magic of financial engineering and by
ordering the perceived risk, financial firms from all over the world could
fill their balance sheets with higher-yielding mortgage debt that would pass
muster with the regulators charged with making sure they held only the
safest assets in reserve.
For a long time, this arrangement worked well for everyone. Wall Street's
banks made a fortune packaging these securities. They even added more layers
of packaging - creating CDOs (collateralized debt obligation) and ABSs
(asset-backed security) - which are like mutual funds that hold RMBS.
Buyers of these securities did well, too. Hedge funds made what looked like
risk-free profits in the equity tranche for years and years.
Insurance companies, banks, and brokers were able to earn higher returns on
assets by buying RMBS, CDOs, or ABSs instead of Treasury bonds or AAA-rated
corporate debt. And because the collateral was considered AAA, financial
institutions of all stripes were able to increase the size of their balance
sheets by continuing to borrow against their RMBS inventory. This, in turn,
supplied still more money to the mortgage market, which kept the mortgage
brokers busy. Remember all the TV ads to refinance your mortgage and the
teaser rate loans?
The cycle kept going - more mortgage securities, more leverage, more loans,
more housing - until one day the marginal borrower blinked. We'll never know
whom or why. but somewhere out there, the "greater fool" failed to close on
that next home or condo. Beginning in about the summer of 2005, the momentum
began to slow. and then slowly. imperceptibly. it began to shift.
All the things the cycle had going for it from 1995 to 2005 began to turn
the other way. Leverage, in reverse, is devastating.
http://selfinvestors.com/tradingstocks/real-estate/whats-different-about-this-housing.../
