A Real Bear Market

Bear Stearns, the investment bank & Wall Street icon, is in talks to be acquired… quickly. As I wrote about a few days back, Bear is in serious trouble and is on life support thanks to the quick intervention of JP Morgan and Fed. After a week’s worth of posturing about the strength of it’s portfolio, Bear quickly reversed course on Friday and was promptly rewarded by having it’s stock price knee-capped.

The lifeline provided by Morgan is apparently a short one, for word this weekend is that Bear is looking to be sold in the next few days to avoid filing bankruptcy.

This is probably the tip of the proverbial iceberg, folks. A lot of the big banks and investment houses bet heavily on mortgage-backed securities, and as time goes on the gangrene in the mortgage market is slowly climbing it’s way up the food chain. Now, the ‘Alt-A’ market is starting to experience the same stress that the subprime one has for the last year or so. This is going to get uglier before it gets better. Hang on for what promises to be an interesting 2008 election cycle.

On a related note, the ‘intentional foreclosure’ movement is branching out away from the main stress zones of Southern California, Nevada, Florida, etc. My local paper has an article running right now about the growing number of Minnesota families choosing to sacrifice a house and keep the cars, credit cards, etc. The article quotes bearish economist Nouriel Roubini and his pessimistic views of the situation and then goes on to quote some real estate/mortgage types who dispute the idea that a new generation of ‘callous customers’ is growing that would walk away from a home that has become a bad business deal. I had no idea that it’s callous to try and find the best way to right one’s financial ship. How dare we stiff those noble mortgage companies that were so eager to sell people toxic paper in order to turn quick profits? The borrowers are paying the penalty for not being well-informed before signing on the line, but the lenders are equally guilty of pushing crap to make a quick buck.

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3 Responses to A Real Bear Market

  1. mike says:

    When a business plays tough and ditches assets, cuts relationships with suppliers, and generally ‘does what it takes’ to make a profit – we honor them and put them on the cover of Fortune. When a family or individual does those same things – as we may be seeing now in the mortgage crisis (or as we did prior to the credit card bankruptcy law changes) – we admonish them for being bad citizens, milking the system and deadbeats.

    Profit is king. Spending is god. But saving your own skin is only OK if you are a CEO or saving jobs and employing folks in the noble method of capitalistic consumptions. If you are a homeowner (debtowner) – suck it up and help out these dear folks out there who are losing their million dollar shirts in bad deals.

  2. Jim says:

    A relative of mine is way upside-down on her mortgage, a problem compounded by the fact that she no longer lives in the house, or even within easy driving distance of it (with no plan to move back). She hasn’t tried to sell because the area where the house is located is depressed and there is almost no hope of selling for better than 75% of the mortgage payoff.

    I’ve been encouraging her to work with her lender on a possible reduced payoff before the discrepancy gets worse. She clings to three notions that prevent any action:
    1. It’s a matter of personal honor to pay the mortgage.
    2. Home values always go up in the long run.
    3. Good credit is the same as, or even better than, actual wealth.

    I asked her to consider that the price of the house could fall even further, such that the payoff would be ~3x the market value (instead of about 1.4x as it is now). Certainly any useful reduced payoff option would then be harder to negotiate, and she’d be stuck paying a huge amount every month on a nearly worthless house. It’s depressing to watch someone going through financial ruin to protect a high credit score.

  3. Bart says:

    @Mike:

    Indeed. Banks cry for relief & bailouts from the government, but then turn around and talk about the ‘shame of bankruptcy’ and the like. Such two-faced rhetoric is becoming more and more common these days. As the market keeps getting worse, more and more people are going to have to look at their houses as a rational investment versus an emotional keepsake, and more people are going to “know when to fold ’em” and walk away.

    @Jim: Good to hear from you again. I see your blog has risen from the ashes again. 🙂

    The whole “personal honor” thing is so ingrained in our culture… especially when it comes to money. I know many people who would rather take out payday loans rather than ask their parents or other family members for help.

    Credit scores can rebound quickly. There are many stories floating out of California about people who have had a house foreclosed, or filed bankruptcy, and then getting solicitations for credit within six months. As more people are forced to embrace one or both of these options, they will lose a lot of their social stigma.

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