Gross on credit crunch: 'It continues to get worse'

The Dow industrials sold off twice today -- at the open and at the close -- to finish with a preliminary decline of 504 points. Certainly not financial Armageddon, but not a good day.

There is a temptation, particularly on Wall Street, to view each new wave of bad news as a potentially positive development -- "Thank God that mess is behind us" or "What doesn't kill me only makes me stronger," etc. It's hard to make that case today.

As Bill Gross said on CNBC today, the credit crunch is worsening.  Unless and until the federal government dreams up new government-supported mortgage programs (and I suspect the next presidential administration will dream something up in 2009), this means tighter credit and a longer and deeper housing slump.

Gross on the credit squeeze: "It continues to get worse. Credit markets worldwide are in the process of de-leveraging, which, in the absence of new capital, leads to asset sales and lower prices and margin calls and further price declines." The last thing he said was, "We need a buyer of assets."

There is one big buyer out there I can think of. It's the government. I'd sure like to hear a serious debate between the two presidential candidates on the government's proper role in the housing and financial markets in 2009.

Tidbits: Washington Mutual shares fell 27% today, to $2; Downey Financial actually rose a penny, to $1.48. Investor Wilbur Ross said he sees "possibly as many as a thousand bank closures in the coming months."

The Bank of America takeover of Merrill Lynch became quite a bit less generous today. BofA shares fell 21%, reducing the value of its bid accordingly, from $29 per Merrill share to roughly $22.82 per share.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo Credit: Associated Press

Comments

[Joe]

This spretty much sums everything up.. if you buy real estate now you have a serious mental problem.

[356man]

First I get to read about the clown in Moreno Valley, now this. This sure sounds like Black Friday all over again, only now with an overwhelmingly indebted government expected to save the day? Thanks to the administration's reckless fiscal policies, if you can call them that, and now the sense of entitlement that everyone who is even slightly in debt (it's the mean old banks' fault I'm underwater) has developed no wonder we are likely headed into a major depression. This is going from ugly to unwatchable, but watch and suffer we must, no thanks in part to folks like Bob Chiordi.

[Jim]

"We need a buyer of assets."

You know, in the old days, the bank that gave you a mortgage HELD the mortgage. They knew their customers. They knew the neighborhoods. They knew the risks on their investments. I find it hard to believe that we can't function without some big, government or government-sponsored institution repackaging mortgages into exotic securities...

[adoptivefather]

"We need a buyer of assets."

Funny that's exactly what I told my wife after our stock in Fruit of the Loom went under.

And I still can't figure out how my FTL stock was transferred for free to Warren Buffett.

I never thought an underwear stock would go out of business.

[Nelcisco]

Peter, I would like to see the candidates debate on the role of government also, but I can see Obama using this subject
of bailouts & socialized losses of private corporations to segway into why we should also socialize other areas like healthcare for the poor and social consciencness toward the elderly, if its done for Fannie/Freddie why not grandma/grandpa

[bigunit]

Get ready for Chinese & Gulf State ownership of U.S. based corporations. Maybe we sell Alaska & Palin to the Russians or Chinese for some cash? What are the odds that Bush pushes legislation thru to make such ownership a reality? It's inevitable.

[MyLessThanPrimeBeef]

Regarding assets needing a buyer, I wonder if Gross is talking about the Lehman bonds he bought last June (see Bloomberg).

I think he's hoping for a Frannie II.

[anonymous]

The government, hugely in debt, is now supposed to buy the assets?!? How ridiculous. This is supposed to be a free market economy. You MUST allow the failures to fail! That includes the big 3.

[E]

Got ZIRP?

nahhhhhh.

Got NIRP?

That's what I'm talkin' bout baby!

[Wes Boudville]

Since this blog is about land, spare a thought for the New York real estate market. In the last year, there have been remarks elsewhere about how New York is immune from the unfolding real estate crashes in far off places like Miami, Las Vegas and Los Angeles.

[ry]

Here is an article in the New York Times on AIG:
http://www.nytimes.com/2008/09/15/business/15aig.html

What was interesting for me was that it gave valuation figures for sub-prime versus alt-a mortgages:

"As of the most recent quarter, for example, A.I.G. had $20 billion of subprime mortgages marked at 69 cents on the dollar and $24 billion in Alt-A securities valued at 67 cents on the dollar. But Lehman officials on a conference call with investors last week said it was valuing similar subprime mortgage securities to those held by A.I.G. at 34 cents on the dollar; its mark on the Alt-A holdings was 39 cents."

What I'm concluding from this is that the financial analysts are expecting nearly the same percentage of defaults for alt-a as sub-prime, otherwise Alt-a loans would be getting much higher prices on the dollar than sub-prime. I'm not in finance, so can anybody more familiar with this stuff confirm or refute my conclusions?

If my conclusions are correct, and the majority of alt-a loans have yet to reset, the housing market is in for a hell of a bumpy ride.

Although I resisted buying a house during the bubble years, just to show that no one is immune to this meltdown, I bought a life insurance policy from AIG last year. They were quoting some of the cheapest rates, and I thought they were too big to have any problems. I guess you get what you pay for, even in life insurance.

[Robert in Palm Springs]

This is only the beginning. The stock market is poised to move much lower despite the ferocious efforts of the PPT to prevent this. Having used up their ammunition on Fannie, Freddie, Bear Sterns et al, it is time for the market forces to take over and put stocks where they should be. Like housing, stocks have been artificially inflated and now it is time for a reality check.

Nothing is worth what we have been told it is worth because it is all made up. Our entire financial system is fundamentally flawed because it has NO stable touchstone (i.e. a gold standard) from which to measure the relative worth of our currency, stocks, housing or anything.

It is funny in the sense that we capitalists got exactly what we deserved. By deregulating everything, we took everything to the extreme through greed and leverage. Now, the only apparent salvation is socialism and the capitalists are screaming for it. How ironic!

We are facing a worldwide systemic failure. How this will be resolved is unknown but it is guaranteed not to be fun.
Ultimately we know that America cannot pay its debts and our days of Empire will soon be over. We will have to beg, borrow and steal just to survive rather than bully, borrow and steal as we have always done before.

[AB]

Peter -

Before you quote Gross, you should preface your posting with a disclosure that Gross can profit greatly when he obtains a certain outcome.

Here is a recent quote from him after the Freddie and Fannie Bailout:
Commenting on the Fannie and Freddie bail-out in a television interview yesterday he said that he liked the plan Treasury Secretary Hank Paulson had put in place, because "it lowers mortgage rates and helps support housing prices".

How about "I like this plan as this has made me the second richest person in the US - I am only a few billions away from Buffett"

[lioness]

Robert in Palm Springs...I was hoping for a post from you...we exchanged some information a couple of months ago when I'd said I got out of the market and put all my assets in cash, CD's or other non-yield, but safe instruments. At that time, you'd mentioned that the market would sink to 10,000...is yesterday's fall the one you were expecting? Lower still?? I'm an "investor," not a market-timer, but these days, "investments" seem foolish.
It would be nice, though, to put some money to work, but where??? Thank you for your present, and previous comments. Lioness

[NewtoLA]

I can see Obama using this subject
of bailouts & socialized losses of private corporations to segway into why we should also socialize other areas like healthcare for the poor and social consciencness toward the elderly.

Nelcisco, your boys bush, greenspan, paulson, and bernanke are/were calling the shots. Stop bending over backwards to blame democrats it makes you look silly.

Also, I'm sure you know something about someting, but health care it ain't. 1) Free market for health care is impossible without a loss of technology. You can't have hundreds of billions invested in research and expect people to pay out of pocket.
2) Elderly aren't offered insurance without gov intervention. Do you know what happened before Medicare? They got sick and died.

Not sure I like your world, dead grandmas and no medicine.

Please don't tell me you buy those Harry and Louise commercials about government interfering in health care? Dude, their commercials and they're aimed at stupid people.

[TrojanDLA]

Have people forgotten the "zombie banks" in Japan when their economy went into a tailspin of collapsing credit and 0% interest? Yes, the government intervened to prop up failing banks and well, it didn't do much good.