A Picture Is Worth (-)Trillons

Thanks to ML for this photo that shows graphically what is obvious to anyone paying attention - we have had a "slight" bubble in the real estate markets over the last coupla years.



The font is too small to read so let me translate: greatest bubble in the past - scaled to 125%. Today - scaled to 200%.

Let's just say I am not being paranoid (for once) when I say this will take a little while to come back to reality.

Let The Backlash Begin

To be honest, I was kinda bummed to see my former employer's name mentioned in the first major headline on this topic, but I can be certain that they will not be the last. I will be absolutely shocked if we don't see certain rating agencies among all of the largest creaters of these instruments in future similar headlines.

Sorting through the mess that is only beginning to be borne by the purchasers of this junk is going to take years and lots of effort. For an entrepreneurial attorney, becoming an expert in this area will likely reap rewards over the next few years:

Lehman faces legal threat over CDO deals

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank’s local subsidiary, Grange Securities.

Why Is the Bad So Bad

Thanks to SK for forwarding this article from the Fool walking through the nuts and bolts of why the Bush "bail out" is so bad. If you have a few minutes and are interested in a quick summary of some of the implications of the current attempt at putting a band-aid on a compound fracture to save some face on wall street, I would take a look.

Bush's Bailout Bait-and-Switch

One note though: I think stopping the wave of ARMs is not a bad idea, I just don't know why this can't be done through private sector action. Why can't the holders just re-negotiate terms with homeowners en-masse if necessary? I know there are challenges of collective action among other things, but if these financial institutions are sophisticated enough to tranche up and price a CDO^3, can't they pick up the phone and talk to a homeowner who is about to be pushed off a cliff?

"Put" Is An Understatement

Things have surely turned dark quickly. It was just three months ago that the concept of a "put" to the government was somewhat in question as I discussed in September.

With three consecutive rate cuts not sufficing to convince the market that the put is strong enough (the market fell 250 points in less than 2 hours yesterday after the 25bps cut was announced), the central banks decided to pump some liquidity directly into the economy as discussed in the following article:
Banks act on meltdown fear

The Bank of England joined four other big central banks around the world yesterday in emergency action designed to prevent the worsening credit crunch derailing the world economy.

These moves coupled with the response to the government's recent bailout attempt in the subprime market have only done more to stoke the fears that the worst is only yet to come: Bush's Subprime Mortgage Freeze Stymies Bond Market

I wish that I could say that my sentiments were improving or that somehow these bail out attempts seem to have hope of preventing the onslaught of massive defaults that we are beginning to see emerge, but at this point, the spiral only seems to darken, and even continued attempts at bail out seem doomed.

Yale Continues The Progressive Strategy

This is a great sign. It looks like Yale already followed Harvard's lead in dropping tuitions. Hopefully the tide will swell...

Yale to Join Harvard in Easing Student Cost, Schools May Follow

Yale University next month plans to announce a student aid plan that could rival Harvard's initiative to ease costs for ``middle-income'' families.

Again what impresses me about this is both the moral fiber that these schools are showing by doing the right thing, but it can also be seen as a private market solution to the problem of increasing costs in higher education. This, among other factors, has been a major burden for the middle class. It is exciting and reassuring when powerful actors do the right thing to help solve the problems of the marketplace.

Harvard Leading the Way

This is a really cool article about Harvard's new policy regarding financial aid. It not only shows how progressive leading universities are now getting with regard to making a real commitment to socially-mobile education policy, it also shows that private sector reform can lead the way to education reform with the right leadership. I hope this is a sign of future reform in this direction as education truly is the most important piece of the puzzle.

Harvard Targets Middle Class With Student Cost Cuts

Harvard University will cut the costs of attending the Ivy League school by as much as 50 percent for families that earn $120,000 to $180,000 a year, making access easier for ``middle-income'' students.

These families will pay 10 percent of their yearly earnings to send a child to Harvard, the Cambridge, Massachusetts, university said today. The payments decline on a sliding scale, with those making less than $60,000 attending for free. The school also eliminated student loans, saying they will be replaced by grants as needed.

Case in point: if we had a better public education system, perhaps people buying homes at the peak of the real estate cycle with adjustable rate mortgages might have anticipated that this was not an ideal situation for the family budget.

On an unrelated note...
I just read an awesome piece on the credit crisis by Bridgewater. Will try to post about it later. But the punch line is this:

Just because I have been silent on increasing problems in the credit cycle over the last couple of weeks does not mean I feel they are dissipating. Bridgewater agrees, and although slightly more optimistic than me, they are only slightly - and probably ten times more specific in their fears.