Will we reward speculators for destroying houses?

When the housing bubble collapsed, many speculators who owned the mortgages or related financial instruments refused to sell them at market value.

The speculators said that the market value was an “accounting fiction,” and if only the house sat unempty for months or years on end, it would become valuable again.

The speculators refused to sell the house to someone who would care for it, out of their financial self-interest, and in many cases the houses were subsequently destroyed.

Calculated Risk: Report: One-Third of REOs Seriously Damaged
Popik says responses from thousands of real estate agents nationwide to the questionnaires he sends out quarterly indicate that badly damaged foreclosed homes … are a much bigger element of the national housing picture than officials in Washington have acknowledged.

“In many cases, it costs so much to rehabilitate these houses, it’s just not cost-effective,” he told CNN. “And the properties are eventually going to be bulldozed.”

Whenever speculators complain about “toxic assets,” they are angered that the goods they purchased are now worth less because (a) they purchased them in a bubble and (b) they have not maintained them.

The definition of a “toxic asset” is (a) something worth less than it once was that is (b) owned by someone politically powerful.

6 thoughts on “Will we reward speculators for destroying houses?”

  1. i’m not sure this observation is relevant to your post… cause i’m not really sure what your post is meant to say. but if it you find it relevant, then all the better.

    i’m beginning to think that the major misstep in all this was not necessarily greenspan, or the banks, or the borrowers, or really anything other than a simple misunderstanding of what the term “asset” means. (that isn’t to say that there weren’t major missteps, they just weren’t THE major misstep.)

    it seems to me that an asset based upon a debt owed is intrinsically different than an asset based upon profits. i.e., a bond versus a stock certificate. of course, that is legally true. but for whatever reason, we stopped treating notes as debt, and started trading them in much the same way we trade stocks. but the risk level of a stock is, on an order of magnitude, different from the risk level of a debt, because a stock owner can be taken to zero, while a bond owner can never be (even in bankruptcy, and even unsecured creditors, will get something … if only pennies), since the legal rights in a debt obligation cannot be obliterated beyond bankruptcy. what this means is the risk level of a debt is never zero.

    here we have an asset bubble. but it is an asset bubble in the credit markets. these are altogether different things than an assent bubble in equities. one major difference is that an asset bubble in equities has already placed the risk of zero on the investor, whereas even at its most inflated price, the asset bubble in a credit market has never placed the risk of zero on the noteholder. when a credit bubble pops, all of a sudden the risk level situation changes overnight, whereas when an equity bubble pops, the risk level has not changed, just the level of reward.

    it seems to me, then, that central bankers should be more hesitant to intervene in some asset bubbles than others. and the ones counseling for more rapid intervention are those involves “assets” on the debts side of the ledger, whereas the ones counseling for less intervention, are those involving assets on the owner’s side of the ledger.

  2. Look at GM. Bankruptcy rumors are everywhere. Is it frozen? No. Is the market’s conclusion that GM common was worth 1.86 last Friday? With tens of millions of transactions a day, close enough for me. And yet, in the blink of an eye it’s going to be zero.

    Meanwhile, my 26-year-old ARM was taken over by Citigroup two years ago. I haven’t been late on a single payment in 26 years It’s in a MBS – probably devalued to around 22 to 40 cents. Whoever ends up with that MBS is going to get my payments just like clockwork; in fact, if they call me up and offer to close it out at 80 cents I’ll bring a bag of 100s to them before their coffee is cold. 80 to 90% of the homeowners in that MBS are like me. We have at least two Nobel prize winning economist running around claiming my commitment to pay my mortgage could be worth ZERO. I’ve got news for them.

    It will be fun to read the postmortem conclusions on the causes of the credit crisis. I still think Mark to Market, as then configured, is going to be found substantially at fault.

    One irony, the biggest critics of free-market economics are now the biggest proponents of Mark to Market. Pinkos are now followers of Milton Freidman. Stress does funny things to people.

  3. sonofsamphm1c,

    The difference between GM stock and AAA-rated MBS’s is that the owners of one are politically weaker than the owners of the other. The GM stock price has declined far more as percentage than the value of “toxic assets,. Because GM’s stock exists in a more-or-less market economy (albeit with government assurances that the enterprise is too big to fail), and MBS’s do not, GM shares are allowed to rise and fall with the market, while MBS’s rise and fail with Geithner’s latest plan.

    One irony, the biggest critics of free-market economics are now the biggest proponents of Mark to Market. Pinkos are now followers of Milton Freidman. Stress does funny things to people.

    I can’t comment for pinkos, but I’ve mentioned several times that the financial crisis has speculators talking like left-wing feminists, insisting that the “value” of their contributions is unfairly tied to the market price of their contributions in the eyes of policy makers.

    Fed. X,

    I think that may be reasonable.

    Using the current idea of ‘asset,’ I have several times played Financial Derivatives Monopoly, which gets around the rule against loans by instead selling shares in organizations whose sources of income are the revenue of houses that are not yet built.

    In the most memorable game, I had no cash on hand, no properties, and was the richest player in the game.

    Then the crisis struck — a solvency crisis tied to the value of housing (or, more technically, real estate tax). The solvency crisis became a stability crisis, as no other players were willing to help… The game ended in an inflationary spiral.

  4. tdaxp: is this a real game? sounds hilarious.

    i think its no secret that i like PPIP for very selfish reasons… but i have to say that now that i’ve had the time to do some digging, it is clear to me that: no one knows what they have.

    this is THE MOTHER of the market for lemons, if there ever was one. good MBS are written down because of the risk of some bad ones. but when was the last time we had a used car sale where prices were below true value? at auction. not treasury, not Citi, not the the raters, no one knows whats in the basket. so auction, while preferred, is still problematic.

    at auction, everything is supposed to be sold free and clear. of course, some cars get sold with liens still attached, and the buyer who thought they were getting a deal just gets a brand new IOU along with the purchase price.

    there is NO way an insolvent institution is going to list its assets at auction, as that would accelerate its insolvency. PPIP will only work for banks that are just weak, but not insolvent. it will give them a market to dump some assets for a reasonable price, and raise some much needed cash, but it will not do anything to change those banks that are insolvent.

    i am now of the view that we should go ahead and nationalize the insolvent institutions. starting with Citi. in fact, Citi could become the universal bad bank, which buys up the remaining troubled assets and eventually serves as a breakwater for the rest of the financial sector.

    in addition, the Feds should accelerate lending to solvent banks and financial institutions that are simply living through a cash crunch. punish failure brutally, reward success lavishly. this will cost the US taxpayer another $1T. but it will be worth it.

  5. Fed X,

    I think Credit Derivative Monopoly is legal, as long as the Monopoly rules are (1) literally interpreted and (2) if everything that is not prohibited is allowed. Here is my impression of how Monopoly rules should be interpreted [1] 😉

    The intellectual justification for a free market I am most familiar with [2] argues the inability of an individual party to rationalize ascertain the true value for goods is an argument against planning. If I am understanding you, you are arguing that systemic uncertainty is an argument for planning.

    I do not understand why insolvent financial institutions are allowed to make their own decisions. Even in the absense of new and improved laws, I would imagine it’s a straightforward thing for the Treasury to stress an insolvent financial institution into doing its bidding. Instead, the Treasury is busy funneling money to these institutions through hapless intermediaries [3].

    The mechanism we have for saving institutions that are experiencing a cash crunch serious enough to threaten normal business operations is bankruptcy. The only difference between firms that go into bankruptcy because of such a serious cash crunch, and those that do not, is their political power.


    See [3] for demolishing homes in a much sunnier place…

    [1] http://www.tdaxp.com/archive/2008/11/30/chinese-logistics.html#comment-175419
    [2] http://www.amazon.com/Road-Serfdom-Fiftieth-Anniversary/dp/0226320618
    [3] http://www.tdaxp.com/archive/2009/05/01/demolishing-new-homes.html

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