Stories of financial problems from Credit Crisis

Why don't the finance experts know how much of the economy is going to be 'hit' by the fallout from the Mortgage crisis? Here are some examples:

E*Trades' problems E*Trade just sold a large batch securities backed by prime mortgages at fire sale prices. The problem has gone far beyond subprime mortgages.

They sold $3 billion worth of mortgages, of which $1.35 billion were prime secure mortgages to people with good credit ratings and good payment histories (prime, first-lien residential mortgages rated “AA” or better), for $800,000,000. That means they got $800,000,000 for the $1,350, 000,000 and nothing at all for the subprime mortgages! Those really good mortgages are worth 59% of face value in the current market.

The Florida local Government Investment PoolThe Florida “Local Government Investment Pool” is getting nasty. This Summer Florida Counties and cities had $27 billion in the pool. Then the credit crisis hit, and a lot of those governments got antsy and started withdrawing their money, so now it has only $14 billion. The State Board of Administration that runs the pool, and its three trustees, Governor Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum, have declared that no other withdrawal requests will be honored. How widespread is this problem?

Nobody ever really knows precisely what's going on when a crisis like this hits. There might be as many as 100 pools like this across the nation, with assets of something like $200 billion.

They are supposed to offer daily liquidity for the public sector in much the same way that money-market funds do for the private sector. They are supposed to invest their clients' money in the safest possible securities, good old boring things like U.S. Treasuries, top-rated commercial paper and certificates of deposit.

It seems, however, that some of the commercial paper investments the Florida pool, and others like it across the country, purchased were backed by subprime mortgages and other things that have declined precipitously in value.

The people who manage the funds find themselves in the position of not being able to figure out exactly what the assets are worth, because they don't trade, or don't trade much, and no one seems to know what the stuff is. [Snip]

If enough participants withdraw, the pools will have to sell some of that stuff that nobody can figure out what it's worth. You can bet that Wall Street, which packaged and sold the stuff in the first place, isn't going to offer 100 cents on the dollar for it.

This means that not everyone will get all their money back. On Nov. 30, an advisory panel of local governments in the Florida pool held a conference call with members of the State Board of Administration.

You can also bet that the local governments that invested in those secure pools are not going to accept less than 100% of their investment back.

And it’s not just in the U.S.

The town in Norway The New York Times has the story of NARVIK, Norway, a town north of the arctic circle that purchased ‘secure’ investments in order to get a return on the money they did not need immediately but expect to need in the near future. The people of Narvik and those of three nearby town have lost at least $64 million Kroner, and maybe more.

Rental Property Where else is the mortgage crunch/credit crisis hitting? California, of course.

Unable or unwilling to sell their homes at declining prices, homeowners in Riverside and San Bernardino counties are converting them to rentals, glutting the market and causing rents to fall for the first time in years, according to Inland property managers.

Among the new landlords are investors who bought houses at peak prices and have watched their equity evaporate or homeowners who have relocated, leaving behind a house they can't sell.

There are so many Inland homes for sale, that even if no more come on the market, it will take more than two years to sell the houses available, according to the California Association of Realtors. [Snip]

"It is a good time to be a renter and a lousy time to become a landlord," said Denver. He said in the past six months, the average time it takes to rent out a house in Perris has lengthened from two or three weeks to two months. Rents have fallen about 5 percent. He said the average monthly rent has slipped to $1,100 in Perris.
Denver said today a $300,000 house purchased with a 7 percent down payment would likely require a monthly mortgage payment of $2,500. The same house, he said, can be rented for $1,300 a month, "and the owner has to do the repairs."

The common thread here is that a lot of people bought what were supporse to be safe, secure investments and treated them as such. The risk was hidden from the investors, so they literally have no idea how risky the investments they own, or as is the case of the people trying to sell homes, they can't sell because no one can get mortgages to buy them out.

The Florida investment pool mirrors what is happening to a lot of investment funds. What if your retirement is in one of them - well, you still have Social Security, as long as it is not privatized. Had Bush privatized Social Security, it would be going down the tubes just like the investment funds in Florida, in Norway, and in pension funds who don't dare tell anyone how much trouble they are having. That's assuming they even know right now themselves. They will know.

There are two big points. First, no one knows how extensive the problems are, but right now we are learning that they are extensive. There are going to be a lot more stories like these. Second, Things are getting worse and will continue to do so for an unknown period of time.

Let's not forget who brought this financial disaster down on us. See my Saturday post laying out Who's to blame for the credit mess.