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Five Things You Need to Know: Subprime CDO Losses "Limited" to $52 Billion; Are We Talking About "Real Money" Yet?; Home Construction: Jobs-A-Plenty?; No Good Deed Goes Unpunished; Appalling and Outrageous!


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Subprime CDO Losses "Limited" to $52 Billion

Losses from bonds secured by U.S. subprime home loans will likely reach $52 billion analysts at Credit Suisse Group said, according to Bloomberg.

  • Subprime defaults "are clearly a huge problem'' for investors in collateralized debt obligations (CDOs), Credit Suisse analysts in London wrote in a report.
  • "But we do not think that they are a systemic one.," the July 6 report said.
  • Investor losses from CDOs could range from $26 billion to $52 billion over time, the Credit Suisse analysts wrote.
  • Banks actually face a bigger risk from the loans made to hedge funds that invested in subprime CDOs than from their own holdings of the securities, the Credit Suisse analysts noted.
  • Banks are unlikely to lose more than $10 billion on the CDOs they hold because they typically keep the least risky portions of the securities.

2. Are We Talking About "Real Money" Yet?

So the major banks losses on bonds secured by subprime loans will only be about $10 billion. Whew! That's a relief.

  • Ten billion dollars? Big deal.
  • After all, we're talking about the Big Time Banks here, not some fly-by-night hedge funds of the kind run by Bear Stearns that collapse whenever some guy in Utah makes a late mortgage payment.
  • No, we're talking the big time. Ten billion dollars? Pocket change.
  • Or is it?
  • What is a billion dollars, anyway?
  • It sounds so trivial when you toss it out as simply an aside in, say, a Credit Suisse analyst report.
  • Well, let's look at $10 billion dollars.
  • Here's a million dollars: $1,000,000.
  • Pretty small potatoes, isn't it? In fact, it's almost sad when you think about how small that lonely 1,000,000 is all by itself there.
  • Let's get serious. Here's a full 10% of one (1) billion dollars:
    $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000 + $1,000,000.
  • Yeah, that's $100,000,000 bucks right there, a full 10% of a billion.
  • Why, that's almost like we're looking at "real money," isn't it?
  • Still, even that is only a mere 1% (one) of $10 billion dollars.

3. Home Construction: Jobs-A-Plenty?

Here's a conundrum: Why isn't the collapse in housing and home construction showing up in the monthly payroll estimates from the BLS?

  • The number of housing starts and units under construction have both plunged over the past year, while residential construction employment fell a scant 3.5%, notes Bloomberg's John Berry in a piece out this morning.
  • Moreover, last month the number of people supposedly at work on homes was unchanged from May at a bit more than 3.3 million.
  • What gives? What are all those people working on?
  • "Something isn't right,'' economist Ray Stone of Stone & McCarthy Research Associates told Berry. "We think that the BLS monthly payroll estimate is overstating the pulse of labor market conditions.''
  • Stone notes that the problem may lie in the relatively small number of construction firms in the Bureau of Labor Statistics' data, Berry writes.
  • Even the San Francisco Fed's Janet Yellen is skeptical about the accuracy of construction jobs data, Berry says.
  • "Most of the recent slowdown in labor productivity growth can be accounted for by such lags in just one sector -- residential construction," Yellen said in a July 5 speech.
  • "Although this sector has experienced huge drops in spending, employment has been remarkably well sustained,'' she noted.

4. No Good Deed Goes Unpunished

The San Jose Mercury News says more lenders are assuming ownership of foreclosed houses in the San Francisco Bay area as fewer bidders are showing up at foreclosure auctions.

  • A growing category in the housing market is in so-called Lender-Owned Homes, known as REOs - "Real Estate Owned."
  • Once rare, especially in Silicon Valley, these REOs are threatening to further pressure prices in the area, the San Jose Mercury News says.
  • "One of the reasons so many foreclosure properties fail to find buyers is because the bidding typically starts at the amount of the unpaid balance on the first mortgage, and in a soft market, some homes are no longer worth that much."
  • In May, $2.8 billion worth of California real estate went up for sale in foreclosure auctions, according to (See Number Two for $2.8 Billion).
  • Of that amount, about $2.6 billion worth failed to find buyers, and so became bank-owned.
  • Moreover, according to the article, that figure is up significantly this year from January's $1.49 billion.

5. Appalling and Outrageous!

The New York Times on Sunday reported some truly appalling and outrageous news about Bear Stearns CEO James Cayne.

  • According to the Times, on June 14, the day Bear Stearns reported a 10% drop in its operating earnings for the second quarter, Cayne played a round of golf at the Hollywood Golf Club in Ocean Township, NJ.
  • He shot a 96.
  • A week later, as a number of banks pressured Bear Stearns to increase the collateral on loans they had made to one of its troubled hedge funds, Mr. Cayne shot a 98.
  • The very next day, as Bear Stearns pledged $3.2 billion to bail out its fund (later reduced to $1.6 billion), Mr. Cayne shot a 97.
  • Good lord, that's... what... a 28 handicap?
  • Anyway, here's the APPALLING AND OUTRAGEOUS part:
    According to the Times, "In the summer, Mr. Cayne routinely hops a helicopter from Manhattan to the Hollywood Golf Club in Ocean Township, N.J., where his pilot has permission to land on the grounds."
  • No golfer with a handicap higher than a 9 should EVER be allowed to land in a helicopter ANYWHERE NEAR a golf course!
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