Juggling Dynamite

Goldman Sachs CFO also cited problems in its mortgage business and warned that the subprime sector’s woes are not over. Net revenues in its fixed income, currency and commodities unit, which includes the firm’s mortgage business, fell 24% y/y.

Freddie Mac reported its third consecutive quarterly loss, with the big miss attributed to derivatives and a widening in credit spreads. It’s CEO said that “the full impact of the housing downturn has not been felt.”

Comment:  Wall Street has made billions in packaging this stuff over the past few years, it seems fitting they should bear at least some of the pain as things unwind.  More to come.

Today the Wall Street Journal reports on how rising rates and tightening lending standards are dampening deal making in the commmercial realty world causing even players as large and aggressive as Blackstone to blink.  See Dawning New Realty for Real Estate:

“The change in borrowing costs was triggered April 11, when Moody's Investors Service fired a warning flare about Commercial Mortgage Backed Securities, or pools of real-estate loans that are sold to investors as bonds. Moody's said lenders' underwriting standards had become too lax during the real-estate frenzy. That warning scared investors and forced bankers to raise yields on CMBS offerings to attract investors, sending shock waves through the real-estate lending world.

The situation got worse last week when Treasury bond yields, on which the loans are based, shot up.”

“It's going to bring the price of real estate down,” says Gary Mozer, principal with George Smith Partners, a Los Angeles-based commercial real-estate finance firm. The “meltdown” in the CMBS market, as Mr. Mozer calls it, has caused a “sea change” in the amount that real-estate investors can borrow. “People can't pay as much for property because they can't get as much positive leverage,” he says.

Mr. Mozer estimates borrowers can get 20% to 30% less than they could have eight weeks ago

Today John Hussman of Hussman Funds reiterates the tight correlation of world financial markets in our very global econony: See Fragile Conditions: 

A final observation – given the extremely elevated and overbought condition of global stock markets, not just here in the U.S. but nearly everywhere, the combination of extended, uncorrected stock market advances and rising yield trends could invite a strikingly coordinated decline. Interest rates are already rising globally, and the U.S. trends are part of a broader picture. As I used to teach my international finance students, international diversification can be very useful over long periods of time – but it generally fails at precisely the point where it is most needed, because market declines tend to be globally coordinated. That's not a forecast, but it is useful to remember given the enthusiasm of investors for international investments at present. This could be an interesting few weeks.