[airship]

Last week, it appears that central banks intervened massively on a global-scale in the so-called "free market" by providing "cheap" loans or at least "loans welcome at any price" to financial enterprises apparently affected by the recent difficulties in the US home mortgage market.

Some of the figures being quoted in the press: the ECB (European Central Bank) alone poured in over €100 billion in order to facilitate any European-based lenders affected.

Excuse me for assuming that these are in fact substantial state-provided subsidies for the benefit of what are (or were) wholly private and commercial enterprises declaring record profits until quite recently...?!

I did recently hear about some Wall St. bod who'd been forced to part with his 45m motor yacht in order to make up for some of the losses experienced by his managed hedge fund, but otherwise, the financial whizz-kids appear to be holding their own (with some timely state-intervention)...?!

What I'd like to know, is why apparently no efforts are being spared by governments internationally when it comes to mainly rich and profitable private enterprises affected by defaults on their investments - at the same time as the private individuals themselves who are at the source of the problem, and apparently can no longer meet their financial commitments / mortgage repayments etc. are inevitably foreclosed-on due to a total lack of government intervention or any help.

Indeed, one suspects that today, the rich man will inevitably be able to squeeze his camel (and why not superyacht?) through the eye of the needle to the Kingdom of Heaven, whilst the thousands of ordinary (Americans) who might have made it through instead, are just given short-shrift...?

What say you, fellow superyacht commentators?!

[Loren Schweizer]

As of this writing, the ECB is well up over $200B in its efforts to prop up certain French and German banks to allay any fears of a possible meltdown.
A slowdown in financial credit growth, according to the folks over at Barron's, could have some ugly repercussions and unpleasant implications for the economy as a whole.

A global bank run would not be helpful to the boat business.

[YachtForum]

Airship,

I have merged your new thread with an existing thread of the same topic. Let's all try to make a concerted effort to use existing threads. Not only does this automatically notify other posters in the existing thread, resulting in greater participation, but it produces more relevant returns when searching YF.

Thanks!

[First Pericles]

Cultural differences abound. My nephew lives in Kunming SW China. He's been there for about 8-9 years after graduating in Mandarin at Leeds university. He tells us that there are hundreds of new flats and apartments being built at an enormous rate. These are snapped up by Chinese investors almost off the drawing board. However, these dwelling are NOT for living in. They are mothballed in the hope that they will increase in value. Apparently, the Chinese believe a second hand home is less valuable, so all are left empty.

How long will this go on? Who knows, but eventually there will be a realisation that investment in thousands of empty flats is like the story of the Emperor's new clothes. Already, according to TIME, China has dozens of shopping malls that are empty of customers because the shoppers earn only a tenth of Westerners incomes and cannot afford the Western brand names.

First Pericles

[airship]

Best understatement of the year (to date):

A global bank run would not be helpful to the boat business.

If you don't mind me saying so, one might also add to this the awful suspicion that noone, beginning with the companies who issued the home-loans in the 1st place, the others who sold on the packaged mortgages, and finally those companies currently holding these securities knows what the hell's going on, who owes or own's whatever or what the paper anyone possesses is really worth...?! There's a lesson or 2 to be learned from these events.

There must be more than a few superyacht owners involved in every step of the process if you think about it.

Back to fundamentals:

1) A number of American home-owners obtained mortgages that they are no longer able to service.

2) These mortgages were supplied by companies whose business methods did not comprehend the requirements to match long-term liabilities with long-term investments.

3) These home-loans are currently unravelling.

The solution:

1) The underlying problem is that individuals are not able to repay their loans. Instead of fore-closures, the simplest remedy would be to revalue their mortgages with a view to making them more easily serviceable.

2) House prices are on a downward-trend in most areas, something those who issued the original loans (and then bought them) wouldf have been aware of.

3) The solution is simple, instead of a global financial meltdown, central banks and the other principal actors in this debacle should seriously consider:

a) Rewriting the original mortgages that the people can no longer afford, with new mortgages on the basis of say, worth 70 cents on the $1 or so.

b) The result might be mortgages that people could afford to repay. Some companies would have to carry substantial losses as a result obviously. But they would be able to offset these losses against future profits (isn't it strange though, how companies can do this, yet your average citizen usually cannot...?!

If sub-prime mortgages were really to blame for the current difficulties, then the obvious answer would be to remove the sub-prime problem entirely...surely?! Unless, of course, it's not that ordinary individuals can no longer meet their repayments which is the main problem. The main problem being a mismatch between long-term assets and short-term obligations. And not just for home purchases...?!

[YachtForums]

Great post Airship!

[airship]

Clarification: Thoughts form in my brain and then I try to put them down in writing. A lot can happen in between. My ideas are probably not very well thought out to begin with.

I don't know why it always appears to take me 10 times as many sentences to get across the same message in 5:

The vultures are undoubtedly "circling and waiting to pounce" even as we speak, buying up all those non-performing assets - the "sub-prime" residential mortgages for "X cents" on the dollar. They serve a useful purpose in financial markets apparently, ostensibly mimicking what happens in nature, relieving (in a fully tax-deductible way) otherwise healthy financial institutions from their sores. Except that in this particular case, the victims are not really quite dead yet, they're actually real live people, probably a lot like you and I, who just can't afford to pay their mortgages any longer, and are now facing eviction, bankruptcy and destitution. For once, it would be just great if something like the equivalent of the profits which these vultures stand to make this time around, could be "spent" in actually trying to help out the people struggling with their mortgages, so that they might keep their homes and not end up on the streets. The vultures can always go off and "short" Microsoft or some other corporation, should they really be allowed to shred real live people - real vultures don't do that, otherwise they'd be known as predators...and like it or not, once a predator has crossed the border to becoming a man-eater, it simply has to be put down, as Jim Corbett might have once said.

[airship]

No lesser a figure than the BBC's own business news editor, Robert Peston, appears to share my own sentiments with regard to the "free-handout from the taxpayer" that once hugely profitable financial enterprises are currently getting through the numerous central bank interventions recently.

Whilst these billions of emergency funds go out to companies who might have known better (so why intervene in the 1st place, "let the market decide who stands or falls"...free markets, capitalism etc.?! ), some 179,599 (one hundred seventy-nine thousand and five hundred ninety-nine only) filings for foreclosures and repossesions were made in July alone in USA. That's a lot of households: lots of adults, children and pets who're going to have to find someplace other to live. That's a lot of human suffering. One asks just how much help the government and central bankers gave them?!

They can't all have been property speculators. Or bought to let. With property prices what they have been, is it any wonder that ordinary people are forced to lie about their incomes - if they're ever to get a foothold on the housing ladder?!

I always knew there was a military-industrial complex that held sway over all our lives. The most recent proof of this was the recent $ billions in official US "military aid" for Israel and other middle-eastern countries. In other words, an "arms race" in the making. That there may also be a political-financial complex that bleeds us dry too, well, that just sucks...

[Loren Schweizer]

airship, I sympathize with your viewpoints.
From all outward appearances, it seems like the "little guy" is taking it in the neck.

But, not so fast.
I am a diligent reader of FT, WSJ, and Barron's, mostly because I find finance and economics fascinating.
Fascinating in that economists are like weatherman/weatherwomen: they don't always get it right. With spectacular results, eh? BTW, train wrecks are morbid, but I can't help but watch.

This is my take on things:

One wag in a recent WSJ piece mentioned that a future doctoral thesis might be able to explain the whys and hows and the still-unraveling ramifications of this sub-prime mess.
The so-called 'Greenspan put' (options-speak for buying your way out of a problem) has been blamed for allowing the "Moral Hazard" (If the Fed moves in to fix the problem, won't that reward future riskier behavior?), i.e., the bailouts of Long Term Capital Management in 1998 and the drastic lowering of the Fed Funds rate following the dot-com implosion in 2000 which, in turn, only led to the overheating of the housing market due to low borrowing interest rates.
Low rates enticed many and greed led lenders to entice many more to buy housing requiring little or no documentation of income or credit history (or downpayments, for that matter). Historically low interest rates were expected to stay low forever?
People really thought that?
Folks also said that they feared if they didn't act NOW, they would never, ever, ever be able to afford a house.

BTW, the relaxed standards of Moody's and the S&P mortgage bond ratings in recent years was also a huge contributor to our current morass. They massaged BBb- tranches ("slices" of huge Mortgage Backed Obligation bond offerings) to magically transform ( I still, to this day, cannot figure out how "they" did this) to AAA+ and, then, through the derivative process, managed to spread all that seemingly-solid paper literally around the world. Amazing.

Add to all that the increased use of quantitative programs in the major hedge funds--as opposed to good 'ol fashioned actively managed funds--up became down and left became right, nothing made sense anymore until, well, the shares hit the fan, so to speak. No one expected computer trading programs to sell off high-valued blue chips and rush to buy crummy issues.
Who knew?
But, that's just what highly-leveraged positions and margin calls led to.

If the pros couldn't forsee what was coming, how could the little guy?

airship, you gave me credit for the "best understatement of the year (to date)" earlier in the thread. Thanks for the notoriety.

I will lay another Irrefutable Truism on you and our readers. Bear with me, here.
While I am slow to connect the dots, I have observed over the years that physical assets purchases requiring the borrowing of money, whether they be cars, or boats, or houses-- all share a common trait:

An Asset Purchase, With Little Or No Equity Toward The Mortgage (a/k/a a sizeable down payment) May Result In the Loss Of Said Asset To The Mortgager When Markets Decline.

Equity.
Equity.
Equity.

Zero percent down!! You can afford it!! Buy NOW!!

Maybe now, but maybe not later on.

I saw half-million dollar boats repo'ed in 1981 (and since) and secretaries whose Pontiac Fieros became "upside-down" to the point where the car was worth less than what they owed. They had no cushion.

So, Benny and the Feds are utilizing old-school methods as a fix by relaxing the Discount Rate to help the markets and financial institutions to recover.
They have left the Fed Funds Lending Rate alone (which would help everybody else's woes) so as to not aggravate inflationary pressures---which would exacerbate everybody else's woes.

If nothing else comes of this mess, there will be--or ought to be--a whole lotta folks who understand how equity works.
And how, just like the Dow, markets decline as well as rise.

Peace.

[airship]

Peace.

Amen.

To use your term "the little guy", well, that's who has been most "on my mind" of late. In a wider context, the "little guy" seemingly has been 99% responsible for GDP growth in far too many economies (the USA, UK etc.) most recently, compared to investments by manufacturers (at least in their home territories). Precisely because governments have "turned a blind eye" to the growth of various consumer credit and asset bubbles (ie. house prices). A few years ago, I'm sure I read about how some Japanese mortgage companies were arranging loans, not to be repaid over a 20 or 25 year period as might be normal, but which would actually span across several generations (ie. the original mortgages would be repaid by the children or their children)...?!

Ever since the dot.com market meltdown, and its' aftermath: 9/11; the invasion ousting the Taleban in Afghanistan; the invasion of Iraq; the rise and fall of N. Korea, the capitulation of Libya as part of "the axis of evil" in exchange for $2 or 3 billion; the new threat from Iran etc., I have begun to draw the conclusion that much of what we are all encouraged to view as crises are nothing less than events tailored to take our minds off the point that we in the 1st world (at least in Europe) are currently living the last of the "good times". Except for a few areas, we no longer make what we buy. We have few raw materials. Or important sources of energy. We're not even making enough babies. EU countries encouraging immigrants such as the UK (whether from within or exterior of the EU) will stave off the effects of ever fewer taxpayers paying for an ever-growing and older population for a bit longer than everyone else.

Far easier for governments to simply be a party to it all and inflate the true cost (or should one say, worth) of a 3 bedroomed semi-detached house built in the 1950s, by a multiple of 5 say, in order to give the impression to the average citizen that they're growing richer by the day instead of the truth: Just like the National Debt which increases without anyone paying much attention to it - a debt which will, one presumes, have to be paid by our children or their children and probably our great-grand children.

In the meantime, politicians all over the place today have basically "shelved" dealing with any of this. They're in it to be elected for 4 or 5 years or whatever. After which they will all be able to retire on fat pensions if they're not re-elected. Of course, the smarter ones who already had some arrangement with private enterprise before they entered public service won't even need the state pensions. They're laughing all the way to their (Swiss bank)...

Vive la révolution...?!

[Loren Schweizer]

Interesting note, airship, regarding the Japanese intra-generational mortgage extension: that would have been very humane considering those buyers in the Eighties suffered an eye-popping 80% drop in housing values in relatively short order.

Now, on a positive, more nautical note, since even my eyes are starting to glaze over, I was curious as to how all the above is affecting yacht loans and so I called on a couple of my marine financial lender friends*.
Turns out that since boat loans have-- and have had-- the lowest default rate of any mortgage class, virtually nothing has changed over the past months, the reason for which is that, typically, one's income documentation and a 20% downpayment are required prior to one's loan approval.

Equity, baby, equity.


* None of whom are known as 'Jimmy's Bait Palace and Quickie Boat Loan Co.'

[airship]

Now, on a positive, more nautical note...

Hehe, I almost forgot this was a yachting forum!

About those low default rates when it comes to boats...is that overall or for a certain size range only? It wouldn't surprise me that default rates are much higher for acquirers of 16' runabouts compared to say, yachts in the 80' + category.

I ask that, because over the years I've had several small insights into how some larger yachts (over 30m) were financed here in Europe. I'd be hard-pressed to remember exactly how it was done, but if I remember correctly, the financial / legal specialists who organise these types of deals first take into account the nationality and residency status of the individual concerned before tailoring the corporate ownership, financing and operating structure of the yacht to his particular circumstances. In the cases involving EU nationals, most deals involved a "lease and buy-back component" which appeared to allow the owner basically "interest-free financing" over a 5-7 year period. Certainly much more tax-efficient than paying cash, even if you had 100% of the purchase price available "up front".

Next time I need a loan for a new TV, I'm going to give those guys a call...?!

[outmywindow]

Not to much optimism from the 'powers to be'. We are waiting for the eventual spill over up here, as we've had double digit annual increases since 2003.
Although we don't have 'sub-prime' type lending up here, 95-100% financing is quit common, especially in our speculative western market.
*Just to keep this tread nautical: There are approximately 12,375 Marinas in the US with about 875,000 slips.
__________________________________________________ _____________

Bernanke's Pledge Fails to Dispel Pessimism at Jackson Retreat

By John Fraher and Scott Lanman

Sept. 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's pledge to stop the credit-market rout from wrecking the economy failed to quell concern at the Fed's Wyoming summer retreat that the U.S. is heading for recession.

``I came to Jackson Hole thinking there would be no recession, but I'm leaving thinking we could well have one,'' said Susan Wachter, a professor at the University of Pennsylvania's Wharton School, who co-wrote the first academic paper presented at the conference.

This year's theme -- Bernanke said organizers had ``outdone themselves'' with a relevant topic -- was housing and monetary policy, eliciting forecasts of sliding home prices and criticism the Fed should have done more. Martin Feldstein of Harvard University warned of a ``very serious downturn'' and called on policy makers to cut interest rates by 1 percentage point.

The normally academic tone of the Kansas City Fed's symposium was replaced this year by concern that the sudden increase in the cost of credit to people and companies will hurt spending and investment. Consumer confidence dropped by the most in two years in August, the Conference Board reported on Aug. 28.

``There are no optimists in the crowd here,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York and a former head of domestic research at the New York Fed. ``There's a pretty strong consensus that this has gotten a lot more serious.''

As officials and professors debated lessons from the housing slump, New York Fed President Timothy Geithner and Governor Randall Kroszner were spotted on their mobile phones. Geithner is the central bank's liaison to Wall Street, while Kroszner heads the Fed board's banking supervision committee.

`Very Serious'

``The economy could suffer a very serious downturn,'' Feldstein, president of the National Bureau of Economic Research in Cambridge, Massachusetts, told the conference. The NBER dates American economic cycles. The last recession was from March to November 2001.

Bernanke, dressed in a dark grey suit that stood out from the typical dress of polo shirts, jeans and khakis at the Grand Tetons gathering, said in the opening speech that the Fed will ``act as needed'' to protect the expansion.

That didn't assuage critics such as Edward Leamer, the head of an economic forecasting group at the University of California at Los Angeles. He wrote in one of the conference papers that the Fed merited an `F' for failing to prevent the housing bubble and then not reducing rates as it burst.

`Lesser of Two Evils'

Feldstein called for ``a major reduction now in the federal funds rate, possibly by as much as'' 1 percentage point from the current level of 5.25 percent. While that may push up inflation, it's the ``lesser of two evils,'' he said in a Sept. 1 speech.

Fed policy makers next meet on Sept. 18. While central banks pumped $350 billion in emergency funds into money markets last month, signs of stress continue.

Commercial paper, a short-term financing tool, declined by $244.1 billion, or 11 percent, in the three weeks to Aug. 29, the most in at least seven years, Fed data show. Three-month Treasury bill yields had their biggest drop since 2001 in August as investors sought safety in government debt.

Delinquencies on subprime mortgages, the origin of the turmoil, are likely to climb further as variable-rate loans reset higher, Bernanke said.

Even so, ``global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans,'' he said. That's because of difficulties in setting prices for complex securities and concerns that housing will hold back economic growth, the Fed chief said.

`Gloomy as I'

``I rather expected that I would come out and find that people weren't quite as gloomy as I was, and I didn't find that,'' said former Fed Governor Lyle Gramley, now a senior economic adviser at Stanford Group Co. in Washington. ``So it confirmed my own concerns about the economy.''

Attendees nevertheless sounded confident that the global economy, which has relied on the U.S. to drive growth for much of the past decade, is strong enough to cope with the slowdown.

In China, where the economy expanded at the fastest pace in more than 12 years in the second quarter, manufacturing unexpectedly quickened in August. While business confidence in Germany, Europe's largest economy, fell last month, it was still better than most economists had forecast.

``The world economy is still very robust and growth is much more evenly spread than it was a few years ago,'' Otmar Issing, former chief economist at the European Central Bank, said in an interview.

That was little comfort to most at the conference as they debated the impact of the housing recession on consumer spending, in between hikes along trails near Yellowstone Park.

Yale University professor Robert Shiller said house prices in some U.S. cities may fall by as much as half, while Leamer predicted declines in some areas of 30 percent to 40 percent. Feldstein saw the chance of a ``substantial decline'' in spending because consumers won't be able to borrow as much against the value of their homes.

[outmywindow]

This graph gives one a good insight into a ‘speculative’ marketplace.
The investors keep purchasing pre-sales (product not built yet) with no intention of moving in but only to flip at profit, hopefully prior to completion to avoid closing costs.
During a prolonged hot market, the new product inventory eventually vastly outnumbers demand, this type of speculation comes to an end with someone holding the product or debt.
Take a 7-10 year brake and repeat the above process.

*nautical piece: In 2005 the US recreational marine industry had $37 Billion in sales and services.

[airship]

So, instability continues to reign. Or to quote a BBC article:

The banks were in a state of "fear and loathing"...

ergo, the banks don't want to lend to each other (hence the central bank / federal reserve interventions), but prefer to hoard whatever liquidity they still possess for themselves?!

Just how big a step is it really from the present situation, to one where these same banks allow their fears to affect the clearing systems all banks use for processing everyday payments - clearing cheques, debits, transfers etc. that affect us in the real world everyday?

I guess I was brought up to respect bank managers. Anytime I ever visited my bank's manager, I'd ensure that I was clean-shaven and on-time...

Obviously, in my younger days and before I'd learned how to handle all those easy-credit store cards, those visits inevitably consisted of why I was overdrawn and how "we" could manage this (usually in the form of heavy bank charges for all the letters they wrote) to inform me that my account was overdrawn.

A few years ago though, I went to the bank for a loan and it was all I could do to persuade the manager that I really didn't need to borrow 3 times what I'd originally envisaged, and decline his very kind offer.

Most recently, I've started wondering about just how far, as a responsible individual, one should be able to preplan and take measures in order to accommodate unusual events. One of these "what ifs?" involved flooding. Suppose that tomorrow, the area in which I lived was affected by floods lasting a few days - I live on the 1st floor so perhaps I wouldn't need to evacuate immediately. But the power goes out, how much food and water do I have, can I still cook, will I be able to feed my cats? Needless to say, the answer is that I would not be able to last more than a couple of days. I'm not suggesting that we should all be prepared for Armageddon, but in the back of my mind, something tells me that even very backward societies in some parts of the 3rd world would be better prepared than I am. You read about calamities affecting some countries - there's food but there's a logistics problem. If your local supermarket can't be resupplied for a couple of weeks, where will your food come from? Just how many days, weeks or months worth of "food" do we in the 1st world really have available in an emergency? I don't know, do you...?!

Just supposing that next Monday, you pop into your local supermarket and at the checkout, not just your credit card is refused, so are everyone else's...? But the supermarket can still take cash. Got any...?! (I checked mine just now - Euros 350 (about US$470) which is a lot more than I usually keep in my wallet. That represents maybe a week's groceries and other expenses. As a responsible individual, I think I'll go to the bank next week and withdraw some cash - a month's worth of expenses should do it, just to be on the safe side.

But what if everyone decides to go to their bank next Monday to do the same...?!

PS. In the event of any life-threatening food shortage / Iranian pre-emptive nuclear attack / Fox decides to discontinue "The Simpsons", make your way immediately to the nearest marina where superyachts berth. I can assure you all that your average superyacht will usually have walk-in sized freezers full of food that they will usaully throw out anyway before the next season. If a yacht has been designed to survive hurricanes at sea, there's probably more chance of surviving a nuclear blast on one of them, than remaining in a timber-framed house. A superyacht will usaully also have a great DVD library - maybe even all "The Simpsons"...?

PPS. Did I forget to mention that superyachts also have safes, lots of safes, sometimes one in each guest cabin even. And hard cash to pay for fuel supplies when the supplier won't accept American Express for 100,000 litres of diesel...uh-oh?!