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Why don't the markets care about the foreclosure crisis?

The foreclosure mess really looks pretty bad. Here's one vision of the worst-case, bad-case and even not-so-bad scenarios. They're all grim. Here's a "doomsday scenario." The words "TARP" and "two" are getting thrown around a lot, and congressmen are musing that we might need to take our new financial bill -- and, in particular, the resolution authority letting us kill off failing firms -- "out for a spin." There's obvious uncertainty. J.P. Morgan just set aside a billion dollars for legal fees. And yet the markets seem totally unbothered:


At another time, I might chalk this up to markets being overconfident. But they've not been overconfident over the past two years. They've been terrified. They're running from all conceivable risk. And it's not as if they just haven't noticed. Citibank hired Adam Levitin, an associate professor of law at Georgetown University, to brief its clients. We don't know what he said, but he told The Washington Post that "if you read through court decisions, there's a pretty consistent picture that there are all kinds of problems in the chain of title. It's not clear how it's going to be resolved. There's a question mark hanging over the whole housing system." That doesn't seem comforting.

So what's with the air of easy confidence? Are they just sure that the government won't let things get bad again? Or do they think this is just the media hyping a story? I'm puzzled.

Graph credit: Google Finance.

By Ezra Klein  | October 14, 2010; 11:38 AM ET
Categories:  Housing Crisis  
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Next: 'A plan and a dream'


No, no, no; don't be puzzled. Because if you are puzzled, then we are in a deep hole then....

Did any journalist ask some these of questions to Tea Party candidates? Why not? Is it not important to hear what they say considering now that 'storming of the Bastille / Congress' will be undertaken by Tea Party elected representatives?

Will it need Congress to pass some unique laws to 'settle the confusing chain of title claims' then? Will it not be infringement on people's freedom by a big Socialist Government?

Posted by: umesh409 | October 14, 2010 12:00 PM | Report abuse

Minor point of clarification: The article states that Levitin spoke to Citibanks's clients. Does that mean he was hired by Citibank, or is this is case where clients of Citibank are looking at potential claims that they may have AGAINST Citibank?

With respect to the status of the market, it may be that most of the major players already feel OK with cash positions -- they feel that they are sufficiently hedged in the event of a crisis -- unlike the last go around. Also, while the liabilities outstanding are significant, the number of foreclosures as a percentage of the economy might be small enough to buy everyone time in order to figure out what kind of response is necessary. Litigation over these issues could take years.

Just guesses of course.

Posted by: JPRS | October 14, 2010 12:03 PM | Report abuse

The market has had two full years to factor in the allocation of lost value. Under what scenario would investors end up footing the bill? With republicans expected to gain an even greater veto over any democratic legislation investors know that the major banks will not be allowed to fail no matter how rotten their books are. Investors decided a long time ago that the taxpayers of the future are going to take the hit for them. It's a double win for them; taxpayers pay and government ends up taking the blame. Rinse and repeat.

Posted by: BobFred | October 14, 2010 12:10 PM | Report abuse

I hate to put it this way, but I believe that the 'market' has concluded that:

1. The Republicans will hold the next Congress;
2. The Republicans have been bought (wonder where all those anonymous funds are coming from?);
3. The next Congress will bail out the banks and support the market.

Ergo, the market is not worried.

The only question (though I know the answer) is where are all those populists?

Posted by: AMviennaVA | October 14, 2010 12:15 PM | Report abuse

I suspect the market is unfazed because it expects a new round of quantitative easing from the Fed, possibly coupled with a price level target. The combination of the two could deliver a potent stimulus to the economy, and I think that's why the market has been so bullish since late September.

Posted by: alexchunha | October 14, 2010 12:20 PM | Report abuse

The markets are confident that the government will again bail out the banks and the bank execs will reap extra bonuses like they are getting now.

Posted by: foofoofoo | October 14, 2010 12:26 PM | Report abuse


actually I'd disagree. I'd think the market believes that there will be a Republican counterbalance (most likely with a Republican house and Democrat run Senate (which is more conservative to begin with) and that counterbalances the previously felt (where real or implied) liberal tendencies of the current Congress and administration.

As far as the market goes I'd go better with JPRS contention that they are flush with cash to deal with issues if they arise. I also think there's more to the market than just this story so while this may be a drag on the market other things postively influence the market like the very slow but steady growth of the economy that if it continues into 2011 the Republican semi return to power will take credit erroneously for it just as Dems have done in the past as well.

Posted by: visionbrkr | October 14, 2010 12:30 PM | Report abuse

The markets don't care about this because it is a crisis whipped up by politicians and is not real. Look at how incumbents are jumping on this, demanding investigations, etc. so they will look like they are on the side of poor homeowners oppressed by evil bankers and force out of their homes. In fact, most of the houses are already empty. This "crisis" will pass once the election passes. You can't fool the markets.

Posted by: edwardallen54 | October 14, 2010 12:32 PM | Report abuse

I agree with the folks above--their attitude is if there's a big problem they will be saved, they will be bailed out, and Republicans in Congress guarantee it.

Keep in mind that these guys aren't very bright. They missed the catastrophe that was obviously looming for 2 years, and then they panicked when the recovery was actually beginning. They don't really understand how the economy works. They have no clue what really drives these prices.

And that's because as a rule, the best short-term predictor of how the market will go is how the guy standing next to you is feeling. Is HE freaked out? Then you should freak out.

But the guy next to them isn't freaked out. In fact, he feels pretty good right now. He dodged the bullet! Bonuses are back up to unprecedented levels! the fin reg legislation is totally weak! He didn't get fired after the worst financial catastrophe since '29, what could possibly take him out? Oh, and tax cuts are coming!

As a rule, the market does not understand the fundamentals its prices are based upon. Because most of the people working in it are idiots, chesters, or math geeks wedded to the elegance of their models. There's a handful of people who can figure out what's going on, but it's really hard to make money that way because it's not a "quarterly earnings" strategy. So they don't do it.

Let's be clear, the best way to make tons of money is by figuring out the most effective way to leverage your insider status (Computerized short-term trading; unloading crummy investments in a plausibly legal way; developing very complex products that guarantee you returns as well as repeat business since you're the only guys who understand the product, etc). The way you make money in the market isn't by understanding what it is you are actually selling, and how the real world interacts with it.

I am kind of amazed that people still seem to think that our financial markets have some kind of expertise in the efficient economic allocation of capital. That's not the business they're in, and the past 5 years have pretty conclusively demonstrated it.

Posted by: theorajones1 | October 14, 2010 12:34 PM | Report abuse

Maybe because 75% of stock trades today are made by computers, with computers.

Posted by: pmendez | October 14, 2010 12:37 PM | Report abuse

Let the banks go bankrupt. Let the banks fail. The FDIC insurance will cover depositor's accounts.

Start over with new banks just as corrupt and fraudulent as the old ones.

Rememeber, it was bankers who created the Federal Reserve System--for their benefit. Too bad people are finally seeing through their scam.

Posted by: foofoofoo | October 14, 2010 12:37 PM | Report abuse

The market doesn't care as much about who's got the House as it does about another round of easing (hopefully) and good earnings reports.

Posted by: supak | October 14, 2010 12:39 PM | Report abuse

corporatism and greed by the corrupt pols and their k st. allies.

the rape of the middle class accelerates.

thanks republicans, for halting any progress for 2 years.

a job well done, clubbie lackeys.

Posted by: xxxxxx1 | October 14, 2010 12:41 PM | Report abuse

Message to Erza Klein: Take Econ 101

Message to Washington Post: Hire some writers who understand Markets

Erza, you Democrat you, you don't underdstand why "Markets care about crisis" because Markets are "impersonal!" They are aggregates you moron!

Markets react "indirectly" to government interventions. Either reacting in positive ways, or negative ways.

Posted by: FormerDemocrat | October 14, 2010 12:48 PM | Report abuse

I think we do have a fairly good idea of what Levitin said. Here's a link to Citi's summary of the conference call:

Posted by: jginsbu | October 14, 2010 12:50 PM | Report abuse

Have your representative to make a



Posted by: grunk | October 14, 2010 12:50 PM | Report abuse


The Federal Reserve is buying up Treasury Bonds.

Then they are printing more money.

That's why the market isn't reflecting the real economy.

Especially now with the election looming.

The Obama Administration and Federal Reserve are propping up a House of Cards and sooner or later it will all come tumbling down.

Just waiting for the other shoe to drop.

Posted by: janet8 | October 14, 2010 12:58 PM | Report abuse

The Fed has pumped $45 billion into the market over the past 2 months and will pump another $32 billion over the next 30 days. Money talks.

Posted by: drstool | October 14, 2010 1:06 PM | Report abuse

Remember how SCOTUS declared Bush the elected President? The more recent Citizens United Case. At some point SCOTUS can rule that the banks intent was to convey title. Problem solved. Banks just draw up the paperwork saying who owns the mortgages. Should things sieze-up, the SCOTUS can take the case and everyone knows they will rule in favor of the Banks. The Attorney Generals can collect some immaterial fine and the politicians declare how they stood up for the populace.

Posted by: chucko2 | October 14, 2010 1:07 PM | Report abuse


How is any of that relevant to the post by Ezra?

The question is: Why aren't problems with the mortgage market -- particular with respect to fraud and problems with mortgage notes -- reflected in stock market prices.

Fed policy is largely a non-sequitor with respect to this issue. As a side note its board is independent of the White House and Congress (up until a few weeks ago a majority of the current members were appointed by Republicans. Regional Fed branches have members who are appointed by local members, who in many cases represent banking interests that lean Republican. So a Democratic conspiracy doesn't really wash).

FormerDemocrats post is equally non-sensical.

"Markets are "impersonal!" They are aggregates you moron!"

Markets are "aggregates" of individual actors who sometimes act rationally and sometimes act with panic or over-exuberance.

"Markets react "indirectly" to government interventions" makes no sense.

Individual market participants sometimes respond directly to government interventions by buying and selling stock or other securities.

It's not really clear though how that understanding applies to the above post.

As another commentator states: the expectation of a bailout in the event of another crisis might prevent panic in a market, stabilize prices, and keep individual investors invested in the stock market -- that's one explanation.

But simply saying that investors "sometimes respond negatively and sometimes respond positively" to government actions doesn't say anything about the question posed by this blog entry.

Posted by: JPRS | October 14, 2010 1:13 PM | Report abuse

The action of markets is difficult to predict because it is driven by expectations of participants to make money off that action over different time scales. Often internal feedback just from changing market momentum is a big factor. The immediate consequences of the foreclosure problems appear to apply mostly to the banks. They are already beaten way down and are suffering some more from this new factor. But the big reality is the extreme interference of the Federal Reserve in financial markets. With that kind of interference nobody has any way of knowing what anything is really worth. The recent stock price advances appear to be driven by the expectation of making money off of even more interference from the Federal Reserve. Presumably more troubles in the financial system only make Federal Reserve interference more likely. Housing prices seem likely to have the most potential for some impact. Presumably the large legal cloud hanging over the titles to a large number of homes is going to have a negative impact on the home market. But maybe the consequence will be higher prices for those homes where there is no question about the title.

Posted by: dnjake | October 14, 2010 1:15 PM | Report abuse

Businesses provide the mother's milk of government -- which is money.

If momma ain't happy, ain't nobody gonna be happy!

Posted by: gr8cntry | October 14, 2010 1:16 PM | Report abuse

EK said: "There's obvious uncertainty. J.P. Morgan just set aside a billion dollars for legal fees. And yet the markets seem totally unbothered"

At ~1:20pm Eastern:
Citigroup -4.9%
JPMorgan -3.6%
Wells Fargo -5.0%
Bank of America -5.7%

Most people would call that "bothered." The markets were waiting to hear what JPMorgan had to say about the economy and the foreclosure mess, with JPMorgan considered the best positioned big financial institution in the US during this economic cycle. If their outlook is still cautious, the others' will likely be too. The banks look at the foreclosure mess as procedural. The people foreclosed on didn't pay their mortgages (more likely than not). The fundamentals of the housing market were already bad. The lawyers will get richer as the lawsuits pile up from mortgage bond investors but housing will still be slow-go, slow-mo.

Even at the home owner level, in the worst case scenario, the buyers who have title insurance are protected; those who paid cash would have to find lawyers.

Posted by: tuber | October 14, 2010 1:47 PM | Report abuse

You're just looking at the wrong market. Who (besides Goldman's robot squids and little Timmy Geithner) cares what the DOW is doing? As Zero Hedge has already reported, CDS spreads on every company in the financial sector have exploded in the last week.

"it's a bloodbath."

Posted by: rule56 | October 14, 2010 1:59 PM | Report abuse

Anthropomorphizing markets won't help, unless you want to use the famous Mr. Market analogy (which is to impress upon the reader that the market is there to give you the option to buy or sell, or do nothing, and nothing else (not provide insight on value or thoughts on foreclosure crises) because Mr. Market is manic).

The market is just a voting machine in the short run, and we all know how good people are at voting. A 5-day graph of a few indices doesn't provide much--remember when people said the markets thought the FinReg bill was easier on banks because stocks went up the next day? That wasn't actually proof.

To try and divine the impact of a particular news item from the market of thousands of people who each have multiple mental models, biases, external pressures, blind spots, and countless other factors involved in their decision making doesn't work.

Posted by: rglvr | October 14, 2010 2:01 PM | Report abuse

I have answers in three flavors!

Libertarian: Even if there were a crisis, it's part of the natural cycle. Stop meddling, and take comfort in the power of the invisible hand. The markets clearly are.

Republican: Obama's policies have created moral hazard! The Democrats work for Wall Street, and the markets know they'll get another bailout!

Democrat: The financial regulation bill works. Uncertainty solved! The markets now know what to expect in the event of a crisis, so there's no need to panic. Booyah!

Posted by: roquelaure_79 | October 14, 2010 2:01 PM | Report abuse

Bank stocks are apparently down today on foreclosure news. But the larger problem is the moral hazard of allowing them to operate with an expectation of bailout. That's not good capitalism or good socialism. Either take over the banks or let them fail like other private businesses. Please read:

Posted by: Brighton21 | October 14, 2010 2:02 PM | Report abuse

QE2 and election results are being baked in.

Posted by: bigless55 | October 14, 2010 2:12 PM | Report abuse

"Are they just sure that the government won't let things get bad again?" Yes.

From above, the investment baking "attitude is if there's a big problem they will be saved, they will be bailed out [...] [T]hese guys aren't very bright. They missed the catastrophe that was obviously looming for 2 years..." "But the larger problem is the moral hazard of allowing them to operate with an expectation of bailout."

Yet even with the moral and practical hazards, "it's hard to see how the government could fix it simply without tramping over contract law." The Constitutional provisions regarding contract law are largely forgotten -- at the moment -- but will likely be used by the banks to protect themselves (particularly from the states' Attorneys General).

Posted by: rmgregory | October 14, 2010 2:17 PM | Report abuse

It's the Greater Fool Theory in action.

Posted by: bgmma50 | October 14, 2010 2:19 PM | Report abuse

I agree with the folks above--their attitude is if there's a big problem they will be saved, they will be bailed out, and Republicans in Congress guarantee it.

Posted by: theorajones1 | October 14, 2010 12:34 PM | Report abuse

whoa whoa whoa there theorajones1 wasn't the idea behind this whole fandamtastic Regulatory reform bill (FinReg, right?) that we wouldn't need any more baiouts. And then republicans said, well wait a minute this doesn't GUARANTEE no more bailouts and you all just accused them of stalling and blah blah blah. . . I seem to remember Senator Corker saying words to that effect around here when he was 90% of the way done. Now we're blaming Republicans for the upcoming bailout?

How exactly does it feel sitting on both sides of the fence there?

Posted by: visionbrkr | October 14, 2010 2:24 PM | Report abuse

The market knows that the banks own the federal government.

Posted by: MagicDog1 | October 14, 2010 2:25 PM | Report abuse

This one's easy Ezra, the market sees that Dems will be voted out and the demonizing of investors, businesses, non-union workers,etc is over. No more undermining America's free market system. Obama will continue trying but our new Congress will be able to defend capitalism from his attacks.
Confidence is coming back to the markets, thank God.

Posted by: dualdiagnosis | October 14, 2010 2:48 PM | Report abuse

Crime pays. Financial sector crime pays enormously, with no fear of reprisals whether your bogus claims are made to a client, investor or a judge. That's what America stands for these days.

Caught presenting forged documents to courts as an SOP, the banks are told to take some time and get better forgeries.

Posted by: Bullsmith1 | October 14, 2010 2:57 PM | Report abuse

I think there isn't enough information to act on. Investors might sue, banks might fail, but at the moment, we can't tell.

Moreover, there is strong upward pressure on equities, that will buffer and meter any instinct to panic. The last thing you want to do is sell just when the market transitions from bear to bull.

If anything concrete happens we'll see more significant movement.

Posted by: zosima | October 14, 2010 3:08 PM | Report abuse

Investors know there is a paper trail on these things. It may be complicated, but it will be unraveled. If a homeowner has been missing payments, they are still going to get foreclosed. Administrative errors at the bank are not going to give the homeowner a free house. Some fees may end up getting waived, some mortgages that were foreclosed even though the buyer was current will be reversed, and there may be fines involved. But nobody thinks that the banks will "lose" assets they have been holding.

Posted by: sold2u | October 14, 2010 4:26 PM | Report abuse

*****So what's with the air of easy confidence? Are they just sure that the government won't let things get bad again? Or do they think this is just the media hyping a story? I'm puzzled.*****

My guess: Financial markets probably realize that:

A) Tea Party anger notwithstanding, the government is unlikely to allow a collapse of the financial sector, and,

B) Even if things get ugly, and another TARP is required, and this TARP is again quite massive in size -- say, another $700 billion -- the fact of the matter is another 5% of GDP worth of federal debt is hardly going to sink us. We're still, what, at least 50 points or so away from where we were in 1946? As countless people have been saying in the face of alarmist rhetoric, the US simply isn't facing a debt crisis in the short term. Another big bailout might mean instead of a 4.245% VAT in 2017, we'll need a 4.5% VAT in 2017. Not that I'm rooting for a big bailout, mind you, I just think financial markets are correctly reckoning it wouldn't be that big a deal.

Posted by: Jasper999 | October 14, 2010 4:28 PM | Report abuse

Oh, and I almost forgot, financial markets are probably betting - again, correctly in my view -- that the intensification of the foreclosure crisis increases the likelihood of robust stimulative action by the Federal Reserve.

Posted by: Jasper999 | October 14, 2010 4:30 PM | Report abuse

The markets are now reacting, Ezra.

Posted by: DavidMerkel | October 14, 2010 4:39 PM | Report abuse

The Fed is going to buy $1.5 trillion, give or take, in private label MBS. They will obviously not bring suit against the originators or servicers. Presto, the problem for the TBTF banks just got a lot smaller. As a kicker the balance sheet leveling, using the principal payments from MBS to be rolled into Treasury purchases, QE 1.5 lite, can be bigger, for years.

Posted by: rapier51 | October 14, 2010 6:02 PM | Report abuse

The "doomsday scenario" is now the "likely scenario". Have a nice Lehman weekend y'all!

Posted by: michaelh81 | October 14, 2010 6:04 PM | Report abuse

Nationalize the risk, privatize the rewards.

Posted by: pseudonymousinnc | October 14, 2010 6:56 PM | Report abuse

The foreclosure crisis is mostly overblown by politicos trying to score points by standing up for homeowners before the elections and the banks who fear their power hungry wrath. This is just another delay in the long term reduction of housing prices, which should lag inflation rates for the next 7-12 years.

Posted by: staticvars | October 15, 2010 10:12 AM | Report abuse

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