Tuesday, August 5, 2008

Just some comments on the email I am getting

I have received a few comments on the Fannie article – which I was going to include in the parts II and III – but as the comments in the email just keep coming I will put something up now:

  • The first comment is that I can’t possibly believe that they are solvent given that they are 130 times levered to a really bad housing market.
    • I make no such suggestion at all. I simply have not got an answer until I do the credit analysis. However I can say that the inventory and delinquency numbers that they have right now do not indicate insolvency – for them to be insolvent a lot more bad loans have to come through the system than have already come through the system.
  • The second – and more sophisticated comment is that all insurers raise rates when times are bad – but it doesn’t save many of them – so why should I spend so much time exploring this effect with Fannie?
    • Well – the pricing effect does save some insurers. It only saves them if they can continue to write business – so I don’t ever talk about the pricing effect with MBI or ABK who are effectively in runoff. But I still want to work the numbers.
  • That the repo inventory at Fannie is 20 percent in Michigan – even though only 3 percent of their exposure is there.
    • That is a real issue which I hadn’t picked up on but should have. When you are as levered as Fannie if a single large state economically falls into the ocean then you can die. I have blogged several times about how bad the housing market is in Michigan (see here and here). It is entirely possible that Fannie loses a very much larger proportion of its inventory. However the point remains that losing 100% on the current inventory is not a problem – for Fannie to be insolvent an awful lot more loans need to pass through the inventory.

As it currently stands very few of Fannie’s losses are in California. Simple logic suggest losses are going higher – much higher. I haven’t worked out any estimate of how much higher – but please keep those emails coming.

Also – my first substantive dig didn’t point out just how exposed to catastrophe risk Fannie is. Fannie has a lot of exposure in LA. The house price in LA currently sucks – and if a major earthquake were to flatten the Inland Empire not only would it be a human tragedy – but I doubt anyone would want to rebuild a large number of the houses. What is a bad situation there for Fannie could turn suddenly diabolical. Warren Buffett once said that he thought Fannie Mae had more super-catastrophe risk than Berkshire. That is a big call by a man who should know…

On the price of hookers in Bulgaria – someone suggested that I could get my readership way up if I were to publish a price index for hookers by jurisdiction.

Well I tried…

No seriously – in the comments was the astounding observation that people in the Baltic States travel internationally to buy food. They suggested pretty well every jurisdiction – but Poland appears to be the consistent answer. This story suggests that food is more expensive in Tallinn than New York or even Finland. I can assure you that not much is cheap in Finland and that this is just another measure of an overpriced currency. Driving to Poland for big shops makes some sense…

But if you wish to confirm that Poland is cheaper than the Baltic States you can do so other ways. The immigrant population of London (who send remittances) will do that for you. Or get on the web and look at the prices of escorts. It will probably do that for you to.

On the last method of research – there is a company in India called “Escorts”. I once worked at a global fund where one staff member legitimately trolled the web for stories about Escorts in India


Anonymous said...

The Michigan comment is right on.
I just checked Fannie's REO for sale (data includes multi-family housing).

1. Michigan 2,542 properties
2. Georgia 2,034 properties
3. California 1,860 properties
4. Florida 1,476 properties
5. Ohio 1,060 properties
AZ 955, TX 932, etc.

Another data point is that ~500 of the properties in Michigan are listed at under $20K. Not just in Detroit either, Flint, Grand Rapids, etc. One listing agent is "Exit Realty 1st". Quite fitting: I read somewhere that U-Haul is charging more for moves out b/c they cannot replenish their trucks in the state.
Bulgarians also shop heavily in Greece b/c the price differentials are substantial: a round trip Sofia-Thessaloniki is 450 km and the gas expense is easily made up even just with groceries + one fill-up (not to mention Ikea or the other big box stores). How's that for helping out with the CA deficit?

I do not know if there is a cross-border hooker arbitrage trade.

darkbloom said...

I'm living on the outskirts of Warsaw, nearby a big shopping mall. And indeed, I have seen once or twice a coach from Estonia on the parking.
I was somewhat stunned then, but now, upon reading the post, I realize that they were certainly on shopping trip.

Paradoxically, there were a couple of articles in our press complaining that Germans (who are our neighbours)are no longer visiting Poland to do the shopping.

This is of course due to the stong (and strenghtening) Polish Zloty.

John Hempton said...

Its an Eastern European phenomenon. The Eastern European countries have just become more expensive.

It was Poles who dominated the low-end UK job market for a while - and whilst they might have been paid less than 10 quid an hour - if they could save one of those it was worth a lot in Poland. They sent remittances or saved to go home.

But as Poland has become more expensive the Poles have gone home lowering the remittances...

There is indeed a generalised flight back home as the economies of Spain and UK have weakened and the prices in the home countries have risen...

Its not easy to tell what is the driver for Poles going home - but someone I know who employs unskilled UK labour (they run a mid-market hotel and employ cleaners etc) tells me this...

Thanks for the comment though. I really value them...

Eugene said...

Somewhat unrelated, but an interesting post about polish workers here

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