This week’s essay of the week is Six Degrees of Separation by Andrew Davidson. It lays out a good explanation for what went wrong in mortgage backed CDO market. But I think that Mr. Davidson point applies to more then just the mortgage market. It is not good for there to be too much separation from any investor who is risking his capital and the product that his capital is producing.

Jim Cramer has made a career out of being an ass, but this is still going to be a classic video. I have a feeling that financial people are going to remember this video longer then Howard Dean’s scream. Here is the link. Go watch it now.

If you don’t know who Jim Cramer is here is a Wikipedia article about him. Here is a Business Week article about him before the current troubles. Here is a Calculate Risk post on the video. Read the comments.

It is getting rough out there in the mortgage backed security market. Everybody is freezing up except the federally sponsored agencies. This was written buy the boss of Indymac Bank….

Unfortunately, the private secondary markets (excluding the GSEs and Ginnie Mae) continue to remain very panicked and illiquid. By way of example, it is currently difficult, at present, to trade even the AAA bond on any private MBS transaction. In addition, to give you an idea as to how unprecedented this market has become…I received a call from U.S. Senator Dodd this morning who seeking an understanding of “what is really going on and how can I and Congress help?” I also have talked to the Chairman of Fannie Mae this morning and have traded calls with the Chairman of Freddie Mac (Fannie Mae’s Chairman telling me that they are “prepared to step up and help the industry”).

Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so…our industry and Indymac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself. As a result, we have seen just since yesterday, many major mortgage lenders announce additional product cutbacks…some leaving subprime, Alt-a, and other products altogether or restricting some products to only their own retail channel (and possibly wholesale) and significant, additional price widening.

The whole thing is worth reading.

H/t Calculated Risk . His post has some very good comments attached to it as always. But I am too lazy to dig them out for the rest of you. But don’t miss this chart that Tanta linked to showing that alt-a and sub-prime accounted for 40 percent of what was issued in 2006. It’s a scary world.

Tanta has little patience for rich smart men who love the free market when it makes them rich and want the government to take care of them when the market burns them. She also does not seem to care all the much for the New York Times. Throw the two of those things together and you get a lovely rant.

This is going to get technical, and also not make much sense. Proceed with caution.
One of the first things I had the privilege of working on when I came to the shipping department was intra-company orders. In a very small way I helped make this an issue that our plant needed to deal with. In Click Here to continue reading.

There was this little press release that came out Friday at around 10 PM. It says….

American Home Mortgage Investment Corp. (NYSE: AHM – News) announced today that its Board of Directors has decided to delay payment of its quarterly cash dividend on the Company’s common stock and anticipates delaying payment of its quarterly cash dividends on its Series A Cumulative Redeemable Preferred Stock and Series B Cumulative Redeemable Preferred Stock in order to preserve liquidity until it obtains a better understanding of the impact that current market conditions in the mortgage industry and the broader credit market will have on the Company’s balance sheet and overall liquidity. The disruption in the credit markets in the past few weeks has been unprecedented in the Company’s experience and has caused major write-downs of its loan and security portfolios and consequently has caused significant margin calls with respect to its credit facilities.

Now when I first saw this on Calculated Risk, I did not think much of it. Lots of companies are having problems because of the sub prime crisis. What’s one more? Besides, Calculated Risk’s only comment in his blog post highlighting this press release was “I can’t recall a declared dividend being “delayed”. This can’t be good.”

This seemed to me to be a no duh statement. Of course a dividend being delayed is not good. But apparently Calculated Risk is one of those dudes who is prone to understating disasters. It became clear in the comment section that Calculated Risk regarded this development as a major disaster.

In one of his first comments he professes to be speechless. Replying to another commentator who argued that there was less than 90 days left until people woke up to the carnage Calculated Risk said….

y.s.wayne, 90 days? How about Monday?

I’ve served on the board of a public company, and I can’t imagine declaring a dividend and then delaying it. That is simply incredible … but I’ve also never had to put out a press release worded like that one: “major write-downs” and “significant margin calls”.

And I’ve never been with a Company that felt compelled to put out a press release in the evening on a Friday either. That had to be an ugly BOD meeting.

Now I have never seen Calculated Risk sound alarmist or predict the short term movement of the market. Normally he is very careful to hedge his bets. For him to talk about carnage coming on Monday was unprecedented. It made me sit up and take notice.

But I still did not understand why this of all things should be such a big deal. Luckily Calculated Risk’s co-blogger Tanta put up a post of her own on the subject titled Saturday Rock Blogging: Speechless. The post itself is just a clip of a rock band playing a song without words, but in the comments section Tanta illuminates the problem for ignorant souls such as me.

All of her comments on the post are worth reading(here, here, and here, for starters), but this one basically sums it all up…

bofiz, to me it’s not just that. It’s that AHM’s stock took a bad tumble a week ago, apparently on a rumor that Lehman was pulling a warehouse facility. Per published reports AHM actually denied that rumor to a reporter. The stock recovered a lot of value (although not all of it) the next day. A week later, we find out they don’t have enough cash to pay dividend.

Surely everyone already knew you don’t cancel a dividend you affirmed 30 days ago on a Friday night at bedtime. I think the problem is that nobody’s going to believe that a lot of companies still have functional access to credit markets unless they fax their bank statements to the WSJ. We’re all wondering what a dividend affirmation means in this climate, not really whether it’s legal or not. (Although I for one suspect that they did it because the clear alternative was even more illegal.)

I feel sorry for a certain elderly gentleman that I know who has most of his retirement savings tied up in Real Estates REIT’s. After all I have read on Calculated Risk, I have a feeling that he is not going to have a fun Monday.

P.S, for extra giggles, read this comment.

Update:7/29/07

Ape Man asked for (and received) Marco Man’s opinion on the matter here.

Calculate Risk has a new post on the subject here.

And the issue has just made Google News. Which means the story is starting to hit a large number news outlets right about now. It is going to be an interesting Monday.

This week’s essay is an overview of the current housing situation by Calculated Risk.

How trustworthy do you think most of the governments in the Middle East are? This question is important because according to a study requested by US Energy Secretary Bodman almost all the new oil for export in the coming years is going to come from the Middle East.

Now all by itself this is pretty depressing. But what would be even more depressing is that if no one could increase oil exports. After all, demand is projected to soar in China and other places. Without new sources of oil, prices are going to soar.

But as Stuart Staniford argues in this post, it is very likely that government in the Middle East are lying through their teeth about there likely reserves.

I won’t provide any quotes from his post, because his argument is too involved and chart dependent to quote well. But if you are familiar with Stuart Staniford body of work you know that just about anything he writes is worth reading.

This from R-Squared…..

Gasoline imports were strong while prices were at record highs. Looks like prices may need to head back that direction to attract more imports. That gasoline import number is pretty weak, considering gasoline imports have been running at well over a million barrels per day. I suspect today’s report means gasoline prices will continue their recent climb, after bottoming out a couple of weeks ago. That refinery utilization number is another big story. We have yet to see 92% utilization this summer. You have to go all the way back to 1991 to see summer utilization numbers in this range. Last year’s June number was 93%, and it was over 97% in June of 2004 and 2005.

As long as refinery utilization rates stay low, we are going to be dependent on imports. And as long as we are dependent on imports we are going to have to pay more then the wholesale price in Europe plus shipping costs for our gas. That will never be cheap.