From the LA Times:

Despite the mortgage meltdown, the blizzard of loan advertising continues. Now firms are targeting those with good credit and plenty of equity….

Of course, the salesman acknowledged, many borrowers at all income levels are attracted to the option ARM because they have let their personal spending get so out of control that the low payment is the only one they can afford. ….

“Newport Beach, where everyone is driving a Mercedes and the homes start at $1 million, is like an old western movie set,” he said, describing the finances of many wealthy homeowners as precarious. “It’s all just a front, with stilts holding it up.”

Mark Cook: “My grandfather once said to me, Mark, sell what everyone is buying; buy what no one wants and you will be a success. Well, Mark D Cook has sold this stock market. I will buy but it will be when the S&P futures is below 1100. I am the lone wolf of bearishness.”

Mark, actually, you’re not alone. I don’t generally take tips but Mark is a very experienced, serious and careful trader. When M. D. Cook speaks, I listen. And if we are on the same side of the market, even if I’m wrong it is a little bit of consolation to know that one of the best in the business is wrong too. Makes me feel a bit less of an idiot.

Citibank is saying that it will only put AAA and AA paper in its super-SIV, the M-LEC (Master Liquidity Enhancement Conduit). AAA is the highest available rating in Standard & Poors rating system, and AA is next lowest. Historically, this rating has meant no defaults between 1970 and 2001 as it was given to issuers of the highest quality.

More recently, with the slicing and dicing of MBSs, CDOs and CLOs, it has been given to the most protected tranche of a security. The idea is that although all of the mortgages in a bundle may be of poor quality, surely only a few will default. So if we slice it up so that some slices bear the risk of default ahead of other slices, then the last slices to see defaults will be safe and can be given the prized AAA and sold to widows and orphans (Do I hear “Pirates?”).

But that all depends on statistical assumptions about default rates, which are now appearing to be badly wrong. The Black Swan has swum by. The ABX indices are saying that most of the lower quality tranches are wiped out and AAAs are trading at prices which indicate significant losses are expected. Once the lower grade tranches are wiped out, the defaults hit the “high quality” tranches. The AAAs. But they’re still rated AAA because the rating agencies can’t or won’t re-rate them on a timely basis. So I suspect Citi has to rush to get these dead fish into the M-LEC and assigned to a new set of bagholders before they go bad. Our compassionate Treasury Secretary is helping them. He is apparently also lobbying for the mortgage companies to be compensated by the taxpayer for the cost any loan modifications they may make to avoid foreclosures. He certainly is right there, looking out for Wall Street. Is that actually his job?

This chart shows what is happening to AAA tranches of home equity loans, which are typically the 20 part of 80/20 financing. Res ipsa loquitur :

A United Nations expert, Jean Ziegler, has condemned the growing use of crops to produce biofuels as a replacement for fossil fuels as a crime against humanity.

I might use less inflammatory words, but the man has a point. In particular, subsidising the use of corn to produce ethanol is not only an unconscionable gift to the agribusinesses like ADM, but a direct blow to food costs because that money is, in part, being used to outbid the food consumer for the corn crop. In addition to which, it is at least controversial whether or not there is a net savings of fossil fuel.

Mr Ziegler suggests a 5-year moratorium, during which time the technology to convert agricultural waste rather than the crops themselves could be developed. I agree. At the very least, the subsidies should be eliminated. Read here about ADM’s political influence and special benefits.