Wall Street, R.I.P.: The End of an Era, Even at Goldman

So will if highly regulated in the US, will the swashbuckling continue (and grow explosively in headcount) in, say, London?

[strike that first "will"]

No it won't switch to London, or anywhere. Have you seen what's happening to their housing markets?

And they have to trade with US firms, who will be regulated in terms of risk and leverage. This is a hard-learned lesson that will be learned by everyone.

they'll be back buckling their swashes in 3-5 years

"they'll be back buckling their swashes in 3-5 years"

Precisely how, lowery? They will be regulated, leverage and risk will be greatly restricted. Can they come up with new ideas for growth? Yup. Will they ever have 40x leverage again?

Nope.

I'm with Steve on this one.

I think Wall Street will eventually be "back" in some way, but not to THIS degree. The last few years were absolutely unprecedented, and all because of leverage. That leverage simply won't be allowed in the future...

If there is a market for high risk, high returns (and I believe there is), this activity will happen again. Most likely in hedge funds. They won't be allowed to turn their contrived assets into AAA rated bonds that they sell to pension funds and municipalities. The government will regulate to make sure their risky activity never becomes systemic, never intertwines with the whole market, and that none of these hedge funds ever becomes "too big to fail".

But rich people (right or wrong) want risk and the associated potential for high returns. And a trader who can get substantially higher returns on their clients' ridiculously large sums of money will be compensated appropriately. Those are the ones who can justify such high pay.

All this '50% decline!' and '70% decline!' stuff is nauseating. Do you seriously believe that I-bankers are the only source of wealth in this city? Do you think it was only a few thousand formerly-filthy-rich-now-dirt-poor bankers who were snapping up all the classic 7's on West End, 5th and Park?

New condos in bland and ugly developments with a million amenities - the types of apartments favored by the nouveau riche - may well be heading for a steeper decline than any other segment of the NYC real estate market. But if you think we're going to see across the board drops of 50 - 70% just because of the loss of jobs on Wall Street, I really think you're allowing the demise of your own little corner of the world to be unduly projected onto the rest of humanity.

A hit? Yes. A decline? Probably. But an epic collapse? If credit dries up altogether, sure. But there always has been, and always will be, plenty of wealth in this town, and plenty of wealthy people indubitably attracted to it.

(1) Once markets for traditional investment banking services return (equity and debt issuances, M&A volume), which WILL happen, investment banking fees will follow.

Unless there is an industry-wide change in fee structures for M&A advisory and capital markets transactions, fee volume will increase again as well.

These businesses carry very high margins even with lower levels of leverage (see Wall Street circa 1998, 1999). It is even higher margin when unregulated businesses provide these services (Evercore, Blackstone, Greenhill, Jefferies).

(2) That said, the two activities that drove up bonuses in the last 4 years (and real estate, concurrently) were: (i) leveraged finance (driven by credit availability and highly leveraged investment banks) and (ii) proprietary trading (hedge funds, and the investment banks that became hedge funds - largely driven by the ability to lever up on bets 10:1, etc.). With the contraction of credit, which will not see the same levels for many years, those two businesses largely go away for a while.

There will be fewer hedge funds. There will be fewer prop traders at investment banks. Their returns will be lower due to lower permitted leverage.

Investment bankers (at boutiques and within commercial banks) will still make a shitload of money, but there will be fewer of them. Barclays has extended generous packages... to star bankers. Nomura is offering 2 year deals to the former Lehman European bankers... at least the 50% they keep. Very good teams are currently in negotiations with their new employers for multi-year packages. The article is correct - comp for mid-level bankers will definitely come back to earth.

But the mix of business at investment/commercial banks will look much more like it was in the late 90s, pre-credit bubble. Look for aggregate bonuses to normalize somewhere around 1998/1999/2003/2004 levels.

Alanhart - yes, it will simply switch to regions of higher growth and tons of money will continue to be made there. North America has been a much slower growth economy for virtually a decade - the only reasons U.S. investment banking was so profitable during this time were (i) a booming mortgage-backed market and (ii) rocking private equity activity, both of which are gone. Banks are already moving their employees from North America to Europe/Asia/Middle East. London, while hard hit now, stands to benefit much more than NYC.

This is not that complicated, at least not as complicated as most are making it out to be. You now need at least 20% over every purchase in Manhattan. You now need 30% if you are self-employed. And you will now be more vetted than Sarah Palin by Katie Couric by your mortgage company. This now means that the buyer pool is significantly less. Now factor in that 30% of Manhattan works in Financial Services and another 10% are somehow connected to the industry. Translation, even LESS potential buyer. Now most Manhattan buyer are most likely stock holders or somehow has assets related to the market. Translation, less buyers. Real estate will, and is falling in Manhattan, but will it bust, no way, we are still on an island. Common sense and simple math say it will fall about 30% across the board over the next 40-60 days. I do not think that those that bought since from 2004-present will see a return on investment, but I do feel (using the above equations) that Manhattan real-estate will drop to 2002-2003 levels. Some agents will continue to ask for unrealistic numbers, but that is why it is an "asking" price. Buyers not be scared off by the ask and should make offers at NO LESS than a 30% discount. If you are a buyer, and you waited, this is your time. If you just bought, well, it is sort of like just paying rent. Good luck to all.

We're not talking about some midwest city that lost its factory and now nobody wants/needs to live there. There's a hell of a lot going on in NYC beyond Wall Street. We didn't see a 50% drop in the Bay Area as a result of the dot com bust and we won't see it here.

Someonewhoknows - "there always has been, and always will be, plenty of wealth in this town, and plenty of wealthy people indubitably attracted to it"

I know many have said this to you before, but to repeat: Just because people want something doesn't mean they'll pay anything for it.

People make informed decisions. The thinking now is "why catch a falling knife?" Market psychology is abysmal. People really think the market here may crash. And the press is only just now beginning to notice.

Look out below. I would not be surprised by a 50% decline.

I never said 70%. I said 50%, which will return is to the pre-boom times of 2003. 5 years ago - not that long.

"Do you seriously believe that I-bankers are the only source of wealth in this city?"

They account for 30% of New York City income, more in Manhattan, and generate 3 jobs for every one investment-bank job. So no, they are not the ONLY source of wealth in this city, but they are the PRIMARY source of wealth.

"I really think you're allowing the demise of your own little corner of the world to be unduly projected onto the rest of humanity."

My own corner of the world continues to go fine, and I continue to make well into the 6 figures. But my equity did take a hit after the (unnecessary) collapse of Lehman, so I'll be on the sidelines for longer than expected. Which is fine, because it will take time for this bubble to deflate.

"We didn't see a 50% drop in the Bay Area as a result of the dot com bust and we won't see it here."

You're right you didn't see the drop in San Francisco - because all the money went straight into real estate, and the leverage remained. The leverage is now gone.

"30% of Manhattan works in Financial Services and another 10% are somehow connected to the industry?"

Uh, no. The population of Manhattan is roughly 1.7 million people. 30% of the population is 510,000 people, 40% is 680,000. All of Manhattan from Fulton St. on down probably doesn't employ that many people.

Even if you slash that number in half (to exclude children, the elderly, and other non-employed) I would tend to doubt that 340,000 Manhattan residents work on Wall Street. Remember that a significant number of Wall St employees live outside of Manhattan

30% (NYC) yes true figure, and most are Manhattan. Also more good reading here: http://www.city-data.com/forum/business-finance-investing/344020-85-000-jobs-lost-nyc-2012-a.html

SWK -- Also note that many Manhattan apartments that are owned with foreign investment money are from the finance sector.

"30% of Manhattan works in Financial Services and another 10% are somehow connected to the industry?"

Who said that? I said 30% of the INCOME comes from financial services, not 30% of the population.

That is a true figure.

It is also a true figure that 1 Wall Street job generates 3 other jobs in the various industries: food service, hotels, advertising, information technology, consulting, audit, accounting.

SomeonewhoKnows - you should read what is written carefully before misconstruing it, and do your research. Also, change your screen name to SomeoneWithoutaClue.

steve, someonewhoknows was responding to goingdown's post, which is based on a posting on another site by somehow who misunderstood the 30% figure from the City's budget report. It wasn't a reply to your 30% income figure.

Steve: "Who said that?"

GoingDown said that, and I quote: "Now factor in that 30% of Manhattan works in Financial Services and another 10% are somehow connected to the industry." SWK wasn't responding to you at all, Steve.

"you should read what is written carefully before misconstruing it"

lmao

yes I stand somewhat corrected and attached the city-budget report for review.

SwK: A large chunk of the "the Street" is located between 42nd and 59th Streets. Even most firms with big concentrations downtown, like Merrill, occupy a ton of space in Midtown.

"We're not talking about some midwest city that lost its factory and now nobody wants/needs to live there. There's a hell of a lot going on in NYC beyond Wall Street."

Yes, but cities can go up and down. My parents remember when Times Square was a destination (in the 1940's) and the Bronx was so safe you didn't lock your doors. I remember, as a young person, Times Square being a no-man's land of porn theaters. I remember people fleeing the city in the 70's and 80's; they couldn't leave fast enough. Now, Times Sq is a destination again, some of the boroughs have come way up but most of the Bronx is still a disaster. Point being: You think the pendulum can't swing in both directions? You think NYC can't go back to Koch or Dinkins-era gloom? Think again.

Steve - you are exceedingly obnoxious, and no doubt buoyed in your rudeness by the anonymity of this venue. Nonetheless, you've presented a claim, and I'm curious to see its source, so I'll engage you. Where is it written that 30% of NYC's (or Manhattan's?) income is generated on Wall St? I'm not doubting the veracity of the claim, just curious to read it from a primary, documented source.

I don't think Wall Street will be what it was, not in the next 25 yrs anyway. Look at tech: After the bust, everyone said it would return. Well, there are still IPO's that make the companies executives a lot of money, but the days of that being the norm are long gone. Likewise, there will always be 8 and 9 figure guys on Wall St, but they'll be a heck of a lot less of them for a long time. At some point in my lifetime, it may come back. But by then we'll be in the second term of president Chelsea Clinton...

SwK - Here's one of many statements to that effect from reputable sources:

"While financial services firms account for about 12 percent of New York City employment, they represent almost 30 percent of total wages and salaries, said Marisa Di Natale, the regional labor market specialist for Economy.com."

http://www.bloomberg.com/apps/news?pid=20601109&sid=akd8fnbNZUao&refer=home

I thought I would throw my 2 cents in.

I actually work at one of the 2 remaining independent broker/dealers (not in proprietary investments but I know enough to provide some real insight as opposed to fantasy)

As I have said before the unprecendented growth in Manhattan real estate has been driven by finance people on the margins. By that I am referring to the hundreds of truly average and mediocre bankers/salesmen who made $600,000 to 2 million per year. They had no brains they were just riding the biggest credit bubble known to mankind.

Make no mistake that is now over. Without those people on the making huge amounts of money there is only one way to go but down. Stars always make a lot of money but they will not drive the market. The mere uncertainty about their future income prospects is enough to bring the market down 15% by the end of the year.

Next, every wall street job I am talking about supports 2-3 other ny jobs. This has already been stated by our governor and our mayor. Prices in the outer suburbs will go down as well as a result. Just think of all the limo drivers who wait outside investment banks and law firms...a fair number of them will lose their jobs. I m sure they are supporting modest homes in the outer boroughs

To the argument that hedge funds will continue to make money...not going to happen...as we speak there is a massive liquidation going on in the hedge fund industry. The future is about transparency and lack of risk...two things that hedge funds do not provide. Wealthy clients and institutional investors are frightened...they are pulling their money out in droves.

Someone who knows, you have to understand that hedge funds demand deposits if at least $500,000 and then require individuals to keep their money in the funds for a minimum of 6 months to a year. There were some funds that demanded tie ups of 2 years. Investors have no idea how the money is invested...they see either a negative or positive balance once a month if they are lucky. People do not have the appetitie for it anymore, hence the massisve liqidation that is going on.

Most hedge funds have had a negative year, which means a lot will have to close up shop. the reason for that is before they can get their 20% profit they have to make up for any negative returns they have. Most hedge funds would rather close then stay in business if they have a down year of 20%.

I suppose financiers could travel overseas to dubai and be reckless...but we know that in three years or so they would blow up again so I really don't understand that argument. its pretty stupid actually, who would invest their money knowing what the eventual income. For example, I don't see anybody bidding up internet companies to the sky anymore...Yahoo will never sell for $400 again.

Since the bailout includes foreign banks who have our bad mortgages my guess is they take the get out of jail free card take their money and get lost. Would you invest any of your money with a wall street trader?

I don't know about 50% but I definitely believe in a 30% drop in real estate prices.

I thought I would throw my 2 cents in.

I actually work at one of the 2 remaining independent broker/dealers (not in proprietary investments but I know enough to provide some real insight as opposed to fantasy)

As I have said before the unprecendented growth in Manhattan real estate has been driven by finance people on the margins. By that I am referring to the hundreds of truly average and mediocre bankers/salesmen who made $600,000 to 2 million per year. They had no brains they were just riding the biggest credit bubble known to mankind.

Make no mistake that is now over. Without those people on the making huge amounts of money there is only one way to go but down. Stars always make a lot of money but they will not drive the market. The mere uncertainty about their future income prospects is enough to bring the market down 15% by the end of the year.

Next, every wall street job I am talking about supports 2-3 other ny jobs. This has already been stated by our governor and our mayor. Prices in the outer suburbs will go down as well as a result. Just think of all the limo drivers who wait outside investment banks and law firms...a fair number of them will lose their jobs. I m sure they are supporting modest homes in the outer boroughs

To the argument that hedge funds will continue to make money...not going to happen...as we speak there is a massive liquidation going on in the hedge fund industry. The future is about transparency and lack of risk...two things that hedge funds do not provide. Wealthy clients and institutional investors are frightened...they are pulling their money out in droves.

Someone who knows, you have to understand that hedge funds demand deposits if at least $500,000 and then require individuals to keep their money in the funds for a minimum of 6 months to a year. There were some funds that demanded tie ups of 2 years. Investors have no idea how the money is invested...they see either a negative or positive balance once a month if they are lucky. People do not have the appetitie for it anymore, hence the massisve liqidation that is going on.

Most hedge funds have had a negative year, which means a lot will have to close up shop. the reason for that is before they can get their 20% profit they have to make up for any negative returns they have. Most hedge funds would rather close then stay in business if they have a down year of 20%.

I suppose financiers could travel overseas to dubai and be reckless...but we know that in three years or so they would blow up again so I really don't understand that argument. its pretty stupid actually, who would invest their money knowing what the eventual income. For example, I don't see anybody bidding up internet companies to the sky anymore...Yahoo will never sell for $400 again.

Since the bailout includes foreign banks who have our bad mortgages my guess is they take the get out of jail free card take their money and get lost. Would you invest any of your money with a wall street trader?

I don't know about 50% but I definitely believe in a 30% drop in real estate prices.

sorry about the double post.

by the way...I do anticipate some sort of a rally on the bailout announcement. How long it lasts will depend on how long the market ignores horrible numbers similar to the ones that came out last week on housing starts, durable goods and unemploymnet.

face facts people we are in a recession...there is a good chance that unemplyment reaches 7% before the end of the year...yikes

take advantage of the rally and get out of bad positions. I recommend 5% of portfolios be placed in Gold.

"To the argument that hedge funds will continue to make money...not going to happen...as we speak there is a massive liquidation going on in the hedge fund industry. The future is about transparency and lack of risk...two things that hedge funds do not provide. Wealthy clients and institutional investors are frightened...they are pulling their money out in droves."

You say that as if this is the first bear market in the history of the country. A lot of people always pull money out of a bear market. Then they jump right back in when the market gets better. Happens every single cycle.

Sure, a ton of hedge funds have been riding the wave, and are now going under. Warren Buffet said its when the tide goes out that you see who's been swimming naked. Their former customers will hate seeing their wealth languish and lose value to inflation, and will jump right back in to the good hedge funds once the market recovers.

"Steve - you are exceedingly obnoxious, and no doubt buoyed in your rudeness by the anonymity of this venue. Nonetheless, you've presented a claim, and I'm curious to see its source, so I'll engage you. Where is it written that 30% of NYC's (or Manhattan's?) income is generated on Wall St? "

SomeoneWhoKnows, you definitely seem to not be in the know on this one....
The city's fortunes are ABSOLUTELY tied to WalL Street.

The city budget office (which also shows the 30% of city income being directly from Wall Street) also notes that for every Wall Street job, there are 2 created jobs in the city. Hell, how many lawyers have nothing to do without Wall Street?

So, we're talking about 30% of income direct, and maybe 40-50% of income if you include the indirect... and somehow that isn't going to put a major KO on the city?

BTW, have you even GLANCED at city and state revenue projections lately?

flmd's points are all well said. There will be a HUGE shakout of the middle there. Also, are you aware of how many SECRETARIES made $70-90k at these banks? And you didn't even need a college degree.

If folks think that ANYWHERE in this city won't be affected, they just don't get it..

"Precisely how, lowery? They will be regulated, leverage and risk will be greatly restricted. Can they come up with new ideas for growth? Yup. Will they ever have 40x leverage again? Nope."

Sure. Restructure. Reorganize. Shuffle lots of paper.

tech_guy please...hedge funds are a creation of a low interest rate environment...they only make money due to leverage. They are a creation of the of the dotbomb implosion.

If they have no leverage then no 20% plus returns...no 20% plus returns then no 2% annual fee and taking 20% profits.

please stop talking about something you have no idea about. it is embarassing. you're right people lose money but if you think that people will put their money into nontransparent vehicles where they can lose 30% in a week and bnot be able to sell so as to limit their losses while being charged 2% you are wrong

People will stick to plain old vanilla investments in stocks and bonds end of story.

The naivete you display indicates someone who has been trained to invest during the Greenspan era. The Greenspan put is over and now people will learn what a real bear market is. Not some fantasy land where the Fed will come to everyones rescue

"you are exceedingly obnoxious"

Thank you. I'm also exceedingly correct, as shown by many other posts here. You don't know what you're talking about, and if I say it and it's true and it makes me obnoxious in your eyes, so be it.

I'm not anonymous on this board. In fact, almost everybody knows who I am, and I'm one of the few.

Not only am I not anonymous, but I'm one of the few who takes credit for being right, and wrong. Your turn.

tech_guy, after LTCM and this recent debacle, hedge funds are going to be regulated just like everybody else. They represent a systemic risk to the financial system, and they are leveraged at 40:1, meaning that every $1 they lose, they have to liquidate $40 in capital to make up. Those days are gone - no commercial bank will be allowed to lend to them with that leverage (and all that's left are commercial banks) leaving their only source of leverage private equity, who do not usually lend money for trading, but rather invest to turn companies around and sell them at a profit.

lowery: "Sure. Restructure. Reorganize. Shuffle lots of paper."

What? That is as meaningless as a Sara Palin answer.

Let's face it, these are NEW times, they fall under NONE of the previous decline scenarios (thus the arguements and fact quotations). Uncharted waters if you will. The bad news is that there will a MASSIVE decline in real estate values in Manhattan. No one can predict the bottom, but we can all speculate. The good news is, no one dies. Who cares about what the numbers are for the financial sector, it is obvious what took place on Wall Street is going to serious effect values. Manhattan is not immune, we convinced ourselves it was, but we were wrong. Everyone who bought in the last 4 years (including me) will have to hold on to re-coup value, but selling into this wind is like having a portfolio of LEH stock. Agree to disagree!

"The naivete you display indicates someone who has been trained to invest during the Greenspan era"

I invest exclusively in Vanguard index funds. I also believe market timing is for suckers. I'd never put a single dime in a hedge fund.

But that's besides the point - the extremely personal nature you take on this shows that you're incredibly biased. You're not predicting, you're hoping. Those who predict are happy to discuss matters objectively. Those who hope are forced to resort to insults when challenged.

Steve - lowery: "Sure. Restructure. Reorganize. Shuffle lots of paper." What? That is as meaningless as a Sara Palin answer.

I think it says all you need to think about, but I don't know anything about Sara Palin to be complimented or insulted. However, I would like to be sure your post does not muddy the waters and confuse me with the person who said, steve, you are exceedingly...... because I do not call people names.

Back to restructuring - it has been said many times here and elsewhere that this is the biggest, worst, most significant this-and-that since The Great Depression. But here we are in 2008, seven decades after The Great Depression and its regulations, and we are dealing with the same types of financial institutions as existed before those regulations. There are things such as de-regulation. You can set up institutions that aren't subject to the same regulations. It happens and it will continue. First there will be lots of carnage, a cleaning out of the rubble. And then the cash will come back, and yes, my friend, it will find a way to leverage itself 40x again and attract lots of OPM (Other People's Money - remember that one?) to spend and leverage and profit from. Times do not end. They just change.

And you still owe me that dinner at Luxembourg, and now you owe me several desserts. And why did you wait this long to sell FI when I told you months ago to do it? You are a very naughty boy!

I have great "faith" in the ability of people to invent new and risky ways to gain and lose money. Just because lowery can't envision the details only means he's not presently inventing them (or is keeping mum). However, that will take time, and time for the new bubble to inflate, and if there is serious regulatory oversight that comes out of this, it may be much harder to do so, so that the time will be even longer. To me that means the money for the near future (measured in many years) will be nothing like what has been seen. That leads to a substantial chance of significant downward pressure on Manhattan RE for some time, and until it is more clear where that is going, buyers not in the $5 million plus category of not needing to worry will be very leery of putting money on the line. But I can only judge from my own reaction to these events.

"And then the cash will come back, and yes, my friend, it will find a way to leverage itself 40x again."

Never - all the deregulation that was saw since R. Reagan will be reinstituted. This is too much risk for the government to backstop continuously.

"you still owe me that dinner at Luxembourg"

Really? I don't remember.

"why did you wait this long to sell FI when I told you months ago to do it"

Because they voted to take out a $3.2 million ground mortgage on a property built on a sandbar, and I don't want to be part of that risk.

tech guy, you keep arguing, but without any base of facts.

Steve is right... we are going to go through some major regulation years now. And cheap credit is a thing of the past.

And, if that isn't bad enough for hedge fund, how about the small matter of LOSSES. Some hedge funds did ok, but another article posted on this thread noted that 90% of hedge funds are now making anything but the 1-2% management fee. Meaning folks are losing money in them.

Folks invested in hedge funds because of expectation of crazy returns. Now that that is gone, and they'll look like the poor excuse for mutual funds with 10x the fees that they really are, folks will be running away in droves.

type3 - I can't envision the details because I'm not a corporate lawyer, nor a financier, but I've worked around them long enough to have great faith in their creativity. I also don't look for NYC real estate to fare well.

steve, I'm afraid I don't agree with you that deregulation will never happen again. Although I can sympathize with your and others' dramatization of just how dire these straights are, I do think it's paradoxical that you only take the here-and-now-and-near-future view of it, but probably look backwards in time to justify the pessimism of the moment with "those who don't know history...." What I have tried to point out repeatedly is that part of history is the rebuilding from the busts. To say we will never again be here because of these regulations and then point to The Great Depression strikes me as odd.

That being said, of course I don't disagree with you about the profound impact this has on real estate and so much else in this metro area. You are not alone to see the price disparity between renting and buying as being a speculative bubble, with the premium representing nothing but the buyers' expectation that that premium will increase.

About Fire Island, yes, I posted many months ago when you first mentioned your Fire Island place that what you really ought to do is sell that place post haste, or better yet, a year ago, and eventually use that money to buy your dream home in Chelsea, which you obviously love, and which has obviously proven to be one of the best long-term bets in NYC in the past 30 years. I will never so long as I live forget my first impressions of Chelsea in 1976! And now....

I have also said I'm curious about that $3.2MM ground mortgage. Was it really granted, no prob? Is it for necessary improvements and maintenance? Is it an amortizing loan? Is it to replace a maturing interest only loan?

Although I haven't had the pleasure of hearing Ms. Palin's press utterances, I can honestly say I find her prettier than Obama, and this Presidential race is about nothing but appearances. A beauty pageant with pit bull partisans for supporters, who see the world in black and white and go for the jugular vein over nothing.

oops - a disgraceful typo - "straits" are dire, not "straights" -- well, on second thought, that too is all dependent on one's point of reference, isn't it, steve?

tech guy: I called you naive about real bear cycles (which you are) and you consider that a personal attack. Very amusing.

If anyone is hoping it is clearly you. Everyone knows you are only on this board arguing agianst bears so as to justify your recent real estate purchase. I understand your situation...getting mad at me at Bears on this board will not change anything

I own real estate and I have for many years...I am not biased I call them the way I see it.

Thank you for admitting you would never invest in a hedge fund...if you wouldn't what makes you think "rich" people would.

Tech Geek said: "You say that as if this is the first bear market in the history of the country. A lot of people always pull money out of a bear market. Then they jump right back in when the market gets better. Happens every single cycle.... will jump right back in to the good hedge funds once the market recovers."

God, you get it wrong on nearly every topic! Sure their have been bear markets before. But it's not since 1929 have we had so many large institutions fail. This is NOT a normal cyclical downturn; it's an 80 yr flood. If I told you a year ago that Bear, Lehman, Merrill, Freddie, Fannie, AIG, Wamu, and others would fail in a few months of each other, they'd have booted me from this board b/c they'd say I was a fantasy writer, not a R.E. blogger.

Eight years ago, tech geeks like you told me "The Nasdaq will be back to 5,000 in a yr; the good times will be back". Eight years later, the NASDAQ is at 2,500.

Some corrections are deeper than others. Just like some illnesses are a cold, some are the flu, and some are a stroke. We've just had a stroke. We'll get better but we're unlikely to be 100% for a long, long time, if ever.

nyc10022: Nevermind facts, you're not listening to me. You can mention present day losses until the cows come home - I never disputed that. I simply said that when the market recovers, money will go back into hedge funds.

Tech guy told FLMD: "the extremely personal nature you take on this shows that you're incredibly biased"

Save it, will you. You told me the exact same thing! If you find everyone around here "too personal", did you ever consider that maybe it's YOU? You say things that may you appear to be terribly uninformed at best, and woefully stupid at worst, and then you when multiple people point it out to you, you introduce a mis-direction such as questioning the "nature" of the writer as a means to invalidate his theory. It's a complete logical fallacy. What will you do next - claim that we all live with our mothers? Can't get dates? Have small genitalia? Why don't you just stick to the facts.

Finally, if you've antagonized people so much that some of us have even suggested you go take a dirt nap, maybe you should consider if there's truth in numbers and the problem might actually be yours, not theirs.

lowery, the mortgage is partially for improvements, but over-the-top ones like cedar shingles and replacing windows that were replaced 5 years ago. I would support doing what's necessary for upkeep, but not the most expensive options available for a property on a sandbar that is long overdue for a hurricane. Had Kyle plowed into Fire Island instead of Maine, with 25-foot waves, it could be catastrophic, and since I own a co-op, and mortgages are indivisible, the only way to get out of it would be to cancel the leases of any destroyed units that they might not be allowed to rebuild (no one knows for sure) meaning the rest of us would have to assume the burden, or to pay it off in perpetuity.

They haven't decided what the details of the mortgage are, but this is a Board that spent $250,000 on landscaping before fixing the roofs, so I don't trust them in the least.

Regarding Chelsea, yes, my grandmother grew up here and my great-grandmother (other side) drank herself to death here, but I'm not wed to it. I could easily move to Hell's Kitchen or the West Village and enjoy them both. Right now, however, I'm in capital rebuild mode since the (unnecessary) bankruptcy of Lehman caused me (unnecessary) losses. But I'm in no hurry to buy.

"To say we will never again be here because of these regulations and then point to The Great Depression strikes me as odd."

Then you've never worked at a bank or an audit firm as I have. The New Deal regulations worked well until the Ronald Reagan deregulation push: look at what they did from 1999 on: undid Glass-Steagall, failed to regulate Fannie and Freddie, allowed investment banks to take on 40x leverage. It led to the collapse of all of them. Never again will the government allow that to happen.

Admiral: "You say things that may you appear to be terribly uninformed at best, and woefully stupid at worst, and then you when multiple people point it out to you, you introduce a mis-direction such as questioning the "nature" of the writer as a means to invalidate his theory."

What? If you're gong back to "multiple people" meaning LICComment and petrfitz, both of whom I have blocked, then you don't know what you're talking about. How I can be "terribly uninformed" when I'm the one who has been providing the links and the theories and the data is beyond me. What does "the nature of the writer" even mean?

Admiral: First, I expected a bubble pop in 2000, so no need to put incorrect words in my mouth.

Second, here's our fundamental difference: I don't believe these financial firms collapsing will have any long term affect on our economy. To those not in finance, everything in finance is a commodity. Individuals and businesses don't care what name provides them with their financial needs, so long as its safe. The added regulation that comes about now will provide the latter. A bunch of firms folding or getting bought up by others doesn't change the former.

If a bunch of dairy farmers folded, and a bunch of others got bought out by others still, causing turmoil in the milk market... a year later, you wouldn't even remember it happened. You'd still buy milk, and couldn't care less that the picture on the carton changed.

People talk about "pre Ronald Reagan regulations" as if those were the dark ages where people died of the bubonic plague and cannibals roamed the streets. Our economy was pretty good pre Ronald Reagan, despite (or even because of) those regulations, and it'll be good once again when the regulations come back.

Admiral: "You told me the exact same thing! If you find everyone around here "too personal", did you ever consider that maybe it's YOU?"

Tons of people, even fellow bears, called you too personal. You really have no leg to stand on here.

"Finally, if you've antagonized people so much that some of us have even suggested you go take a dirt nap, maybe you should consider if there's truth in numbers and the problem might actually be yours, not theirs."

Those "numbers" are 1 - learn to count :) You're the only one disturbed enough to suggest this (multiple times no less - so long for the "momentary fit of anger" excuse). Personally, I'd rather lose every investment I ever make than have a personality/mentality like yours.

In that sense, arguing with you is incredibly moot - even if your predictions for real estate and the market are 100% right, I still win. Welcome to my ignore list! Population, 1.

"type3 - I can't envision the details because I'm not a corporate lawyer, nor a financier, but I've worked around them long enough to have great faith in their creativity. I also don't look for NYC real estate to fare well."

I'm in your corner on this. I just meant to deflect possible criticisms of you saying these things would happen without being able to really say how. I have not idea how they'll do it next time. But they will. There's gold in them thar hills....

> nyc10022: Nevermind facts

Exactly...

flmd: "Thank you for admitting you would never invest in a hedge fund...if you wouldn't what makes you think "rich" people would."

I felt the same way in 2000, when tons of rich people did it. I feel the same way now. If my beliefs/actions couldn't predict what rich people did then, why would they now?

"> nyc10022: Nevermind facts

Exactly..."

Quoting out of context? That's a new low for you. You're better than that.

steve, re Remembrance Of Things Past (economics by Proust): if we are to learn from the past, we learn that a big catastrophe happened, yet we're right back to big financial firms, huge leverage, humongous profits, speculation, boom and bust, just as we were beforre the Great Depression

re FI coop - I used to own out there and so I'm biased, thinking it's a very bad idea, but was particularly curious as to how you could talk about how buying in NYC was a bad investment in today's environment, yet invest on a sandbar, etc. Glad for you that you're out of there.

About your rent-to-buy, I don't know why this has been such an argument here, because I seem to recall reading a book review about someone's book, the coming New York real estate crash, paraphrasing, and the author's premise was exactly the same. But I also pointed out here some real-life experience that was very different - the market peaked in Sunnyside Queens at just barely over 12x, and the bottom was about 5x. Actually, rent-to-buy ratios in most of the stable outer-boro 'hoods discussed by SWK are what this rent-to-buy theory might call optimal. But come down those prices will, and I'm actually less convinced as time goes by that that particular theory is relevant. People paid higher ratios in Manhattan, but the ratios are going to come down not only in Manhattan but outside as well.

Yes, I have worked in a bank, what was once a large commercial bank, gobbled up by a European bank in the early '80s. It seems redundant here, but, as many well-meaning souls have cautioned you, be careful of extremes and absolutes.

"how you could talk about how buying in NYC was a bad investment in today's environment, yet invest on a sandbar"

I'm willing to take some risk, but not that much.

And I did buy it at a very good price - until 4 years ago prices had been stagnant for 5 years, and they never did go up very high. But when I bought there was neither a flip tax nor an underlying mortgage, and now they have the one and will soon have the other, so it's changed the risk and finances: it's cheaper to own a home.

"we're right back to big financial firms, huge leverage, humongous profits, speculation, boom and bust, just as we were beforre the Great Depression"

Right. Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice...

...it ain't gonna happen.

tech guy : this is getting tiring...no one invested in hedge funds prior to 2000. it was way to get returns once the tech bubble imploded.

Let me remind you of your argument since you seem to have forgotten. You state that this is just a normal garden variety downturn and everyone will go back to their regular investment habits which you feel includes investing in hedge funds. I am telling you that they will not return to hedge funds in the sae numbers that we saw from 2000 - 2007.

Hedge funds as we knew them from 2000-07 are finished period. People will not return.

You talk as if these investment vehicles have been around for a long time...sorry newbie you are incorrect

" I don't believe these financial firms collapsing will have any long term affect on our economy."

tech guy, then what is your position on the bailout? The rationale, and near panic, seems to be exactly that the financials will have a devastating impact long term on the rest of the economy. Is it logical to assume you think the bailout is not needed?

> > "nyc10022: Nevermind facts
> > Exactly..."

> Quoting out of context?

No, that was perfectly in context. You told us to ignore the facts, because you have opinions. Your opinions just aren't well supported (or supported at all, for that matter). That was my point...

"Tons of people, even fellow bears, called you too personal. "

Tons of people? Other than yourself, reference two.

"I'd rather lose every investment I ever make than have a personality/mentality like yours."

I'd like that as well. As you advocate buying & holding in a real estatee market poised to lose 40%, it appears we will both get our wish...

"Let me remind you of your argument since you seem to have forgotten. You state that this is just a normal garden variety downturn and everyone will go back to their regular investment habits which you feel includes investing in hedge funds. I am telling you that they will not return to hedge funds in the sae numbers that we saw from 2000 - 2007."

Are you going to quibble over semantics now? I argued that there will be a demand by the rich for actively managed investments. I don't care what they're called. If your whole point is that they won't be called "hedge funds"... uh, ok. So what?

"No, that was perfectly in context. You told us to ignore the facts"

Our chat history is here for everybody to read. In actual context.

A hedge fund is a few people sitting around making very large single stock, commodity or sector bets. The goal is to have many uncorrelated bets with a low probability of success but a high payout (via leveraged investments). That the bets are uncorrelated hedges the fund against any one bad bet. When too may bets go bad at the same time you have a meltdown (c.f. Long Term Capital 1998). A hedge fund, like Milleium Capital Partners, will hire a trader but will only pay them if they make money and usually fires them after a few months if they don't perform. Hedge funds are nothing like investment banks in that investment banks are full of people who perform only administrative tasks although they tell their friends they are "bankers" or "traders". At an i-bank, one senior banker landing one merger deal can feed 100 hungry MBA's, analysts, support staff etc... This kind of thing is simply not seen at a hedge fund where you only eat what you kill.

steve likes to believe he is right, in his own mind, even though he has not actually been right about anything to date. He sure can talk himself into circles . . .

As flmd points out the "Hedge Fund" as we have today are products of the dot-com boom. Mainly stock and sector analysts who were fired after the SEC cracked down on stock recommendations. One guy bets Telecom. One guy bets energy. That's your "hedge fund".

There were some "quantitative" hedge funds like D.E. Shaw but they were blown up in the S&P 500 implied vs. realized volatility disaster of 1998, a not-so-well-known by-product of the Long Term Capital collapse.

A truly bizarro statement from someone who's spent the last three weeks being (uncharacteristically) verrrry quiet about NY RE:

LICComment
11 minutes ago
ignore this person
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steve likes to believe he is right, in his own mind, even though he has not actually been right about anything to date. He sure can talk himself into circles . . .

Oh my ! when I read just a few "facts" about a tiny area of my first hand knowledge, and see how far they are from reality or overstretched, it makes me wonder what the quality of all other postings must be. 80sMan - no offense to part truth part stretch from you in particular, this is a generic comment to the entire board, just happened to be written after yours.

I know a fair amount about hedge funds, and have worked at one in the past. First of all, some history: Hedge funds have been around since the 80's, slowly grew in popularity in the 90's, and really exploded in number, size, and visibility in the last 5-7 years. There was minimal information available on them until recently, because they were almost unregulated, and the fund founders were low-profile, secretive people.

My view is somewhere in the middle. On the one hand, everyone LOVED the returns of the hedge funds in the last few years and conveniently forgot that those returns were driven by much higher risk/leverage. Now they are reminded, so I agree that in the short term there will be a whole lot fewer hedge funds, a whole lot less $$ in them, and thus a whole lot fewer rich fund managers/employees.

On the other hand, I don't think this is the end of the hedge fund industry. As one example, Paulson became the highest-earning manager ever in 2007 by going short subpime. I am sure there are other examples. Further, people have short memories, and sooner or later, money will flow back into hedge funds. Not sure if it'll ever reach the proportions of recent years (there will be other bubbles instead).

"At an i-bank, one senior banker landing one merger deal can feed 100 hungry MBA's, analysts, support staff etc... This kind of thing is simply not seen at a hedge fund where you only eat what you kill."

That was mostly the case years ago, but that changed dramatically over the last few years. There is TONS of support staff and tons of "analysts" (as in ibanking analysts, fresh out of school). 10 years ago, I remember few folks right out of school going to 'em, now I know tons of 'em...

Put more simply: anyone who tells you "this time it's different" is wrong. The details may change, but the big concepts always stay the same. The bulls said it about tech stocks, then the bulls said it about real estate, and now the bears say it about the financial industry collapse.

I'm sure those who aren't as young and naive as me lived through far more examples. Which makes me wonder why they haven't learned yet, and need a young whipper snapper like myself to remind them?

alanhart, please don't reprint what LICC says as I have him permanently blocked & it forces me to read the nonsense he writes. "even though he has not actually been right about anything to date."

Please!

Wall St will come back but more as in private equity, private partnerships...everyone forgets that the big i-banks were private in the beginning.

"everyone forgets that the big i-banks were private in the beginning."

Makes no difference in terms of regulation.

Steve...you still expecting that 6,000 point drop in the market this morning?

"I'm sure those who aren't as young and naive as me lived through far more examples. Which makes me wonder why they haven't learned yet, and need a young whipper snapper like myself to remind them?"

LOL. If you're so smart, why on EARTH did you buy Manhattan real estate in 2008, at the very very tip of the peak??

Tech Guy said: "Put more simply: anyone who tells you "this time it's different" is wrong. The details may change, but the big concepts always stay the same. The bulls said it about tech stocks, then the bulls said it about real estate, and now the bears say it about the financial industry collapse."

This is circular logic that does not support your conclusion: We've had a runup of historical proportions...if history repeats itself, and those markets are mean-reverting (as they have been in the past), to revert to the mean we need a downturn, a correction, of historical proportions. That would wipe out 35-50% of recent real estate gains, or more.

"you still expecting that 6,000 point drop in the market this morning."

What did I say? Is there a bailout?

Not yet...I was curious what you thought after what has gone down this weekend.

Asia down big. US down big today.

sizzlack, if you're addressing me, first, I've never seen anything like this in my life. Second, today's WSJ headline:

"Lehman Triggered Global Cash Crunch

"The decision to let Lehman collapse sparked a chain reaction with dire results. Critics now argue that intervention could have prevented the crisis that followed."

All of this - and all the losses I suffered on the stock market - were entirely avoidable. This is the most incompetent political administration in the history of the United States. 9/11, Katrina, Iraq, Afghanistan, now this. I call it Trickle-Down Incompetence.

So - politics aside - if the House passes the bailout bill today that will be a huge help, since there is doubt there. The first tranche of money must be out in the market quickly. The speed with which this is coming to a close is frightening, but necessary. A few smaller players will go belly-up, but with the takeover of Wachovia by Citigroup, the entire banking industry in the US has been reshaped in 2 weeks.

That will make a much healthier landscape going forward. There are 3 major US banks: Citigroup, JPMorgan Chase, and Bank of America. You will see a fourth as Wells Fargo picks up a few regional players: National City, Sun Trust, for example. Therefore, they CANNOT fail and they will be regulated to ensure that they don't fail. You may also see the deposit cap raised from 10% to 15%, allowing them to diversify regionally so their income statements aren't tied to specific regions (which is what caused the state-based model to fail in the 1980's). Mitsubishi is buying a 21% stake in Morgan Stanley. Guess where that's leading...?

To me the speed of this is astonishing, but healthy, if painful. Things should calm down starting October 1, once the quarter is over. There aren't that many weak financial institutions left that can have a catastrophic effect on the international financial system. I could be wrong, but I doubt the major players left will actually make use of the bailout facility - they don't need to as, in the case of JPM and C, the losses are already backstopped by the FDIC. AIG is backstopped (and owned) by the Treasury.

Right now we're back where we were after Lehman (unnecessarily) failed. I think that the worst is over. Not for Manhattan real estate however, which has another 50% to fall.

"All of this - and all the losses I suffered on the stock market - were entirely avoidable. This is the most incompetent political administration in the history of the United States. 9/11, Katrina, Iraq, Afghanistan, now this. I call it Trickle-Down Incompetence."

That's right... Blame the Republicans for being leveraged at least 2:1 (and possibly a lot more) into the deflation of the bubbles known as the BRIC stock markets. Just buy more... They are at lows, they are definitely due for a bounce...

"SomeonewhoKnows - you should read what is written carefully before misconstruing it, and do your research. Also, change your screen name to SomeoneWithoutaClue."

Steve, might want to take some of your own advice - SwK was responding to GoingDown's claim, which is pretty clear since he quoted it directly. Someone else made this point earlier, but I'll repeat: you've never played well with other kids in the sandbox, have you?

"Further, people have short memories, and sooner or later, money will flow back into hedge funds. Not sure if it'll ever reach the proportions of recent years (there will be other bubbles instead)."

newbuyer99, I agree with you here (it's too facile to conflate the banking and hedge-fund worlds), but it's all about "when?" in my opinion.

"There aren't that many weak financial institutions left that can have a catastrophic effect on the international financial system."

The other way to view this is that there are only massive ones that if they topple....

Many economists have argued that the root problems are not really addressed. Because of the leveraging, and how much is truly not understood about what is owed, and the uncertainty of how the RE market downward spiral will play out (level off? worsen?), I don't know how to know whether the worst is not yet to come.

Allow me to recast the bailout in real estate terms: the government is creating the financial equivalent of public housing for banks ($700 billion worth). The idea is if they can get the banks off the streets and into apartments they'll get back on their feet and start lending again in no time! Meanwhile, the gov't will hand out weekly checks to banks so they can eat a decent meal. Everybody needs somebody sometime. Even multi-national banks.

Speculative question:
How will re-regulation affect the options/commodities/derivatives markets and the people who feed off them?

"How will re-regulation affect the options/commodities/derivatives markets and the people who feed off them? "
If you're a broker/dealer I'd imagine regulation leads to more clearinghouses, less leverage, more standardization, more transparency, and more compliance costs. All of that leads to lower margins

alan, you can keep re-posting my comments so steve can see them, thanks.

sad