A picture is worth 1,000 words...

We find it interesting that amidst all of the ill news regarding housing that the housing stocks are turning higher, with volume rising. Too, we find it interesting that lumber prices are suddenly beginning to hold, rather than plunge to new and lower lows. Something is happening in the housing market...even as "news" on the front pages of the newspapers and in the lead televeision reports is of foreclosures, bankruptcies and builder's demise.

One Guy Who Has Seen It All...

One Guy Who Has Seen It All
Doesn't Like What He Sees Now

April 26, 2008; Page B1 of the Wall Street Journal


Peter Bernstein has witnessed just about every financial crisis of the past century.

As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
[Peter Bernstein]
One of Peter Bernstein's worries: 'If China goes into a recession, God knows.'

Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.

Mr. Bernstein, whose books include "Against the Gods: The Remarkable Story of Risk," sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike.

Mr. Bernstein is hopeful that Federal Reserve intervention will prevent deflation and depression, but he says there is no guarantee.

Excerpts of a recent interview:

WSJ: Aside from securitization, what were the main causes of the problem?

Mr. Bernstein: You don't get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion. It was like [former New York Gov. Eliot] Spitzer: "I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me."

When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again. They will tell themselves, "I'm too smart to do that again." And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren't going to be any excesses.

I'm a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don't think we are going to feel that way going forward.

WSJ: You said that it could turn out that the smart thing to do is to take more risk, because everyone will be so risk-averse. What kinds of investments do you see as the big winners coming out of this?

Mr. Bernstein: You could say: the things that have been beaten down the most, which would be real estate. But I think real estate is going to be under a cloud for so long, and you can't buy real estate with cash, it is too much money. I think you should go with the stock market. If things are better, the stock market will go up, and if things are awful, the stock market is going to be way down. But it is a place where, if you want to take risks, you've got a wide range of choices. This is why I own stocks [in addition to other investments], because I don't know where the bottom is going to come, and I want to be exposed to every kind of possibility I can think of. And, at least, if you pick the stock market and you are wrong, you can change your mind. There is some liquidity there. Stocks never became cheap, but they didn't become crazy, the way other assets were.

WSJ: How long do you think this whole process will take, before we get back to normal?

Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren't the case, I would be talking entirely differently. I would be saying, "What an opportunity we have got." And I just can't believe that the opportunity is here yet. There is too much to unwind.


WSJ: Can you explain the reason you think it will take a long time?

Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, "This house is cheap, I am going to buy it," or where some businessman says, "This is a great opportunity for us to expand our business. Everything is available to us."

If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don't know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.

WSJ: What kind of indications are you looking for as signs that the economy is about to get better and that the stock market and the investment world are about to turn the corner?

Mr. Bernstein: Somehow, the housing trouble has to at least flatten out. As long as that is going on, I think the pressure on the credit system is going to persist. It is kind of the leading indicator. It is where the trouble started. We have to underpin the consumer. That is why this is different. That is why this is like nothing we have had before.

Before, it was investment that made the V at the bottom of the business cycle. I don't see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won't do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.

What Warren thinks...

Warren Buffett talks about the economy, the credit crisis, Bear Stearns, and more.

If Berkshire Hathaway's annual meeting, scheduled for May 3 this year, is known as the Woodstock of Capitalism, then perhaps this is the equivalent of Bob Dylan playing a private show in his own house: Some 15 times a year Berkshire CEO Warren Buffett invites a group of business students for an intensive day of learning. The students tour one or two of the company's businesses and then proceed to Berkshire headquarters in downtown Omaha, where Buffett opens the floor to two hours of questions and answers. Later everyone repairs to one of his favorite restaurants, where he treats them to lunch and root beer floats. Finally, each student gets the chance to pose for a photo with Buffett.

In early April the megabillionaire hosted 150 students from the University of Pennsylvania's Wharton School (which Buffett attended) and offered Fortune the rare opportunity to sit in as he expounded on everything from the Bear Stearns bailout to the prognosis for the economy to whether he'd rather be CEO of GE - or a paperboy. What follows are edited excerpts from his question-and-answer session with the students, his lunchtime chat with the Whartonites over chicken parmigiana at Piccolo Pete's, and an interview with Fortune in his office.

Buffett began by welcoming the students with an array of Coca-Cola products. ("Berkshire owns a little over 8% of Coke, so we get the profit on one out of 12 cans. I don't care whether you drink it, but just open the cans, if you will.") He then plunged into weightier matters:

Before we start in on questions, I would like to tell you about one thing going on recently. It may have some meaning to you if you're still being taught efficient-market theory, which was standard procedure 25 years ago. But we've had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction; for more, see box on page 74] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once.

Here's one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it's backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There's nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn't buy went for 9.87%, and one went for 6.0%. It's the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory.

So wild things happen in the markets. And the markets have not gotten more rational over the years. They've become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past.

Do you think the U.S. financial markets are losing their competitive edge? And what's the right balance between confidence-inspiring standards and ...

... between regulation and the Wild West? Well, I don't think we're losing our edge. I mean, there are costs to Sarbanes-Oxley, some of which are wasted. But they're not huge relative to the $20 trillion in total market value. I think we've got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don't want a capital market that functions perfectly if you're in my business. People continue to do foolish things no matter what the regulation is, and they always will. There are significant limits to what regulation can accomplish. As a dramatic illustration, take two of the biggest accounting disasters in the past ten years: Freddie Mac and Fannie Mae. We're talking billions and billions of dollars of misstatements at both places.

Now, these are two incredibly important institutions. I mean, they accounted for over 40% of the mortgage flow a few years back. Right now I think they're up to 70%. They're quasi-governmental in nature. So the government set up an organization called OFHEO. I'm not sure what all the letters stand for. [Note to Warren: They stand for Office of Federal Housing Enterprise Oversight.] But if you go to OFHEO's website, you'll find that its purpose was to just watch over these two companies. OFHEO had 200 employees. Their job was simply to look at two companies and say, "Are these guys behaving like they're supposed to?" And of course what happened were two of the greatest accounting misstatements in history while these 200 people had their jobs. It's incredible. I mean, two for two!

It's very, very, very hard to regulate people. If I were appointed a new regulator - if you gave me 100 of the smartest people you can imagine to work for me, and every day I got the positions from the biggest institutions, all their derivative positions, all their stock positions and currency positions, I wouldn't be able to tell you how they were doing. It's very, very hard to regulate when you get into very complex instruments where you've got hundreds of counterparties. The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns. And I think they were right to do it, incidentally. Nobody knew what would be unleashed when you had thousands of counterparties with, I read someplace, contracts with a $14 trillion notional value. Those people would have tried to unwind all those contracts if there had been a bankruptcy. What that would have done to the markets, what that would have done to other counterparties in turn - it gets very, very complicated. So regulating is an important part of the system. The efficacy of it is really tough.

At Piccolo Pete's, where he has dined with everyone from Microsoft's Bill Gates to the New York Yankees' Alex Rodriguez, Buffett sat at a table with 12 Whartonites and bantered over many topics.

How do you feel about the election?

Way before they both filed, I told Hillary that I would support her if she ran, and I told Barack I would support him if he ran. So I am now a political bigamist. But I feel either would be great. And actually, I feel that if a Republican wins, John McCain would be the one I would prefer. I think we've got three unusually good candidates this time.

They're all moderate in their approach.

Well, the one we don't know for sure about is Barack. On the other hand, he has the chance to be the most transformational too.

I know you had a paper route. Was that your first job?

Well, I worked for my grandfather, which was really tough, in the [family] grocery store. But if you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do. It might be wonderful to be head of GE, and Jeff Immelt is a friend of mine. And he's a great guy. But think of all the things he has to do whether he wants to do them or not.

How do you get your ideas?

I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report. [Editor's note: Berkshire purchased the shares five years ago and sold them in 2007 for $4 billion.]

What advice would you give to someone who is not a professional investor? Where should they put their money?

Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

When Buffett said he was ready to pose for photographs, all 150 students stampeded out of the room within seconds and formed a massive line. For the next half hour, each one took his or her turn with Buffett, often in hammy poses (wrestling for his wallet was a favorite). Then, as he started to leave, a 77-year-old's version of A Hard Day's Night ensued, with a pack of 30 students trailing him to his gold Cadillac. Once free, he drove this Fortune writer back to his office and continued fielding questions.

How does the current turmoil stack up against past crises?

Well, that's hard to say. Every one has so many variables in it. But there's no question that this time there's extreme leveraging and in some cases the extreme prices of residential housing or buyouts. You've got $20 trillion of residential real estate and you've got $11 trillion of mortgages, and a lot of that does not have a problem, but a lot of it does. In 2006 you had $330 billion of cash taken out in mortgage refinancings in the United States. That's a hell of a lot - I mean, we talk about having $150 billion of stimulus now, but that was $330 billion of stimulus. And that's just from prime mortgages. That's not from subprime mortgages. So leveraging up was one hell of a stimulus for the economy.

If that was one hell of a stimulus, do you think the $150 billion government stimulus plan will make an impact?

Well, it's $150 billion more than we'd have otherwise. But it's not like we haven't had stimulus. And then the simultaneous, more or less, LBO boom, which was called private equity this time. The abuses keep coming back - and the terms got terrible and all that. You've got a banking system that's hung up with lots of that. You've got a mortgage industry that's deleveraging, and it's going to be painful.

The scenario you're describing suggests we're a long way from turning a corner.

I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that.

Your OFHEO example implies you're not too optimistic about regulation.

Finance has gotten so complex, with so much interdependency. I argued with Alan Greenspan some about this at [Washington Post chairman] Don Graham's dinner. He would say that you've spread risk throughout the world by all these instruments, and now you didn't have it all concentrated in your banks. But what you've done is you've interconnected the solvency of institutions to a degree that probably nobody anticipated. And it's very hard to evaluate. If Bear Stearns had not had a derivatives book, my guess is the Fed wouldn't have had to do what it did.

Do you find it striking that banks keep looking into their investments and not knowing what they have?

I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done. When you start buying tranches of other instruments, nobody knows what the hell they're doing. It's ridiculous. And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska, but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything. It's a bunch of juniors all put together. And the juniors all correlate.

If big financial institutions don't seem to know what's in their portfolios, how will investors ever know when it's safe?

They can't, they can't. They've got to, in effect, try to read the DNA of the people running the companies. But I say that in any large financial organization, the CEO has to be the chief risk officer. I'm the chief risk officer at Berkshire. I think I know my limits in terms of how much I can sort of process. And the worst thing you can have is models and spreadsheets. I mean, at Salomon, they had all these models, and you know, they fell apart.

What should we say to investors now?

The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

By your rule, now seems like a good time to be greedy. People are pretty fearful.

You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

But you're still bullish about the U.S. for the long term?

The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.

What to do with your tax records?

When it comes to tax paperwork, many people are adamant about keeping every scrap of paper, often believing those documents will save them if the Internal Revenue Service comes knocking. But that's not necessarily the case. Bankrate.com tax writer Kay Bell has these tips on how to sift through piles of tax-related documents and keep only the ones you really need.

When it comes to tax records, says Bell, you should hang on only to those that help you identify sources of income, keep track of expenses, determine the value of property, prepare tax returns or support claims made on those returns. This means 1040 forms and any accompanying tax schedules, along with the documents supporting the return, such as W-2s, 1099 miscellaneous income statements and receipts or canceled checks verifying tax-deductible expenses.

But don't go overboard. If you used something to claim a deduction, keep it -- if not, shred it. For example, hoarding medical bills is useless if you didn't accumulate enough to meet the deduction threshold. Let common sense, as well as storage space, be your guide.

To be sure, some items do have a longer shelf life. These generally are assets that a taxpayer will eventually sell, triggering a tax bill. So if you have a pension plan, own a home or invest in the stock market, tax pros recommend keeping these records indefinitely. At the very least, you should keep them until three years after you dispose of the asset.

As far as how long you should hold onto tax papers, the rule of thumb is until the chance of audit passes. Usually, this is three years after filing. But if the IRS suspects you underreported your income by 25% or more, it gets six years to check into your tax life. That's why most accountants advise taxpayers -- even those who are meticulous filers -- to keep tax documents for six to 10 years.

Since for most taxpayers the biggest asset it their home, it's important to understand the rules governing profits from home sales. While the tax rules have changed in recent years, meaning sale profits don't automatically face IRS charges, any paperwork relating to a residence should be kept for as long as the home is owned.
Single home sellers now can net capital gains of $250,000 (double that for married couples) before owing the IRS. To determine whether sale profits fall within the tax-free limits, the seller must accurately establish a residence's basis. That means that records related to a home's value -- settlement papers and receipts for improvements and additions -- are critical.

If you sold a house before May 7, 1997, that could affect your current home's basis. With home sales back then, taxpayers were able to defer tax on any gain by using the profit to purchase another home and filing IRS form 2119. If the home you're now selling is the one your pre-1997 sale proceeds were rolled into, you'll need those old forms to figure your current property's basis and any potential tax bill.

Virginia Tech - One Year Later

This a post from our friend Rob Fraim...


Today marks the one-year anniversary of the shooting rampage at Virginia Tech – as various news broadcasts have no doubt reminded you. I have received some requests for the piece that I wrote last year, so I’m just going to rerun it today – as we all think back on that horrible day.

Some of you have contacted me over the last 24 hours or so, remembering my proximity to Virginia Tech – my town of Roanoke, Virginia and Blacksburg, Virginia being just about 35 miles apart. Folks were kind enough to ask if I had any family at Tech.

I appreciate the concern. No, my two older kids are out of school now and my youngest is still in high school. So we are all well - as well as any of us who live in this area can be that is. Roanoke and Blacksburg are closely intertwined, with Virginia Tech being the major university in the area and the alma mater of many people here. More important, there are many young people from Roanoke who are Tech students. So while the whole nation was horrified by what was taking place, here in Roanoke it was very personal – since virtually everybody knows someone there.

Yesterday as the news started hitting I called several parents here to see if they had heard from their children. With each call I felt better, as folks told me that they had spoken with their kids and that they were safe.

Then I called my friend Mike, since I knew that his son was an engineering student – a senior – at Tech. He said, “No, I haven’t reached Brian yet. He didn’t pick up his cell phone, but that’s not unusual. I’m sure he’s ok though.” Of course he wasn’t sure. He wasn’t at all sure, and we both knew that.

We watched and read the news together over the phone as more and more details came out. He noted that the first shootings took place in Ambler Johnston Hall and mentioned that he knew where that was – he himself having gone to Virginia Tech back when we were young, back before young people routinely killed each other in random mass attacks. I asked where Brian would likely be and Mike said “Most of the time in Norris Hall. That’s a long way from Ambler Johnston.”

Then, within just a minute or so we both read that it wasn’t just confined to the two shootings at Ambler Johnston. Soon, the words “Norris Hall” and “engineering” started popping up with frequency as the details began to emerge.

Mike got quiet, as did I. Then he said, “I guess I’d better go and try to reach him some more.” He promised to call me as soon as he heard anything.

I only felt a fraction of his fear. A smidgen of his panic. I only got a glimmer, a glimpse of what Mike and many other parents were experiencing yesterday. And it terrified me nonetheless.

Any parent who has ever worried about a child driving home and being later than he should, or watched as she almost toddled into traffic, or felt helpless as he was wheeled away to the operating room, can imagine what Mike and others were enduring yesterday.

I wanted to call somebody. I wanted to watch the news. I knew I should get some work done. But I left the office and walked the two blocks to my home. What I actually wanted was to see my son.

I remembered that he was at home, studying for an afternoon test at the community college where he also takes courses, and it seemed important for me to talk to him. But he wasn’t at the house after all, having decided to study at the college. Now I knew that his school wasn’t Virginia Tech and I knew that he was ok, but I still felt compelled to reach him. I made up an excuse and called him to talk about something that could have easily waited until later – knowing that if I told him that I really just wanted to hold him and hug him and hide him, he’d think the old man had gone nuts.

On my way back to work I stopped in to two little family stores in this quiet neighborhood of ours – Lipes Pharmacy to pick up a prescription and Tinnell’s Grocery for a Diet Coke. While I was in the grocery my cell phone rang and it was my office. My heart froze when they told me that Mike had called and left word for me. He had news of his son.

Brian was fine.

And his dad was fine. And my son was fine. And all’s right with the world.

Well, no. Not really.

Our quiet little neighborhood somehow didn’t seem so quiet, and Tinnell’s and Lipes didn’t feel like Mayberry anymore. Blacksburg and Roanoke are just a half an hour apart, and Blacksburg and Roanoke are forever changed.

I know I’ll never pass a Luby’s restaurant again without being reminded of Killeen, Texas. And now, let’s do a quick word association. I say “Columbine.” Do you say “pretty little purple flower” or does your mind immediately flash to the senseless and evil violence at that school?

Oh, and someone reading this is certain to question my use of the word “evil.” Let me be clear:

E-V-I-L. Or perhaps “wicked” makes my point more plainly to you. Please, please spare me the diatribes about poor little bullied and socially disenfranchised young people acting out in the only way they know how. Evil, wicked, senseless, cowardly, hurtful, despicable, and once again evil I say.

And now, Virginia Tech and Blacksburg will always be known, not as a fine school and a nice town, but instead as the place where evil once again robbed life and hope and promise. 32 people were lost, and another 22,000 or so young people lost their youth, as something wicked their way came.

And here in Roanoke, I’m not sure that things will ever be exactly the same either. You see, even if you don’t know somebody who was hurt or killed, or know their families, this is a small enough community and the degrees of separation close enough that inevitably you will know someone who knows someone who was impacted.

Classes will resume, and life will go on, and kids will learn and study and graduate. People and towns and even schools have remarkable resilience. But let’s not think for even a moment that things haven’t changed.

I’m kind of afraid that people watched the news for a moment yesterday and thought “Oh, another school shooting - what a shame” and then switched to the sports channel or MTV.

We get used to evil and violence and it doesn’t shock us the way it once did. We get hardened to it, and accustomed to it and inured to it, and we come to accept it as routine. And that’s a change that bodes poorly for us all.

“Mother, mother, there's too many of you crying

Brother, brother, brother, there's far too many of you dying

You know we've got to find a way

To bring some lovin' here today …”

Marvin Gaye – “What’s Goin’ On?”

Rob Fraim

Sowood Manager Launching New Fund

Hot on the heels of reports that former LTCM manager John Meriwether is once again losing investor's money, why he even has investors still confounds us, we now learn that former Sowood manager Jeffrey Larson is starting a new fund.

Don't remember Sowood? Its former investors surely do, since they lost more than half their money in the matter of a few days last July. The $3 billion fund ultimately returned $1.4B to investors, vaporizing $1.6B in less than a week. Once again, our "friend" leverage was up to his old tricks. It wasn't enough for Mr. Larson to simply invest the $3B he was given, so of course leverage was the answer. Note that his portfolio was supposedly "market neutral" and hedged against losses. Hedged, that is, unless something unexpected happened (does one need to hedge against expected events?), which it did forcing him to sell the portfolio to Citadel at distressed prices. Once again, much like LTCM or Bear Stearns, it was leverage that forced the fund to liquidate.

Larson was reportedly "devastated" by the losses. Heck, I am sure we would all be devastated if one day we were collecting $60 million in annual management fees, and the next, POOF, no more management fees. Not to mention, no more 20% performance fees either. I am sure it really ruined his afternoon to have that cash spigot shut off.

An article in the Boston Globe tells us that friends of Mr. Larson report that he is "eager" to get back into the investment business. I mean, come on, it's been almost a year without a shiny new stack of more than 1 million dollar bills to bring home at the end of each and every week. Poor guy.

To date he has apparently obtained interest from potential investors (i.e., "suckers") of $250 to $500 million. Hey, it's been 9 months, I am sure he's learned his lesson (just look at Meriwether - the first time he brought the World's financial system to its knees, whereas this time he is only 15x levered and is just losing hundreds of millions - he's not even responsible for the current world financial crisis!). Sure, Mr. Larson will have to slum it on a mere $100-200 grand per week, but I am sure the joy of just being back in the investment business will make up for it.

Let us not forget that Mr. Larson ran money for Harvard's endowment and apparently did well before starting Sowood. Yet Harvard lost $350 million in Sowood's collapse - anyone think they're giving Larson a 2nd chance? How about the Mass. pension fund - they only lost $30 million?

You know, you just can't make this stuff up...

Barron's on Government Debt (and a Mention of Financial Armageddon)

History has clearly shown that governments take to debt like a fish to water.

One reason, of course, is that politicians can make expensive promises today that generally won't become due and payable until years later (i.e., after they've left office).

Eventually, though, the illusion ends -- and a day of reckoning begins.

That is at the heart of a column by Barron's editorial page editor Thomas G. Donlan, "A Penny for an Old Book" (which also happens to mention Financial Armageddon).

You were warned: the warning said that in a certain year, ". . . the United States of America, as we know it today, will cease to exist. That year, the country will have spent itself into a bankruptcy from which there will be no return. What we once called the American Century will end, literally, with the end of the American way of life -- unless you and I act now to pull ourselves and the country back from near-certain oblivion."

That certain year of disaster, however, was 1995. Harry E. Figgie Jr. first issued the warning in Figgie International's 1985 annual report. Government debt, he said, was growing out of control. The trend would culminate in 1995, when all the tax revenues of the federal government would not suffice to pay the interest on the national debt.

Figgie repeated his warning many times, buttressed with calculations provided by an economist, Gerald J. Swanson. People listened. Figgie and Swanson published Bankruptcy 1995, which enjoyed more than nine months on best-seller lists in 1992 and 1993.

Used-book listings on Amazon show that Bankruptcy 1995 is widely available for a penny, plus $3.99 shipping.

We have been warned before. Thomas Jefferson, who spent $27 million to purchase Louisiana but was frugal enough to reduce the national debt from $83 million to $57 million in eight years, said that public indebtedness was "the greatest danger to be feared."

The War of 1812 seemed a greater danger to his successor, James Madison, and the country survived having a debt of $123 million. Real danger only appeared when the country freed itself from its debt during the administration of Andrew Jackson.

Post-war arrangements to pay off the debt included the sale of public lands that had cost the government nothing. Purchasers' payments were financed by bank loans on easy terms, since everyone knew that vast profits could be made on the resale of land to new immigrants, new cotton planters and new developers of new towns. Payments for land deposited to the Bank of the United States helped retire the national debt, putting liquidity in the hands of former bondholders, many of them bankers who could then lend for more speculation in land. The phrase "doing a land-office business" entered the American language at this time.

On Jan. 1, 1835, the United States was officially debt-free. This happy condition lasted two years and a bit -- five weeks longer than Jackson's presidency. The Jacksonian boom of development and real-estate speculation accelerated, further fueled by foreign capital and foreign creditors. It came to a crashing end in the Panic of 1837. The conversion of bank currency into gold was first dubious, then made mandatory, then suspended, then made irrelevant by a wave of bank failures.

Historian Edward M. Shepherd summarized the situation in his biography of Martin Van Buren, the unlucky president who followed Jackson and received the blame for the ensuing depression:

"Fancied wealth sank out of sight. Paper symbols of new cities and towns, canals and roads were not only without value, but they were now plainly seen to be so. Rich men became poor men. The prices of articles in which there had been speculation sank in the reaction far below their true value."

The United States did not go out of business in the Panic of 1837 and the following depression, nor in the cyclical panics and depressions and recessions that followed through the decades. Each time, individuals suffered dispossession of their homes and the loss of what they imagined was their monetary wealth.

The development of the United States continued. Immigrants did not stop setting up farms and businesses. Miners did not stop mining, traders did not stop trading and, most importantly, capitalists did not stop investing.

John Jacob Astor, who had made a good-sized fortune in the fur trade, sold out in 1834. He had gold when others had paper, so he was able to buy Manhattan properties for cash. He leased them back to the sellers for 5% of the purchase price per year. Such transactions saved the sellers' homes and businesses and made Astor one of the richest men in the country. Other capitalists also made their fortunes in distressed real estate in other cities.

Capitalists also rose to the occasion or the bait, in the other panics. The Great Depression was the first in which government attempted to impose solutions, and it lasted longer, with worse pain, than any other.

Even in the 1990s, capitalists were at the center of the solution. The Clinton administration acquired a healthy fear of "bond-market vigilantes."

Interest rates fell even as the national debt was piling up. Figgie and Swanson had projected a $6.5 trillion national debt in 1995 with interest payments of $619 billion. The debt was only a little lower than their ferocious projection -- it came in at just under $5 trillion -- but interest expense in 1995 was only $332 billion.

The government had increased taxes and slowed the growth of spending for a time, and investment capital, foreign and domestic, flowed into U.S. stocks, corporate debt and government bonds. The returns on capital were reinvested in a more productive economy, and taxes on investment profits were reduced, not raised. A few years after the expected disaster, the U.S. very nearly ran a real surplus, and did report budget surpluses for three years.

Running a surplus, however, merely encouraged higher spending and lower taxes. By 2004, after tax cuts and war spending, Swanson was back with a new book, America the Broke, and other authors joined the doomsday chorus. Financial Armageddon, by Michael J. Panzner, spread scorn all over the mortgage-backed securities market in 2006, a year or more before most financial writers knew what CDO stood for.

This year, the national debt is on track to surpass $10 trillion, not counting another trillion or two of mortgage debt that won't be paid back unless the federal government does it, or allows capitalists to pick up the pieces of a shattered market.

You have been warned. Again.

The IMF's World Economic Outlook

On Wednesday, in its new World Economic Outlook [WEO], the International Monetary Fund [IMF] announced that global economic growth is slowing.

The WEO advised that:

The global expansion is losing speed in the face of a major financial crisis.

The report says that, thanks to the correction in the housing market, the leading offender is the U.S.

The emerging and developing economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by China and India, although activity is beginning to moderate in some countries.

How bad will it get? Judging by the IMF's estimates, the outlook is more about a slowdown rather than an outright contraction. According to the IMF, last year, global GDP rose by 4.9%. The projection for 2008 is 3.7% growth, followed by 3.8% in 2009.

If the prediction proves accurate, the deceleration will still bring pain to various segments of the world economy. Then again, world GDP rising by 3.7% is hardly a disaster. Indeed, 3.7% growth is the upper range that's prevailed since 1970.

But no one should ignore the other risks bubbling that aren't obvious in estimates for GDP. Inflation remains a threat, for example, particularly in the developing world. The trend threatens the ability of the developing world to export disinflation to the U.S. and the developed world generally, as has been the case in past years. At some point, if prices keep rising, might the emerging markets export inflation? In fact, that seems to be the case now for certain items, starting with oil, which on Wednesday touched another new record high of $112 a barrel in New York. The U.S. is the world's biggest consumer of oil, and more than half of its crude is imported, much of it from the developing world.

Meanwhile, monetary policy threatens to fan inflation's fire. According to the IMF, real short-term interest rates have turned negative in the U.S., Europe and Japan.

Of course, the argument for such a loose monetary policy is that the global economy needs an antidote to the deleveraging that's sweeping financial systems from New York to London to Tokyo. The IMF report warns that:

A further broad erosion of financial capital in a climate of uncertainty and caution could cause the present credit squeeze to mutate into a full-blown credit crunch, an event in which the supply of financing is severely constrained across the system.

In fact, one could argue that a fair degree of the global economy's future path over the next year or so is tied to whether or not the credit crunch mutates into something worse from this point onward. The challenge for policy makers is that addressing each scenario requires different medicine. If greater liquidity troubles are coming, central banks may feel compelled to act by effectively printing more money than is otherwise prudent. The danger is that the liquidity injections turn out to be unnecessary, in which case inflationary pressures will be that much more troublesome and difficult to control. If, and when that becomes the leading issue for central banks, the easy money party will end, perhaps for an extended period.

The IMF report leans toward the conclusion that the credit crunch may yet get worse before it gets better. Unfortunately, no one really knows and so the risk of dispensing the wrong policy medicine remains higher than usual at the moment. Risk, in short, is still with us even if the world economy is set for modest growth.

10 Market Rules To Remember

The Best Read of the Day

from the Financial Times

False ideology at the heart of the financial crisis
By George Soros

The proposal from Hank Paulson, US Treasury secretary, for reorganising government regulation of financial institutions misses the point. We need new thinking, not a reshuffling of regulatory agencies. The Federal Reserve has long had authority to issue rules for the mortgage industry but failed to exercise it. For the past 25 years or so the financial authorities and institutions they regulate have been guided by market fundamentalism: the belief that markets tend towards equilibrium and that deviations from it occur in a random manner. All the innovations – risk management, trading techniques, the alphabet soup of derivatives and synthetic financial instruments – were based on that belief. The innovations remained unregulated because authorities believe markets are self-correcting.

Regulators ought to have known better because it was their intervention that prevented the financial system from unravelling on several occasions. Their success has reinforced the misconception that markets are self-correcting. That in turn allowed a bubble of excessive credit to develop, which extended through the entire financial system. When the subprime mortgage crisis erupted it revealed all the weak points. Authorities, caught unawares, responded to each new disruption only after it occurred. They lacked the ability to foresee them because they were in the thrall of the market fundamentalist fallacy. They need a new paradigm. Market participants cannot base their decisions on knowledge, or what economists call rational expectations. There is a two-way, reflexive interaction between the participants’ biased views and misconceptions and the real state of affairs. Instead of random deviations, reflexivity may give rise to initially self-reinforcing but eventually self-defeating boom-bust sequences or bubbles.

Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop. I shall mention only two. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000bn. To put it into perspective, that is about equal to half the total US household wealth and about five times the national debt. The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred. That must have played a role in the Fed’s decision not to allow Bear Stearns to fail. One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted. That would do more good in clearing the air than a grand regulatory reorganisation.

The other issue is rising foreclosures. About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises.

The Bush administration has resisted using taxpayers’ money because of its market fundamentalist ideology. Apart from a bipartisan fiscal stimulus, it has left the conduct of policy largely to the Fed. Yet taxpayers’ money will be needed to reduce foreclosures. Two proposals by Democrats in Congress strike a balance between the right to foreclosure and discouraging the exercise of that right. One would modify the bankruptcy laws allowing judges to modify the terms of mortgages on principal residences. Another would provide Federal Housing Administration guarantees that would enable mortgage holders to be paid off at 85 per cent of the current appraised value. These proposals will not solve the housing crisis, but go to the heart of the issue. They should be given serious consideration

Laugh and the world laughs with you...Cry and you know...

The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.

Some housing bubble news from Wall Street and Washington. Bloomberg, “Home prices declined in 21 U.S. cities in January, led by Sacramento and Las Vegas, as banks sold foreclosed homes at bargain prices. The price per square foot in Sacramento dropped 28 percent to $166 from a year earlier, according Radar Logic Inc. Las Vegas fell 25 percent to $137 a square foot. San Diego was the third-worst U.S. market, with prices dropping 21 percent, and Los Angeles was fourth, with a 17 percent decline.”

“‘Like homebuilders who feel pressure to get rid of inventory quickly, many banks and lenders experience the same pressure when dealing with homes from foreclosure,’ and decide to sell at below-market prices, the report said.”

The Kansas City Star. “NovaStar Financial Inc. disclosed that more than half a dozen regulators and law enforcement authorities, including the FBI, have requested information from the subprime mortgage lender.”

“The decline in housing prices has clobbered NovaStar, which specialized in making mortgage loans to borrowers with shaky credit histories. Soaring delinquencies, defaults and foreclosures led to a staggering loss for the company last year of $733.1 million.”

“In its filing, the company repeated its earlier declaration that there were ’substantial doubts’ it could continue as a going concern and that it may be forced to declare bankruptcy.”

From Spiegel Online. “Germany’s second biggest state-owned bank, Bayerische Landesbank, revealed Thursday that the global credit crunch (more…) has cost the bank €4.3 billion ($6.7 billion) — far more than it had previouly predicted and more than any German state-owned bank has suffered so far.”

“During a presentation of the bank’s results Thursday, the company said that €24 billion of its assets were at risk of devaluation. On Wednesday, Germany’s third biggest state-owned bank, WestLB, reported it had lost €1.6 billion (more…) in 2007 after the credit crunch cost it over €2 billion last year.”

“‘What the real fallout will be, nobody knows right now,’ said Michael Kemmer, BayernLB’s CEO.”

From Reuters. “British house prices fell for the fifth month running in March, according to data from the Nationwide Building Society, as lenders pulled cheap loans, rushing to cut their exposure as they themselves struggle to obtain reliable financing.”

“Britain’s house prices have tripled in the past 10 years and, at about 174,000 pounds each, cost more than seven times the average annual salary.”

“‘Most of the recent news has been concerning,’ said Ed Stansfield of consultancy Capital Economics in London. ‘It’s looking as if the chances that we follow the United States in terms of scale of (house price) falls are rising all the time.’”

“The truth is that most British homeowners couldn’t afford their houses if they didn’t already own them. Take a buyer on an average salary of about 23,000 pounds buying an average house for about 174,000. Even if by some stroke of luck the buyer had managed to save 35,000 pounds for a deposit, finding a lender who would lend them six times their salary today is all but impossible.”

“This is beginning to dawn on many, to judge by a recent survey of British consumer morale, which showed it had fallen to its lowest level in more than 15 years in March.”

“The UK has been heavily dependent on consumer spending that is housing related in one way or another; either due to investment in housing or based on spending predicated on house price gains past and future.”

“Spain’s fast-crumbling property sector, the driver of stellar growth for a decade, still has a long way to fall and will condemn the economy to years in the doldrums, economists believe.”

“Last week official figures showed January home sales slumped 27 percent year-on-year and anecdotal evidence suggests the situation is far worse. Juanra Doral, director of operations at one of Spain’s biggest property websites, said sales on its site have more than halved year-on-year.”

“‘We are witnessing an almost complete halt. Nobody expected it to be so severe,’ he said, adding that it now took over 11 months to sell a house compared with three this time last year.”

“‘When it comes to the imbalances within the economy, Spain is like the U.S. on speed,’ said Diana Choyleva, a senior economist at Lombard Street Research in London.”

“Home starts will halve to 300,000 this year, the Madrid Association of Property Developers (ASPRIMA) said last week. The group had estimated 400,000 building starts but its chairman told journalists the estimate had become obsolete in the time it took to publish the report.”

“With hundreds of thousands of properties standing empty, prices are likely to fall 8 percent this year after tripling in the last decade, ASPRIMA has said.”

“‘Forget about Spain,’ Lombard’s Choyleva tells real estate clients asking her whether to invest in the country. ‘It’s going to be a long time before this economy returns to anywhere near the growth rates it enjoyed over the last 10 years.’”

“A plunge in consumer confidence and services sector activity shows the collapse in the property market is fast infecting the wider Spanish economy. ‘In Spain it seems to be an all-round malaise,’ said NTC chief economist Chris Williamson. ‘It was a dreadful survey.’”

“Not only that, consumer confidence fell in March to 73.1 from 76.8 in February, the Official Credit Institute said on Thursday, close to January’s all-time low of 70.9, and well below the 100 mark which separates pessimism from optimism.”

“‘Spain is a real disaster,’ said Marco Valli at Unicredit MIB. ‘The housing downturn is spilling over very quickly to all other sectors, helped by the surge in inflation that dampens purchasing power at a time in which consumer confidence drops due to the weakening labour market and economic outlook.’”

“The first hint of an end to the Spain’s decade-long property boom, which saw house prices triple, came only around the middle of last year when property websites reported prices began to dip.”

“At the time, economists and officials scoffed at any suggestion of an end to exponential growth in property. But the U.S. subprime crisis and ensuing credit crunch in the second half of last year taught Spaniards the dangers of allowing household debt to reach 130 percent of annual income.”

“The cause of the mess was cheap credit thanks to Spain’s membership of the euro zone, long hailed here as an unalloyed blessing.”

From Stuff.co.nz in New Zealand. “House prices are overvalued by about 30 percent, according to BNZ economists who warn against increasing the supply of houses when the market is diving. ‘We believe house prices risk falling by more than the 10 percent we already presume for this year,’ BNZ said in a report.”

“Between 2003 and 2007 there was roughly one new dwelling built for every two additions to the population. This build-rate has been higher at times in New Zealand’s past but it was not low.”

“A correction in the housing market is inevitable. It will be painful for many people but it will be good for the economy. ‘Well, it’s here. And the potential downside bears thinking about - as our indications of a 30 percent housing overvaluation attest to.’”

“‘But let’s also bear in mind the good news, in that many potential home owners, long squeezed out of the market, stand to be big benefactors,’ BNZ said.”

The JoongAng Daily from Korea. “In a switch, the price of apartments in the Songpa District of the trendy southern Seoul area are falling as thousands of new apartments near completion.”

“‘There is a large number of new apartments and there are units for sale for 20 million ($20,470) to 30 million won less than the current market price,’ said Lee Mun-hyeong, a realtor in Jamsil-dong, Songpa District.”

“According to real estate industry experts, there will be 18,105 new apartments available between July and September in the Songpa redevelopment area. That number represents 23 percent of the 78,524 apartments now in the district and is double the average annual new housing supply in southern Seoul since 2000.”

“Apartment prices in Songpa have fallen 0.3 percent on average this year. As the trend continues, more owners are considering selling.”

“‘Apartments purchased for investment purposes are on the market and the prices have declined by 50 million won this year,’ said Lee Sang-woo, another realtor in Jamsil.”

The Calgary Herald from Canada. “Alberta’s resale housing market is cooling in the same manner as Calgary’s with sales dropping and new listings rising dramatically in February, according to the Canadian Real Estate Association.”

“The association’s latest MLS data show unit sales for residential properties (single-family homes and condos) in the province decreased by 30.3 per cent compared with a year ago in February (6,602 to 4,601) while new listings increased by 44.9 per cent (from 7,800 to 11,302).”

“New listings were at the second-highest level ever for the province.”

“‘Now that price growth has come to a grinding halt, speculators are looking to get out of the marketplace,’ said Richard Corriveau, regional economist for Canada Mortgage and Housing Corp. ‘So people who had purchased in previous months are attempting to now get out of the market because there’s no incentive to wait for future price gains in the near term.’”

“The drop in Alberta sales, said Corriveau, is due to a sharp decline in net migration and ‘a response from prospective buyers on the rapid price escalation from previous years.’”

The Calgary Sun. “Calgary homeowners Darren and Colleen Long are feeling the impact of the city’s saturated housing market. The couple has had their family’s Douglasdale Estates home on the market for six months with plenty of showings, but no offers.”

“‘You need to compete,’ Colleen said of the large number of homes for sale. ‘There are four, five or six (homes for sale) on the same street.’”

“In Calgary, the average sale price for a single-family home in February was $471,696, well up from the $448,557 in 2007.”

The Vancouver Sun. “Greater Vancouver closed March with its slowest first-quarter for sales since 2001, Canada Mortgage and Housing Corp. analyst Robyn Adamache said Wednesday.”

“In Greater Vancouver, realtors saw 2,997 sales through the MLS in March, compared with 3,582 in March 2007. New listings added to the market in March were up four per cent to 5,674 compared with the same month a year ago.”

“Prices, however, remain elevated with the benchmark price of a so-called typical single-family home hitting $764,616 in March, 12 per cent more than March 2007.”

“In the Fraser Valley, property inventories hit a 10-year high in March, the Fraser Valley Real Estate Board reported, with total active listings up 27 per cent to 9,361 units compared with a year ago, although new listings in March were down from the same month a year ago. MLS sales in the Fraser Valley of 1,315 units represented a 25-per-cent decline from the same month a year ago.”

“Tsur Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at the University of B.C., added that his sense is that the market psychology has shifted from ‘unmitigated optimism’ to caution, given what has happened in the U.S.”

“‘People are cognizant of risks to real estate in a way that, two years ago, they weren’t entertaining,’ Somerville added.”

The Winnipeg Free Press. “Bargain-savvy Manitobans are creating their own little desert storm, snapping up vacation homes in the Phoenix area as Arizona builders scramble to unload properties for as little as half the usual price.”

“Tom and Angela Lamboo of Winnipeg paid $117,500 for a brand new, 1,327-square-foot bungalow that includes three bedrooms, two bathrooms, a two-car garage, all new appliances, $3,000 worth of window coverings, a fully-landscaped front yard, and a 1.8-metre-high brick fence that runs all around the property.”

“‘Did I think we would get a brand new home for that price? No!’ Angela Lamboo said in an interview. ‘When you think about it, it’s crazy.’”

“Steve Lauritano, owner of Arizona Pro Realty, Inc., and business partner Diane Olson, an ex-Winnipeg police officer now living in Phoenix, said the type of home the Lamboos bought was selling three years ago for $220,000. Lauritano said Phoenix-area house prices haven’t been this low since the late 1980s.”

“Overextended homeowners have been losing their homes left and right, the banks are flooding the market with repossessed properties, and desperate builders and developers are unloading new homes at bargain-basement prices to reduce their debt loads.”

“And because nervous Phoenix residents aren’t buying move-up homes like they used to, builders are bending over backwards to accommodate foreign buyers, Lauritano said.”

“‘The prices for buying brand new are unbelievable,’ Olson added. ‘They’re cheaper than a lot of the (resale) homes that are available through foreclosures.’”

“‘Even if we were to decide to get out in a few years, I think it will be worth more than we paid for it,’ said Tony Russell, of Stonewall. ‘So I think it’s definitely going to be a good investment, as well.’”

“Lauritano agreed. ‘Home prices definitely will go up again,’ he said, adding the only question is when.”

The New York Times. “The rapid decline in housing prices is distorting the normal workings of the American labor market. The Census Bureau, however, calculates how many people move across state lines for all reasons, and that number fell by a startling 27 percent last year, after climbing by almost that percentage for each of the previous three years.”

“Out of 3,500 employees in the United States, Applied Industrial Technologies normally transfers 25 to 30 each year from one center to another, or to the headquarters in Cleveland.”

“Almost all are career people rising in the ranks. Despite the opportunity, transfers have fallen by half, VP Richard Shaw said. That is mainly because transferred employees too often find themselves owning two homes — one in the old location and one in the new — and paying two mortgages.”

“Applied tries to minimize the problem by paying one of the two mortgages for up to six months, the expectation being that the old home will sell by then. Increasingly, that does not happen, not with inventories of homes across the country at an 18-year high, according to the National Association of Realtors. That makes employees reluctant to move, even for a raise and a promotion, Mr. Shaw said.”

“He tells of one transferred executive ‘who ended up owning two homes for more than six months and, finding himself paying two mortgages, opted to move back to his original city, surrendering his new house to the bank.’”