Mortgage rates are stuck just above 6 percent, but the key indicator of anxiety, the 10-year T-note, fell into the 4.30s. The drop was brisk following news of deepening weakness in housing and credit.

Stocks are holding a key level, in Dow terms, 13,500. That market recovered once this week on the rumor that things were so bad that the Fed would cut its rate before its Halloween meeting. A Fed panic would be good news?

The resilience in stocks worldwide, and energy ($92 oil is the same constant-dollar price that killed us in 1980), and the euro (at $1.44 apiece a collector’s item, and making it rather difficult to make a pfennig selling Euro exports) has two sources: great faith that the U.S. economy is no longer necessary to the world, and an ocean of Asian-exporter and petro cash still looking for investments. That ocean is still rising, the supply of valid investments shrinking by the hour.

One of the world’s leading investments 2000-2007, eagerly pursued by that ocean: the now-infamous CDO, or collateralized debt obligation, at least $1.2 trillion manufactured and sold. Of course, that was the aggregate purchase price; they are worth somewhat less today.

How much less may be inferred from the dismal results at Merrill Lynch: a $9 billion quarterly loss (estimated three weeks ago at half that), more coming. Merrill was the last big manufacturer of CDOs, shoveling them out clear into July, and got caught with work in process: in-house CDO inventory was $32 billion 90 days ago, now $15 billion; mortgage-related securities down from $41 billion to $21 billion. How much was sold, how much written-down or reclassified (heh-heh), Merrill won’t say. Why Merrill’s CEO and board have not removed themselves … oh, you know, stock market people.

Ultimate CDO losses will be rather larger than thought. Half?

The Treasury-assisted costume to cover $400 billion in SIVs (structured investment vehicles) is Freddie Krueger dressed up as a nice-looking kid. If these things liquidate, half at least are dead-loss, and would begin a cascade to liquidate similar assets. The failed dress-up is now an embarrassment to Treasury Secretary Henry Paulson. He was leader of Goldman Sachs, like his predecessor Robert Rubin, and should have all the information and skills to handle this credit meltdown. However, Rubin, the best since Hamilton, was a financial brain surgeon; Paulson seems a determined pounder, thus far unencumbered by insight.

Paulson is also trapped inside the Bush administration, which is certain that markets are the solution to all economic crises; is opposed to financial bailout in any form; is unaware that national power flows from economic strength, not military; and is preoccupied by trying to bail itself out of Iraq while trying to pick a fight with Iran.

As for housing, September sales of existing homes fell by double the forecast, which anybody at street level could have told you. These sales are measured by closings of contracts written in the months before, and the mortgage crunch did not bite until mid-August. You should assume that October will underperform its forecast, also; September was the worst contract-writing month since that one in 2001.

However, perverse good news: At street level it is clear that psychological damage is worse than actual loan-denial. In our local market, that shock began to wear off last week. I wouldn’t be surprised to see a false-bottom in November or December sales, a shock-rebound, and then a resumption of the grinding decline.

Everyone should ignore the reports of new-home sales: they are based on contracts-written, not closed, and the cancellation rate is running 30-50 percent. Builders are not “clearing inventory”; they are still building it and then dumping it at market-wrecking discounts — more than 10 percent of the gross revenue for some. Nothing would help housing more than the failure/merger/mothball of as many national builders as possible.

Bigger than the Fed on Wednesday (even a half-point surprise): October payroll news next Friday. Employment gains are the only thing holding mortgages above 6 percent.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at

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