Bear Stearns has more than $1 billion of short positions on subprime, up $400 million from the end of November, Bloomberg reports. Of course, since Bear Stearns got the subprime trade so wildly wrong last year, people are already wondering if this might be a signal that it is time to go long subrime.

Over at The Big Picture, Barry Ritzholz writes, “While I do not expect us to be done with the subprime slime yet, I do get a ‘Is this a bottom indicator?’ sense from Bear on this.”

JPMorgan Chase, which emerged relatively unscathed from the credit market debacle, is apparently taking the opposite position. Yesterday Jamie Dimon was reported to have said that the bank plans to expand its role in the subprime mortgage business. Goldman is also rumored to have reversed it’s position on subprime, taking a net long position.

Bear Stearns Is `Short’ Subprime Mortgages $1 Billion [Bloomberg]

In the official version of the subprime mortgage mess, the villians “thousands of mortgage brokers who banked big bucks steering customers into subprime loans and the hundreds of mortgage traders and bankers at investment firms” who recklessly securitized the loans and sold them off to investors. Borrowers are typically portrayed as naïve victims of the mortgage bubble—save for a few actual fraudsters.

But what if the fraud was a lot more widespread than we’ve been lead to believe? According to a story in today’s Wall Street Journal—hidden from sight way back on page B 8—subprime speculation seems to have been fairly common.

Roughly 20% of mortgage fraud involved “occupancy fraud,” or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in.

Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were investors during the boom, up from their earlier estimates of one in 10 buyers.

This of course does not bode well for the default rate. If default projectionss are built on faulty assumptions about owner occupancy, they will tend to underestimate the number of defaults. Non-resident speculators are far more likely to default than occupying owners, especially if the value of their home has fallen below the amount they owe on the mortgage. This looks like it is going to get worse before it gets better.

Speculators May Have Accelerated Housing Downturn [Wall Street Journal]

It’s not that often that I find myself in agreement with the Qaeda guys, so on the occasions I am, I like to make notice of it. American Al Qaeda leader Adam Gadahn, who recently made a “dramatic gesture” of tearing up his U.S. passport (pointing out that he doesn’t need it to travel “anyway”), said in a taped appearance that the subprime mortgage crisis was “triggered by right wing-fanatics trying to usher in the ends of days.”

I know what you are thinking, this is a rejection of the western capitalist system and a symbol of his return to a pure ideology not restrained by the dreadful inequalities of free markets (well, except in the case of those whores who try to walk around without veils), but DealBreaker readers know better: he’s just WAY short SPDRs.

American Al Qaeda Leader To Bush: ‘We Will Be Waiting For You’ [ABC News]

Apparently there’s some kind of protest on near Goldman Sachs on Broad Street today. Gawker dot com, a media and celebrity gossip site, reports that twenty or so protesters are chanting and waiving signs outside of Goldman. Security, of course, was summoned and the protesters apparently took off to march up Wall Street.

The best part of all this, of course, is the cause: the protesters are protesting predatory lending. Of course, since Goldman doesn’t originate residential mortgages and made money last quarter shorting mortgages, it’s a bit odd to protest them for predatory lending. If anything, they engaged in predatory anti-lending. Details!

I Predict A Riot [Gawker]

What do ousted Wall Street chiefs Stan O’Neal and Chuck Prince have in common? Put aside the obvious. What we want to talk about today is that both men are married to blonde women. (That’s Stan’s wife Nancy on the left.) And that may have dumbed them down, at least if you believe the researchers mentioned in a story in the Times of London earlier this week.

[The blonde condition after the jump.]

So Paulson & Co is getting out of the subprime trade? It seems like only yesterday that our little babies were almost in a panic about their short play, complaining to the SEC ththat banks were buying up bad loans in order to contain derivative losses. Remember the era when that might have sounded scandalous, rather than smart, heroic or obvious?

Well, whatever the plot to rescue subprime that Paulson thought it saw, it didn’t work out. They’ve doubled their assets this year, and now run $24 billion.

And now they have reportedly cut their subprime positions by 86%.

Paulson Funds Cut Bets Against Subprime Mortgages [Bloomberg]

UBS has fired David Martin, head of interest-rate trading, following the firm’s first quarterly loss since 1998 due to its major exposure to a few collapsed areas of the bond market. James Stehli, head of the collateralized debt obligation unit, was also told he would no longer be receiving health care. Having lots of practice at letting people go—last week investment bank chief exec Huw Jenkins and CFO Clive Standish were shoved out the door, just as president Peter Wuffli was earlier in the year—the layoffs are rumored to have gone quite smoothly. Security was not needed to be called, though Martin, allegedly, did yell, “You motherfuckers aren’t going to get away with this,” as he exited the building.

Subprime Snuffs UBS Execs [New York Post]

The whole mortgage meltdown situation—don’t much get it, don’t much care. Per usual, we’re not really interested in delving a lot further than “Who’s to Blame?” but apparently, we can’t even do that right. Previously, we (in cahoots with Bear Stearns, who’s always in cahoots with someone) had sent singing telegrams dripping with vitriol and pipe bombs to the poor and Alan Greenspan. Over the weekend, we found out that represented a grave error in judgment on our part (conveniently, we—meaning me—were able to atone for our misguided sins against the country’s underprivileged/that crazy old guy. Carney, having no such get out of jail free card, will be going to hell).

As a guest on Rupert Murdoch’s “Forbes on Fox,” Richard Karlgaard, publisher of the magazine, was asked by host David Asman “what’s the deal” with home foreclosures, the economy, etc. His response, if you’re not Jerry Falwell taking part in this dialogue from the grave, may surprise you:

Well, what I think is that we’re seeing the first generation of home buyers who, in school, were taught to put condoms on bananas instead of learning about compound interest. This is not a good thing, but, ah, we have to work our way through it and the only way the market can clear, as Neal [Neal Weinberg, a senior editor at Forbes] said, is for the foreclosures to happen.

Other horrible events you can trace back to schools teaching kids to put condoms on bananas include but are certainly not limited to: 9/11, the theory of evolution and Global Alpha’s disastrous August (which actually hinted toward Sex Ed. being to blame in an earlier version of its letter to the investors).

Incidentally, if this was meant to be a preview for what we can expect from the Fox Business Network, color us excited. High school health classes have been getting a pass for TOO LONG.

The Publisher of Forbes Magazine, a Regular on Fox, Blames the Mortgage Meltdown on Sex Ed [News Hounds]

If the Economist’s “Free Exchange” blog didn’t exist, Michael Lewis would have to invent it. And, in a sense, he did. In this morning’s Bloomberg column, Lewis—tongue planted firmly in cheek—explains that the main lesson from the subprime fallout is that “finance is one thing you should never engage in with the poor.”

“Our society is really, really hostile to success,” Lewis writes. “At the same time it’s shockingly indulgent of poor people.”

It’s written so straight forwardly that you almost believe that Lewis is transcribing his column straight from the reactionary brain of a right-wing elitist, except that elitists long ago learned to stop thinking and talking in such shocking ways. But someone didn’t get that memo at Free Exchange, which this morning began a column by announcing that “America’s so-called poor live like kings.”

More after the jump.

“Don’t Buy Stuff You Can’t Afford” is a classic Saturday Night Live skit whose underlying lesson—that you shouldn’t buy what you can’t afford—seems to have been ignored by a lot of those whose financial troubles or outright failures have been making headlines lately. (And, frankly, making the job of writing about the follies, hogwash and bumble-buzzers a bit too easy here at DealBreaker.)

At the heart of the mortgage problem is that many home lenders seem to have adopted the opposite motto: buy what you can’t afford. And more importantly, lend money to customers who can’t afford the repayment terms. How did so many financial institutions—from smaller lending shops to prestigious banks—get drawn into this race toward the bottom?

An article in the LA Times yesterday suggests an answer: the supposedly smartest guys were following the stupidest. Because so many of the stupid guys were making so much money from fees built on stupid mortgages. Sure, they won’t admit that it was a competition to be stupid. Their word is “aggressive” but you know what they mean.

“Countrywide suggests that mortgage pricing and underwriting standards during the housing boom were set by the most aggressive — that is, least rigorous — lenders, and that it was all but powerless to impose its own standards,” the LA Times reports.

“Most of the large bank lenders, as well as Countrywide, were limited, slow, reluctant followers behind the lenders who most aggressively relaxed underwriting guidelines,” the company said in a written response to a question from The Times.

Just in case this got lost in translation: super-tanned Angelo Mozilo now says his company was “powerless to impose its own standards.” How did it lose the power to set its standards? The answer seems to be that it was hypnotized by the lure of fees and profits that others would reap if it didn’t cast its standards to the wind.

A bit of historical reflection on how we got here after the jump.

If you work in structured finance, you might soon be getting fired, unlike Rick Ziwot, who voluntarily left his job. HSBC confirmed today that Ziwot will depart from his post as the bank’s global head of structured credit products, to be replaced by Jeff Jakubiak, head of structured credit products for Europe, the Middle East, Africa and Asia. Allegra Kelly will become deputy head of the structured credit products group (a title that includes a badge, plus chaps and spurs).

Think Ziwot’s exit has anything to do with fears of major losses for collateralized-debt-obligation investors affected by subprime? Think again. According to HSBC, Ziwot’s departure (and the ensuing shuffle) has nothing to do with the meltdown in the market. Rather, it had to do with “a decision by Rick Ziwot to retire after his 45th birthday, which was in July.” Okay, we’ll buy. You set a deadline for yourself and you stick to it, man, you fucking stick to it. (But seriously, who among hasn’t planned to retire at 45? This sounds legit to us, no sarcasm implied.)

Structured-Products Head Is Set to Leave HSBC [WSJ]
Senior US credit banker Caplan departs RBS [Times Online]

More fallout from the mortgage mess. Only a month after CIT said it would sell its mortgage origination business, yesterday it announced that it was simply shuttering it instead.

“The move comes as dozens of other financial institutions flee the free-falling business of making home loans to consumers with subprime credit. Last week, Lehman Brothers closed its subprime mortgage unit, and Capital One shut down the wholesale unit of GreenPoint Mortgage,” Crain’s New York reports. Bear Stearns had shut down two of its mortgage units the week prior to last. HSBC, one the the biggest providers of subprime mortgages, has shut down some operations but is far from exiting the mortgage origination business.

CIT is eliminating 550 jobs across 25 offices by shuttering the operation.

CIT first reported problems in its mortgage business, which caters primarily to subprime borrowers, six weeks ago. At that point the Manhattan-based firm wrote down the value of its roughly $10 billion portfolio by $765 million, resulting in an unexpected second quarter loss of $135 million. Its stock plummeted, as investors feared further writedowns to come. On Tuesday the shares lost another 4%, sinking to $35.85 by late morning.

So far the mass layoffs haven’t yet hit Wall Street. But many fear that just as the problems in the subprime mortgage market spread to other credit markets, the layoffs may follow as well.

CIT shutters lending business, takes charge [Crain’s]

Hey football fans! A fund managed by HRJ Capital, the investment firm that counts Joe Montana and Ronnie Lott among its partners, lost 12.3 percent in those first two heady weeks of August, wiping out almost all of its 2007 gain. (And that’s after rising 12.4 percent through July. Ouch, right?) According to the firm, declines in its Legends Multi-Strategy Plus Fund should be blamed on everyone’s favorite fall guy—subprime. A letter sent to investors dated August 22 contains the rocket science, platitudes and—and correct us if we’re wrong—air of condescension we’ve come to expect of investor letters detailing losses, noting, “The first two weeks of August have brought about an extremely difficult market environment for several of the Legends Funds’ managers… What changed in August was the apparent de-leveraging of quantitative equity market neutral funds as a source of greatest liquidity when there was none to be had in equity portfolios.”

Are there jokes to be made alluding obliquely or overtly to Montana and Lott’s careers with the 49ers and, later, with the Chiefs and Raiders, respectively? Probably, but I have no idea what they are because I don’t know jack about football. References to it in pop culture, positions, basic rules and strategies, you name it, because I definitely can’t. It’s not that I have anything against football, I just don’t get it. It’s not easy to understand like baseball, or as fun to watch as hockey, and every time someone’s ever tried to explain it to me I listen for the first thirty seconds and then, involuntarily, start hearing the lyrics to “Margaritaville.” It also seems like it takes a freaking decade to get from one end of the field to the other, what with all the stopping and starting every five seconds. (You can’t argue with me on that point, I know I’m right.)

I’m not proud of my ignorance and I actually am pretty envious of the hundreds of millions of people who seem to derive inordinate amounts of pleasure from the game. I went to the Rose Bowl in 1998 (Michigan v. Washington State); it was fun, but I can’t help but thinking I would’ve enjoyed myself more if I knew what the fuck was going on. This post probably also would’ve been better. (Another point I won’t back down on.)

So what I’m thinking is DealBreaker reader/writer Monday Night Football watching/tutorials this fall, at whatever bar you want, on Carney (who also doesn’t get football, and will therefore be in attendance and taking notes for me when I can’t make it.) When Ryan Leaf’s Leaf Investments (“We overhype and underperform”) goes under, I’ll have something funny, or mildly amusing at best, to say about it.

Joe Montana’s Firm Says Fund Declined 12% in August [Bloomberg]

Lehman Brothers announced this afternoon that it is shuttering BNC Mortgage, one of its home lending units and, in the process, laying off 1,200 employees. This translates to roughly 4.2 percent of its total workforce (and: 4.2 percent less people clamoring for a Size M Super Mario Brothers t-shirt with a “LEH” superimposed onto the “Super Mario” at bonus time). The bank noted that current market conditions, wherein no one in their right mind is giving out subprime loans, have significantly reduced the demand for “resources and capacity in the subprime space.” Lehman will suffer only a mild hit of $52 million to third-quarter earnings. One Brother based in New York commented, “Big deal, it’s our lending arm and they likely sit in Wisconsin, no? BNC???” Familiarizing himself at this point seems somewhat moot.

Lehman Closes Subprime Unit and Lays Off 1,200 [NYT]

[photo via an enterprising young reader]

The general feedback to our BonusBumper feature was that it slightly overstated things. Initial reports across the Street reported $110k bonuses for first years at the highest paying banks. When numbers started coming in, most reports we received confirmed that bonuses were $90k - $100k for first years at the top of the range at the highest paying banks.

There may be some less than transparent outliers within banking divisions and Goldman always crashes the summer bonus party late, and may top out the market as it has done the past few years (any word on Goldman numbers or if they’ve been announced yet?), but $100k is a ridiculous chunk of change, especially considering where things were five years ago.

As it stands, bonuses this year represented a 300% increase from 2002 and a 122% increase from 2003, in which the top bonuses for first years at most banks were $25k and $45k respectively.

The bonusbumping is set to continue in spite of Street gargoyles predicting marketpocalypse and more subprime fallout. Record compensation is expected again at year’s end in terms of grown-up bonuses, according to estimates from Johnson Associates. Keep in mind that record compensation would be one dollar more than what was paid out last year, and the percentage increase in compensation is expected to plummet.

One of the people predicting a real slow-down is Jim Cramer, who states in his latest New York Magazine column that:

In the past half-dozen years, the major brokerages in New York added hundreds of thousands of jobs in three areas: mortgage-bond sales and trading, private equity, and prime brokerage (the management of hedge funds’ brokerage accounts). Each has grown by leaps and bounds each year. Now all three are frozen. There are no mortgages to package and sell and no clients who want them. The private-equity deals are all hung. And the way I see it, the hedge-fund business is liable to be cut in half by the chain of mismarking and redemptions. I think that many of these firms have as many as 30 percent more people than they need right now in these departments, and all of them will be cashiered by the end of the year. The lists are being drawn up; the HR people notified. Not too close to the holidays, please! And for those who are left, sorry, no bonuses. The money was all eaten up by severances. Unlike other times on Wall Street, the jobs will dry up across the board, because so many firms have beefed up the same divisions. This time, get laid off at Bear, no walking across the street to Lehman. The departed will be cut off from billions in disposable income that fuel the New York economy.

A little dramatic, but Cramer does have a few good points. There is less pressure on Wall Street firms to dramatically up the ante by doling out big bucks. Since a record number of Big Hitters was reached in June after a record round of hiring, there isn’t much pressure on the Street to recruit, or for firms to differentiate themselves with comp. In fact, it’s the opposite. You’re stuck at the party, and if you haven’t received an invite, you’re unlikely to crash, as hiring freezes are in effect at a number of firms.

Getting laid off, or *only* getting a bonus in the low six-figures is better than losing your roof, or displacing a whole chunk of SoCal. Here’s Cramer again, pulling an opposite Robin Williams (“it is your fault…it is your fault”):

I fear that the pain and contractions in the housing and credit markets could cause as many as 7 million homeowners who bought houses in the past few years to flee or be tossed from their dwellings, even if the rest of the stock market thrives. It’s why I went off the reservation and screamed about this problem on television the other day (my latest unhinged rant). I see what could go wrong. I see how the forgotten man gets forgotten, and I feel helpless because I don’t see anyone doing a whole hell of a lot about it.

Sure Tom Joad may have overstated his income by just a smidge and not read his credit agreement to begin with (it didn’t hurt that Rosasharn was the loan offier), but if nothing else, you should carry the guilt of his impending trip back to the dust bowl with you.

Bloody and Bloodier [New York Magazine]

The subprime mortgage broker most known for a faith-focused business model has moved on to the afterlife of solvency. Atlanta-based HomeBanc Corp filed for bankruptcy protection last Thursday. The company celebrated by staging a mock-up of the book of Exodus, expelling 1,100 of its flock to wander around the desert of the real-estate market searching for employment. The only decree “Thou shall not covet thy neighbor’s adjusting rate. Really, because he’s not going to budget for the step-up properly and the bank’s going to take away his Winnebago.”

As part of a new company strategy, HomeBanc is exiting the mortgage-loan origination business and not processing the current loans in its pipeline. It is a wonder that HomeBanc failed, as divine intervention couldn’t lower the default rates of loans issued by a crack team of loan officers hired without any prior experience. The Wall Street Journal reports that “most of HomeBanc’s 450 loan officers had no prior experience in the business.” Instead, the company trolled the ranks of local churches, families, friends, and former college athletes to fill its staff with people who would give you a loan if you had a Jesus fish on your Taurus.

“Pretty much anyone who walked in wearing a “Footsteps” T-shirt was given a job, or a loan, or both,” one insider commented.

Not everyone believed that such extensive preparation for a life not on earth distracted HomeBanc employees from more immediate concerns, from the Wall Street Journal:

“I don’t [HomeBanc peeps] saw God as a magic genie that was going to insulate them from the marketplace,” said the Rev. Victor D. Pentz, the senior pastor of Peachtree Presbyterian Church, an 8,500 member congregation whose leadership includes several HomeBanc executives. Instead, he said HomeBanc was “a place where the deeper expressions of their values are welcomed as a part of the mix. People want to relate at a deeper level than ‘I stand next to you at the copy machine.’ “

God isn’t a magic market-insulating genie, but he does protect you from awkwardness at the water cooler.

At least the people who got laid off got a $20 gift card (we’re not kidding), opposed to the $5 million in severance former CEO Patrick Flood got in January. Sixty people (i.e. - the lucky ones) were laid off from HomeBanc last fall, and received some severance and benefits in a company initiative called “Project Dignity” (also not making that up).

Mortgage Woes Take Toll on Lender With Roots in Faith [Wall Street Journal]

Citi (NYSE: C), as one of the only large banks that survived the last couple of weeks with a P/E over 10x (only exceptions we could find were Lazard, which doesn’t really count as a true comparable, and UBS), was being valued by the market as large and clunky enough not to be significantly jolted by subprime issues. It’s a good thing, because Citi is one of the biggest subprime losers according to the Financial Times.

Citi wants you to know that the $700 million in credit related loses the bank incurred in the last several weeks would have been much more damaging to any bank less poised to remain inert and flatulate in the general direction of market forces.

The bulk of the losses were sustained by the structured credit group led by Michael Raynes, brought in from Deutsche last year specifically to lose almost a billion dollars.

Last month, Chuck Prince told FT that, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Citi may finally be ready to rest its feet after embarrassing itself almost as much as Elaine at the office party.

Citigroup faces the $700m music [FT via Deal Journal (subscription required)]

You want to know why the markets are in the toilet? Why every hedge fund (besides Paulson & Company and MKP Credit) is taking it up the A? Why subprime is sub-optimal? Why James Cayne is no longer a championship bridge player? Why Stephen Schwarzman’s Crab-Shack-By-The-Sea has earned the distinction of worst IPO EVER? Why John Devaney is reduced to tears on his now yacht-less dock? Why American Home Mortgage has ceased to be? Why Bear Stearns has made UBS’s Dillon Read look like Hedge Fund of The Year? Why? I’ll tell you why:

We hate to kick a man when he’s down, and on the brink of homelessness, but we haven’t been this grateful for the existence of the internet since we discovered the Cats ‘n Racks section of Cuteoverload.com (hat tip: James Simons). Soon-to-be former yacht/ski lodge owner John Devaney, whose United Capital Markets Asset Management restricted investor withdrawals after some bets didn’t exactly go as planned, booked a 30.4% loss for June, and is expected to match or exceed those losses in July, had some interesting things to say about subprime bonds (of which he is a victim) at the ASF 2007 conference in Las Vegas last February. To wit: “I personally hate subprime—and I’m kind of hoping the whole thing explodes. You are just dancing on the edge of a razor blade. They just fall off a cliff. They are awful investments.” Ah, well. Hindsight—it’s 2/20. (I’ll be here all day—meaning I’ll be here ‘til 1).

Anyhoo, let’s do a poll: