A Meltdown Primer

Foreword:
Having started out with no more than a finger in the wind suspicion about what caused this, I'm learning more and more about how we got to this sorry mess.

I'm not going to do this in one pass it may take weeks or months and that means by the time I get done it wont be worth diddly in the way of advice or helpfulness because you and I may have already lost all our money.

So you can either use it to research for yourself, or just consider it another bloviation on my part to show how smart I am.

I dont really care, it's cathartic for me to research "WHY" and write it down..sorta like a blog, you know.
BTW: I'm not going to provide links to definitions and articles unless it's reallly important. Because this forum software doesnt make it easy to do that. You can use google to find those for yourself.


What I have found out to this point:

What this is really about is credit liquidity. And mostly about ability of one institution to borrow from another, based on value of held assets or 'securities'.

The troubling assets/securities in question are largely based on mortgage instruments. Typically bundles of 'mortgage debt'. The rapid fall in property values and rise of foreclosures caused these to have questionable value, even though they are traceable to real assets. 'Mark to Market' values are largely cited but many dont agree that's the core of the problem. See also 'Mark to Model'

The 1977 CRA did not cause this in any way shape or form, any more than the first trading in stocks caused the 1929 market crash. Anyone says it did is either lying or an idiot. Anyone taking the opposite tack too loudly is really afraid it did.
It didnt.

GSE's... specifically changes in how GSE's operated... are a factor. How much of one, we dont know yet. There need be no financial relationship between a GSE and a mortgage lender for the influence to be felt.

Unregulated Financial Instruments related to subprime mortgage debt packages are a factor. How much.. not known yet.

- those Derivatives, developed to provide a method to manage risk involved in trading real assets, are of two classes:

Asset based. These are like commodities futures and may actually require taking of possession of a physical asset, at some point.

Value Based. This is a bizarre market vehicle based on nothing more than the traded value of assets someone else holds. In other words.. pure betting. An example is there is trading in the derivative sector in McCain and Obama futures.

more to come
- - - - -- - - - - - - -- -
I'll keep pushing this down:
Since this 'housing bubble' succeeded the previous decade's 'internet bubble', what's the NEXT bubble to look out for?

Easy! The 'Green Energy bubble'! That, like this one, is well under way during the previous crisis.

ie; people investing in bio-diesel from snake oil!

 

From the offal post by BigMamma:

I Replied:
The first time I post on here for a long time, and it's to AGAIN point out Big Mamma is correct.

This all started in 1977 when Jimmy Carter got the CRA passed into law. But -much as I despise Carter- it was not that version that caused the problem. That version 'encouraged' banks and lenders to write mortgages in low income neighborhoods so low income residents could BUY the houses they were living in.

It worked pretty well but it was not good enough, right? If one thing works, then you 'improve it' by adding on to it. So after Clinton meddled, those minority buyers could qualify for loans on 100% with a poor or nonexistent credit history. And in the US, at least, they started buying NEW CONSTRUCTED housing.

To spread the risk, those high-risk mortgages were bundled into Mortgage Backed Securities, which were a good deal during the housing boom resulting from all those 'new buyers'. A foreclosure simply meant the foreclosing agent sold the house for as much or more than equity/principal.

It's sorta like Catch-22's M&M Enterprises where 'Everyone has a piece'.
But the US quasi-governmental Fannie Mae/Frddie Mac lenders of last resort was the first danger sign, and Barney Frank is the culprit, along with the Congressional Black Caucus who refused to let anyone question the health of those corporate miscreants who cooked the books Enron-style.
Both Bush and McCain tried to get it looked into but were shouted down as 'racist'.

And it should be noted that one couple made their Billions and 'sold their bank' just in time, all the while contributing heavily to progressive/socialist causes. The bank they sold to, Wachovia, recently hit the skids. And they are good friends and political stalwart supporters of none other than George Soros. You guys remember Soros? Remember the run on Pound Sterling?

So... there are culprits everywhere... it's like having a beachhouse and the Tides, Storm Surge and a Tsunami all hit at once.

Wall Street Greed and lack of long term vision, Populist vote-buying greed by pols and last but not least, the Mutual Funds where the actual citizen owners are divorced from contact or caring about the fiscal health of the banks and corporation's assets.

One thing, though, Bill Clinton has pretty much admitted he went overboard. Dont hold your breath waiting for Barney Frank or Chris Dodd to admit they did anything wrong... in fact they are currently blocking any investigation into FM/FM in Congress.

And no... it had nothing to do with Reaganonimcs or Thatcherism. You will hear lots of howling about how those MBS' should have been regulated but not a single peep on how that might have been done. Simple fact is if they had been -somehow- regulated, the 'low income buyers' simply could not have gotten loans.

At the end of the day, though, when books are written about it I suspect that George -Milo Minderbinder- Soros will have made some money on this stinking mess.
- - - - -- - - - - - - -- -
I'll keep pushing this down:
Since this 'housing bubble' succeeded the previous decade's 'internet bubble', what's the NEXT bubble to look out for?

Easy! The 'Green Energy bubble'! That, like this one, is well under way during the previous crisis.

ie; people investing in bio-diesel from snake oil!

 

Me thinks too speculative. You assume that we will be able to afford enough soap to create another bubble. The next bubble may be inverted. How do you invest in losing money?

Besides geting into the stock market, of course.

 

If there's a shortage of oversight, then how does one attribute the same problem in Europe where they are over-regulated. I'd say it's a lack of quality oversight in all likelihood caused by (as you stated) Populist-vote buying greed. However, given the number of committees and seats on them, you're hard pressed to pin this mess on one party or the other. Since the earliest rumblings and clear signs that we had a problem looming, we've had both rep and dem majorities in both the House and Senate and neither did anything about it. Both could have, easily, but the proper motivation is lacking.

I particularly enjoyed the "cynical woman" who called them on this during the townhall debate and the backtracking the candidates displayed as a result.

 

And THAT would be one good reason NOT to run government like a business. It ain't business, it's people.

(Speaking of cynical, "It's just business," goes right up there with "It is what it is," in the history of obnoxiously apathetic sayings.)

 

Well, I would propose the next "bubble" is the medical technology sector. We all know sooner or later something has got to give with health care. Every major health care institution is investing heavily in medical technology - trying to invent, patent and license the next great treatment, cure, or medical device. This is being done to remain competitive, create revenue, and create jobs. However, almost all of these new innovations are expensive - this is better for making money and better for attracting venture capital funding after all. Making the situation worse is the fact that FDA requirements and government research grant paperwork is only increasing and slowing progress and efficiency (while that may seem reactionary, check it out. Most medical treatments and devices are tested and approved in Europe or South America before the US in large part because it is easier).

When health care in this country hits the wall, the medical technology sector and contributing venture funding groups will be in over their heads. All of this technology will be too expensive once we have to provide the same healthcare coverage to all the peeps. The market for this stuff will shrink enormously and many of these start-ups and institutions will go out of business.

 

RE: Re: A Meltdown Primer

Unfortunately I know WAY too much about this topic because I am in the lending business however I will say this, Fog is correct that the loosening of lending standards by Fannie and Freddie lay squarely on the shoulders of President Carter and President Clinton for the reasons he stated. Why they weren't pulled back earlier lays squarely on who came after them.

The lack of oversight on Wall Street, who created the investment appetite for paper that was asset-backed for questionable borrowers was what really torpedoed the housing market. There are two individuals who started packaging these pooled mortgages together while adding leveraged derivatives of the same asset class to the mix, to create, what they sold as a low risk investments. This created huge investment appetite with investors all over the globe who were looking for high return low risk investment vehicles. In turn, this created more investable $$'s available and more appetite for these MBS's, so Wall Street told lenders they wanted more of this paper cause they could sell it and make money. When they couldn't get enough, Wall Street players relaxed underwriting guidelines for the paper they would buy, thus widening the net for potential borrowers. It was truly ridiculous really. It was only a matter of time the bomb that was being created would blow up. This model doesn't work when values are leveling off, and clearly only temporarily when values are going up. A few early subprime lenders sold themselves at the absolute right time, and finally the walls came tumbling down.

The subprime mess is a bi-partisan mess, but facts are facts, the seeds of future problems with Fannie and Freddie were sown on Carter and Clinton's watch and because of their decisions to make it easier to get a loan. Please don't forget homeowners are are as culpable in all this as anyone as they got drunk on equity and us lenders have a big part in it to.

My two cents.

 

Let's just stop right there!

The only time you bother posting seems to be in defense of Dems... or to bash Bush.

You dont even have to bother reading what I write, do ya?

How many ways do I have to write it?
Anyone taking the opposite tack too loudly is really afraid it did.
And methinks thou protesteth too much!

Now... am I right or wrong in that?
- - -- - - - - - -
Mo.. you may be right. But Pickens keeps getting in my face.

 

Is it still Reagan's economy?

 

Meltdown Primer update

Well, back to the thread...

Today's developments and statements by Paulsen call for some clarity. If you are watching Lou Dobbs right now, the decision by Paulsen seems to fly directly in the face of what he said originally. In essence, if Paulsen was the 'doctor', he just reversed his diagnosis.

In fact he didn't. He changed the prescription. If you think and read back, the problem now is the same as the problem then: credit liquidity.

It would have been great if the government had bought those securities, but it looks like 'mark to market' struck again... there's still no way to value them and the process would have been too slow.

Intuitively, I am against bailing out anyone... especially in a way that results in an essentially 'nationalized' industry. In this case, though, there's no recourse. Government IS meant to be the port of last resort.

Lou Dobbs, though, is claiming he told us so, last year. But his suggestion is direct bailout of those being foreclosed. That would sit well of course with the foreclosee's neighbor who DID buy a house he could afford.
- - - - -- - - - - -
GM / Ford / Chrysler bailouts.

Please do... my whole family of GM retirees is counting on those great retirement pension and health benefits continuing. You guys dont mind chipping in a little, do ya?
- - - - -- - - - - - -

BACKFILL: The Glass-Steagall Act of 1933
finally repealed by..
Gramm-Leach-Bliley Act 1999
{And, yes, the very same 'Leach' that Obama just sent to the World Economic gathering.}
This is the issue that Congressional Dems are yelling about when they claim it's all about Wall Street and the Republicans subverting watchdogs and regulation.
Not that the Mae's and Mac's were all that well watched.

So there's plenty of blame to go around when it comes to securitization and trading in them. Notice however the emphasis on compliance with CRA.
- - - - - -- - - -

BACKFILL 2: what Herbert Hoover did
- Scroll up a couple paragraphs from that point.

 

RE: Meltdown Primer update

Excellent article by Michael Lewis

 

Re: RE: Meltdown Primer update

heh.....

 

RE: Re: RE: Meltdown Primer update

Slip-slip-sliperry slope syndrome, on your original post as well. If you start opening up the checkbook for them, why not us, say many. Including those fussy car people.