There was no money. It was all credit. The house was built on credit, credit changed hands. Bought on credit, and the mortgage was sold, with a little more credit added on for the finder’s fee. It was then consolidated with a bunch more credit into a bigger chunk of credit, and sold on credit, with the appropriate brokerage fees. Another bite of cash taken out, with the compensating addition of more credit.
And the value of everythling was going up! And everybody has a share!
(Maybe this stuff is easier to understand if at some point in your life, you’ve taken really a lot of acid…)
I saw Lehman killed. I saw Merrill Lynch with 100 billion dollars in cash forced to run into the arms of Bank America or die. I saw AIG killed. On Tuesday Morgan Stanley announced their earnings early to show everybody that they were in fantastic financial shape. The stock was around $40. Thursday at 1:00 it was $10. Goldman Sachs lost half of its value. There was no liquidity because every surviving financial institution looked at every other and wondered if it had the plague. Because of this, they wouldn’t even do carry trades with each other. Liquidity was non-existent. I don’t know the guy you’re citing from Adam. He looks like a political type economist. I consider them dismissable whether they’re Pinkos or free market fanatics.
What I can tell you is this. I am neither. I was there, though. I was involved. There was nowhere to run, nowhere to hide. No safe harbor (actually that’s not true. Certain commercial banks it was supposed had a business model that suggested survival and those stock did ok for the time being. I looked at that as very wishful thinking.) They had moved on from the terminally ill, to the sick and now they were frogmarching healthy insurance and Financial companies out behind the woodshed and putting a bullet in their head. We can get as detailed as you like, but the short answer is that those companies and do things that have a direct effect on people’s lives. If they cease being able to meet those obligations and do those things then people stop receiving pension checks, can’t get car loans or mortgages. They can’t bank.
Why do you think the central banks of the world voluntarily threw hundreds of billions of dollars of liquidity into the market on Thursday? for fun? It was a last ditch effort to try to prop things up before they came under attack and got killed.
This is Greenspan’s mess. Asset price inflation is inflation. Unfunded tax cuts are reckless. You expect to hear people saying “this boom is different” but not from central bankers.
He failed to ensure prudence in financial markets. He failed to be the monetary rock against which fiscal excess founders. He could have achieved both with a tighter monetary policy. Or with a combination of demands for better scrutiny of financial dealings and outrage/ refusal to accommodate the tax cuts.
He decided to be a politician. He accommodated the demands of the party he preferred and allowed himself to be flattered as a sage whilst acting like a pushover. That is not the gig of a central banker: the gig is to refuse to indulge the demands of the present and to be a killjoy.
Scylla, or someone else who knows this stuff, it sounds like the rating agencies decided to completely abandon their job and give risky loans a great rating, why would they do that? Do they have some interest in seeing such a bubble be created? Or were these loans so complicated they didn’t want to be embarassed and say they don’t understand them? Or what?
Also, is there no regulation on the ratings agencies? What’s to stop future fuckups by them causing another problem like this?
It is a form of money laundering that works just fine – right up until the point it doesn’t – right up until the point someone can’t find a greater fool to pass the hot potato to. What do I mean?
Freddie Mac bought and bundled a lot of mortgages and created an instrument (a CDO, but think of it as a bond) whose rate-of-return was structured such that, if X% of the mortgages in the bundle basically paid off on time, the stream of income would provide buyers of the CDO Y% return (profit). If (X-1)% paid off, and a handful of the underlying mortgages had to go into foreclosure, but the collateral could be sold at basically the nominal cost for which the mortgage had been issued, then the CDO holder might get, I don’t know, (Y-.5%) – the rate on his bond went down.
This is all fine and well as long as (a) the number of defaults doesn’t rise beyond some critical threshold; and (b) repossessed collateral, for the handful of foreclosures, can be sold at or near the value placed on it originally.
So – when the economy was okay, housing was booming, and underwriting standards for “conforming” loans were being fairly well-enforced, the payout on the CDOs might fluctuate, but there was never any risk the CDO would just evaportate, fail to pay the CDO buyer.
For that reason, the ratings agencies could contend that, as an issuer, Freddie was a prime borrower – AAA – because the instruments it underwrote (the CDOs) had never defaulted (even if a few of the underlying loans did).
IANA credit analyst, but I suspect the ratings agencies did not drill down as deeply as they should have to ask questions beyond (a) has Freddie ever defaulted on a CDO note?; and (b) are the underlying loans conforming? Questions such as: are the so called conforming loans really the result of rigorous application of the underwriting rules, or have borrowers and mortgage brokers been playing games with assessments, credit inputs, etc.?
Also: EVERYONE overlooked that when the two factors I mentioned (a) mortgage default rate; and (b) the recoverable value in foreclosure of a house, varied by more than some critical, and not very large, amount, things could unwind faster than anyone could imagine (especially given that a significant rise in (a) has a compounding effect making (b) fall even more rapidly).
I honestly view that as being too simplistic to argue with. You could blame Clinton for his housing initiatives, or GNMA for first securitizing mortgages (I’m not really sure where you think tax cuts did this.)
Why stop there? Why not blame Og Thurmundsen who 10,000 years ago said “Cave too cold. Why not build house?”
IMO, the roots of this problem lie in the way mortgages were securitized, and flawed assumptions concerning the risks of of those securities.
Not true on the CNBC money channel.The talking heads are in back of the bailout nearly 100 percent. I suppose they find it offensive in principle but necessary in practice.
The pricks looted the system for all they could get. We let them. People voted these idiots in and may do it again. Like the fearless leader Reagan said We must get the foot of regulation off the neck of business. Mission accomplished.
I am not sure this is the conservatives gone awry. They made it clear that they would gut the system to end medicare ,social security and any other programs benefiting the unwashed masses. Now Nordquist has the system small enough to flush it down the toilet like he wanted to. So when they restructure the system they will have to kill all the programs that don’t help the wealthy. They will just be too expensive. Perhaps the economic bloodbath was the plan. Real big hearts in these thieves.
They didn’t know what they thought they knew. To oversimplify, If I owe you money, you will want to know how I’m going to pay you. I may tell you that I currently own a mortgage on a house. If the homeowner defaults I can foreclose and own the house and sell that. If I lose money doing this, there’s a government agency I’m insured with that will make me whole.
I am willing to put this loan up as collateral in order to pay back the money I owe you.
How safe do you feel?
You should feel pretty damn safe. In order for you not to get paid, I have to go bankrupt, the homeowner has to default, the house has to lose value and the government agency has to fail. Unless all those things happen, you can’t lose a penny.
Let’s say over the course of 30 years or so we do a lot of business together, you always get paid, and everything is fine. You are very comfortable with the security because its backed by solid guarranties.
Over time I start showing you more and more complex instruments that make things work even better and that are highly complex, leveraged and derivative of these mortgages.
You shrug and say “It’s still got the same backing as it always had, so it must be good.”
Big mistake.
The problem is that they follow general consistent principles in evaluating this debt. The debt evolved past the point where it was subject to analysis by these principles. They got left behind, and didn’t know it.
As for it happening again, I don’t know how you legislate against incompetance or stupidity. Do you?
I have no fucking idea because this makes no sense. Money laundering specifically means disguising illegally earned income to make it appear legitimate.
What we are talking about has nothing to do with money laundering.
No. Completely wrong. Freddie Mac does not do this, and never has that I am aware of. Investment banks and certain SPVs issue CDOs. While your explanation of how a CDO works is not 100% wrong, it’s close enough.
AAAAHHHHHHHHHH! No. No. No. This is not accurate. I’m sure you’ve heard bits and pieces and tried to put it together, but this is very innacurate. We can just stop here.
On the upside, we have the psych benefit: needless panic is averted, everybody calms down, having been offered vague and insubstantial promises that Something Is Being Done.
Now, they have to get to the really important part, Fucking It Up Beyond All Recognition. But somebody is going to end up a lot poorer than they were yesterday, and the struggle is about to begin. Karl Marx, in his wildest, most fevered dreams, could not have imagined how class war would be conducted in the 21st Century. We are about to see it demonstrated.
This is a new wrinkle. This will pit the middle class (pension funds) against the upper middle class (money market) against the middlin’ rich, and all of them against the grossly, disgustingly rich (who own most of everything else). Their lawyers, lobbyists, and representatives are gathering to present the obvious truth that it is* they *who are most deserving of being made whole, or that making them whole is essential to solving The Problem.
Were I a scurrilous radical lefty, I would assert that money is power, and power exerts itself to maintain itself, and that the more you got, the more you are going to keep. I would say that are all going to take a bite from the Shit Sandwhich, but some of us can afford mayonnaise.
I am a scurrilous radical lefty, and that is* precisely *what’s going to happen.
So the housing bubble pops and house values go down, mortgage holders are defaulting (more than you can handle because of too many sub-prime loans?), you lose money selling the houses, and since you’re leveraged 30 to 1 or whatever, you can’t eat the losses, so you go down?
Are the CDOs sort of regular loans on steroids, with great profits (and risk but a top rating, due to the ratings guys screwing up for whatever reason), letting you become way overleveraged, and making all these fireworks when the shit hits the fan, instead of a usual downturn?
What’s this government agency that insures you if you lose money on the home? I assume something went wrong with them?
Is the reason the situation got so bad because houses kept increasing in value for so long? I suppose if other risky loans had gotten a triple A, the problems would’ve become apparent a lot quicker?
Ever hear of a metaphor? In the case of both Fannie and Freddie and the guys who were making instruments based on subprime debt, the effect (I don’t know if it was intended) was that not-entirely-solid mortgages were dressed up by putting them into an instrument that could be rated AAA because the instrument itself had not defaulted. Which had the effect of making the underlying mortgages look more legit than they were. Which is (metaphorically, hyperbolically) what money laundering, in your accurate if literal-minded definition, does.
I should not have said CDO. I should have said MBS. As far as issuance of MBS, that’s precisely what Freddie Mac did.
Yeah. The one you were looking for was “ponzi scheme.” “Money laundering” makes no sense as a metaphor either.
Ummmm. No. That doesn’t work, either, because that’s not what Fannie and Freddie did. What they do is buy up mortgages. They take those mortgages and divide them up into pools typically of a billion dollars. The pool becomes a security and somebody can buy the security without actually servicing the individual loans, collecting mortgage checks, doing inspections to make sure the house is still there, foreclosing and what have you. They just buy the pool and collect the interest. The value of these pools is that they tend to be homogenous. That’s what makes further securitization possible. So, a billion dollar pool of prime loans a 6% for 30 years might consist of one security that might be sold. Another would be 7.5% bbb- rated 15 year mortgages.
Investment firms, and SPVs buy these pools and further securitize them, so no they are not “dressed up” at this point.