Mass Insanity Coupled With A Large Dose Of Denial
A report from the LA Times. “The third day of hearings into the subprime mortgage mess highlighted the difficult task of the Financial Crisis Inquiry Commission in ferreting out the causes of the worst fiscal morass since the Great Depression. The session was similar to the first two days, in which those at the center of the crisis — such as former Federal Reserve Chairman Alan Greenspan, top Citigroup Inc. executives and banking regulators — deflected blame for the huge amounts of subprime mortgages that helped crash the housing market.”
“On Friday, two former Fannie Mae executives testified that the legislatively mandated mixed mission of the former government-sponsored enterprises — increase affordable housing and make a profit for shareholders — drove it so deeply into subprime and other risky mortgages that there was no way out when the real estate bubble burst.
“‘This extraordinary upheaval in the economy, and in the mortgage market in particular, challenged Fannie Mae in ways that would have been difficult to overcome, regardless of any business decisions that preceded the crisis,’ said Daniel H. Mudd, who served as Fannie Mae CEO from 2004 to 2008.”
“‘Ultimately, the companies were not the unwitting victims of an economic down cycle or flawed products and services of theirs,’ said Armando Falcon Jr., former head of the Office of Federal Housing Enterprise Oversight, which regulated Fannie and Freddie. ‘Their failure was deeply rooted in a culture of arrogance and greed.’”
The Wall Street Journal. “At the hearing, commissioners honed in on why Fannie executives made their ill-fated decisions to loosen underwriting standards and increase their exposure to riskier ‘Alt-A’ loans for borrowers with good credit but little documentation of income or assets. Fannie and Freddie’s market share fell rapidly beginning in 2003 as private nonbank lenders were fueled by Wall Street’s desire to bundle and sell mortgages as securities. One internal Fannie document made public on Friday showed how executives in 2005 considered a ’stay the course’ strategy to try to steer the market back to traditional products such as the 30-year fixed-rate mortgage.”
“But executives ultimately decided that new, riskier loans were ‘not a fad, but a growing and permanent change’ in the mortgage market that the companies couldn’t ignore, Mr. Mudd said. The company opted to strike a ‘middle course’ by trying to offer less-risky versions of Alt-A loans. ‘Could we really sit out?’ said Robert Levin, a 27-year Fannie veteran who retired in 2008. ‘That’s what we were grappling with.’”
“Alt-A loans accounted for just 9% of Fannie’s loan guarantee business, but represented nearly 40% of credit losses in the fourth quarter of 2009. Nearly 23% of Alt-A loans originated by Fannie Mae in 2007 were 90 days or more delinquent at the end of 2009. Even if Fannie hadn’t stepped up its exposure to the riskier loans, ‘they still would have taken a huge hit,’ said Thomas Lawler, a former Fannie economist who retired in January 2006, in an interview. ‘But would it have been this big? Well, good god, no.’”
“James Lockhart, the former federal regulator who placed the companies into conservatorship in 2008, told the panel it was unrealistic to expect policy makers to design a perfectly regulated housing-finance system. ‘We need to take some of this and put it back in the private sector,’ he said.”
“But Mr. Mudd, who was alternately contrite but firm, said it was unlikely that a fully privatized mortgage market could be ‘logistically accomplished in our lifetimes.’”
The Times Online. “Mudd said in prepared testimony to the inquiry: ‘Maintaining the delicate balance between profitability as a private company and service to a public mission became impossible. ‘When (house) prices crashed far beyond the realm of historical experience, it became ‘The Pit and the Pendulum,’ a choice between horrible alternatives.’”
“Armando Falcon, former director of the Office of Federal Housing Enterprise Oversight (OFHEO), which previously regulated the GSEs, told the inquiry, ‘Fannie and Freddie executives worked hard to persuade investors that mortgage related assets were a riskless investment, while at the same time covering up the volatility and risks of their own mortgage portfolios and balance sheets.’”
“James Lockhart, another former director of OFHEO, told the inquiry he had warned as early as July 2006 that Fannie Mae and Freddie Mac represented major systemic risk because their GSE status allowed them to borrow cheaply and take on legally massive amounts of leverage. At they same time, they resisted all outside efforts to reign them in. He said: ‘The GSE structure itself was flawed. It allowed the companies to be so politically strong that for many years they resisted the very legislation that might have saved them.’”
“While all of the witnesses pointed to flaws in GSEs, their fate remains in the balance. The Senate is debating legislation aimed at tightening regulation of banks and capital markets. The House of Representatives has already approved a bill along those lines. Analysts expect Congress to send a final bill to President Barack Obama this year. But it will lack a plan for reshaping the GSEs.”
The Nightly Business Report. “Staphanie Dhue, NBR Correspondent: In 2005 when the housing market was still booming, the companies were embroiled in accounting scandals and losing market share to Wall Street firms. In response, Fannie and Freddie dove aggressively into riskier mortgages, backing more alternative loans and buying sub-prime mortgage-backed securities.”
“Mudd: ‘If you’re not making money, you’re not driving profits, you’re not increasing revenues, you’re also unable to grow your capital and therefore, you’re unable to participate in the — in the marketplace…The government-sponsored enterprises were able to balance business and mission when home prices were rising. They could perform when home prices were flat. They could survive a 30-year flood, but not 2008.’”
“Dhue: Regulators say they didn’t have the tools to rein in the mortgage giants. Fannie and Freddie lobbied heavily against any regulation that would shrink their portfolio or require higher capital. James Lockhart oversaw the firms from 2006 to 2008. He says they resisted raising capital when the financial crisis hit. Lockhart, ‘The boards were much more focused on profitability. They felt that that was their fiduciary responsibility to the shareholders and the mission was a distant not even second.’”
“Jeffery Brown: Fannie Mae, and its sister organization, Freddie Mac, were government-chartered, but private companies, set up to buy mortgages from lenders and package them into securities sold to investors. And, by 2008, the two agencies owned half the country’s $11 trillion in mortgages. But when the housing market collapsed, so did Fannie and Freddie, and the government was forced to step in, a move that’s so far cost taxpayers $126 billion.”
“We turn to Andrew Jakabovics, associate director of housing and economics for the Center for American Progress, and Edward Pinto, a longtime consultant to the financial service industry. He was chief credit officer at Fannie Mae in the late 1980s.”
“Jakabovics, ‘They were actually not as responsible as a lot of people would think. I think that the real problem here was the creation of an unregulated mortgage market. Wall Street was funneling trillions of dollar through unregulated channels into private-label securities. These were largely where the subprimes were. And what ultimately happened was the GSEs, Fannie Mae and Freddie Mac, were losing market share. They are government-chartered, but they were also shareholder-owned. And so they basically put short-term profits ahead of long-term safety and soundness responsibilities. And they basically sort of followed everybody else down the rabbit hole.’”
“Pinto: ‘It goes back to the early 1990s and a number of federal housing policies that were put in place that pushed very low down payment lending and other loosening of underwriting. Fannie and Freddie were leading that charge starting in the early 1990s. And that eventually, along with all the advantages that they had, led to a tremendous disruption of the market, which culminated in 2004, with the subprime market really ballooning, and following the lead for low down payments and higher risk.’”
“Jakabovics: … (Fannie Mae) was ultimately privatized largely because of the interest to get them off the government balance sheet for the reasons of the Vietnam War…Their bread and butter was actually guaranteeing these mortgages. It’s only when they sort of decided to chase Wall Street and chase the profits that they really got into problems.’”
“Pinto: ‘Something went wrong with the original model was they — in 1992, Congress hard-wired the amount of capital they needed. And they were tremendously overleveraged. And that is really what drove the market off a cliff.’”
“Brown: So, the government comes in at the end of 2008. What has happened since? What shape are these organizations in? What are they doing in terms of lending now? Pinto: ‘Well, in terms of what shape they’re in, they have losses that are, for the foreseeable future based on the business that they did in 2004, ‘5, ‘6, ‘7 and 8. Recently, they are the secondary market..they account for 95 percent of all the lending in the United States is guaranteed by the federal government.’”
“‘So, we have a nationalized market in terms of housing finance. And the challenge is going to be how to undo that. But, right now, that’s the role that they are performing. They have been turned into public policy vehicles…What I think should happen is, there needs to be a plan to bring private capital back into the housing market. And that needs to be done by slowly phasing Fannie and Freddie out…’”
“Brown: ‘…particularly at a moment like this, when the country still is in a housing crisis, to — you have to figure that into this debate, right, in terms of what — the role for a Fannie Mae. Pinto: ‘Absolutely, although the general view is — and this is what was the problem as we got to this crisis — there were calls for requiring Fannie and Freddie to have more capital. Fannie and Freddie fought that. Many of the industry participants fought it: It’s not the right time. We can’t do it now.’”
“‘And it seems like it’s never the right time. And, so, I think we need to start figuring out how we reintroduce the private sector back into the process. It is going to be a slow process. We have really sort of almost destroyed the system in bringing it back. It is not going to be simple.’”
“Jakabovics: ‘I think it’s going to be a slow process…the administration is going to be coming out with a set of questions, I believe next week, asking for input as to where people think that the — this process should go, in part because they need to move slowly because there is a tremendous amount of money at stake.’”
“There’s confidence in institutions, as well as in the federal government at stake, and I think particularly from a perspective of foreign investors, a lot of money comes into this country through the mortgage-backed securities issued by Fannie Mae and Freddie Mac. And to suddenly turn that off or to create new entities that people don’t have comfort with, I think would be incredibly problematic.’”
“‘And, so, if you have a political process that kind of takes lurches to the right, lurches to the left, that leads to spooking the markets. And that is, I think, the last thing we can afford.’”
From Barron’s. “In case anyone tells you different, Dan Mudd, former CEO of Fannie Mae, is definitely NOT contrite. Mudd goes on… Congress and various Presidential administrations prevented Fannie from diversifying in the mortgage business away from the secondary to the primary market, even though that’s where the profits were going; government pushed Fannie into taking 50% of its business from home owners whose income was below the median; and all this at the same time he had to please shareholders to keep bringing in capital to support mortgages.”
“And when all hell broke loose in 2008, Fannie was required to clean up the mess in mortgages. ‘As crisis became havoc, Fannie Mae was called upon by the Administration and Congressional leaders from both sides of aisle [sic] to refinance subprime borrowers who could qualify for a fixed rate loan.’”
“He also defended what Fannie had accomplished: ‘In the days when the yawning gap in homeownership between white and minorities was an issue of national concern, Fannie and Freddie Mac narrowed the difference. Fannie Mae did this while earning a competitive return.’”
“His parting shot? ‘Government entities created to support homeownership as a social good will tend to socialize the risk to all taxpayers. Purely private companies will tend to exercise their fiduciary responsibility to pass the costs and the risks to homeowners. Hybrid organizations will be left to balance conflicts between taxpayers, homeowners, and shareholders. There are no simple answers.’”
The San Diego Source. “Last week, former federal chairman Alan Greenspan was testifying on Capitol Hill. Sounds like the old days, but things were quite different and he is no longer considered the hero he once was. Mr. Greenspan was blamed for the subprime crisis and the fall in real estate. The panel’s chairman Phil Angelides, who was a former California gubernatorial candidate, who I will point out lost, stated, ‘You could have, you should have and you didn’t in regards to Fed action on raising interest rates.’”
“I for one am glad Mr. Angelides didn’t get into office for California; I think things would be a whole lot worse than they are now. What Mr. Angelides doesn’t understand is that it wasn’t low interest rates that were the problem. It was Fannie Mae and Freddie Mac.”
“Subprime loans are not something new; they have been around for a while. The problem: Before 2003, around 70 percent of the loans that were made in subprime were fixed loans, and get this, the borrow could really afford the monthly payment. They may not have had the down payment or have a high credit score, but they could afford the monthly out go each month based on a fixed monthly payment. After 2003, there was too much loose lending with the ‘liar’ loans and to be frank, people just getting in over their heads. Even if you have high interest rates with loose lending standards you will still have the same train wreck down the road.”
From ABC News. “During the boom, cash-out refinancings were the unofficial currency of bubble states from Florida to California, beloved by mortgage brokers as a way to persuade existing homeowners to take out new loans repeatedly. As home values surged, the sales pitch was a slam-dunk: Borrowers could refinance their homes at extremely low interest rates, and based on newly reappraised property values get more cash in their hands than they might earn in a year. Sure, these were teaser rates that would adjust upward after two years, but brokers routinely assured borrowers they could just refinance again before that happened.”
“Homeowners and mortgage brokers weren’t alone in their addiction to the cash that flowed from homes-as-ATMs. The entire U.S. economy was right there with them. One of Alan Greenspan’s lesser-known contributions to the annals of the credit crisis was a pair of studies he co-authored for the Fed, sizing up exactly how much Americans borrowed against their home equity in the bubble and what it was they were spending their newfound (phantom) wealth on.”
“Greenspan estimated that four-fifths of the trifold increase in American households’ mortgage debt between 1990 and 2006 resulted from ‘discretionary extraction of home equity.’”
“Only one-fifth resulted from the purchase of new homes.”
“In 2005 alone, U.S. homeowners extracted a half-trillion-plus dollars from their real estate via home-equity loans and cash-out refinances. Some $263 billion of the proceeds went to consumer spending and to pay off other debts.”
From Bloomberg. “Asked in a Bloomberg TV interview about a possible bubble in China, former Federal Reserve Chairman Alan Greenspan said there were ’significant bubbles in Shanghai and along the coastal provinces’ and ’some of that in the hinterlands.’”
“He of the Can’t-See-a-Bubble-In-Advance School now recognizes region-specific bubbles halfway around the world?”
“Greenspan told Bloomberg TV that neither he, nor anyone at the Fed, heard about problems brewing in the banking system. That’s patently false. I know for a fact that regulation and supervision division staff at some of the Federal Reserve District Banks reported risks and irregularities to the Fed in Washington.”
“Greenspan, who was never an academic economist, chose an academic forum last month to present his most detailed defense of his stewardship of monetary policy. It was low long-term rates, depressed by capital inflows, that were responsible for the bubble in residential real estate, he claims. Surely one of the hundreds of economists on the Fed staff could have explained to him that the long rate is the sum of the current and expected future short-term rates. If long-term rates are too low, jack up short-term rates more aggressively rather than in quarter-point increments. He can’t plead not guilty.”
“Greenspan says originations of adjustable-rate mortgages, which are geared off the federal funds rate, peaked two years before housing prices, absolving him of any blame. His numbers prove nothing. Just eyeball a graph of the federal funds rate and ARM volume as a share of total mortgages during the period in question. With the funds rate at 1 percent, the ARM share exploded from less than 15 percent in the first half of 2003 to a peak of 36.6 percent in March 2005, by which time the benchmark rate stood at 3 percent. Home prices peaked in the middle of 2006.”
“Lending standards were easing more quickly than the Fed was tightening. As short-term rates moved up, potential homeowners moved out — to 30-year fixed-rate loans. If those rates were too low for his taste, Greenspan should have raised the rate directly under his control.”
“Greenspan was a big cheerleader for adjustable-rate mortgages in 2004. He dismissed the idea that record household debt was a problem as long as people could service it, courtesy of his super-low interest rates. He repeatedly rejected the notion of a housing bubble, admitting belatedly that there might be some ‘froth’ in the residential real estate market.”
“He gave political support to the Bush tax cut in 2001 because — get this — unless the government reduced taxes, there would be no more Treasuries for the Fed to buy to conduct monetary policy! He refused to raise margin requirements in the late 1990s to defuse the technology-stock bubble, arguing publicly it would have no effect. (Privately, he acknowledged it would curtail the bubble but might nail the economy in the process.) He advocated a ‘risk management’ approach to monetary policy and failed to exercise even a modicum of risk-management during two asset bubbles on his watch.”
“To his credit, Greenspan warned about the bloated balance sheets of Fannie Mae and Freddie Mac. And he sniffed out the increase in productivity growth in the 1990s — and then did nothing to raise real interest rates. Greenspan can command high fees for speaking engagements and consulting work for select clients. He cannot write his legacy. History will do that for him.”
The Nevada Appeal. “I turned on CNBC Thursday morning to see Robert Rubin, former financial superstar and Treasury Secretary testify before the Financial Crisis Inquiry Commission about his role in the financial crisis. Rubin, a top executive at Citigroup when things began melting down, expressed regret about not knowing until late in the game about the subprime mortgage crisis or about the $43 billion in high risk-mortgage securities on Citigroups books.”
“He, like so many other Wall Street exec’s, passed the buck to the Citi trading desk who built up a mountain of risk, but thought they were acting in good faith. He also cited the ratings agencies (Moody’s and S & P) for rating what were 80 percent BBB-minus mortgages in the risky multitrenched securities as AAA and safe from default.”
“Also to blame were the mortgage brokers and banks lending to anyone who fogged a mirror and of course the borrowers themselves. Rubin, with vast experience in financial markets, admitted not picking up on warning signs about a serious potential crisis.”
“I have often said that I have seen greed gone wild many times before on Wall Street, but nothing compared to this. Could greed be the answer when so many failed to see what would happen when you lend people money that they cannot afford to repay? Was it just greed when those risky loans were packaged and sold to someone else (mostly Fannie and Freddie) to avoid personal exposure? Did just greed allow the very firms that packaged these complex financial products to provide the ratings agencies the models on how to rate them, and the ratings agencies did not question those models?”
“Those wanting to hedge their bets bought credit default swaps that transferred the risk of default to the insurance companies and the insurance companies said ’sure, no problem.’”
“Is it just me or does all of this seem like a bit of mass insanity coupled with a large dose of denial? Everyone knew what they were doing was risky, but the risk buck kept being passed and everyone considered their own exposure manageable.”
“Honestly, the biggest risk takers in this whole insane scheme made a fortune doing it and since these products were mostly unregulated (thanks to Congress), no one is going to jail. The pattern of the risk taker profiting while the average person pays (either by losses in their accounts or taxes as bailouts) continues on and on with little or no changes so far.”
“Mr. Rubin expressed his apologies Thursday for not knowing about the risks that Citi was taking until it was too late (or so he says). We have heard the same ‘I’m sorry’ from a lot of people who profited, and kept said profits from selling risky unregulated securities, but how sorry can they be? Obviously not sorry enough to return all the money.”
“Mass Insanity Coupled With A Large Dose Of Denial”
Here comes a Nietzsche quote, which also kindled a wistful Olygal memory:
“Insanity in individuals is the exception. In groups, parties, peoples and times, it is the rule.”
Beyond Good and Evil
– Friederich Nietzsche –
This entire national ripoff model was basically the PTB methodology and rational in the dangerous “cost of doing business” with other peoples monies.
It was the fault of management, corporate, government COMMAND decisions, and no one else, to assume these well known risks for higher profits.
Peons way down these chains of command DON’T call or manage big money board room shots, calls and decisions without direct, implicit instructions or a good “wink and a nod” approval from higher authority.
“b..b..but We, in higher authority made those decisions…in “Good Faith”. Yup…you were out of the loop, never heard of the fiasco and never saw it coming. It was all the memo clerk’s fault and he screwed everybody…
Uhuh….all a bunch of high paid mushrooms, wallowing happily in horse$hit and the dark. Not a prison jump suit or a pair of handcuffs in sight.
Spare us the all the congressional hearings, so that they can get back home to Living the Good Life”, as we all know that is what they intend to do.
Allowing $25k a year strawberry pickers to buy $700k houses and making banks lend to areas that are traditionally high in foreclosures was the right thing to do.
It is also the right thing to do to have Barney Fwank, Chris Dodd and Ben Bernanke solve the question of “what went wrong.”
Also, it is the right thing to do if the Pope steps down in favor of Maxine Waters.
“On Friday, two former Fannie Mae executives testified that the legislatively mandated mixed mission of the former government-sponsored enterprises — increase affordable housing and make a profit for shareholders — drove it so deeply into subprime and other risky mortgages that there was no way out when the real estate bubble burst.”
‘affordable housing’ = crock of propaganda sh!t
Is there any prospect the Fed will number among the “Government-Sponsored Enterprises” that ultimately goes up in flames during this financial crisis?
And if so, what is likely to replace its function in the U.S. economy?
Just thinking out loud here, folks…
‘affordable housing’ = crock of propaganda sh!t
Political pablum that the dumb masses love to down by the shovel full. Just a forever feel good campaign.
Exactly. You’ll never hear anything else from Republican/Democrat. But Ron Paul will tell you the unvarnished truth!
+1 Doug
“…two former Fannie Mae executives…”
Any mention of what these two “Titans of Finance” earn in retirement benefits and compensation?
Just to call it plainly. Greenspan is a lying POS. Very hard to imagine how he can claim ignorance or inculpability in this meltdown. I suppose when you are in such an important position and your actions are associated with so much carnage, the ego protects itself with denial. But the man has no credibility.
As W would say, “Heckuva job Greenie!”
“Very hard to imagine how he can claim ignorance or inculpability in this meltdown.”
Really? What would you be doing if you were in his shoes? I bet you would be saying, ‘Nobody could have seen it coming.’
“Very hard to imagine how he (Greenspan) can claim ignorance or inculpability in this meltdown.”
Really? What would you be doing if you were in his shoes? I bet you would be saying, ‘Nobody could have seen it coming.’
Here’s what I’d do.
I would put my country before my reputation and admit I’d made a big mistake and I’d outline why, so it could be avoided in the future.
This would accomplish two things:
1. It would be better for America to learn from the mistakes. This is the primary goal.
2. By putting my country before my reputation (by admitting my mistakes), my reputation would be greatly enhanced after about 30 years or so. I would then be seen as an imperfect man but a true patriot nonetheless.
As it is now, Greenspan will go down as a total failure. His excuses will not stand the test of time.
“In 2005 alone, U.S. homeowners extracted a half-trillion-plus dollars from their real estate via home-equity loans and cash-out refinances. Some $263 billion of the proceeds went to consumer spending and to pay off other debts.”
What fueled the “consumer spending” and the GDP of 1999-2008.
It is not coming back.
Louder my friend…..
IT’S NOT COMING BACK. IT’S OVER.
You can say that again.
And, rumbling just off stage left is another story from the Arizona Slim File:
Last week, I was having my elderly carport roofed shored up. I worked with a local handywoman, and darn, she was good. It was a privilege to be her carpenter’s helper. And, considering that we were working with a structure that wasn’t level, plumb, or square, things turned out well.
She’s been a pretty busy handywoman of late. People are paying cash or writing checks for her services — she doesn’t take plastic. And a lot of her work is coming from people who are deciding to stay put, so they’re having their houses fixed up.
And neither is the tax revenue associated with all this spending, yet governments are still counting on this…
That quote is what I was stunned by also and that is 1/2 trillion of “disposable cash” created out of ink on paper…To create the same amount of disposable cash you likely would need to earn two trillion…Will we ever see that amount broad based consumer spending again ?? I don’t think so…In fact, I believe the pendulum has swung the other way…The new normal = Austerity…….
The new normal = Austerity……. ??
That is unless your are in this group;
http://www.cnbc.com/id/36422316
I like Diane Olick. The only real person on CNBC. They used to argue with her. Now they just listen because she’s right.
“I like Diane Olick.”
Me too although I wonder how she’d size me up?
That’s jaw-dropping. It all makes sense. All those expensive SUVs and luxury cars floating around the last eight years or so. And no, we will most likely not see such consumer spending again in our lifetimes. Goodbye Lexus and hello Toyota.
Toyota?
May 2005:
‘Legislation to be debated Wednesday to overhaul regulation of Fannie Mae and Freddie Mac has been changed to allow the mortgage giants to buy higher-cost loans in pricey markets. It would also allow Fannie and Freddie to increase the percentage of the secondary mortgage market that they serve, challenging competitors who now operate in the so-called nonconforming market.’
‘Some lawmakers are reluctant to curb the holdings because they create liquidity in the mortgage market. ‘The last thing any lawmaker wants to be accused of is killing the goose that laid the golden egg in our housing market,’ said Jaret Seiberg.’
Where are we today? (Note the 2005 date on this article.)
In particular, who or what is propping up the $500,000-$729,750 principle loan balance segment of the housing market?
From above:
‘particularly at a moment like this, when the country still is in a housing crisis, to — you have to figure that into this debate, right, in terms of what — the role for a Fannie Mae. Pinto: ‘Absolutely, although the general view is — and this is what was the problem as we got to this crisis — there were calls for requiring Fannie and Freddie to have more capital. Fannie and Freddie fought that. Many of the industry participants fought it: It’s not the right time. We can’t do it now. And it seems like it’s never the right time.’
‘the administration is going to be coming out with a set of questions, I believe next week, asking for input as to where people think that the — this process should go, in part because they need to move slowly because there is a tremendous amount of money at stake.’
‘There’s confidence in institutions, as well as in the federal government at stake, and I think particularly from a perspective of foreign investors, a lot of money comes into this country through the mortgage-backed securities issued by Fannie Mae and Freddie Mac. And to suddenly turn that off or to create new entities that people don’t have comfort with, I think would be incredibly problematic.’
‘And, so, if you have a political process that kind of takes lurches to the right, lurches to the left, that leads to spooking the markets. And that is, I think, the last thing we can afford’
‘While all of the witnesses pointed to flaws in GSEs, their fate remains in the balance. The Senate is debating legislation aimed at tightening regulation of banks and capital markets. The House of Representatives has already approved a bill along those lines.’
‘Analysts expect Congress to send a final bill to President Barack Obama this year. But it will lack a plan for reshaping the GSEs’
‘And to suddenly turn that off or to create new entities that people don’t have comfort with, I think would be incredibly problematic.’
Just what kind of entities do make people comfortable? Are collapsed GSEs that kind of entity?
They have those cute names..
It must be Silicon Valley, because in the better areas, there’s no huge drop in values and houses are selling. Mind boggling!
It must be Silicon Valley, because in the better areas, there’s no huge drop in values and houses are selling ??
You are correct “but”, inventories are on the rise and the trajectory is fairly steep…This, in the prime spring time season…Interest rates are also rising, taxes & fee’s are going up and incomes are not recovering…
In particular, who or what is propping up the $500,000-$729,750 principle loan balance segment of the housing market?
The FHA….at least in SoCal….
or hedge fund heaven Greenwich CT where $500K was entry level 50 year old workforce housing
Lots to ponder there Ben. I seem to remember Bush v2. trying to reign in the GSEs a bit and getting crushed by moderate republicans and hard core decomcrat activists. Frank and Dodd were leading that charge. One of the only good moves that I thought Bush tried to do.
Also seem to remember the secondary market showing cracks as early as 05 though things limped along for a while with lots of exciting fraud. Remembering the early payment defaults hammered the banks. Seem to remember thinking they hated those because they hadn’t had time to securitize them and sell them to Fre/Fan.
I wonder how much banks were actually forced to repurchase?
‘Lots to ponder’
I know, this covers a lot of ground and took me hours to put together. I did that because this is becoming a bigger issue. Think about it this way; when lenders put up cash for a house, they are in a way betting that prices won’t fall, or at least below the down payment. If the US govt is behind 95% of loans today, they are basically gambling that the price declines have ended. Some would say this is propping up the market. I see it more as sticking their head into a band-saw.
Recently, during the health care thing, you couldn’t turn on the news without hearing about it. IMO, this issue is as important and maybe more so, yet we read above that reforming the GSEs isn’t even being contemplated. Unbelievable.
Ben:
Maybe it should read: gambling prices won’t decline more then the (20%) down payments
——————
If the US govt is behind 95% of loans today, they are basically gambling that the price declines have ended
No DJ it is FAR WORSE than gambling prices will not drop any more than 20%. It’s gambling that prices will not drop more than 3.5% AND picking up the tab when it happens.
Our government picked up the tab on 3.5T in debt. Conservatively we could be looking at another 1.5T in losses, given big bubbles persisting in California costal regions and Florida coast and many other bubbly markets… VA, Mass, NJ, NY/NYC exc.
The really interesting part is that the money all goes to the banks.
Same guys that F-ked us on the tarp deals.
Same guys that fu-ked us on the AIG deals.
Same guys that F-ked us back in the S&L deals.
BOHICA
The government has washed all the loans from the books of the banks and is driving us under even faster.
Thanks I forgot about the 3.5% “down payment” loans they accept.
This issue of Fannie/Freddie is going to get ugly, politically.
The short version is that Fannie/Freddie have a foot in both the public and private camps, and are considered both spy and traitor to both. Liberals can complain that F&F were just fine thankyouverymuch until they began chasing Wall Street-level profits while counting on the taxpayer safety net to catch the corresponding risk. Conservatives can complain that F&F are a “failed government entity” and therefore all government is bad etc. And both would be right.
(except for the generalization from F&F to all government. How many other gov agencies chase profits like that?)
F&F were Private Corporations and it was stated on their Website in 2005 that they were not backed by the Government and any investors knew that . There has always been a implied
back -up because of the Charter that was originally formed .
F&F became the dumping ground for toxic assets only late in the game . Prior to Congress raising the loan amounts of F&F (in response to the meltdown ) they loans were capped around 400k . So ,this was contrived so F&F could become the dumping ground and lender with taxpayer backing
after the fact .
“If the US govt is behind 95% of loans today, they are basically gambling that the price declines have ended.”
Funny — I was interpreting that as a signal that Uncle Sam knows price declines will not end unless they backstop the price at levels private lending subject to prudential underwriting standards would not support.
Dubya tried to reform SocSec and got utterly hammered. Lesson learned - don’t touch the pink ponies.
The big difference is that people have been paying into Social Security their entire working lives. Liberals view Soc Sec as helping out the elderly (something like that). Conservatives(?) would rather not have to pay in, but dammit as long as they were forced to pay, the gov better not take away what’s theirs.
And again, both are right. That’s why Soc Sec is such a high-voltage third rail. It has “support” (for lack of a better word) from both sides of the political spectrum.
Marco Rubio says people HIS age (i.e., far from retirement) should wait till later than age 67 to collect SS, and should not expect a full COLA. Charlie Crist was asked if he could go for either of those changes, and he said no. He said SS should be “reformed” by curing waste, fraud, and abuse. WTF?
I’m not a Florida voter, but this reminds me of when Crist said the 2007(?) act making the grand-fathered property tax basis sort of portable from one house to another would cause the FL RE market to “skyrocket.” What an A.H.
Well, Rubio leads Crist in the polls by double digits, so don’t be too sure that people can’t see SS needs fixing.
az:
Tell that to the coppers and firemen et all, who will scream bloody murder if they cant double or triple dip their pensions.
wait till 67 to collect Blasphemy…an affront to the pension gods
No, in 2004, moderate and conservative House Republicans tried to increase regulation of Fannie and Freddie without support from the White House. They were shut down by House Democrats, who liked the campaign money F&F provided them. Neither side tried to regulate the banks, who started buying and selling subprime before F&F got into the business.
It’s interesting to speculate about what could have happened if Republicans regulated Fannie and Freddie. They would have been put out of business, but Wall Street would have continued buying and selling subprime and AltA, further inflating the housing bubble.
If we get rid of F&F, is that sufficient?
‘The last thing any lawmaker wants to be accused of is killing the goose that laid the golden egg in our housing market,’ said Jaret Seiberg.’
It appears that these friggin’ idiots don’t know the difference between a goose and a gator and these hatchlings are gonna eat us alive.
Four-fifth’s of the trifold increase in Americans’ mortgage debt from 1990-2006 resulted from ” discretionary extraction of home equity” WOW!!
When do we stop blaming people and start blaming the system. Is there a Mr. Smith who can come to Washington and do away with the mortgage interest deduction? Our future depends on it.
I seem to recall reading that the UK recently eliminated its mortgage interest deduction. And that the islands of Britain and Ireland didn’t sink into the sea as a result.
come to Washington and do away with the mortgage interest deduction? Our future depends on it ??
Not sure about who you believe “our” is but I think our = government and they will do a multitude of things to create more revenue including IMO, a curtailment of the 1-mil cap on the loan amount qualifying for the mortgage interest deduction to somewhere between $300-$500k AND a “elimination” of the $250/$500k tax free exclusion…Both will have a severe negative impact in any high housing cost area but I believe it will happen because it will be the path of least resistance in D/C…
People who own property in that price range have a lot of ability to create resistance.
People who own property in that price range have a lot of ability to create resistance ??
But only with their own Congressmen & Senators…Most of the votes will come from area’s that will be little impacted by the reduction in the one and elimination of the other…IMO, its coming along with the VAT and other revenue generating legislation…The Greedy Hand cometh…
I think we as Americans should get a 1 time gift of no taxation.
But the 2nd 3rd+ time tax free only if you put the gains in an IRA, or a trust for your kids grandkids down payment on a future home or college? In other words you cant spend it.
—–
AND a “elimination” of the $250/$500k tax free exclusion
By “our” I mean the country and all its’ citizens. That figure of 80% is shocking, but not surprising. Part of all retirement plans should be zero mortgage debt. The system is set up to keep joe 6pk in debt forever. It encourages free spending and endless bubbles. Need a new car, $100,000 for dear son’s college, daughter’s wedding, pay off the CC’s, no problem, we’ll re-mortgage and it’s the smart thing to do because it’s a tax deduction.
Since the banks run the country, what’s the chance of this ever happening?
Thank you!!! I’ve been asking a similar question for a while: how many of these mortgages are really cash-out refis?
However, k-dad, as far as I’m concerned, it’s not “the system.” These re-fi FB’s deserve all the bile that’s thrown at them. It’s one thing to be a first-time buyer who’s hoodwinked by a fee-hungry mortgage broker. But these re-fiers presumably bought their homes in different times, have been through the process at least once before, and therefore should know better.
From age 21 to age 47, I was furious with the mortgage-interest deduction, seeing it as a horrid distortion. At age 47, I started earnestly lending my money to trailer-park residents. (It’s a F&F loophole! — F&F won’t finance any property that has a MH on it.) My high interest rates are very dependent on people’s love affair with the mortgage interest deduction. I always hated it, but now that I feel I live on it, I don’t mind it so much.
Hey, here’s a dangerous new thought. If they eliminated the mortgage interest deduction, how would the IRS ever know about my mortgage interest income?!?!?! …
We have ways…we know all…….we can assume you are probably dealing a little marijahwanna to other old ladies to ease their old age pain, and loneliness and using the profits to freely travel all over the country…we know you are up to no good az lender……and don’t look behind the bedroom mirror…
“Fannie and Freddie’s market share fell rapidly beginning in 2003 as private nonbank lenders were fueled by Wall Street’s desire to bundle and sell mortgages as securities…‘Could we really sit out?’ said Robert Levin, a 27-year Fannie veteran who retired in 2008. ‘That’s what we were grappling with.’”
In finance, that is what I call the “flight to stupidity.” If everyone else is doing stupid loans, you have to do them too, or else you are out of business and/or out of a job.
How many people have really paid a price for what went on? Lots of them walked away with dynastic wealth, while responsible people are dealing with the fallout. And the prophets are without honor in their own industry.
April 2005:
‘The powers that be insist there’s no housing bubble. They have to, mass delinquencies and foreclosures are simply not an option, not with the risks built into the mortgage-finance system. The general concern about these instruments is that they’ve yet to be ‘tested’ by an inevitable market downturn.’
‘John Vogel (said that) when the government first noted the risks in the savings and loan industry, he remembered, a pencil-to-paper exercise put the risk at about $40 billion. ‘We knew we had a problem back when the S&Ls were on the skids in the early ’80s. Instead of taking care of it then, we waited until we had a $500 billion problem.’
‘Ten years ago, when the whole securitized mortgage market was $1.6 trillion, Fannie and Freddie held about $76 billion on their balance sheets, or less than 5 percent. Today, Fannie and Freddie either own or back about $3.5 trillion of a $5.5 trillion market.’
From above:
‘by 2008, the two agencies owned half the country’s $11 trillion in mortgages’
‘Recently, they are the secondary market..they account for 95 percent of all the lending in the United States is guaranteed by the federal government’
This thing is getting worse, folks, way worse.
Fannie and Freddie -dumping bad paper entity . The sole reason why
Congress raised the loan limits after the meltdown .
Now that it’s apparent that so many of the junk loans were from equity extractors ,how much sympathy do you have now for loan moaners ?
’so many of the junk loans were from equity extractors ,how much sympathy do you have’
It’s really beyond emotions like sympathy, and goes straight to public policy, IMO. I recall reading in 2005 that 80% of the foreclosures in Colorado were refis. (CO was ahead of most states).
These numbers from AG are in 2005. Yet we rarely hear any breakdown of what % of foreclosures are equity loans. If it was more widely known that many had taken out a boatload of cash and spent it, it could change the debate. But instead we get all this boo-hoo crap.
In the case of refis, these folks basically sold the house to the bank, and at a pretty good price too. (Hell, lots of them refied over and over!) They got their money, so don’t the people who ponied up that cash deserve to at least collect their pennies on the dollar?
I’ve never seen a real tabulation. How many people who got in trouble are those who:
a) Simply got stampeeded into buying at the peak before being “priced out forever,” and subsequently suffered health or employment reverses?
b) Owned affordably before the bubble, but got on the cash-out gravy train?
c) Speculated and bought more than one home?
d) Bought a home they could never have afforded, based on a liar loan?
The anectdotal evidence, based on press reports of people in trouble, is that there are very few in category “a.” Either that or those in category “a” are not deemed worth reporting on.
Also in April 2005:”
‘Among first-time home buyers in 2004, according to the NAR, the median down payment was 3 percent, half what it was in 2003.’
‘What is new today is that lenders are allowing for the layering of risks on top of one another. What we don’t know is what if we put all these risks together and put them in a rising interest rate environment, a declining housing market, or a weakening economy.’
‘The shift in lending standards started after the dot-com stock bust in 2000. By 2003, with the refinancing boom coming to a head, banks quickly set about trying to recruit more first-time home buyers, encourage second-home buying and promote home equity lines of credit as an easy and responsible way to fix up the house or finance a vacation.’
‘The amount Americans owed on home equity lines of credit jumped to about $491 billion at the end of 2004, up 42 percent from a year earlier, and more than triple the amount at the end of 2000.’
Seriously how many really did this with the money?
—————————
promote home equity lines of credit as an easy and responsible way to fix up the house
When the gold bugs worry about the dollar the GSE bailouts are often cited. Now, you are talking about additional debt on top of the 12T will already have.
Not sure where the breaking point is.
I’m also not so sure how on the hook we are for that debt either.
Again, we are adrift where major swings in policy can crush your investment strategy. You could get hard money conservatives in control and payoff/deflate the debt OR you could get a bunch of loose money liberals paying their way out.
Plenty of in the middle options as well. Scary as hell isn’t it.
Not sure what you think of Florida real estate. Muggy is a long time poster that is buying. I think they are pretty much deflated however, economic viability of social services in many swaths of Florida will probably be a “concern”.
Don’t want to get too bogged down with reserves/velocity debates right now.
Big credit contraction.
A re-fi freeze.
Bribe money and GF running out.
Job losses and layoffs.
Energy prices and taxes going up.
Shadow inventory and a massive MLS house glut.
Yup…I’m sure glad that I’m not sitting in some lonely 3 Million $ McMansion unemployed, on a some Wisconsin hill under total House Arrest, starring at a 25k property tax bill and wondering what my next trick is gonna be.
Yup
I haven’t seen it documented or admitted anywhere yet, but I think the real reason they decided to blow away their traditional lending standards is executive compensation. If someone can find out what the top executives made in bonuses at the top of the bubble and what they would have made if they had stuck to traditional standards, you will find a real answer. Any additional blather about creating liquidity or fulfilling a mission is garbage.
Public/private entities are a disaster, pure and simple. Government employees are not angels, but you can at least be sure that they aren’t going to ignore huge amounts of obvious information in order to make more money. The additional money available is trivial. And if you are dealing with execs who can be lured to the dark side with promises of cash beyond their wildest dreams, you damn well better not give the enterprise government backing - those folks need at least some kind of fear of failure (not that it helped much this time around).
If Fannie/Freddie had completely stayed the heck out of the bubble, allowing themselves to become a tiny part of the market as the insanity grew, their executives could have warned Congress that the reason their loans were falling off was because no one wanted their fairly safe loans when stupid ones were available. And they would have been around to start making the sane loans once the private ponzie scheme loans fell apart (much earlier than we really got since someone would have been yelling about them).
Follow the money.
“Follow the money.”
I wish someone would ‘follow the money’ into prison terms.
I know that a lot of people here agree with you, prof, but I fear you will end up very disappointed. The big guys were awful, but I doubt many of them actually committed many crimes. The rules are very complicated and the prosecutable offenses are few and far between and pretty easy to avoid if you have a lawyer. That is the way they are written, and quite on purpose.
There may be a bot more hope in Europe if they can figure out a way to grab jurisdiction. When I worked for a German multinational, we attended a few seminars about EU regulation and were told that the US way of making all the laws very detailed (allowing for loopholes) was less common in Europe - that people could actually be held accountable for clearly violating the spirit of the law even if the exact situation was not covered in the text.
You ain’t seen lobbying yet, until you see what will happen if Congress grows a pair and tries to do the real work needed (bring back Sarbanes Oxley, put CDS’s on an exchange and regulated by SEC disclosure rules, etc.) to keep this from happening again.
What do you mean bring back Sarbanes Oxley? It still exists, and existed throughout this entire debacle.
And it’s a waste of time pointless regulation, and stopped nothing. The proof is in the pudding.
Well, it made the audit companies very rich. I maintain that KPMG now sets all the company rules.
Polly,
Were we (the U.S.) ever active in ISDA?
All you hear about are OTC Derivatives, never anything about our relationship with/in ISDA.
Sorry, Overdog. Glass-Steagall. A bank that is FDIC insured and an allegedly safe place to put deposits has no business doing investment bank style portfolio trading, leverage, etc. I guess people know how little I think of the usefulness of investment banks - over blown rolodexes with some sales guys. The internet (and dutch auctions) should have made them obsolete a while ago.
The problem with prosecuting based on “spirit of the law” is that has no objectivity. You really would not want to live in a society that ran it’s justice system that way. That’s how the USSR and similar societies were run.
I guess people know how little I think of the usefulness of investment banks - over blown rolodexes with some sales guys. The internet (and dutch auctions) should have made them obsolete a while ago.
Thank you, polly!
BTW, I’m going to be contacting you off this blog about that matter we were discussing late last year. Be typin’ at ya shortly!
“The problem with prosecuting based on “spirit of the law” is that has no objectivity. You really would not want to live in a society that ran it’s justice system that way. That’s how the USSR and similar societies were run.”
Well, the folks giving the presentation were German, not Russian. They seemed to have a handle on dealing with shorter laws that had to be interpreted, rather than voluminous regulations that covered every possible instance and left room for loopholes the size of a…well, an economy threatening credit bubble.
Slim,
I look forward to it.
ISDA? Well it is headquartered in NYC, so I assume so. But standardization of the terms of a transaction doesn’t mean squat when the numbers underlying the transaction are all stupid.
There are ways to get some of the huge pools of money out of the credit default swap market at least. I’m thinking of pension funds, but it would make some of the others (not hedge funds) hesitate a little bit too. Not that anyone will actually do it.
Polly
Thanks for the “real world” answer to the realities of The International Swaps & Derivatives Association (ISDA). I’m textbook, while you’ve worked on the legal side. Much appreciated.
Possible solution…make all officers of the GSEs real officers in a military branch, subject to the UCMJ. If they completely misbehave, give them a court martial and shoot them.
‘their executives could have warned Congress that the reason their loans were falling off was because no one wanted their fairly safe loans when stupid ones were available’
April 2005:
‘CBO Director Douglas Holtz-Eakin, said the housing market no longer needs the parts of U.S. law governing Fannie and Freddie that Wall Street interprets as a federal guarantee of the companies’ obligations.’
‘Therefore, those entities could gradually be relieved of the responsibilities and benefits of their current status as GSE’s and required to operate as fully private organizations, which would reduce their risks and costs to the federal government.’
‘I’m not pushing for the total privatization of the GSEs,’ said Alabama Republican Sen. Richard Shelby, chairman of the Senate Banking Committee. ‘The GSEs play a critical role in the housing market.’
Wisconsin Ticker
Failed rescue leaves AnchorBank struggling for stability
By Paul Gores of the Journal Sentinel
Posted: April 11, 2010
Chris Bauer
Now that a complex plan to recapitalize AnchorBank has fallen through, the state’s fourth-biggest bank is back to the drawing board in its effort to save itself.
While a Wall Street firm hired by Anchor seeks a new investment deal, a buyer or other ways to raise capital, the bank’s chief executive, Chris Bauer, said he intends to keep doing what has been his top priority since he came on board last summer: try to stabilize the troubled bank…
If the recapitalization plan had been successful, Hovde’s group would have purchased up to 483.3 million common shares of Anchor for 60 cents each. Badger Anchor Holdings also would have provided a term loan of $110 million, convertible to common stock at 60 cents a share or the market price when it converted, whichever was lower…
Part of the plan also called for the preferred shares that make up Anchor’s $110 million in TARP capital to be converted to common stock - an uncertain proposition that needed U.S. Treasury approval…
Bauer acknowledged that U.S. Treasury’s $110 million investment through the Troubled Asset Relief Program likely has helped keep Anchor afloat…
“Without the Treasury’s investment, it’s very questionable whether AnchorBank would still exist,” Bauer said. “It has done its job in many ways in terms of what it was intended to do. If we can turn this thing around and we can raise some capital, it would be partly because the Treasury allowed us to be around long enough to do that.”
When can we say TGIF and kill this pig ?
“Greenspan estimated that four-fifths of the trifold increase in American households’ mortgage debt between 1990 and 2006 resulted from ‘discretionary extraction of home equity. Only one-fifth resulted from the purchase of new homes.”
This is one of the amazing aspects of this. He saw — but was blind. When I read about that study, I said “Oh my God we’re screwed!” He thought everything was rine.
I remember the first time I saw an advertisement for a liar loan. It was a television commercial for Ameriquest Mortgage, and promised something like “we won’t look too closely!”
The whole pitch sounded so contrary to what I thought banking was — how could anyone be in the business of lending money without looking closely to make a judgment on whether a borrower is capable of paying the loan back with interest — but at that juncture I wasn’t aware of securitization, extraction of home equity to fund consumer spending, derivatives, or any of the other economic practices and behaviors that have characterized our time. All I knew was that house prices where I live didn’t match up with local incomes, people were flipping condos that didn’t even exist yet, and there were a heck of a lot of people driving Escalades. Then I found this blog.
I’ve got an add from a local Brooklyn newspaper on the back of my cubicle, from February 2006.
Mortgage
No Dowpayment
3.25% APR*
No income verification.
No asset verification.
(Very small type)
* Restrictions, rate increases and fees may apply.
Unbelievable.
Another ad offered “restore programs for your foreclosure needs.”
I think I saw that same ad in the real-estate section of YESTERDAY’s paper!
I recall the second gen line of BS circa 2007…..
“People Are Smart” by GMAC. But honestly they are @#$ing stupid. Stupid for parrotting MSM BS.
I firmly beleive that many realtors and brokers actually did believe the BS they were spouting themselves. I can’t think of anyone more dangerous than a salesman who believes his own garbage.
‘actually did believe’
Probably one definition of a mania is that the vast majority of participants firmly hold irrational beliefs. Back in 2006, a custom builder I know told me he’d just finished a spec house. It sold the first weekend he put it on the market for $950k. He was out of town, so the couple from California bought it having only looked through the windows. He told me he made a $250k profit.
Now, a reasonable person might have saw something was wrong, or decided he’d had a good run and take a break. But this fellow put everything he had down and borrowed even more, to buy a bunch of lots. Last I heard a couple of years ago, he was having trouble making the payments.
Wife got a loan without income verification for $300k, on a home that cost $380k. So a sizable down plus FICO and she was good to go. UHS told us no worries, the house would be worth $500k in one year, appraiser said it was worth $440k, so the house came with $60k in “instant equity”. As a grocery checker, three years later, an inability to pay has presented itself.
Same lender BOFA just wrote a loan on a unit in the same complex; it sold for $200k. A unit that sold for $350k in 2006 is now in foreclosure and the bank is asking $165k; it is not moving. But underwriting standards have changed somewhat, as BOFA has a loan to my wife out for $300k, that has remained current for 3 years. However, since they now looked at her income, they suddenly cancelled her $500 limit credit card. Talk about cutting their losses!
So how is much is foreclosure going to trash her credit if it is now not worthy of a $500 CC? FICO, what is it good for, absolutely nothing. In 2007, FICO alone was still good for $300k.
We are not home moaners, we appreciate the generous underwriting standards of lore, how else could a checker live in a luxury home without the glory of the No Doc? No need for liar loans back then, income was simply not necessary at that time.
Well its time to stop all payments and live mortgage free….If they are so petty about a lousy $500 CC then Fair is Fair.
Sell what you can pack what you dont need get a cheap storage place…save cash…
Use the next mortgage payment to get a secured credit card.
And if they sell their investments at a loss, or let them go into foreclosure, they are on the hook for forgiven debt!! The forgiveness basically only applies to main residences.
“But Mr. Mudd, who was alternately contrite but firm, said it was unlikely that a fully privatized mortgage market could be ‘logistically accomplished in our lifetimes.’”
This is the “bureaurocrats know best” mentality that I thoroughly despise. Eggheaded government agency toadies pontificate about how important it is that THEY always have the power to interfere with and regulate actual markets. To “protect the consumer” from themselves, presumably. Amazing how when confronted with the empirical evidence that they actually ruined many people and created huge losses for the taxpayer to clean up, they sneer about how “private” enterprise would take too long.
These jackasses belong in prisons or re-education camps, IMHO; not wallowing in the public funds trough making millions for themselves.
From NPR my quick take ; hedge fund Magnetar bought the most risky part (tranch) of mortages to increase demand for mortgages of other tranches and then bet against the middle tranches of mortgages by buying insurance on them. very clever I’m suprised the insurance paid off or maybe thats what we the taxpayers are bailing out?
“In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.
At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.
When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.
Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.
“
cactus …This is all bullshit and it explains why they even went downhill more on their lending from late 2005 onward . Why isn’t the question being asked ,”Why do the taxpayers have to rescue Insurance Companies that made bets that they couldn’t cover ?
‘When (house) prices crashed far beyond the realm of historical experience, it became ‘The Pit and the Pendulum,’ a choice between horrible alternatives.’”
‘Far beyond the realm of historical experience’?!
Huh?
Home prices rise ‘far beyond the realm of historical experience’, and these dingbats don’t bat an eye. But when they crash, it is just shocking to them…*facepalm*
Thru history, you can see several times when prices rose beyond expectation, and they always fell back to where they should have been in the first place. Why this time it was supposed to be ‘different’ it is beyond me.
I heard this over the weekend and it answered some questions I had regarding why the bubble went on for so long. Fascinating, disturbing, but fascinating …
The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going
… From what we’ve learned, there was nothing illegal in what Magnetar did; it was playing by the rules in place at the time. And the hedge fund didn’t cause the housing bubble or the financial crisis. But the Magnetar Trade does illustrate the perverse incentives and reckless behavior that characterized the last days of the boom. …
http://tinyurl.com/yyd9q5w
The Big Short also covers some stories of investor betting against the market only to realize their CDSs were being used to create synthetic CDOs and further inflate the bubble. They weren’t packaging their own CDOs with the intent they fail and then betting against them, however.
(or at least they didn’t admit to it)
Can anyone say that this article doesn’t point to a conspiracy ? 96 % of Magnetar CDO’s defaulted by 2008 and we are to believe these weren’t hand picked just to get the Insurance bet against those bundles .
I was wondering who was putting up the money between late 2005 and 2008 in which the lending went downhill more and it was nothing more than a fraud market .
Make bad loans and contrive it that you get big pay-offs on betting that they will fail . This is a scheme in my book . Was AIG the insurance Company that made those bets ? Also Freddie and Fannie getting into the bad loans late in the game ……that was a scheme to me also in that they took these bundles . Who did Freddie and Fannie buy from from late 2005 until the Hank Paulsons Blank Check request for Tarp ?
Nothing ever made sense and the Money Changers even went more risky from late 2005 onward . They all say “We didn’t see it coming ” and a couple say they are sorry ,but I think they knew it was coming and they conspired to save their asses .
AIG FP apparently got out of the game relatively early, 2005 IIRC.
“Brown: ‘…particularly at a moment like this, when the country still is in a housing crisis, to — you have to figure that into this debate, right, in terms of what — the role for a Fannie Mae. Pinto: ‘Absolutely, although the general view is — and this is what was the problem as we got to this crisis — there were calls for requiring Fannie and Freddie to have more capital. Fannie and Freddie fought that. Many of the industry participants fought it: It’s not the right time. We can’t do it now.’”
“‘And it seems like it’s never the right time. And, so, I think we need to start figuring out how we reintroduce the private sector back into the process. It is going to be a slow process. We have really sort of almost destroyed the system in bringing it back. It is not going to be simple.’”
I am afraid that we are at the point where this is not going to happen in our lifetimes. It will be government-backed mortgage lending (either directly with FHA or indirectly with the endless funding of Fannie/Freddie losses) for the next few decades.
The Fed’s can’t/won’t allow housing prices to fall any further, and this would happen if the mortgage market dried up……which it would with the “private sector” truly involved since we all know mortgage rates would go up significantly.
‘The Fed’s can’t/won’t allow housing prices to fall’
Where have I heard this before?
‘any further’
Another variation of same.
‘and this would happen if the mortgage market dried up’
The mortgage market has dried up, IMO. There is money to lend on houses, but the market believes the risk of price declines is too high, for the rate of return.
I detect some of that ‘the Feds are invincible’ stuff we used to see posted here back in 2005-06. IMO, they are a bunch of idiots, for the most part, and aren’t capable of providing decades of mortgage funding. Look at just about anything the government has set out to do, and it can be described as a disaster.
F&F are probably going to lose money on every loan they make this year, and next. Do you really think the bond markets are going to fund these money-losers for generations?
“Do you really think the bond markets are going to fund these money-losers for generations?”
No. I assumes that was why their $400K funding cap was eliminated on 12/24/09.
The mortgage market has dried up, IMO.
I think this is why approximately 35-40% of the loans being made in SoCal are FHA….which kinda proves my point about how the government is taking a greater and greater share of the mortgage market. I wouldn’t be surprised if it goes above 50% by 2011.
…IMO, they are a bunch of idiots…
I agree, but I really haven’t seen any evidence that they are going to stop intervening any time soon.
Do you really think the bond markets are going to fund these money-losers for generations?
No, I don’t. Which is why I think the Fed will be forced back into buying Fannie/Freddie MBS by the end of this year.
So if the Government is going to be the mortgage backer ,they can control lending requirements and even make rules that only small amounts of points can be charged to discourage faulty lending . Take away the big profits for the Money Changers of Wall Street in taking their cut . Also they will most likely have to insure loans at greater borrowers costs to the borrower . In other words take some of the money out of the commission and put more money into the insurance of the loans with real reserves . In other words ,if your the buyer of loans ,your the one that can call the shots on the loans . One of the problems with the loan mania was that the commissioned sales people investment firms were calling the shots on what type of loans would be marketed and what type of underwriting would be done and they passed the risk
to their suckers .The buyer of loans should be the one that calls the risk and calls the shots ,not the middle men .
There’s a whole lot of probing going on.
* The Wall Street Journal
* BUSINESS
* APRIL 12, 2010, 5:45 P.M. ET
Senate Probe Finds Washington Mutual Ignored Warnings
By JOHN D. MCKINNON
WASHINGTON—Officials at the failed banking operations of Washington Mutual Inc. securitized substantial volumes of risky, fraudulent loans in the run-up to the financial meltdown despite repeated internal warning signs, according to a Senate probe.
The Senate Permanent Subcommittee on Investigations found that problem lending at the Seattle thrift grew so chronic and severe that one mortgage insurer warned it would stop writing coverage for loans generated by one of Washington Mutual’s highest-volume offices in California. Internal auditors and federal regulators also were heavily critical of the bank’s deficient lending and securitization practices, according to the subcommittee.
Stephen Rotella, a former president and chief operating officer at Washington Mutual, wrote in a 2007 email: “I said the other day that HLs [Washington Mutual's home-loan division] was the worst managed business I had seen in my career.” He added: “(That is, until we got below the hood of Long beach),” the company’s subprime unit.
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PB.. One has to ask why are they investigating after the fact when they should of before they handed out trillions …kinda ass backwards isn’t it?
This has alway been Obstruction of Justice and it will always be
Obstruction of Justice .
Frankly WHO CARES anymore WHY it happened…now the time has come that the people responsible should be hung.
Of course, that”ll never happen so we have articles like this over and over and over again stating the obvious.
That’s the bottomline. All other conversations, excuses, reasons, and “looking back” chatter is a waste of time.