Posted on 09/15/2008 8:38:53 PM PDT by Orbiting_Rosie's_Head
PERHAPS the greatest scandal of the mortgage crisis is that it is a direct result of an intentional loosening of underwriting standards - done in the name of ending discrimination, despite warnings that it could lead to wide-scale defaults.
(Excerpt) Read more at nypost.com ...
We gotta keep New York ‘cause “CSI: Trenton, New Jersey” just doesn’t sound right for t.v.
Because the first loser is the owner.
If they default the bank gets the property and has the possibility of getting most of its exposure back - the owner loses his equity first, after all. Most of the defaults aren’t on the no-money-down loans.
This is not a simple analysis nor is your solution necessarily better for the bank.
Today the central banks had to inject $150 billion in new bank credit and the fed fund rate still closed at double its target level. These injections were dramatically oversubscribed - banks sought $400 billion in funds and many got nothing, which is why fed funds stayed so high. Understand, every bank has to make adequate funds on deposit at the Fed by the day's close (or it is breaking the law, and can't open the next day).
Markets sold off huge amounts, yes that is equity losses. But it isn't remotely over and it required massive central bank intervention - many times the size any bailout would have been - just to let banks open tomorrow morning. AIG in particular has disclosed that it needs $70 billion in capital to be in compliance with its swap contract collateral obligations, as well as its regulatory required capital for its policyholders (the latter are segregated and protected first, like bank depositers more or less). AIG doesn't have it. There isn't equity to take that full hit, which is a direct result of Lehman failing and not paying all its obligations (to AIG, and to others that AIG guaranteed if it couldn't).
The Fed and Treasury have said they will not lend to AIG to cover this. If no one does, AIG will follow Lehman into bankruptcy in less than a week, and the very same losses will remain unallocated and will hit AIG's counterparties next. The larger banks are trying to put together a loan to let AIG do this. AIG has valuable assets it could sell, if it can get the time. But it won't have the time without a loan.
The likely resolution is that the other banks will give a big loan to AIG until it can sell assets - and they will borrow the money for it from guess who, the Fed. The Fed will say it isn't lending to AIG to save it, but in effect that is what will happen.
The alternative, "burn 'em all down" approach, is flat nuts. It has already cost the authorities 10 times as much in one day as an orderly liquidation of Lehman would have caused.
I understand the State of NY is permitting some leeway to AIG (I once worked for AIG btw, I’d hate to see it fall) with respect to required capital.
The Treasury/Fed/etc. are not likely to be reacting to the “populist firestorm”. Give these guys some credit, they are adults over there. This business in complex and has many angles, and no doubt there are judgement calls.
You have revealed your "angle".
You wanted a bailout and didn't get it. As a result, you are angry.
More support for my contention that you have an axe to grind.
On another thread: AIG nay get $20 billion help from New York state.
Somehow JasonC got the straps loose and slipped by the nurses to post. Pay him no mind, the Thorazine will kick in momentarily.
The causes of this problem were evident years ago and were argued about endlessly on Free Republic on the old "Is There Really a Housing Bubble" threads.
On those FR threads, most people argued that Housing Trees Grow to the Sky and that the Bubble price of house "reflected what the market was willing to pay" while a few other pointed out that when people were putting no money down and getting gimmick loans on terms they could never afford to repay, the "market" was not really "paying" anything.
I predicted the present disaster on Free Republic back in 2005.
35 posted on Wednesday, June 22, 2005 12:17:19 PM by Polybius
49 posted on Wednesday, June 22, 2005 2:28:10 PM by Polybius
Some now want to blame the predictable crash and burn on a Carter era law that worked just fine throughout the 1980's and most of the 1990's.
That explanation is too convinient an answer. Low income people were not snapping up $800,000 condos on Miami Beach or $900,000 McMansions as fast as they could be built.
The law says you cannot turn down somebody for a loan because of race, creed or color but nowhere does the law say you can turn down somebody for a loan because of the fast that they can't possibly repay what you are loaning.
What happened was a scam, a con game, a swindle.
Specifically, it was a classic Pigeon Drop " in which a mark or "pigeon" is convinced to give up a sum of money in order to secure the rights to a larger sum of money, or more valuable object. In reality the scammers make off with the money and the mark is left with nothing."
The "pidgeon" of this scam was the mutual fund manager of your own 401K. Therefore, you, by proxy, were the pidgeon.
The illegal aliens, the deadbeats without jobs or very low paying jobs or the middle class guy with a middle class job or the lawyer with a high income borrowing two or three times more than they could actually afford to repay were merely the tools of the scam.
The mortgage mess was created by loan brokers who were not lending their own money. They were just creating phony Pidgeon Drop mortgages to sell to gullible investors. Let's be clear here. That "gullible investor" was NOT the house "buyer". It was a mutual fund manager in maybe your own 401K or a foreign investor wanting to invest in the U.S.
At the time, the stock market was not red hot like it was during the Tech Bubble and interest rates on CD's were pretty low.
However, Americans were lining up for big mortgages that they promised to repay at a good interest rate after a few years at an introductoray "teaser" rate.
As a long term investment, those mortgage loans seemed pretty good and Wall Street's customers wanted to buy them up.
So, loan brokers would write up mortgages, they would be bundled up in financial instruments and would them be sold off to your 401K manager or to that foreign investor.
Every time that happened, the loan broker would get a good commission.
Life was good for a loan broker.
There was one problem, however. Although there was a high demand for that product and investor wanted to buy more and more of those mortgage loans, the supply of credit-worthy borrowers was running out.
What to do?
Simple.
Just sign up borrowers without a snowball's chance in hell of repaying the loans. Mix those loans up with better loans in a package and they will still buy them up like hot cakes on Wall Street.
So, the loan brokers started creating mortgages by getting anybody, ANYBODY with a pulse (and even some dead people without pulses, as investigators discovered) to get their names on mortgages. The worthless mortgages were then sold to eager Wall Street investors, maybe the manager of your own 401K.
As the demand for these "great investments" grew, illegal aliens, native born Americans without jobs or good credit, people with good credit wanting to borrow three times what they could actually repay to buy a house at three times the price a real market could actually bear and even dead people had their names put on these Pidgeon Drop mortgages.
And Wall Street's customers just kept buying that worthless paper up.
For the loan brokers, it was just like writing a commision check to themselves, having a drunk downtown sign it, taking the check to your 401K manager than then having your 401K manager give him you 401K money in exchange for that check.
That is why loan brokers were getting filthy rich.
Every time such a worthless Pidgeon Drop mortgage was sold on Wall Street to a 401K mutual fund manager ....KA-CHING..... the loan brokers got richer with commissions.
The loan brokers who rounded up illegals and dead people's names to put on the dotted line for "loans" they could never hope to repay knew exactly what they were doing: They was swindling YOUR mutual fund manager out of YOUR money and they knew it.
The mutual fund managers and investors around the world, plus the legions of Freepers who used to argue that there was no such thing as the Housing Bubble all swallowed the loan broker's Pidgeon Drop swindle hook, line and sinker.
What still dumbfounds me is that Wall Street banks were also that incredibly stupid.
< Bones McCoy voice> "I'm a doctor, Jim! Not a Wall Street banker!"< /Bones McCoy voice>
Be that as it may, if I figured out this idiocy back in 2005, why couldn't Lehman Brothers figure it out?
The loan brokers who left the game early got filthy rich. The ones who stayed in the game too long are now in deep kimchee because the "pidgeons" wised up and are no longer buying their worthless product.
The home "buyers" that are now whining about "losing their homes" have lost nothing. They came in with nothing and are leaving with nothing.
The investors that bought those worthless IOU's, however, are now taking it in the shorts as they find that the true market value of a house is NOT a price that the buyer can barely afford "interest only" payments on each month and can never hope to repay in full.
Back in 2005, far too many people knew the Bubble price of everything and the value of nothing when it came to real estate.
That financial blood has already been spilled and, through the stock market, is now affecting even those of us who predicted that the behavior of the last several years was lunacy.
What about the future?
How about getting back to that good ole common sense that required buyers to put down a meaningful down paymet, that required that interest PLUS principal be paid each month and that required buyers to ..... GASP!! ..... OH! THE HUMANITY!!! ...... prove that they actually had the income they claimed to qualify for the loan.
You can blame Jimmy Carter for thousands of things but the economic idiocy of the past few years is not one of them.
The problem is and always has been a law enforcement problem. It is less so, but partially a regulatory problem. Bottom line, the SEC, the Fed, and many other public, semi-public and pseudo-public agencies failed to act. Nevermind that a large percentage of loans were fraudulent “liar loans” based on minimal documentation. The house would appreciate anyway right? And both the borrow and the bank and the buyers of those packaged mortgage backed securities were too greedy, and the SEC and Fed didn’t care that people were selling “liar loan” packages as triple A bonds when the risk was substantially higher.
The SEC so conveniently lifted the uptick rule right when Bear Stearns was imploding. Just what did Chairman Cox smoke to make him dream up a dark money pool wet-dream like that?!?! Relentless naked short selling was the only outcome for these pools of money which we now call “hedge funds” but which are unregulated... and I don’t think we need to regulate them as entities so much as merely to have responsible laws and regulations on the books and to enforce them! Chairman Cox Smoker should be tarred and feathered.
We could see another 2000 points shaved off the DJIA before this is over. The 401k and house equity that many boomers spend decades building up and were counting on to retire could lose half their value in this one single year.
There is a lot of blame to go around. But ultimately if people are not thrown into prison or tarred and feathered by angry mobs then justice will not have been served.
Meanwhile, Barack Obama is running around with his 2 top economic advisors and top fundraisers Franklin Raines and Jim Johnson - the 2 previous chairmen of Fanny Mae!
In a single stroke, without a single act of congress, the USA took on $500 billion in additional debt and potentially more in backstops.
They may choose to fix it by dumping all this “bad debt” into a so called “bad bank” which is the economic equivalent of “sweeping it under the rug” but what it really means is that some people walked away with their share of $500 billion in taxpayers money without a single prosecution.
Tar and feathers are my top two investment recommendation for 2008.
NINJA loans. Just another moniker for the infamous “no-doc” (no documentation) loans. AKA “liar loans”. Made famous by 3:00 a.m. TV con artists selling get rich quick schemes involving buying real estate with no money down and flipping it. The Community Reinvestment Act greased the tracks for this sort of thing by giving lawsuit firepower to “under-served” communities to sue lenders who resisted. Reputable firms pulled out and were replaced by hucksters who prepackaged FHA insured mortgages derived from phony appraisals and sold them to Fannie Mae and Freddie Mac.
There was a huge bust in Atlanta area in about 2005 involving hundreds of people (many from Nigeria) who were running a mortgage fraud ring composed of corrupt mortgage brokers, appraisers, and pools of straw buyers packing “under-served” credentials. It’s funny that the lenders who participated in the scam got higher CRA audit scores.
Even the title of those threads were lies. The media persisted in chanting "housing bubble," but it was in reality a "derivitive creation bubble." Housing was merely a steady source of loan initiation that enabled the scheme.
Step one, stop exacerbating the problem with further incorrect market signals (moral hazard bailouts, short term rates that are too low, mortgage rates that are too low). The financial risks and the rate of inflation are far above what interest rates are being set (or forced) to.
Step two, after letting the market set rates (i.e. much higher), provide liquidity in specific cases (Bear, Lehman) to keep failing securities from bringing down the market (focus on systemic risk reduction).
Nothing wrong with that. It will be expensive, but it will help reduce the risk to the system.
I guess your new jalepeno suppositories aren’t working out so well....?
That's mostly incorrect. The Treasury had to triage Lehman and Merrill this weekend and got BoA to pony up for one. One out of two ain't bad in this environment.
Because they knew that they would always get more cheap liquidity to effectively bail them out. Until the game winds down and we either hyperinflate or face a decade or two of stagnation like Japan. As you point out nicely, there were shills supporting this scam all along, but even a lot of them were fooled by misdirected interest rates.
I think you have your proportions wrong. There can be no laws to regulate or prohibit stupid behavior when interest rates are jury rigged low through various policies and financial "innovations". Certainly false and fraudulent ratings of mortgage securities was a problem and should be prosecuted. Certainly false and fraudulent insurance of those securities should be prevented. Prosecuting now does nothing since AIG is dying as we speak.
So put away the tar and feathers, they will only make things worse at this point. Use the money instead to invest in something that will grow the economy.
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