Posted on 09/23/2008 7:12:51 PM PDT by Eagles6
I thought that I would pose a few questions to the sharpest knives in the drawer, Freepers, and perhaps incite some discussion by those more knowledgeable than myself and in the process enlighten us all a bit. I have been employed in the residential mortgage business for the last 6 yrs. and may have a little better grasp of what is happening than the average guy on the street, though far from an expert.
Uhh... The original intent of the CRA was to increase minority access to mortgages which is what I said. I did not comment on the percentage of Black/Inuit/Jewish , one legged, lesbian dwarfs who are now in foreclosure.
1. Into banks and other financial institutions that have toxic derivatives off the balance books.
2. Maybe, but that’s just a sideshow compared to the credit default swap racket.
3. It was approved through the business models of these firms. It was by design. Fraud spread through the system like financial HIV, at all levels.
4. Yes. Once the risk could be laid off to another level of the pyramid, they were free to make their next subprime loan (which was a constant).
5. Because for every dollar they had in the bank, some of these firms loaned out 40 times that to others. If they have only one dollar, how do they pay out two defaults? Banks that don’t have the money to pay back their liabilities are effectively insolvent. When everyone you’ve loaned to goes bust, you don’t get back anything you loaned out, and now you’re bust, too.
Good information and a help to me.
The thing that irks me is how a company can be allowed to become so huge that it can't be allowed to fail or all hell will break loose globally. I'm thinking of Reagan and MaBell and deregulation and what happened with that? What I see today are many many companies who buy up their smaller competitors and grow that way. When these companies hit bad times, and they always do, Americans are really hurt. In the case of some of these financial institutions, citizens of many countries are adversely affected when these companies fail/falter.
As an aside, from what I've seen, these huge companies are nearly unmanageable due to their size.
In a word: leverage.
Banks borrow money from other banks on the strength of their net capital.
If Bank A has $10 in assets and $9 in liabilities after borrowing money, then Banks will lend them money on the assumption that if anything goes wrong, well as long as defaults don't exceed $1 (10%) then liabilities will not exceed assets and there will be no losses.
But if defaults mount to 20%, then investors who placed assets in the bank will remove their assets out of fear - and then defaults go from 20% to 40% and higher.
It is a vicious circle. Once defaults rise above a specific level of assumed tolerance, then there is a rush for the exits and value evaporates.
I do not have a definitive position on this matter and definitely want to avoid socialism in any form.
With that said, I do think there are some reasons to believe that the $700 billion plan is not completely wrong or in need of rejection.
1. The money as I understand it does purchase bad loans. Those loans are not forgiven and provide in the long term an opportunity for the recovery of the funds. This is not a ridiculous prospect given that land values and property values are ultimately destined to rise in the US— even if they do suffer a temporary crash. This means that potentially, even the taxpayer could realize a return on this now terrible investment.
2. This has been done before with some success. Many people felt horrible about the Chrysler bailout. That bailout did save roughly 1/3 of the US auto industry with socialist action and did yield a long term return on the investment rather than costing taxpayers in the end. Today, Chrysler is a leading auto manufacturer.
3. The germane question is what lesson has been learned and has that lesson truly been learned? We would learn from this that government run systems are bad. Government operated mortgaging should now be dead. If it costs $700 billion dollars to instill a lasting lesson on why statism is bad then it is in some measure a good investment. Perhaps, this lesson could stop the impending nationalization of health care or even student loans. Preventing those events would be a tremendous value despite the short term contradiction.
4. I have to agree with jveritas here. Short term risks of Obama being long term President must be included in the calculation. If we have to pretend to be Socialists for 40 days to develop a hunger for conservatism then we better indulge the sacred ritual. Eight years of Obama or worse would far exceed the 1 trillion dollars— as bad as that sounds.
5. Despite the mortgage crisis, home ownership has increased dramatically in the US and this has for the overwhelming majority of owners been good for them and the US economy. The US economy exceeds 40 trillion dollars in size and so it is possible to absorb this catastrophe.
6. The massive spending which may actually be a true loan from tax payers will temporarily freeze radical socialist proposals including large spending activities by Obama and like minded dems. Obama has already conceded this.
Those are I believe important reasons why this bail out may be acceptable.
bump
Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default.
CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to speculate on market changes. In one blogger’s example, a hedge fund wanting to increase its profits could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money - free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. And there's the catch: what if the hedge fund doesn't have the $100 million? The fund's corporate shell or limited partnership is put into bankruptcy, but that hardly helps the “protection buyers” who thought they were covered.....
The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.2 The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years - ever since the founding of the Bank of England in 1694 - until the whole world has become mired in debt to the bankers’ private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.”
When the banks ran out of creditworthy borrowers, they had to turn to uncreditworthy “subprime” borrowers; and to avoid losses from default, they moved these risky mortgages off their books by bundling them into “securities” and selling them to investors. To induce investors to buy, these securities were then “insured” with credit default swaps. But the housing bubble itself was another Ponzi scheme, and eventually there were no more borrowers to be sucked in at the bottom who could afford the ever-inflating home prices. When the subprime borrowers quit paying, the investors quit buying mortgage-backed securities. The banks were then left holding their own suspect paper; and without triple-A ratings, there is little chance that buyers for this “junk” will be found. The crisis is not, however, in the economy itself, which is fundamentally sound - or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people's money.
You got to love the Wall Street Business Model.
Profits are Privatized
Losses are Nationalized
I understand perfectly well what the intent of the CRA was. So does everyone else, no need to explain.
Just pointing out (from personal experience) that the debate goes much better without making race or ethnicity the focus point. Members of minority groups take this as a personal accusation, when the fact is the minority status is not the important factor, it's whether they repay the loan or not and we really should stick to that.
Unless we're just into offending people for the fun of it (and yes, it can be fun, just pointless)
Could well be wrong, but my understanding is that there is 'only' about 250 Billion in sub-prime loans, not all of which are even at risk of default. I've been led to believe the 700 Billion is to cover some of the credit default swap risks and keep certain institutions liquid and that this will involve a lot more risky and less collatoralized items for which there is no market value at all.
You are welcome. Just remember, it is in the interest of most bureaucrats, academics and Wall Streeters to obfuscate the causes of economic turmoil so they can continue fattening at the trough. There aren't many ways to permanently screw up markets except through government intervention and/or the printing of money, both of which are forms of thievery.
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