Posted on 03/18/2009 12:00:31 PM PDT by Windflier
What Cooked the World's Economy?
It wasn't your overdue mortgage.
By James Lieber
published: January 28, 2009
It's 2009. You're laid off, furloughed, foreclosed on, or you know someone who is. You wonder where you'll fit into the grim new semi-socialistic post-post-industrial economy colloquially known as "this mess."
You're astonished and possibly ashamed that mutant financial instruments dreamed up in your great country have spawned worldwide misery. You can't comprehend, much less trim, the amount of bailout money parachuting into the laps of incompetents, hoarders, and miscreants. It's been a tough century so far: 9/11, Iraq, and now this. At least we have a bright new president. He'll give you a job painting a bridge. You may need it to keep body and soul together.
The basic story line so far is that we are all to blame, including homeowners who bit off more than they could chew, lenders who wrote absurd adjustable-rate mortgages, and greedy investment bankers.
Credit derivatives also figure heavily in the plot. Apologists say that these became so complicated that even Wall Street couldn't understand them and that they created "an unacceptable level of risk." Then these blowhards tell us that the bailout will pump hundreds of billions of dollars into the credit arteries and save the patient, which is the world's financial system. It will take time—maybe a year or so—but if everyone hangs in there, we'll be all right. No structural damage has been done, and all's well that ends well.
Sorry, but that's drivel. In fact, what we are living through is the worst financial scandal in history. It dwarfs 1929, Ponzi's scheme, Teapot Dome, the South Sea Bubble, tulip bulbs, you name it. Bernie Madoff? He's peanuts.
“Regulatory reasons or something else?”
Yes, Regulatory laws. It states as much in the article.
I believe the article posted is essentially the 2nd of the Village Voice series. Here is the previous article:
I thought the same thing, and yes, I read the part about AIGFP of London.
Facts are facts, regardless of the source, and they’re backed up with good references.
That's all I care about. I'm not interested in defending anyone responsible for this mess because they're a "capitalist". If they absconded with trillions of dollars and crashed whole economies, then they're the biggest criminals of all time, and should be thrown under the jail.
Likewise, any government officials who are responsible for enabling this theft, or those who profited by it should be thrown under the jail with the rest.
I'm not qualified to discuss the more technical aspects of trading, so I'll leave that conversation to others. I posted the article so that financially educated people like yourself could shed some light on this.
I was gonna post that also after reading the article and replies. Thanks for saving me the time of looking it up. ;)
Look, I’ve been saying for some time that it would make sense for the standardization and central clearance and settlement of many types of credit default swaps. But that’s a sideshow.
Think of it this way. What if the investment banks had packaged bonds of say, Wal-Mart with those of, say McDonald’s Corp into CDOs?
And the rating agencies had slapped overly good ratings on those CDOs, which were then sold around the world, including to banks?
And AIG and others sold credit default swaps on those Wal-Mart/McDonald’s CDOs around the world, including to banks?
There would be no financial crisis. We have the crisis because instead of Wal-Mart bonds, it was crappy home mortgages taken out by people who had no business with those mortgages, that were originated, packaged and sold and which also underlay various derivative instruments.
Having said that, there are certainly things I would change if I were in charge of the financial regulatory scheme, but these are not the root cause of the problem.
You forgot your sarcasm tag, but I get where you're coming from. Thing is, I don't believe the author put that idea forth in his article.
“We have the crisis because instead of Wal-Mart bonds, it was crappy home mortgages taken out by people who had no business with those mortgages, that were originated, packaged and sold and which also underlay various derivative instruments.”
Very good point. This is exactly the sort of sharp analysis I was hoping to see on this thread.
Thanks.
The rest of the article might be exactly right (if I knew for sure, I’d be rich). I’ve just noticed a lot of knee-jerk criticism of short-selling lately (more than usual) — combined with a leftist worldview. Such obvious biases or ignorance, regarding something I know a bit about, tends to make the rest of the article (the part I don’t understand) less credible to me.
Same here. I put the article up to get responses from the more financially educated Freepers. They're coming in now.
One of the better responses was the observation that if stocks like McDonald's Corp and Walmart had been packaged like these toxic mortgages, we wouldn't be in an economic crisis at all.
I would have to assume, though, that the reason those blue chip stocks weren't packaged that way, is because of the fact that they were considered safe enough that they didn't have to be "insured" against default or loss.
The claim that the crisis was due to an insufficient level of regulation is not convincing. For example, commercial banks have been more regulated than most other financial institutions, yet commercial banks performed no better than other classes of financial institutions. At the other extreme, hedge funds have been the least regulated, and on the whole they did better than most others in the financial sector. One major problem with regulations is the regulators themselves. They get caught up in the same bubble mentality as private investors and consumers. For this and other reasons, they fail to use the regulatory authority available to them. This implies that as much as possible, new regulations should more or less operate automatically rather than requiring discretionary decisions by regulators.
From the article: Credit derivatives, those securities that few have ever seen, are one reason why this crisis is so different from 1929.
Derivatives weren’t initially evil. They began as insurance policies on large loans.
Okay, so now I’m wondering if the author of the article, or anyone else for that matter, would consider PMI insurance a credit derivative? I guess it depends on what a large loan is. One of the fellas at work mentioned that the folks who got in over their head with a mortgage they could not afford were likely not to have the 20% down payment required to forgo the PMI insurance on a home mortgage. And since these folks likely represent the majority of default borrowers, why are the mortgage companies in trouble instead of the PMI companies?
I thought it was a good question and I haven’t heard of this topic asked before. Anyone else?
Ping for later reading....
“Government intrusion and distortion of the massive housing market in this country is the ultimate source of the crisis. Packaging the bad mortgages with other mortgages and slapping a good rating on it magnified the crisis. Credit derivatives shifted the bad risk thus created to other parties, including banks whose capital was thus put at risk.
The massive housing bubble was the root cause, with numerous other contributing and magnifying factors. The housing bubble resulted primarily from the destruction of long-standing credit standards in the mortgage market for political reasons, along with the easy money Fed policy.”
I have no disagreement with those statements.
I’ve been more aware of the housing bubble as the root cause of our economic troubles, than the subsequent packaging of those loans into toxic bombs. Like most Americans, I’m still learning about this, as the story develops.
Good post. Aside the financial techniques, the bottom line is the failure of our elected representatives to understand what was going on. There are all sorts of screams about getting government [our reps] out of the equation so that the financial operators can play a get rich game of 3 card Monte on the public. The world is now paying the price for our reps being talked out of doing their job [or put another way - the power of campaign contributions, gone wild]
Now the next question and please bear with me, I'm trying to be very deliberate with this; which specific piece of the regulatory puzzle?
Bottom line I'm trying to find out if it was SOX or something else. I know that SOX drove a huge amount of business from NY to London, was this part another SOX related business that was pushed overseas and then went rogue either on purpose or by intention.
I’m not personally involved with AIG, nor any other related associations, therefore I cannot say what they had in mind, or as to whether SOX was their reasoning for positioning that aspect of their operation to London.
NOT going to speculate either.
Hopefully more will come out about this in the future, as I too would like to know.
Well said, ES. I indicated something similar in an earlier post, when I said that there's a place for laws and a Sheriff in any town, no matter how upstanding their public.
As you indicated, it appears that a combination of ignorance, incompetence, and greed at the federal level are a great part of the cause of this catastrophe.
China’s imploding US ally (AIG)
http://www.freerepublic.com/focus/f-news/2084468/posts
AIG: Inquiring Minds Want To Know
http://www.freerepublic.com/focus/f-news/2192489/posts
(China)
Fed won’t say who helped by AIG rescue
http://www.freerepublic.com/focus/f-news/2200398/posts
Top U.S., European Banks Got $50 Billion in AIG Aid
http://www.freerepublic.com/focus/f-bloggers/2201213/posts
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