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Origins of an American Kleptocracy
- AIG
- Alt-A
- American International Group
- Asset-Backed Securities
- Barney Frank
- CDO
- Collateralized Debt Obligations
- Credit Crisis
- default
- Edward Pinto
- Fannie Mae
- Federal Deposit Insurance Corporation
- Freddie Mac
- Gross Domestic Product
- Housing Prices
- John McCain
- Moral Hazard
- Mortgage Backed Securities
- Nationalization
- Quantitative Easing
- ratings
- Real estate
- Securities Fraud
- Treasury Department
- Wall Street Journal
Some days ago we wondered aloud at the blank check extended to Fannie and Freddie along with the suspiciously convenient timing of those announcements on Christmas Day. Back then we wondered if we had been told the entire story. To wit:
So. Let us summarize:
We do not expect the GSEs to grow their portfolios at all, so we are fixing the bloated portfolio problem by easing the portfolio caps to permit a quarter trillion dollar expansion thereof.
We do not expect either of the GSEs to need more help from the Treasury, so we are responding to the underutilized $400 billion "lifeline" the GSEs have with the Treasury ($111 of which is currently used) by expanding it to... infinity.
Oh, and though they have collectively lost nearly $200 billion, we are paying the CEOs around $6 million each.
Great work team! It's already almost 11:00. Let's go to lunch.
The other shoe having now dropped, Bloomberg has joined in our skepticism:
Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to Peter Wallison, a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.
“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.
Wallison continues:
“It was always safe to buy these notes,” he said. The U.S. government was always going to stand behind them. They’re as good as Treasury notes.”
We are no longer sure this is the most inspiring comparison. Wallison also chimes in via the Wall Street Journal and points to a darker vein shot through the GSE story:
New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.
In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.
But because of Fannie and Freddie's mislabeling, there were millions more high-risk loans outstanding. That meant default rates as well as the actual losses after foreclosure were going to be outside all prior experience. When these rates began to show up early in 2007, it was apparent something was seriously wrong with assumptions on which AAA ratings had been based.
Losses, it was now certain, would invade the AAA tranches of the mortgage-backed securities outstanding. Investors, having lost confidence in the ratings, fled the MBS market and ultimately the market for all asset-backed securities. They have not yet returned.
It has become conventional wisdom, perhaps even cliche, to pin the origins of the credit crisis on the big banks or, AIG or even the practice of financial modeling. Certainly, these actors have received the most play in the media, and have now endured the focus of populist ire for more than a year. We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.
We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral. This is in direct contrast to the allegations of Edward Pinto as printed by the Wall Street Journal. If Pinto is correct such that the mis-marking of mortgages by the GSEs and the discovery thereof destroyed confidence in the accuracy of ratings in mortgage backed securities and their derivatives (and it seems probable to suspect that he is) then it seems almost beyond question that the policies (or policy malfeasance) of Fannie and Freddie, and not the actions of large banks or firms like AIG are the proximate cause of not just the credit crisis, but also the continuing multi-act, multi-bailout farce that continues to be passed off to the public as necessary "stimulus."
It takes only a cursory examination to suspect that misdirection plays a key part in the latest act of the ongoing crisis theater of the absurd. Misdirection to distract attention from the key complicity of GSEs in the crisis. Misdirection to deflect scrutiny away from the political personalities from both sides of the aisle responsible. Misdirection to conceal what could only be described as the most damaging acts of accounting and securities fraud in the history of accounting, securities or fraud.
Precious few assumptions are required to come to conclusions laying responsibility for the largest economic disaster in recent memory at the feet of the GSEs.
First, that the GSEs had substantial influence over the mortgage market.
This is a no-brainer with the GSEs either holding or guaranteeing 51% of outstanding home mortgage debt in 2003. To put this in perspective, that figure was around 33% of the GDP of the entire United States in 2003. Read that last line again. Anyone wishing to play in the market had to compete with the rates set by Fannie and Freddie.
Second, that the GSEs artificially depressed rates (read: underpriced risk).
This is equally trivial to find given that this precise mandate has been the express purpose of the GSEs since at least 1993. The GSEs were not tasked with increasing the capacity for mortgage lending. They were tasked with making loans "affordable." They used a number of tools to do so, but the key elements were acting as a proxy for quasi-government guarantees and bundling mortgages into risk tiers to act as a sort of clearing house for securitization pools. It is often said that providing a guarantee (particularly governmental) reduces risk. This is, of course, a fantasy. All that explicitly or implicitly tax dollar backed guarantees do is socialize risk. However, they manage to do so without requiring consolidation of the resulting liabilities on the government's balance sheet. Convenient that, yes? A guarantee is a subsidy. Period. Failing to understand this is what permitted the political class to mislead the American public into thinking that cheap loans for everything from housing to small businesses to education (the next fiscal disaster on the horizon) come with no cost. (Or that cheap debt wouldn't pump up the price of everything from education to housing). Today's pundits seem to enjoy blaming "moral hazard" (by which they mean "corporate moral hazard") for the crisis. Oddly, government guarantees, particularly those that everyone assumes will be costless, are not typically part of this definition.
These assumptions, on their own should be sufficient to indict the GSEs, the totally unqualified and unaccountable recipients of political payoffs who occupied the executive offices of these fiscal singularities1 and their other supporters (including the voters who continued year after year to return these jokers to public office) on charges of gross negligence.
If, as Pinto suggests, we add purposeful misrepresentation of underlying collateral to the mix three things become apparent:
First, absent some intervening criminal act by actors farther downstream (and we may yet find some), we have isolated absolutely the cause of all that followed.
Second, it becomes quite easy to construct a criminal case for literally millions of counts of accounting, securities, wire and mail fraud against the GSEs. To the extent executives at Fannie and Freddie signed off on financial statements disclosing the portion of their balance sheets that held "AAA" securities and these had been purposefully misidentified we should be exploring prosecution for violations under e.g., Sarbanes-Oxley. (Given, however, Rham Emanuel's involvement in Freddie and Fannie, we aren't holding our breath).
Third, given the presence of blatant government price fixing in more than a third of the entire economy, the United States hasn't been anything like a "free market" since before 2003.
It should shock you that literally a third of the U.S. economy should become a playground for the social experiments of any political group of any party affiliation.
It probably will not shock you (since you are reading Zero Hedge) to find what may be the largest example of securities fraud ever directly connected to elected officials of the United States and their cronies.
Taking a step back, it should shock you that power over literally a third of the U.S. economy should ever have been allowed to become concentrated in two entities with blatantly socialist aims and under the control of executives with no relevant qualifications of any note other than loose purse strings on their political contribution satchels.
What should grip readers with even more substantial alarm is the combination of blank checking for Fannie and Freddie backstops, and the shifty manner in which these disclosures were made. Is it possible anymore to doubt that the administration simply lied through its teeth while promising us it expects no need of increased credit lines for the GSEs while simultaneously expanding same literally to infinity?
Given that Fannie, Freddie and the FHA have now taken up the mandate of supporting housing prices at any cost (to the taxpayer via endless bailouts and unlimited credit) is it possible in any way to credit the current "upturn" to fundamentals? When we factor in similar capture of the FDIC and the like, where does this leave us, exactly?
Permit us to ask a few questions:
1. Why are Fannie and Freddie still operating in any way whatsoever?
2. Given that their credibility for reliable (or even remotely non-fiction) financial disclosure nears complete obliteration, who is likely to buy anything from these entities in the future? (If you said "The Fed" you may advance to the bonus round). Surely the conflict of interest implicit in government ownership does nothing to improve the situation. Perhaps the news that the Fed plans to issue securities to shrink its balance sheet and reverse "quantitative easing" describes an attempt to securitize the tattered reputation of the GSEs? Will the Fed simply aggregate its balance sheet and issue tranches? Does that make the Fed simple the collateralized debt obligation ("CDO") of last resort? Who will do the rating? Who will be writing protection on CDO Fed Tranch A-1 (AAA)?
3. Given that neither entity is currently monitored by an Inspector General (despite what used to be statutory language so mandating) and both entities are completely captured by the current administration, how can it be anything other than insanity to expect any result from these entities other than the formation (or expansion) of a ravenous fiscal black hole?
4. Given increasing government control beyond Fannie and Freddie that now extends far beyond 33% of GDP, what can we expect if we continue to permit political parties of any stripe to exercise command and control influence over what is now probably a simple majority of our economy?
There was a time when we hoped that the United States would learn its lesson with respect to permitting political control over large swaths of private markets. Today that time seems very long ago, and somewhat naive.
Perhaps we are being too harsh on the likes of Barney Frank and other GSE proponents. Adopting a slighty more relativistic economic morality, we might count Frank as one of the greatest legislators of all time. Consider:
To the extent Mr. Frank and his ilk self-identify as advocates for low-cost housing for those ill-able to afford it, or beset by poor credit, the last 20 years have represented the largest single wealth transfer (composed primarily of real estate and flat screen TVs) to that sector known to us. Not only that, but given the de facto nationalization of MBS portfolios (we'll give you three guesses who have been the largest MBS buyers over the last several quarters) the GSEs and their supporters have managed to get taxpayers to pay for it all. Of course, had they simply proposed such a measure in Congress it would have been laughed from the chamber. And yet, it almost seems as if these individuals simply wrote a multi-trillion dollar check to their constituents that happened to be drawn on the United States Treasury.
It almost seems this way because it was this way.
- 1. Just consider Fannie Mae's torrid leadership history: James A. Johnson (Fannie CEO 1991-1998, Democratic luminary, Obama fundraiser, John Kerry vice presidential selection committee chair, $21 million in Fannie compensation). Franklin Raines (Fannie CEO 1999-2004, Clinton's Director Office of Management and Budget, $90 million+ in Fannie compensation later the subject of a civil suit) Daniel Mudd (Fannie CEO 2005-2008, $80 million in Fannie compensation) Herbert M. Allison (Fannie CEO 2008-2009, National Finance Chair, John McCain Campaign). Freddie's record is no better.
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The Federal Judiciary; an irresponsible body (for impeachment is scarcely a scarecrow), working like gravity by night and by day, gaining a little today and a little tomorrow, and advancing its noiseless step like a thief, over the field of jurisdiction, until all shall be usurped from the States, and the government of all be consolidated into one. When all government... in little as in great things, shall be drawn to Washington as the centre of all power, it will render powerless the checks provided of one government on another and will become as venal and oppressive as the government from which we separated.
I am not a friend to a very energetic government. It is always oppressive.
The concentrating [of powers] in the same hands is precisely the definition of despotic government. It will be no alleviation that these powers will be exercised by a plurality of hands, and not by a single one.
http://www.jubileeprosperity.com/
My goodness! Now I am just so sorry that I ever thought anything at all bad about those wonderful Masters of the Universe on Wall Street, who it turns out were just innocent victims of a government conspiracy. And Lloyd really was going god's work after all!
So Lehman's portfolio that burst---especially the garbage detailed by David Einhorn---was really just an innocent victim of the GSE's malfeasance and obfuscation. And AIG had every right---and was merely following good business practice---to insure every debt on the face of the Earth. And Goldman really does have a Chinese Wall so that it is merely an historical amusement that one hand was shorting subprime MBS' while the other hand was pawning them off as AAA investment to the great unwashed masses. And across the board 100:1 leverage was actually conservative and all the models that told everyone that everything was okay are Nobel Prize-worthy. And Angelo Mozilo, Kerry Killinger, Ken Lewis and all those good folks who railroaded money out the door in southern Cal and Tampa and Las Vegas really were following the proper due diligence and are absolutely without blame.
I feel so bad that I doubted the character and intellect of our saviors in the banking/IB/insurance communities that I'm calling Gordon Brown---if Jamie will get off the f'ing phone---and telling him all those boys and girls don't derserve to get their fully justified bonuses taxed at unfair rates.
And when I'm done I'm going to go buy me a GM or Chrysler because they probably really are superior to Toyotas and Hondas and Kia's.
Finally, I'm going to confession and tell the priest I've broken Commandment #8.
Amen
@Anon
+1. I guess I should have tried satire to make my point above. At least you nailed it here.
"First, absent some intervening criminal act by actors farther downstream (and we may yet find some), we have isolated absolutely the cause of all that followed."
Wow! So FNM/FRE are THE cause for the mess we find ourselves in? If I'm reading the above-quoted passage (emphasis mine) correctly, they are the SOLE cause.
Pardon me but there is a body of "evidence" (this is in quotes as many would consider the evidence "kooky tin-foil hat ideas") that can be found on the internet if one chooses to look. This body of evidence suggests that the problems we currently face go much further back than 1993 and have far more than FNM/FRE as the root cause. Hell, take a look at the Federal Reserve Act of 1913 (specifically, the true authors of that legislation) for starters.
This is the problem in any approach which only looks at recent history for "causes." The ills befalling us go much further back.
Marla said "absolutely the cause of all that followed", meaning the current Global Financial Crisis. The evidence you refer to pointed to supports an eventual must-happen default on debt.
The GFC ain't that. Perhaps the international bankers exploited the GFC to further or to accellerate their aims, but initially they were caught flat-footed. The financial system had poison running through it (delivered using the vehicles that Marla describes in the article) that should have brough it down and would have if it weren't for blatant, illegal political maneuvers.
This has answered a question that has nagged at me since this all started: Why kill yourself by issuing all that bad debt? Why set that time bomb?
I've worked with Banks, Wall Street, and the Federal Government. Only one of those organizations would have swallowed a little bit of poison each day, thinking that it wouldn;t really affect them or just being too stupid to understand it was poison.
If you can't read between the lines: That would be the Federal Government.
"The GFC ain't that. Perhaps the international bankers exploited the GFC to further or to accellerate their aims, but initially they were caught flat-footed."
And you know this how? Wouldn't a truly clever adversary have multiple paths to the end game in mind? After all, ultimately, they cannot know the exact reactions of the people at any specific point in time to their machinations (contraction/expansion of credit/money supply)? Just something to ponder.
You make a good point, and of course I can't know anything of this sort. It's just observation; last September and October was keystone cops; Paulson on his knees begging Pelosi for a big bag of money and unconstitutional powers; Bush falling for his "we're buying low and selling high" bullshit (if you haven't read Bush's speech writers book that came out a couple of months ago, do); and Bernanke's "Duh... we're just going to give the banks a bunch of money" response since. Idiocy. It woke too many people up, myself included in that. There are too many paper trails waiting for the right administration to take back the White House and appoint the right Special Prosecutor. Of course evil geniuses won't let that happen, right? Certainly that's what Geithner, Bernanke, and Paulson are depending on.
So, I don't know... Evil geniuses or Keystone Cops... Which is it? Even evil geniuses can act like keystone cops when they get caught flat footed. Contraction/expansion of credit/money supply would certainly bring down the economy, but not necessarily the financial system. What the GSEs did collapsed the financial system... without that system, the evil geniuses can't inflate, hoard cash, then deflate so that they can buy up my house for a song and make me a renter. If this is Evil Genius 101, I'm giving them a 'D' for the GFC term paper.
Although none of us knows the end game except the folks with the playbook, yes, this would rate a low grade as an evil genius term paper. The point I am attempting to make is that, at least from what I've witnessed and read, the root cause of all of this is the monetary system that we have had in place since 1913. While temptation is human nature, the monetary system we have in place is at least a very strong catalyst for the corruption (in the banks, the investment banks, the government, etc.) that has led us to where we are, IMO.
Agreed, point well made.
This piece is a good example of what happens when analysis is driven by political framing. You end up with drunken distortion.
GSEs are the laundering unit for mortgage lending. during a time when the Gov is all over the banks to lend, the GSE are the only hope of sparking this lending. As for the Fed, perhaps this is the chosen backdoor mechanism for a treasury bailout of the polluted balance sheet.
They aren't only stealing our treasure but our nation...
Obama Has Finished What Reagan Began: He Grants Interpol Full
Diplomatic Status. Now We Can't Sue It.
The media are ignoring this story. It's another reduction of
American sovereignty.
Agreed. Add it to a very long (and growing) list.
A wise truth that i have lived by - "the moment someone tells you what is "not", is the moment they tell what "is"..........
I believe the treasury is planning to take up where the federal reserve has left off to continue to purchase MBS through Fannie/Freddie. Mr. Obama is this true.
Once again, as a lone voice in the wind, i ask Mr. OBAMA - please tell me the truth - let's just begin with the truth!
Great post Marla. It is very hard for people to realise that every single time when one mixes private biz. greed with gov. stupidity one ends up with a Molotov cocktail. I am afraid GSEs are going to do the same thing to this great country what the Kolkhozes did to my old country. Hope I am wrong.
PS. I wrote the same thing in '05 on CR's blog and after a while I realized it had been easier dealing with the KGB than dealing with Tanta. (and BTW Prozac doesn't seem to work in this particular case of mental disease.)
Marla is spot on with this piece. We would not be in the mess we are in today if the GSE's had acted in a manner consistant with their half sister FHA/Ginnie Mae.
The whole GSE structure was/is a rip off. The private sector lenders took advantage (rape?) off F/F. But F/F just let it happen. No one was minding this store. OFHEO/ James Lockhart are the problems here.
I would love to see a lawsuit that got some real disclosure going on this. (what a swell idea!)
Well done Marla. My guess is that this piece is going to reverberate for a long time and at some pretty senior levels.
The system is operating on pure fraud
To get a fundamental understanding on this problem,
the following is a must watch interview with
Dr William Black, professor of Law and economics
at Kansas State University. Black Investigated/Prosecuted
the S&L crisis of the 90's
This interview is an hour and a half long, but worth every minute.
http://hammer.ucla.edu/watchlisten/watchlisten/show_id/129363
Well done Marla. My guess is that this piece is going to reverberate for a long time and at some pretty senior levels
I sent it to Drudge, footnoted
Unless there is prosecution for fraud this is just a verbal exercise
The perpetuation of fraud is just a game to both the Civil Servants at the GSE's and the brokers / bankers.
There is no guilt, no godly sorrow, no remorse -- they boldly face the future unafraid, confident that whatevever befalls --- they can cheat their way out -- but they don't think it is cheating or stealing.
They are full of greed both of them
I have been waiting for an article like this for months, and emphatically agree with it. Even the "all powerful" bankster and his backroom cabal can be put in his place at any time and imprisoned in the tower. At the end of the day, The Street has to operate under the directives of The Hill, not the other way around.
Sorry vanderrook but that is an absolute joke. Lobbyists for wall street write the financial laws. If they want the laws to be different, they will be. What happened last week when Obama summoned the top banker CEO's to the White House. The one doing God's work was too busy doing God's work. He said eff you Obama. You should really understand that this is fascism, not a kleptocracy.
The politician must vote on and pass a law, even if influenced- or entirely written- by a lobbyist. A banker cannot force an issue at the point of a gun, a politician can. It is true the "one doing God's work" failed to show when summoned, and I can tell you that I am no fan (to put it mildly) of Government Sachs; I still maintain that government market intervention (GSE's) is where the first domino fell. From there, things like the CRA shenanigans act as the carrot and the stick.
I don't disagree with you; this is fascism. But what was it's genesis?
The thing is, Fascism always begins with the state; they will "allow" big corps or banks to stay in business- and even receive special consideration- if they go along with the political agenda [insert political agenda here]. If there is non compliance, then they will be hindered or shut down any number of ways.
At the end of the day, the distinction between Kleptocracy and Fascism seems to be: either we have all been taken to the cleaners by the government alone, or we have all been taken to the cleaners by a collusion between the government and Wall Street. Either way, the government is involved in this debacle- and the government initiated it with laws. Maybe for malicious reasons, maybe for wholly benevolent ones. The result always shakes out the same way...
We mostly agree. I tend to think we are being fleeced by both, but would contend that a few oligarchs have more power than the government and whether they want to "allow" big banks to stay in business or not, the banks have the upper hand. The big corps/banks basically have, and will continue to, hold our country hostage for their ransom (subsidies) whether their bets pay off or not (socializing the losses).
Those who believe govt had anything to do with planning the alleged schemes in this piece should listen to a House or Senate hearing when these people show utterly lame they are in all matters of finance. I always found it amazing that people with the financial literacy of a 5 year old would be running a budget worth trillions.
The idea that Govt planned all this is laugh out loud funny. If one wants further proof, they should see sausage being made when they get these people elected. A political Consultant interviews a candidate. Sees if they can take some heat. Does some due diligence. Do they have the dicsipline to stay on the message that they give them? Great , then they analyze a few more. Put their pick down, hire a campaign manager and direct everything. They get 15% of everything the campaign gets in the early stages of the political career of one of these dunces. They are like an agent and a ad agency wrapped up in one. "Read the script and STFU. No one is asking you to think. "
That's why this piece is comedy at it's best. SNL type stuff like when they had Reagan speaking German during Iran Contra as he planned every last detail as his staff sat befuddled because they didn't understand what he was saying.
Yep, the Govt did it. Snort
The Law trumps the Money.
"Let me issue and control a nation's money and I care not who writes the laws" - Amshall Rothschild
A ZH poll on this would be great.
First the good news:
Very quietly, the GSE's have dramatically tightened standards since the 4th quarter of 2008. The average FICO/LTV for 2009 originations are approx 745/70 vs 715/76 for the 2003/2008 period - the improvement is probably even more if one considers that reported ltv"s were inflated during the bubble. In addition, both GSE's have dramatically increased fees for sub720 Fico and higher LTV loans.
The Bad news part A
The guarantee portfolio pre 2008 continues to get worse. In the latest report, 12.5 % of all loans that required PMI were seriously delinquent. Approx 4% of prime mtgs were seriously delinquent. Since home prices are at best stagnant, the cure rate for these loans will be close to zero and the pipline keeps growing. Could the lose 400bb-maybe. lots of these loans will get bought out of MBS pools and will have to come on the GSE balance sheets this year. That is the main reason why the portfolio caps were essentially raised.
The Bad news part b
THE FHA hAS taken up the slack to insure not just first time homebuyers but also all others that do not meet the GSE's tighter standard. They are still offering 97 LTV loans - combine that with the first time buyers tax credit and some of these loans are no money down. Given that the program has oversight issues, lots of questionable loans are getting underwritten. Since most of the insurance premium is paid up front (2 points) and the defaults do not peak until year three, this is a ponzi like attempt to shore up the FHA insurance fund that is quickly heading into the red - FHA has doubled the amount of insurance it has written in the past year. Although the most recent origination is of better quality, the delinquencies of these newly underwritten loans are still quite high.
If home prices decline another 10%, FHA will also lose hundreds of billions of dollars. This is the REAL story. The GSE is just a distraction so that Congress does not raise the minimum down payment requirement for FHA loans.
And Part c. Under HUD Mortgagee Letter 2009-46B, FHA/HUD is setting up a program (Direct Endorsement Lender Review and Approval Process) whereby the lenders themselves "clear" residential projects for FHA lending. I think part of this DELRAP program is to lay off liability for sloppily underwritten loans on the lenders themselves, so that they must reserve against potential charge-backs from FHA.
Put another way, in the old days, the mortgage brokers/agents all the way down to the buyer would "make the forms say what they need to say" and once that loan was off their books, it was FHAs problem. Now, it will be the lenders' problem. As we speak, lenders are trying to figure out what this means and how to set up their underwriting process under these new guidelines. Step in the right direction, yes. Will lead to a second leg down as supply of mortgage money becomes increasingly constrained? Absolutely. Another 5-10% down jsut because of this simple, sensible adjustment will spell insolvency for many lenders, developers, and borrowers on the margins of this adjustment.
All True.
Part D - all those delinquent MI-insured loans are backed by mortgage insurers that are in some cases rated as low as B+ Insurer Financial Strength Rating. Say what you want about the ability of the rating agencies to do their job, but a B+ does not inspire confidence.
So far, only one (I think Freddie) of the GSEs is taking a valuation charge against that counterparty risk, and it ain't that large a charge yet.
If/when one or more of these MIs goes tits up, that is going to be more of taxpayer dollars down the drain.
One of the MIs already went tits up last year and is paying claims at 60 cents on the dollar.
If that wasn't bad enough, the GSEs are still dependent on the MIs to insure 80+LTV loans, the same MIs who have B+ ratings, and worse yet, there was an article in the WSJ recently about how these MIs are lowering their credit standards. Basically the taxpayer is enabling the entire MI industry to roll the dice to try to dig their way out of their hole. If it works, the executives get paid and are still around to take their friends at Fannie/Freddie out for golf and ski outings, and if it doesn't work the taxpayer forks over more money.
As I mention above, this could all be eliminated if the MI option were struck from the charters and originators were forced to retain a 10% participation (as is currently allowed for in the charters).
http://www.fanniemae.com/global/pdf/aboutfm/understanding/charter.pdf
page 7
Our housing finance system is a national fucking tragedy.
The MI is worthless and will have to be written off. Since the best predictor of future default is current loan to value, it makes you wonder why FHA still allows 97% LTV loans to be originated? Either Govt still has not learned that making the borrower have meaningful skin in the game is essential or they are intentionally playing a game of extend and pretend because they need to keep demand for housing artificially high to stabilize prices. Either way, they are exposing the taxpayers to the risk of even bigger losses down the road or worse - inflating their way out of the problem.
http://open.salon.com/blog/anthony_m_freed/2008/12/18/goldman_sachs_evad...
Here is an open question. I just sold my very nice house for the purpose of downsizing, however, I'm not sure if I should jump back in and buy before the rates skyrocket or sit tight and let the housing prices continue to erode. Does anyone have justification for either side of this argument?
Never average down!
Depending on which Market you are in,
you could see another 10 to 15 percent downside,
which could last for years.Perhaps even more
Park in Au/Ag until things recover, if in
our lifetimes....
Assets correct the amount they were financed.
(Think of 125% LTV GM Ditech Loans.)
In other words, we may see 1930s housing
prices again. Keep cash dry. Beware
the liquidity trap of deflating gold and silver...
http://www.jubileeprosperity.com/
slickrock, that is a tough onr from waht I read nome prices will come down close to another 20% one way or the other - doubt it could be pushed beyond 2011 at the latest but with higher rates coming will the real price be the same for the borrower almost.
That is the side of the argument I am leaning toward, just wondering if I might be missing something. Thanks.
I guess I should start proofreading some...
"We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral."
Oh come on, we all know AIG FP was selling CDS protection that far exceeded the value of their entire firm. We also know the IBs that were purchasing this protection knew this fact, but bought it anyway. It was a colossal fraud scheme which allowed AIG to collect easy fees and the IBs to increase their levered bets on the housing market.
Of course Fannie/Freddie were a huge part of the scam, but your article makes it sound like the banks/AIG all acted in an ethical manner. It was a massive Ponzi scheme with many participants. The wrath directed at the banks is completely justified, although I do agree that the GSEs are trying their best to hide their involvement from a dim citizenry.
I must have missed the place where you addressed the passage of mine that you quoted.
slickrock, running a 30 year 250k mortgage at 7.0 % as opposed to 5.5% gives a 17% higher payment each month over the 30 years but I am sure there is time value/inflation of money issues and early payoff savings to look at also to get a good figure on what is the best way to go with that issue.
We don't dumb down content on Zero Hedge. Zero Hedge requires adult levels of reading comprehension and adult levels of attention span. (Or, in this era, I such attention span as is acquired via adult medication).
"...such attention span as is acquired via adult medication."
LOL
I take mine, twice a day, just like those men in the white coats tell em to do. And really, that drooling thing is hardly noticeable anymore. But now I need to take Viagra just to masterbate.
Sad, really sad, the state of the average American Joe. :>))
Huh? I take mine, twice a day, just like those men in.................
I'm just a spectator, but Andy's spot on...and Marla's got talent.
Goldman Sachs, AIG and the rest are just as much at fault and I still dont understand why some of them arent in jail. You could just seize computer records and phone records and the rest and have a winnable case they knew the true risks of them and misled investors purposely. But what happens they get billions more in bonuses instead of paying for their crimes because of connections. It makes me sick.
Dear God,
I know Ive never prayed before and I know I made alot of jokes at your followers expense,but God,I have a huge favor to ask. You see down here on earth we are having some...issues.Turns out that money(or the desire for) really is the root of all evil. Here in America we have lost our way and I fear there is no righting this situation.We have become sheeple led to slaughter by the Oligarchy.We baah and piss and shit our selves on the way to the chopping block while our sheperds(not you big guy ;) ) laugh and play and roll in huge piles of money.Money they got from the backs of our labor,and the labor of future generations. Our "leaders" lie,cheat,steal,and commit horrible acts of war in the name of there true God..The Dollar.
So,my simple request is this.Could you please give some rotten dirty goverment worker that knows the truth behind the filthy lies of our goverment the balls and moral guidance to stand up and let us sheep know why and how we are being led to slaughter?Can somebody..anybody(deepthroat) please,for the love of humanity put this wretched,miserable fuedal system out of our misery?Maybe you could let this(probably church going) person know that he will burn in hell for all eternity for lying and cheating just for his lousy(soon to be unfunded) pension?
And as for Obama,the liar in cheif...could you make a special place in hell for this man..the populist turned banker,the change man,turned changed man.If anybody has the power to stop this mad descent into poverty,destitution,and slavery(funny how a black man is enslaving a nation,payback?) its Obama.But of course we have been fooled before by the sheep in sheperds clothing,these mouthpeices for corporate interest..some of us just thought this would be different i guess....bbbaaaahhhhh
Amen
"Not only that, but given the de facto nationalization of MBS portfolios (we'll give you three guesses who have been the largest MBS buyers over the last several quarters) the GSEs and their supporters have managed to get taxpayers to pay for it all."
Has anyone else noticed that the taxpayer has not paid for it all and has no intention of doing so? Taxpayers have not been willing to foot the bill for any of the Bush era initiatives from the forever war to all levels of government spending. This can not end well.
oh please, yes fannie and freddie are culpable, but to place blame there more than Wall Street is just incredulous, Wall Street does run DC, in case anyone hasn't yet notice.
And as to why they're still operating, because they're being used to bailout the banks and Wall Street. I know ZH is Wall Street people, but trying to act like this was all the government's fault, and dont get me wrong they're completely culpable, but they aren't the only ones at fault.
Let me get this straight:
The GSEs are now fully prepared, via the blanks check, to become a new shell in the game where we simply keep hiding the ball (toxic "assets")?
Great. How ironic that entities designed (at least stated) to make homes affordable actually do the exact opposite.
Sir, could you please stop the carousel? I'd like to get off now.
Uncle Stupid runs the carousel, and you ain't hopping off just yet, chum. Keep feeding the meter. He'll consider removing you after you're soiled and unconscious and incapable of generating taxable coin.
the machine can't work in reverse -
inflate or die.
Securitization technology will be the greatest casualty of this crisis. Due to the fraudulent exploitation of this technology the only hope in 800 years to move away from the disastrous banking model has been lost. Large banks are now de facto GSEs.
"Fraud is deceit, and the essence of fraud is 'I create trust in you, and then I betray that trust and get you to give me something of value.' And as a result, there is no more effective acid against trust than fraud, especially fraud by top elites. And that's what we have." -W.Black
http://www.npr.org/blogs/money/2009/04/william_k_black_on_fraud.html
http://hammer.ucla.edu/watchlisten/watchlisten/show_id/129363
This flies in the face of everything I thought I understood. A) Fannie and Freddie are toxic waste dumps for financial garbage, which raising the limit seems to confirm B) That the fence is the reason the burgular keeps stealing. C) That the securitization process took the loan application out of the hands of banks and allowed second and third tier lenders to create fraudulent loans, and made the process by which Fannie and Freddie banked these loans, more opaque E) The GSE's do not originate loans F) That at the height of the crisis Credit Unions were still writing loans, which suggests it was a banking problem, not a loan backing problem.
I'm willing to give the GSE's their share of the blame, after George Bush made an impassioned plea for the "ownership" society, after Congressional Democrats like Maxine Waters have pushed the GSE's to help her constituents get fair access to the mortgage market, which I would say offhand she is more than 50% justified in doing. That investment firms like Goldman built these securities and then SHORTED the same stuff after they made a fortune collecting underwriting fees. Next thing we should do is blame homeowners who took out ReFis to pay their doctor bills.
Great article, no, I mean really great. Great comments and follow up discussion. However as a simple country lawyer, I won't be distracted from the forest by the trees.
There is an issue here which is much larger than the relative culpability of these different participants. That issue is that our system, all three government branches as well as the "professional" groups and corporate management, have failed completely in this matter.
When this happens and justice becomes unavailable to the general public they will settle for retribution in lieu of justice. Retribution which, in order to be complete, will fall upon far more innocent than guilty and whose severity will be unmitigated by compassion or reason.
Some mock with terms such as "Joe Sixpack" or "The Sheeple" but they are fools because they do not know those of whom they speak and they certainly do not know that of which they are capable.
"they certainly do not know that of which they are capable"
+10
i remember the t-shirt, "never underestimate the power of large numbers of stupid people" during the y2k era...
i'll add that large numbers of so-called "tea-baggers", fox news watchers, etc. are anything but stupid. so, maybe an update is due:
"never underestimate the power of large numbers of people who aren't quite as stupid as you've been led to believe they are..."
bust out the popcorn...
Not to worry, Herbert M. Allison is a member of the Obama Administration.
Ergo, we are in good hands, along with those ever playful hands of Rahm, Diana Farrell, Laura Tyson, Larry Summers, Timmy Geithner, Bernanke, Furman, Orszag, ad nauseum.....
What, me worry?
(NABE recently announced that employment would rise in 2010 and the recession would be long over. Larry Summers is a NABE guy, along with Katherine Mann -- two people who have never...ever...predicted anything correctly!)
Everyone in America wanted and still wants easy credit for homes. in fact everyone in America wanted and still wants housing inflation. RE inflation substantiates America.The inflation of American real estate could be said to be the American dream. George Washington was an RE speculator. Half of all assets in America historically are RE. Against that political and cultural imperitive it was impossible for the political sphere to act as a brake.
The Maestro with knowlege afore thought embraced the GSE's as a significant engine of credit expansion during the banking crisis of the early 90's. Greenspan and the financial sphere understood fully at the time what we all now know, in a financialized and every more leveraged economy credit expansion must never slow and it makes no difference where it comes from. The beauty of the GSE expansion for Greenspan and the boys was that they were only tangetal players in them. The banks providing the short term credit for the mortgage purveyors, then just stand back and watch. The expansion of the GSE balance sheets served almost exactly the same function as an expansion of the Feds. It was a beautiful thing.
There was no political counter force to GSE expansion. The monetary and banking side wanted it. The citizens wanted it. Any politician who would have protested would have been considered insane. In all likelyhood it never occured to Barney et. al. that there was a problem. In any case to get out in front of them and hold up a stop sign was political suicide. Imagine some congress critter campaigning on a platform of higher interest and higher down payments on RE.
The citizens wanted it...In any case to get out in front of them and hold up a stop sign was political suicide.
It has been suggested in the past that this is precisely the reason that democracy cannot be a permanent form of government: the citizenry always end up voting themselves the treasury.
And that is why it is necessary for the collapse to happen. Not a nice future, but much better to have a chastened and newly wise electorate.
If only it would come back. Maybe if we print enough money....
Derek
Yep, Rapier, the guy/gal in the mirror played a part. HL Mencken said sumthin like: Americans get everything they deserve; good and hard. I think thats cruel. But if one is over 20 yrs old one is accountable. Ignoring civic duty in favor of the entertainment of the matrix is costly. The billionaires understand human nature too well and use central banks and corrupt politicians. They take advantage of the gigantic size of it all. Who can keep em honest?
Maybe 5 million unemployed. Set up a whistleblower-like reward. Give em 10% of the theft by deception they discover. Appraisers, L/O's and realtors gotta be around a million. They can sift through some records. And outa work construction guys? Deputize them to serve subpoenas. You could have 10 bounty hunters for every Mr. Potter/scoundrel in the US! The mother of all CLAWBACKS!
But we gotta pick a city, county or small state to target for our program. Cause national govt is bought off and locked up in their pocket. North Dakota has some kind of state central bank thing. They didnt drink the Koolaid. So there is hope but it will have to be state by state. In 5 or 10 yrs we can do an amendment to the US Constitution: no central bank. Have Ron Paul handle that. Andrew Jackson did it. Theres gotta be a few thousand idealistic 25 yr old Jacksons out there. email em the ZH fire in the belly online masters degree in kick ass.
Some guy talked about 100 or 1000 monkeys on a nuked pacific atoll. They ate coconuts but the husks were radioactive. They tried to teach em to wash em b4 husking em. It was slow going but 2 or 3 learned. Then 5 or 6. After a month or so when there were ten monkeys washing their coconuts, the other 90 adopted the process in like a day or two.
Maybe 5 yrs to clean up the first State. In 10 yrs you might have 6 States. When their economies are runnin fine like North Dakotas, the other 35 would join in and then we amend the constitution to perpetually outlaw central banking.
Dream BIG!
Since bonds are theft, what do your protests matter? As for me, I'll take what I want any way I can get it. If this leads to a ban on all housing evictions, it will be another step in the enforcement of the new bill of rights, which I wrote (see The Eminent Domain Revolt).
Ever wonder why you Zerohedge clowns are maginalized? why no one pays any attention to what you say? It's because you don't know anything about the law. Your assumptions are pure petit bourgeois. You sound like characters in Balzac or something.
Real idiots. Real jerks.
I'm going with "We're not the ones on the margin" for $1000, Alex.
I guess he didn't like the cornbread, either.
Hey squidster, like Mr T said: I pity the fool!
Excuse this reply is you ARE NOT the anon who posted the other day a few paragraphs about the Constitution and what is now 'fact' and the new Bill of Rights.
If you are the one, would you direct me to the post or re-post here?
I wanted to read it again and I lost track of the heading it came under.
Thx in advance.
And here´s another issue which requires immediate attention....
No conflicts of interest....
A firm such as JPM or GS etc....should not be able to promote
securties in one dept. and sell them in another....
The market maker cannot see all the cards and act on them...
Make markets...absolutely....
Create all securities...absolutely....
Provide fact based information....absolutely....
Take speculative bets with govt. $ and inside info...
Absolutely not....
And here´s another issue which requires immediate attention....
No conflicts of interest....
A firm such as JPM or GS etc....should not be able to promote
securties in one dept. and sell them in another....
The market maker cannot see all the cards and act on them...
Make markets...absolutely....
Create all securities...absolutely....
Provide fact based information....absolutely....
Take speculative bets with govt. $ and inside info...
Absolutely not....
I am thinking this:by eliminating the cap from FAN FRE,they can go back and buy all MBS;s from the banx. After the 1.25 tr is gone (the fed),there are still about 10-15 tr on banx balance sheets. So if FAn and FRE buys all and any MBS from them,sudenly and within a year we have a healthy and well capitalized banking systme. Any ideas regarding that?
Interesting discussion. I'm late. I like Cursive's stuff... One is astounded that there are still apparently sentinent people (Marla...) claiming that it was Freddie/Fannie and the Dems who caused the crisis. See, eg, the following. Of course providing a Krugman ref. may cause apoplexy among the Invisible Hand types. Sorry! - not.
http://www.google.com/bookmarks/url?url=http://www.ritholtz.com/blog/200...
http://www.google.com/bookmarks/url?url=http://economistsview.typepad.co...
http://www.google.com/bookmarks/url?url=http://krugman.blogs.nytimes.com...
Misdirection to conceal what could only be described as the most damaging acts of accounting and securities fraud in the history of accounting, securities or fraud.
Well said.
OK, kids, I was an MBS trader before some of you were in kindergarden. I traded options on them in one of the biggest houses on the street in the 80's. I may be 51 but I know a thing or two and you guys are really missing part of the history of this whole game.
The rules were changed in the early 90's after the S&L's crashed. Marla, you seem to have omitted that. But I love you anyway--just remember to keep things in context of the larger macro picture when typing out laws and rulings as though they sprang from a platform of nothingness. There was a root cause for much of that legislation.
Educate yourselves on this 1990 document (forget the typos and blame a computer--read it):
The Six Trillion Dollar Debt Iceberg; A Review of the Government's Risk Exposure http://www.heritage.org/research/economy/bg774.cfmSo you are saying the concept of "never letting a crisis go to waste" is not a new one in American politics?
I'm saying the root of this mess is not all in the agencies. It's in bailouts.
I'm having a hard time distinguishing between "agencies" and politics these days. Agencies can not be corrupt without corrupt politicians. Trying to defend one over the other or even trying to draw a distinction between the two seems pointless.
So have another drink and remember that agencies sponsored by the government are political entities.
Without trying to beat this dead horse and for real edification, if the two are so firmly attached at the hip, I don't see your issue with Marla pointing out legislation that had political backing for whatever problems, real or imagined, they were intended to fix and which have certainly led us to the point we are now.
Well gee, I guess you were born after I was. Because you can kiss her ass from here to Siberia but basically, she missed the point of the legislation that was enacted at that time. So stop beating the horse, because they are good, weight bearing animals. Marla is acting as though the actions implemented in the early 90's were in a vacuum. But they weren't. The mortgage lending capabilities of the S&L's was huge--and it created a vacuum. OK?
I'm going to go with Marla's own words here. Regardless of the good intentions of the GSE and Congress after the S&L problems, the legislations were the foundation of the problems we're having now. Go back further to creation of the GSEs...why should the government be in the mortgage business at all. It's kind of obvious this kind of public-private model does not work. Name any such agency and find failure. It seems to me that we are merely repeating the same process we used in the late 80s/early 90s to use the agencies to cover over the corruption and failures of regulations of the mortgage industry. Same game, different players...except for the GSEs and Congress.
You can call this ass-kissing if you want, just tell me how our solutions now are so vastly different than they were then?
I'll explain it to you very simply. Liquidity. It works when the system isn't piled with dogshit. It's actually a good thing when there are applicable standards, which there were until the 2000's. Any evidence to the contrary is not convincing to me as an ex-MBS trader and option trader. Telling me the GSE's were shooting out squirming slime in 1995 is not provable. The loans at that time were still the same old same old. If Pinto has solid data that there were regular mortgages going into Fnma/FRE product with less than 80/20 LTV and no docs, etc. BRING IT ON. He's full of it. This charade started in 2003 or later, not 1993, and he can eat my shorts.
I know that you are more knowledgeable than me in MBS's , but unless you could personally audit their books at that time then 80/20 LTV means nothing. They can spin numbers anyway they want and with no accountability whats to stop them. Remember the ratings on MBSs meant nothing. Was everything honest back then and then they became corrupt. I think not. BTW appreciated the article on The six trillion debt iceberg
80/20 is a GSE Charter requirement. They followed it
more less until early 2000s..
I guess we will take their word for it that they didn't violate this ratio. They wouldn't lie to us.
Come on that link is ten miles long and it reads like an email from a Nigerian banker. We all know what happened during the S&L, Bush Sr ran Iran/Contra off money his pals like Lawrence King, (see John Van Camp, The Franklin Coverup), stole from the institutions. Just to be fair, McCain was one of the Keating Five. Let's not forget Neil Bush, who used his position at Silverado to pump and dump a phony property scheme. (What was young George doing?) Speaking of toxic waste dumps, which is what the development property was, let's blame mother earth herself for being so corrupt. But hey trees cause pollution and ketchup is vegetable, and America votes these people into office, or maybe they don't.
Thanks for missing the point.
good to see you back in the game Howard.
Hoping all is well!
Happy New Year DH--I'm Back. And up to no good as usual! But this post is full of sense and nonsense. I just had to make the point of Marla's long list of regulations being completely drawn from the end of the S&L's and not some goverment ploy to shift the world to Fan/Fred. It's illogical and wrong. Once upon a time, the agencies served a purpose. And I traded that stuff and it was not toxic waste. Then 2001 came along--not the 1990's--and all hell broke loose. I'll elaborate much further if challenged more. It was my world, I understand it deeply, have good friends that worked at Fan/Fred on the securitization side, and get it at the root core of how deals were made. Some newbie above claimed the street follows the law--I beg to differ--the law followed the street when CMO's and REMIC's dwindled and CDO's became the primary source of dicing and splicing. Good to see you DH--hope you weathered the holidays!
RTC was a warm-up for TARP. Run by GHWB.
Think about it.
I'm not here to tell you that we aren't going down. I am just trying to get you to look at the facts. There is no way but down and we are going to pay for the mortgages of the last few years, so please don't get me wrong. I am just a little pissed that Marla bolted out a gaggle of laws/rulings that were not out of the wind. DO YOU HEAR ME NOW? My cell phone is weak. I'm no schmuck Orly-and I don't need to think about your silly comment. I hated Paulson on his knees to Pelosi and I think TARP and every other acronym the FED has used in QE is revolting. Rev the presses Ben. I hate him too.
@Howard_Beale
Thanks for the clearing this up and using your experience to explain what happened.
The very definition of naivete'. Anyway, good to see the Swine Flu couldn't keep a good man down! Welcome back.
Here's where I stand on this agency bashing--for those of you so ready to kow-tow to our beloved hosts. Pinto's claims of Alt-A and subprime in 1993 are just that. Claims. Back it up Pinto with data. I do not believe that was the case at all since we were coming out of recession and I refi'd my house twice in that year and had the same LTV, docs, and other requirements as the years before. I was still trading the paper and it was plain jane. Nothing fishy was going on in 1993 in the mortgage banking world. What was fishy were the REMICS (and as noted above, they were sprung from the CMO world, started in 1983 by First Boston). The agencies were in cahoots with the street that got big fees to underwrite massive Remics that would make your skin crawl. But the underwriters were the culprits--can you say Kidder, Morgan Stanley, Salomon?--do you remember their names? These deals made CDO's look like child's play. It was an interesting time. I knew the nastiest of the nastiest--they had the ability to convert 80/20 LTV loans into toxic waste with their structures. Perhaps it was a primer for things to come. You had 100 traunches--45 were ok--the other 55 for salespeople to stuff down the throats of Orange county or another victim. Does anyone remember Orange County for God's sake?
Everyone here needs to get some mojo and understanding of mortgage finance if they want to get my point. If not, ask questions, fine. Attack me for not agreeing with Marla and I will bite back. I will add that all of the agencies had a purpose for a great long time. Until subprime. Until no-docs, Until liar-loans. On average through the 80's and 90's Fannie and Freddie had 70% LTV on the books and their servicing portfolios were strong to withstand a downfall as seen in the S&L debacle. What happened with sub-prime is a witches brew of shit and it took the world down. End of rant.
I'm with you, Howard. Done everything, seen everything in the world of derivatives and structured finance since the early 80's. The fraudulent exploitation of this technology started in the late 90's and the agencies were not spearheading it. Derivatives would not be a great loss, they should all be exchange-traded IMO, but MBS-ABS technology is of great value and it has been completely discredited, few people understand the consequences of this great loss.
What everyone needs to sit back and realize, is that this whole bailout thing from TARP to bottom, was nothing more than a bailout of the rich and rich foreigners. I knew this when it was all planned and announced. Confirmed by a letter from my Senator to that very fact months later.
Just wait till this year when the HELOC's and second mortgages and so on start faltering. Get ready for the Wall St. plunge. How many sheep are getting ready to be taken out to slaughter this time around?
It is all about control....fight back by not taking loans or credit cards, pay off what you can now, refuse to deal with the crooks. Short of a revolt by the people, this is how you fight back and defeat these crooks. National work stoppages across the country would do a nice little damage to these crooks too. Organize people, we gotta get organized to stop it.
The A-B-C's of mortgage finance--take note all!
When a mortgage institution, whether it be a banker or Fannie Mae, has two cash flows. One, when times are bad, is the servicing portfolio because origination is weak. The other is origination--where new loans are created and the servicing porfolio weakens as loans prepay.
When you have a shitbox of mortgage originations that could go into default--you sell them fast--or you should not be in the business. If you are Fannie or Freddie and mandated by the US Gov to buy them under all circumstances, we have a problem. I do believe this is happening now. The trouble is already on their books. Fnma/FRE are dead. I think the Fed has the paper. Don't you?
Yeah the Fed has the paper. But Fnma/FRE will buy the underlying credits before they default and thus prevents them from becoming a problem. So the paper is not a problem, too. You need lots of money to buy all the underlying but that issue got fixed. The banks got bailed out by the Fed and now the Fed got bailed out by the taxpayer. As there are no bankers in government, the tax payers will be the bag holders.
It doesn't really matter where the paper is, it's like the oil gambit with the SPR in 2004, oil from the salt dome was transferred to enterprise storage, (during Katrina) but it remained on the books as govt oil, while enterprise double counted it as their own, to create false inventory builds (which traders no longer pay attention to) and use those reports to bully the overseas tankers into lowering their prices. (But we were just screwing a bunch of Arabs so nobody cares)
So enter the GSE problem, who cares where the paper is, the Fed has their back, with trillions of dollars of TARP, its not real money, (it comes out of the SMR, strategic money reserve) and it is being double counted in order to backstop illiquid firms, just as GHWB carried money to the floor of the NYSE in 87', and that was the start of the Presidents Working Group. This isn't money, its numbers in a computer. When things get better you take the backstop away, sorta like a sick guy using a wheel chair for a while. The real problem is that Americans think the money is real, and they think the patient is going to get better.
This is the SPR election year gambit all over again, only this time its American taxpayers getting screwed, which is the ultra-rich mostly, but Bush convinced us we can spend without raising taxes, and Obama has pretty much followed his lead on everything, including the TARP. Additionally trying to unload a shitbox of underperforming mortgages on an unsuspecting buyer, in this case the GSE's, hardly strikes me as being ethical business practises.
Has anyone else started to notice blacked out areas on ZH pages?
that happens when I have the screen enlarged too much, zoom out and its fine
I have noticed blacked out comments or sections of comments that move with the screen when scrolling up or down.
In addition, I refresh often but sometimes the comments don't appear to update except in a large batch and I will suddenly see an extra 30 comments - like on a delay.
How exactly did the Community Reinvestment Act cause a housing bubble in Spain? There is a worldwide securitization crisis (including the above-mentioned housing bubble in Spain) and the US GSEs are not a point source of evil. Yes, having the "non"-govt. agencies be private organizations with million-dollar CEOs and huge lobbying budgets is profoundly meshuggah, but they are just playas and not the game.
The US securitization crisis involves four major chunks of product: residential mortgage, commercial mortgage&similar, consumer car loans, and student loans. Residential is the biggest and the first to go; the rest are non-trivial and their fuses burn (CRE in particular is close to the kaboom). The worldwide securitization crisis can be viewed as the result of a 3-part engine: Push, Engine, and Pull. The push came from the willingness of people (not just the allmighty US consumer) to go into debt. The pull came from rent-seeking all over the world. The engine came from many developments on Wall Street: cheap computing, a massive Principal-Agent problem (from going public), the Harvard comma, and more.
It should shock you that literally a third of the U.S. economy should become a playground for the social experiments of any political group of any party affiliation. - Every action of govt. is a social experiment. There is no control group in Room 101.
good points, I think many Repubs/Libertarian types over-emphasize its all the governments fault, as private mortgage markets, such as almost all of Cali in 2000's (houses too expensive to be part of govt backed secur) messed up with no govt help.
However, I think anti-capitalists types, say like Michael Moore, over-emphasize its all greedy businessman's fault, as this post notes, the GSE and other govt policies did have an effect.
I think our govt policies and private markets both were bad actors in doing things that were not in the best interest of regular folks common wealth. The politicians, CEOs, and the Fed (whatever they are) screwed the pooch.
No doubt, as Marla/ZH points out, GSE did have a an effect on private market. No doubt private securitization and lying, fraudulent selling of stinky MBS to pensions and foreign investors would have gone on just fine without any govt programs. However, govt intervention may have contributed to the steady, ever rising cost of houses even when wages were flattening. Certainly the Fed (not the govt) interest rate policies increase house prices and once house prices kept increasing, the mania was on, both in govt and market. Liberals wanted everyone to be in housing price gains, not just those with big down payment, so lets help everyone buy a house. Markets wanted to be in on it, cause you could loan shark sub prime refis and when the turnip had no blood to squeeze, you could just take the asset, the house and sell it, and make big money either from high interest rate or foreclosure of an asset that kept going up in price. Subprime loans were private loan sharks, mostly to people who already owned homes, not new buyers. So MBS gave great yields at first, and Wall Street was ravenous for more. Banks were losing business to commercial paper lenders and so they went as low as they did, giving any amount of money on any house as long as you had good FICO score, bankers trying to maintain earnings. Those already owning a home wanted to be in on it even more, so they invested in more houses...til the point where 25 percent+ of houses in bubble areas were investor buys, no govt intervention needed, thank you.
I think we can be most clear-headed about what went wrong and how to fix it when we don't have partisan blinders looking to prove it was all Wall Streets fault or all the govt fault. In my mind, all were players, whole system was caught up in the mania, and there is plenty of fraud, lies, cheating, deceit, corruption in both govt and private market players. Focusing exclusively on one or the other will keep us from progress.
"We have seen no credible data that any of the large banks or other underwriters of mortgage backed securities ("MBSs") or collaterized debt obligations ("CDOs") or firms like AIG selling protection on same actually misrepresented the character of underlying collateral."
Good thing "we" (ZH) read all those lawyers letters and have done a complete 180 on this even as others dig something out from under a rock every single day.
If this were a term paper on forensic pathology, I would have to give it an incomplete, at best. Marla, please dig deeper for root causes in your quest for sunlight/illumination.
"Let me issue and control a nation's money and I care not who writes the laws" - Amshall Rothschild
The question that naturally follows is: to what degree were these products misrepresented? Perhaps even the insiders are unsure, or that it simply takes too much work to compile the data for what its worth; hence the unspecified (ie, infinite) ceiling on aid amount.
In other words, a thorough mess.
the thing that annoys me is Fan/Fred are example of an inefficiently controlled economy. A real socialistic govt would have just had Fan and Fred as actual govt agencies and their leaders would at least be subject to political criticism and elections, but Fan and Fred being in private hands, they got to make all the profits and we got all the losses. I would take prue socialism over this, say like the post office or a regulated utility. If, we the US taxpayers are going to insure/guarantee something, then we should do like any rational insurer would, manage the risk.
Same thing has happened with bank bailouts, nationalized banks, at least temporarily would have been better than we pay for all the loss, private hands get all the gains.
US policies are an ugly frankenstein of socialized capitalism, all the profits go to a few elite powerful private hands, all the losses go to taxpayers and yet we have no control to stop losses because regulators captured. Ugly.
Bingo. I'd much rather live in a true socialist state than in a fascist state which is what we have now. Of course I'd rather live in a true capitalist democracy, but we're so far from that I'm not sure we can go through the transformation we're going to go through and get back to it. would be great if we could. The problem is Marla got political with this from her far right republican/libertarian point of view. Of course, her previous work in PE where she castigated people for calling out much of PE for the bloodsuckers that they are is in sync with this point of view. Don't get me wrong Marla, I do love your work and different points of view make this site great - don't lose that.
Ok. I understand very little of what's being said here - and I haven't combed through all the comments - so if this question is off target it's not meant to be, umm, snarky. Here goes ... might I conclude that the CRA, Community Reinvestment Act, is responsible for this mess?
I believe it is the contention of some that it is not the CRA that is responsible, but the evil minds that wrote, enacted and promoted the CRA. At that point, the debate breaks down into two camps -- those that believe CRA was crafted by evil bankers and those that believe CRA was crafted by corrupt politicians. The debate is something akin to the chicken and egg debate.
And there are those that believe that it is because of both -- evil bankers + corrupt politicians. They seem to go together. Where you find one, you'll find the other.
Short everything except toilet paper and whiskey.
It takes more than bacon to make a pig and similarly, it took a confluence of the CRA, the GSAs, mis, mal, and non-feasance on the parts of politicians and bankers, speculators, and a large swath of the general populous to create the debaucle we now witness. Even assuming malice on the part of all these players, the bubble could not have been created without the root cause of too much cheap money and guess who owns that end of the puzzle? I refer to the institution rather than the particular ass-hat who sat in the chairman's chair at the time. This is how Spain could have a similar disaster without the CRA.
I didn't waste a lot of time going to class in college, but my faculty advisor taught foreign exchange and I did attend his classes. While teaching interest rate parity, he pounded into our heads that the risk-free rate is assumed to be 3%. Looking at t-bill rates back to the mid 50's, you will note that prolonged periods of t-bill rates below this level has a tendency to produce a recession within 2-3 years. http://www.federalreserve.gov/releases/h15/data/Annual/H15_TB_M3.txt
While greatly over-simplified (what do you expect in three paragraphs?) the way to put a stop to this madness is to eliminate central bank(ers/ing).
Thanks for the eye-opening read, and for the underlying research that went into it. It tipped me over the edge to register with ZeroHedge.
[Amazing. I'm thanking someone for writing an article that gave me an incipient migraine when I first read it.]
Much ado about something.
Why is it so hard to come to terms with the complete and utter corruption of politicians and bankers working in collusion with one another? That was the whole point of the Federal Reserve Act of 1913. A few powerful politicians working with a few powerful bankers put in place a symbiotic system that guarantees the bankers access to U.S. taxpayer backstops while ensuring pols substantial campaign contributions and the ability to deficit spend to buy votes. We can argue all thread long about who is most venal, but the fact is that one could not survive in present form without the other. I suppose the pols could refuse the contribution quid pro quo, but then those funds would simply flow to their competitor.
The only potential solution to this axis of corruption is for government to return to its originally circumscribed bounds. Shrink government and you will reduce the impact of the fraud. You will never remove the cancer but you can isolate it to a smaller part of the body politic. Unfortunately, THAT aint' gonna happen until this all collapses under its own weight. Worried about out-of-control pensions? Medicare? Social Security? Fear not. None of that will matter in a few years. Along with the USD, it's all going away, friend.
Well put, well put.
You're right on the prognostication as well. We have passed the fail-safe point, if there ever was one after 1913.
After reading so many comments and opinions I agree that the Government, Wall St., banks and people playing the system are all responsible for us being in the mess we're in, maybe in varying degrees. The Government will never pass a term limit on it's "stars" so I believe the voters need to enforce a term limit at the ballot box, because power corrupts. If an incumbent is on the ballot - look further for someone to vote for. I'm sure our problem is bipartisan so let's get rid of lobbyists and send our representatives to DC and let them figure out what's best for America. This is a little naive but I saw a prayer among the remarks and would suggest a two-part Great Commission for our leaders:
1) Get a copy of the Constitution and study it from election day until you take office.
2) Consider all bills in light of what's good for America, if in doubt refer to document in rule 1 for guidance
Straw men. This has been the line since last year about the meltdown: "Look over there! The big bad government caused this!" Fannie and Freddie 20/20, American Enterprise Institute, wing nut I told you so that ANY government or quasi-government ruins everything, leave the free market alone - it can take care of itself, and finally "Leave (Britney) Goldman Sachs ALONE!
BS. Yeah Fannie and Freddie were used. By the banks and the powers and corporations to stoke the smoke and mirrors economy all to save "Freedom" and "Free Enterprise " and our way of life. Read billions in false profiteering from Wall Street to Washington. All were participating. This started with the securitization of the Savings and Loan leftover assets and once the "Free Market" decided to tap into the idea there was no going back. So what if Freddie and Fannie took advantage of their positions. Do you honestly think that any other institutions did not take advantage of whatever lax regulatory oversight looked away or wouldn't have done the same if they could make the spreads the GSE's were using? BS. The same dynamic that overtook the GSE's went viral long before in the financial sector.
Marla, your a shill all the same for whatever think-tank you've contrived this piece for.
I'm very excited to learn this because now I'm looking forward to getting a big fat think-tank check. Hmmm, hasn't arrived yet. Maybe monday.
The origin of the problems is that some people were authorizing mortgage loans to be made without doing reasonable diligence to ensure the likelihood that the loan would be paid back. The procedures to deter this were not followed. The probable reason for that was the authorizer was incentivized by a company that did not want to keep the loan, and the company was quite willing to pawn the risk off to others.
The problem starts with the companies that allowed their employees to shirk reasonable diligence in the authorization of these individual loans. More than likely they may have packaged these loans, and thus these companies are the main source of the problem.
Sure, others were the suckers (victims) who trusted these loan packagers were producing a reasonable product. But there were also a whole system of other conmen who improperly rated these derivatives, as well as a government who has YET to punish the perpetrators of these deceptions.
I don't buy the idea that only the GSEs deserve the blame. But the bailouts show that the government has been complicit in allowing the con artists to avoid justice, and that's because the politicians are similarly incentivized to look the other way.
Good article, Marla.
Let us also consider the role of MERS (Mortgage Electronic Registration Systems), the entity that the big U.S. banks used to fast-track the mortgage securitization process.
They were tasked with keeping track of the mortgage notes and other paperwork and
helping banks bypass state filing fees.
As luck would have it, MERS is also the achilles heel of the entire mortgage-backed security Ponzi scheme. Judges have begun to deny MERS and its banking partners the
right to foreclose, stating that the the company doesn't really own the note.
If the use of MERS were to be invalidated on a national level, CDOs would instantly become worthless. The reason is that tens of millions of mortgages would be voided, and the homeowners would own their homes free and clear.
Here's the CDO scheme in 10 easy steps:
1. Banks and other lenders provide Adjustable Rate Mortgages (ARMs) with low teaser rates.
2. Consumers blindly obtain the ARMs for houses they wouldn't otherwise be able to afford.
3. When the ARMs are securitized, MERS is tasked with keeping track of the paperwork.
http://www.doctorhousingbubble.com/wp-content/uploads/2009/09/mers.jpg
4. The securitized ARMs, or CDOs, are made part of an offshore shell company owned by the originating lender, usually a bank. Citigroup, for example, had just such an entity on Grand Cayman.
5. Banks such as Citigroup continue to issue an endless number of these loans. Why was this legal? They didn't require the usual capital to back these mortgages because they moved them off their balance sheets into offshore shell companies.
6. The banks begin shorting the CDOs as the arms come due. After all, when a 5- or 7-year ARM resets, the interest rate suddenly rises from the original teaser rate to prime plus.
7. The accounting rules are changed, making it unnecessary for CDOs to be valued at mark to market.
8. The Federal Reserve begins its bank bailout program, shifting the CDOs from the big banks to the public by transferring them to its own balance sheet and then over to Fannie Mae and Freddie Mac.
9. The multi-trillion dollar theft is now complete.
10. The U.S. Dollar is now backed almost entirely by CDOs. It collapses!
f the use of MERS were to be invalidated on a national level, then the whole mortgage market will stop functioning, and rates will go through the roof (if anyone will be able to finance real estate at all). Home prices will collapse and dollar will follow. While MERS decimation may seem a silver bullet to some, it's not. And there is no silver bullet here.
There was a mortgage market before MERS, and I don't believe the current market would collapse without it. U.S. states are starting to wake up to the fact that MERS was used to fraudulently deny them the filing fees to which they were entitled.
MERS, in collusion with the big U.S. banks, circumvented the normal mortgage filing process. The result is that the states were robbed of billions in revenue. What if they were to sue the banks for that revenue? Would the banks be able to pay? Perhaps they should pay restitution to the states, which are desperately seeking money to plug the budget gaps left by tax revenue shortfalls.
I'm late to this party, but I still feel like I should chip in for posterity.
Deflection of blame is a theme in TFA, but even as it acknowledges it, it goes on to point fingers elsewhere. Yes, I agree that Fannie and Freddie played a part in the crisis, but to lay the entire crisis at the feet of Fannie and Freddie, absolving the street of any blame is too convenient and too simplistic to be true, yet obviously a very popular idea in the world of finance.
Instead, the seed of the crisis was something that Fannie, Freddie AND the big banks had in common: overleverage. The GSE's were the most blatant offenders, gearing up at roughly 60:1, but I don't think Fannie and Freddie forced anyone to gear up to 30:1, like some of the banks did. But it sure is a good idea if housing always goes up... ahrm. At 30:1 you only need a loss of 3.3% to go bust. Less leverage would have allowed the financial system to absorb the losses without need of taxpayer bailouts.
The kleptocracy has it's origins in the bailouts, where the profits are privatized and taxpayer is soaked for multiple trilions of dollars in bailouts and guarantees, in order to "rescue the financial system". This blatant theft of taxpayer funds generates expectation of future bailouts, which is moral hazard, and doesn't this contribute to the mispricing of risk?
Furthermore, let us not forget that Greenspan slashed rates to 1% and held it there. Whatever Fannie and Freddie did to lower rates artificially, I rather think it pales in comparison. Which led to more of a mispricing of risk?
Then, let us consider derivatives. Which allowed players to offload risk to counterparties, because, hey the worst that can happen is that we'll be made good by AIG, and just in case, we'll buy insurance in case AIG goes under... from AIG. What could go wrong? This leads to a SYSTEMATIC mispricing in risk because while you've cleansed your books of that risk, it is still present in the system. Yes, if you spread and distribute risk around the system you can absorb more... up until the point that the system itself cannot sustain it, and guess what happens then...
I guess I shouldn't forget a brief mention of rating agencies which are paid by those they rate. One only has to look at the MBIA debacle to see the brokeness there.
So... I think there is plenty of blame to go around, and while our federal corrupt departments of unaffordable housing deserve ire for being batshit insane, let's not pretend that everything else was perfect and there would be no crisis if only there were no GSEs.
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