Marble banks and shadow banks: Paul Krugman on the crisis. Trying to make sense of the hugh numbers.

[BelgianMadCow]

I recommend to those interested in the crisis to listen to Paul Krugman on october 24th:
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=385x245743

My distillate from his speech + other facts:

He explains clearly that the bailout has been going to the shadow banking system ("completely unregulated...it's the Far West").
The US mortgage market is worth seven trillion dollar. The bailout stands at 8.4 trillion now. Krugman explains how all kinds of recent schemes (a whole bunch of acronyms) have been used to spend that money without Congressional oversight. Sound familiar?

So if the government bought everybody's mortgage, it would still cost less. It's clear the mortgages don't account for the amounts we are seeing. Which brings me to my main point: the biggest hoax surrounding the crisis is making everyone believe the mortgages are what caused the bigger part of the crash.

The reality is, the shadow banking system has speculated to the extreme on mortgages. They were highly leveraged, the leverage being the number of times they have magnified the risks. When nothing happens, this means astronomical earnings, as we have seen in banks. I remember Fortis making 5 billion dollars per quarter and how that upset me. However, once a major party calls someone's bluff, the entire trust-based system goes down. Oh, there was no bank run? There was a bank run,not by the people on the street, but by the big players.
Note on leverage: a maximum allowed leverage existed in the past, but was abdicated by the Bush*co regime. Surprising eh?

Which begs the question: who called the US bluff? Imho, the Chinese, as they found out the CDS on one mortgage was actually SOLD multiple times, and as they understood all the US debt, the mortgage on the entire US if you will, seemed about to default. I remember them expressing the immediate need for the US government to back Fannie&Freddie mortgages about one week prior to Lehman Brothers. Talk about a vote of no confidence...
Small note: the derivative market is worth 640 trillion dollars - twelve times the world gross product. :crazy:

I'm just saying, the taxpayer is bailing out the shadow banks first. If anyone believes the Federal (not!) Reserve (not!) members, ie the haute finance, are gonna be the ones footing the bill,I think you're wrong. I wonder who is making money shorting the US? 30-something pages redacted out of a "commission" report a couple years forth?

And finally: compare the 8.4 trillion to the 25 billion for the auto industry. Maybe it's better if they fail first, so the pension plans can be shed to an underfunded government fund, and then they can be sold for pennies to the dollar. It's been done before, with the US steel industry and in former communistic countries in Europe, by Lakshmi Mittal. There was a great accounting of all of this on www.historyofsteel.com, but that gives a server error now and google gives no hits linking to that content anymore as far as I saw - the official Arcelor Mittal webpage is hit number two on the other hand. Interesting.

If people understood, there would be a revolution, or maybe I just long for one. Bush better step down before january the 20th.

shock doctrine baby
regards
bmc

[jimshoes]

1. Series!!111!!!

[knowbody0]

2. trillions spent on "margin calls"

gambling at its best.

[BlooInBloo]

3. While I'm happy to have my posts cited, can we lighten up on "teh crazy" just a lil bit?

[BelgianMadCow]

4. Umm...I guess one could but

it's a medical condition.

What struck you as crazy? :hi:

[Idealism]

5. No one "called a bluff"

Fannie and Freddie had to report write downs each quarter, and when they reported the losses due to home foreclosures and collateralized mortgage obligation (CMO) bundles defaulting (because one bad mortgage ruins the entire securitized package) the assets became worthless. And because you can't micromanage and "splice" a CMO, even good mortgages that were yielding payments were devalued because they were attached to bad ones, triggering a default on the entire package. This default triggered the credit default swap (CDS) that was sold as an insurance policy on top of the CMO to cover the loss to the entity holding the debt. The main dealer in CDS' was AIG and this should've brought them down several times over if the government didn't continously prop them up. Either way, because AIG couldn't pay the money to the businesses holding the now worthless CMOs immediately, the companies who held this mortgage debt found themselves writting down billions in losses on their books. When word got out, everyone pulled their money out of these companies. Two groups held about half the market in CMOs before the crash this year ( Fannie and Freddie ) and they went down first. There was no "bluff" called by Chinese debt holders, they just sold out before the stock price dropped to zero. Prior to this crash, earlier this year Fannie and Freddie's stocks were both sold in the $80 per share range and were considered safe buys due to their implicit government backing. This led to further risk taking by the execs in buying sub-prime bundles of CMOs and it led to their bankruptcy. CMO's were seen as one of the safest buys in the deriavitives market because people always paid their mortgages. Even if you had a 80% default rate, you would still make money. The only problem is with such widespread home foreclosures, you have a much less favorable rate of success, which is why these companies who dealt in them are recording such huge losses. WaMu comes to mind, as they wrote down over $50 billion this year alone, and it caused them to collapse. There will be more to come from the losses associated, I'm sure.

[BelgianMadCow]

6. That sheds a lot of light. Thanks.

The chinese part of my diatribe is guesswork really. They made those statements, their importance can be challenged for sure. I just don't believe this crisis is an accident. :shrug:

Again, thanks for your perspective.

[Arctic Dave]

7. You seem knowledgeable about this stuff so I was wondering about

a part of your comment. If only a small percentage of the package was bad why couldn't adjust or resell a new package from the old one minus the defaulted mortgages?

If you can keep it simple for me, this is not my field of expertise. Thanks.

[Idealism]

10. Biggest problem with the splicing

of good mortgages from bad: Its laborious and time consuming. Every account I have read from the state of affairs inside the big dogs in the industry seemed to say that armageddon was imminent. The Fed proposed to slice up the CMOs, buy the bad mortgages, and resell the good ones back to their holding companies, but apparently the consensus from the businesses affected was the process would take too long, and the instead of buying the assets, they needed direct liquidity to be injected into them to stay afloat. Basically, the banks assets are worthless because they are all linked to home prices and defaults. Home prices continue to drop like a rock, 11% last month alone. That is the reason why even good current mortgages inside a CMO have lost tremendous value, too. The defaulted on mortgages are just part of the problem. Also, consumer confidence is part of this bottom out of the CMO market. If the banks that buy CMOs foresee higher unemployment due to the economic downturn, higher foreclosure rates, and less likelyhood that the CMOs won't default, they simply won't want to buy the securities. The success rate was over 90% of mortgages, its nowhere near that level now, so the profitability of this particular segment has become nominal. With this bleak forecast of future defaults taken into consideration, even if the Fannie or Freddie ripping out bad mortgages among their bundles and repackaging them, its just restarting the cycle. Their will certainly be more home foreclosures, and probably at a more rapid pace due to rising unemployment, so even after they examine the good from the bad, selling the bad back to the government, then repackaging new good-standing mortgages, their will still be losses. The system is just silly.

[Arctic Dave]

16. Thank you for the info. AD

[Cronopio]

19. "The system is just silly."

Of course, no one could have predicted the precarious house of cards would fall.

So much for the infallible wisdom of the financial "in crowd".

[Idealism]

20. There were people who blew whistles

They were ignored if they were high up enough (Fed Reserve Governors) or were middle-management/grunts who got laid off for opening their mouths. Trust me, people knew, but didn't want to stop the gravy train of easy money. There were people trying to raise alarms for years, but no one wanted to hear about it because "Who cares if it doesn't add up, we are making MONEY" is the mentality in this country

[Cronopio]

22. Yes, I know that many, many people knew.

But in the words of one person who knew and did nothing about it, "When the music's playing, you've got to dance."

There are far too few people in this society who are willing to turn down a quick payoff to ensure the overall health of the system that provides the payoffs. "If I don't exploit the opportunity and profit from it, someone else will."

[Hannah Bell]

23. Lots of people knew. CEOs cashed out 21 billion in the last 4 years.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4560311&mesg_id=4560311

[OxQQme]

9. Very interesting read

here, being two different viewpoints. Both very valid. What they don't say is: why the sudden massive mortgage foreclosures?
De-regulalations seem to be the root cause.
In addition there's the 'NEED' to pursue "The American Dream" that's been foisted on this segment of civilization.
Prolly didn't happen by accident.

[BelgianMadCow]

12. "the NEED to pursue ..no accident" - indeed

watch The Century of the Self if you haven't yet.

It's all about created needs, isn't it.

[Idealism]

13. The meme you are referring to I believe

was pushed by BushCo. He talked a lot about universal home ownership, stating the success of the program by how high percent as a country we had of ownership. Bush did this by directing Greenspan in 2001 to slash interest rates in order to encourage lending and to get the economy out of recession. Problem is Greenspan kept interest rates so low (100 basis points- a 45-year low) for over a year, that lending became profitable to less and less qualified individuals and more risks were taken. If you could cite some examples of deregulation, perhaps it could stir my memory of events, but as far as I recall deregulation wasn't the problem, banks and thrifts were. Banks and banking affiliates saw profit potential in underwritting loans/mortgages to people they turned away prior to the rate cut because they were "risky" investments. These are typically called low -and moderate- income borrowers (LMI) and because of their lack of reliability to pay, they were given some really bad loan structures that blow up in their faces later on. Another word for these are sub-prime lenders. Things like Adjustable Rate Mortgages, No-Down Mortgages, NegAm's, and Interest-Only Mortgages are all ticking timebombs that can cause your initial payment to be nominal or NOTHING at all, but after a short grace period, the payments will baloon to thousands per month in most cases. This caused the sub-prime meltdown, because people that werent qualified by usual standards were given loans by banking affiliates that couldn't make the payments once they adjusted, leading to foreclosure. Because so many people were buying houses that couldn't before, home prices took off, making it harder and harder for people to afford a house, even if they were qualified to own one, credit-wise.

[KoKo]

25. But, haven't we learned that Bush never pushes anything that's good for average Americans...

He was probably just doing the work of his "handlers." He's so psychologically impaired they might have told him to promote "universal home ownership" figuring he was so clueless he would believe it or he could have known and was laughing up his sleeve about the fortunes he was making for his buddies Cheney and the rest of them. Whatever Bush ever said...one always needed to look in the other direction he was pointing for the truth of it...or to understand he was covering up for someone.

[Idealism]

27. There is nothing wrong with promoting universal home ownership

The problem is in the answer he offered to it: keeping interest rates at 1% for so long to encourage lending. If he would've raised the minimum wage in the country and enacted labor regulations, people would've been able to afford houses that couldn't before- not how they "afforded" them during the past two decades, by credit. Wages in this country have not kept pace with inflation since the 70s, and actually the average worker makes about $100 less than they did in the early 80s. Yet house prices kept getting higher, as did food and commodities costs. Universal ownership is a noble idea, but leave it to Bush to cook up another ill-conceived approach, at best.

[bemildred]

8. Ponzi schemes all collapse eventually.

You can skip all the details. When you give people a license to print money without oversight, this will happen. All those billions of "profit" did not come from any actual production of anything that had value in itself. It was all based on bets, like in a casino or horse race.

[BelgianMadCow]

11. license to print...

indeed - the Rotschildt quote comes to mind.
"Allow me to control a country's money supply and I care not who writes it's laws"

[KoKo]

14. What's amazing is...that I thought Congress put in OVERSIGHT of Paulson

after he came in with his One Page Requistion to "Give me the Money Now" thingy. Seems from all the financial links I read that Paulson never got around to putting in that "Oversight Panel" that we Dems were told that Barney Frank made sure was put into the "Bail Out" before they passed it.

Either Paulson or Congress is LYING! I'm betting it's both. :eyes: We were told that Congress put in Oversight and Safeguards but in the end Paulson got around those with some damned "Amendment" that our Congress (Dems and Repugs) always put into BILLS at the last minute, under the wire, in legalese that they know the McCorporate Media won't find out about until later and that the Lefty Blogosphere will have to take some weaks to parse through to get to the truth on their very limited resources.

It's always a "WIN/WIN" with our New Dem Congress which seems to be turning out as the SAME DEM CONGRESS we thought we VOTED OUT! :nuke: or :cry:

[Hidden Stillness]

18. "Democratic" Leaders in Congress, Not Like Democrats at All Anymore; Strange People

What is so distressing about this whole incident to me, is the way Sen. Chris Dodd fought so hard, adding hundreds of billions of dollars of "pork" spending for individual Senators to the horrible Senate version of the Wall St. bailout bill, to get them to vote for it--as if in a panic to get those votes--when it is just a huge, unregulated giveaway of corporate welfare, and nothing else. Dodd was then exposed as having a very odd "preferred V.I.P status" mortgage refinance, with new lowered interest repayments (Google "Sen. Dodd Countrywide mortgage," just as one example), rather corrupt I would think, then had a testy, tense press conference where Dodd blamed "the wife" (!) and said she negotiated the whole deal and Dodd didn't know anything about the terms! (To think, I supported Dodd as my first choice for President--God help us.)

Think of all the times that Congressional Democrats have denounced and attacked "left-wingers," "activists," etc., and the neverending drone-call of "bi-partisan," "Republican friends," etc., and it really starts to seem like a closed corporate/social club of rich insiders, pissed off at the "servants" (us) telling them what to do--and they aren't going to do it. How many of these schemes have there been: "Medicare" Part D, which forces people onto corporate insurance plans that do not cover things, hugely inflates prescription drug prices that people cannot afford, subsidizes the drug and insurance industries--then does not correct it; "Medicare" Advantage, which subsidizes corporate insurance for taking people off of real Medicare, then does not cover things, charges huge fees and premiums--then does not correct it; the Bankruptcy Bill, deathly punitive to individuals, written by the credit card industry, that does not cover corporate fraud/bankruptcies--and does not correct it; student loans, killing the Goverment grants and low-cost loans that helped people, shifting it all to commercial, loan-shark rate loans, subsidizing the corporations for taking them over and profitting--then does not correct it; campaign finance laws, which have made it worse, introduced even more corporate money and influence--and does not correct it; commercializing IRS operations, which has been a huge drain on the budget, is not doing the work, does not pursue corporate tax-cheating and fraud, and is an illegal intrusion on privacy--and they do not correct it; on and on.

Even though official budget figures (I think from the GAO or the Congressional Budget Office) showed that, like Katrina/Rita, if they had just given the money to individual families to pay off debt/rebuild, rather than giving it all to corporations and then having no oversight or regulation, it would have solved the problem and saved money--but they don't do it!--they do the same thing over and over and over, giving to connected corporate friends and not to the people, it doesn't solve the problem, and they don't correct it.

Something is different here, with this group, that was never here before, and it is all because they are so rich, there is so much corporate money in the system, they need so much money (to give to the media for advertising) to even run a campaign--they are not political Parties anymore; it is a corporate, financial arrangement between club members... And Ralph Nader is "wrong" about, what?

[KoKo]

24. Agree...I think they've become "out of touch" and even the ones like Dodd

who seem to present a Democratic Front...seem to cave when the "chips are down" and Repugs need money or a vote for one of their obscene bills.

Dodd and others are part of the system that survived on Lobbyists when Dems were in the Wilderness...but after they take the money...then aren't they useless as Dems? Don't they become just like the Repugs who were raking it in from Tom Delay's "K-Street" Bonanza?

Yes...there's something very wrong.

[kentuck]

15. Damn!

Where does it end?!

[KakistocracyHater]

17. yep, Germany & Britain

we are expected to believe they, too, made McMansions & ALL of this is merely a 'housing bubble'? I am glad & horrified that you pointed this fallacy out.

[BelgianMadCow]

21. House prices have risen considerably, but over at least 5 years

and nowhere near US levels.

There has been a tendency here to build as much as possible volume on small lots - and there are relative bargains to be had in the upper market. I always thought that was gonna happen anyway, with the boomers retiring with too large houses, and their kids unable to buy something similar..

Thanks for your appreciation!
regards
bmc

[KoKo]

26. I heard on NPR a year ago that oil rich Russians and Arabs were buying up London

Townhomes at ridiculous prices. We have business ties with a German firm whose CEO was telling us all his German buddies (high rollers) were buying up villas and home in Spain on the Coast. So...alot was going on over there. Many not for the average person but the CEO's and other newly wealthy Business folks were seeming to be buying second and third homes for use or investment. :shrug:

[BelgianMadCow]

28. You are right, not for the average person

but indeed, really well-off people invested in partly bubbled real estate.
And there was a bubble in Spain for sure. A nephew of mine is in construction over there...

regards
bmc