Posted on 09/14/2007 9:16:11 AM PDT by SirLinksalot
There is a bit of overstatement in this article. For example:
“While the debacle continues to unfold, millions of homeowners may never again obtain credit in this country, impacting the economy for a long time to come…perhaps as long as a decade.”
Even people that go bankrupt can start over in 7 years. Credit rating can be rebuilt over time. Federal law requires credit to flush out evens past 7 years.
Here is what I know, you know, and everyone knows. Pay your mortgage on time and you keep your house.
The definition of predatory lending to me is bilking elderly people out of the remainder of their lifesavings - people who genuinely, by their advanced age and declining faculties, are taken advantage of.
But the vast majority of “suckers” are simply people who got greedy and couldn’t say “no” to instant gratification. When my wife and I bought our first house, not many years ago, we took a 30-yr fix at 6.0%. According to our various friends and colleagues, we were nuts for not getting an ARM at about a percentage point lower. Ultimately, to us, it wasn’t about scalping a percentage point for a few years and refinancing later on. It was about looking at an historically excellent fixed rate, with a payment we could afford, and knowing that we would never have to worry about unforseen problems in the marketplace. Knowing we would be able to sleep at night, regardless, was worth the extra point we would be paying in interest. It was simply good enough for us.
When we went to the closing, at the title office - I’ll never forget this - the Realtors and title officer sat in utter amazement as we actually READ the terms of the mortgage contract. They told us, “no one ever reads these contracts.” My wife and I were just like, “you’re kidding right?” They said they weren’t. People just sign away. I said, “So people are committing to massive amounts of debt without reading the fine print? Are people that stupid?” Their response was silence.
Just amazing. People inevitably make their own beds. A scant few are legitimately screwed by criminal elements, but too many people have their head in the clouds and got what was inevitable.
I’m pretty sure Milken got done for tax evasion (both his own and helping others in theirs).
Sinclair writes, concerning over-the-counter (OTC) derivative contracts, that they are:
Without regulation.
The issuers and the individuals who trade them are regulated by the SEC and by voluntary associations like ISDA and the NASD which are in close contact with government regulators on a continuous basis.
Without listing on public exchanges.
I'm not sure why this is a problem. Options on equities were traded without a public exchange for years. Most corporate bonds - a product that has been traded liquidly for well over 150 years in this country - are not listed on public exchanges.
Without standards.
This is a complete lie. Everyone who trades these contracts comply with the standards of ISDA and other derivative trading associations. I'm unaware of any market players who are willing to do business with anyone who refuses to sign on to association standards.
Not in the least bit transparent.
Of course they are. Registered investment companies are requried by law to keep records of all such transactions.
Without an open market of the bid/ask type.
What other sort of market is there? Of course such markets exist. Thousands of OTC contracts trade every single day.
Dealt in by private treaty negotiations.
I have no idea what this even means. Financial transactions are always negotiations and usually private.
Without a clearing house.
There were no clearing houses for stocks, bonds or non-OTC derivatives for decades. Eventually there will probably be a brisk enough market for OTC derivatives to the point where a clearing house makes sense, but it is a developing market.
Unfunded without financial guarantee of any kind.
No standard derivative has a financial guarantee. Most corporate bonds have no financial guarantee. Shares of stocks have no financial guarantee. Mutual funds have no financial guarantee. This could be Sinclair's most idiotic statement yet.
Functioning as contracts of specific performance.
Ummm, what are "contracts" for? When I contract with a builder to finish my basement, I expect a specific performance - i.e., that the builder finish my basement! What is the point of a contract if the parties do not abide by its specific terms?
Of a character or ability to perform that is totally dependent on the balance sheet of the loser in the arrangement.
So? If I buy a share of stock hoping that it will go up and it goes down - I lose money. That's life. If I buy an OTC derivative and it expires out-of-the-money, I lose the premium I paid. Is Sinclair suggesting that individuals who enter into voluntary financial transactions should be guaranteed not to lose any money?
Evaluated by computer assumptions made by geeks, market-inexperienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
This is just ignorance wrapped in insults. OTC derivatives traders generally have deep market experience in various financial products and they do not all hold to a doctrinaire view of regression theory. just because Sinclair isn't good at math doesn't mean that people who are good at math don't know what they are doing.
Now in the credit and default category and are considered by accepted authorities as totaling more than $20 trillion in notional value.
That's probably a large exaggeration. And even if it were not, it would represent just a small fraction of the world financial markets.
Notional value becomes real value when the agreement is forced to find a real market for ending the obligation, which is how one sells it.
That it is the whole point of any financial obligation.
To put it kindly, this Sinclair guy has literally no clue what he is talking about.
This was a classic abuse of prosecutorial power (by then U.S. Attorney Rudolph Giuliani, ironically) in the use of RICO statutes to strong-arm accused white-collar criminals into pleading guilty to lesser offenses. Milken's real "crime" was that he was an unapologetic insider trader but could not be proscuted for that because SEC regulations against insider trading that were in force at the time did not apply to the bond market.
What about the people who lied about their income?
John
Seriously, tell the truth now. Is this satire?
He admitted that he sold securities to buyers and then bought them back at a lower price.
That happens every day in every market.
In theory, this results in a book loss which can be used for tax purposes - but this hardly the only reason why this happens.
Thank you for your response. I’ll follow Sinclair’s future comments with a more critical eye.
“In the Bush years, tax cuts are going to the rich while the IRS is browbeating the middle class.”
I knew it would end up being Bush’s fault!
freshcarrion; vulturegram
Boy I hope you don’t believe any of the slop this guy’s selling...
How do they say “adjustible” in Spanish?
Felonious is as Felonious does.
[What about the people who lied about their income?]
Go Directly to Jail. Do not Pass Go.
Yet this is all so true. FOLLOW THE MONEY. So many charlatans, extrememly well represented here on FR btw, made fortunes on this ponzi scheme. True the morons they used should and will pay the price of their stupidity, but the greedy abusers should have their miserable coiffed, contempible heads on pikes at the gates of Ron Reagans shining city on the hill. Same schiesh different tage
Thanks for an excellent post.
My view is that much of the rot we've seen in the economy over the last two decades is due to the disappearance of the Depression from our collective memory.
My grandparents (born 1910-1912) viewed taking on new debt with about as much enthusiasm as getting a root canal without anesthesia, and that lesson has stuck with me all my life.
I now have “vulturegram” bookmarked. It’s the best pointer to economic news on FR.
Brief Summary, Not Excerpts:
Alan Greenspan predicted in a new book coming out on Monday, September 17th -- that the Fed will have to raise interest rates to double-digit levels over the coming years. Otherwise, a new round of inflation may tear apart the U.S. economy.
His new book, The Age of Turbulence predicts the effects of globalization will naturally lead to more inflation worldwide as countries like China, Mexico and India are forced to raise wages.
In the meantime, Fed Chairman Bernanke has been keeping interest rates at 5.25%, or may be planning lower them. Greenspan’s assertion that the Fed may have to double interest rates suggests the Fed may create a new BUBBLE crisis by tinkering with rates now.
That is from the guy who singlehandedly created at least three MASSIVE bubbles and invented the U.S. bubble economy.
Want to learn more about what is really going on in the real world?
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