a ferrari is a marvelous machine.
but in the hands of a fool, it's a rolling disaster.
"The guy walked away..."
re: the source of this thread: by tinfoil futures.
Posted on 02/09/2008 5:31:32 PM PST by palmer
ABS meltdown ping
We are choosing the latter.
But the credit bubble will still melt down. Subprime was just the beginning. Already we see soaring default rates in Prime ARMs. Any attempt at legislative remedy (such as moratoria on foreclosures or interest rate resets) will cause the credit markets to seize up. This doesn’t mean that the idiots in DC won’t try it anyway.
psst!
Yes, we are trying to pump credit into the markets, but as you point out, it won’t stop the bubble from deflating. And you are right, the politicians promises to help out borrowers (foolish ones or merely unfortunate ones), will only knock the securities down another 50% as the income streams become that much more unreliable and unpredictable.
yep...Halgr will be interested in this; we’ve been talking about this just the past couple of weeks....
Fascinating article. Thanks for posting!
A must-read for everybody who innocently believes that we are in a normal business cycle. They don’t seem to understand “this time it IS different”. The unprecedented nature of bank practices in the past 10 years has put us into uncharted waters. I highly doubt anyone can reach back into the past and really project what the future holds for the economy or the lenders. The very nature of lending and debt has been completely changed.
Anything but normal. Thanks for the fascinating read. Good find.
a ferrari is a marvelous machine.
but in the hands of a fool, it's a rolling disaster.
"The guy walked away..."
re: the source of this thread: by tinfoil futures.
okay...got a fresh pot of coffee brewing...and will have to kick up my feet and sit a spell to read through this long’un.
: )
There's a fundamental disconnect now between product and money. Fiat money allows manipulation of the markets to the benefit of the few. Eventually, though, economics requires that the fundamental link between the value of money and the value of goods or services will return to a true state.
Hmm.
Sure, house prices are down .. in selected areas. A lot of people bought homes and knowingly speculated using high LTV mortgages. So, ARMs reset and the speculators default.
Boo hoo. Too bad. When you go to Vegas, you can lose too.
Subprime ABS and CDOs are way down in price. Boo hoo. INVESTORS KNEW SUBPRIME WAS RISKY!
The market will clear. It always does.
Some of you are buying into the Democrats “The Financial Sky is Falling! Elect us, we will fix it!”
How about this - if you can’t afford a home, DON’T BUY ONE!!!!!!!!!!!!!!
BurnYankee seems to be going for door #2. Currency wipeout...
Plenty of folks will be getting educated the hard way in the near future.
Anyone who doesn’t have time to read the full article should at the very least read the excerpts below...
________________________________________________________
“It required a Congress and Executive branch that would repeatedly reject rational appeals to regulate over-the-counter financial derivatives, bank-owned or financed hedge funds or any of the myriad steps to remove supervision, control, transparency that had been painstakingly built up over the previous century or more.
““Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants... said Alan Greenspan
“Central bankers traditionally were known for their pursuit of transparency among banks and conservative lending and risk management practices by member banks. Not ‘ole Alan Greenspan.
“...the securitization of assets would remain for the banks alone to self-regulate. Under the Greenspan Fed, the foxes would be trusted to guard the henhouse.
“The Fed’s “private counterparty surveillance” brought the entire international inter-bank trading system to a screeching halt in August 2007, as panic spread over the value of the trillions of dollars in securitized Asset Backed Commercial Paper and in fact most securitized bonds. The effects of the shock have only begun, as banks and investors slash values across the US and international financial system. But that’s getting ahead of our story.
“The argument was that certain very large banks, because they were so large, must not be allowed to fail for fear of the chain-reaction consequences it would have across the economy. It didn’t take long before the large banks realized that the bigger they became through mergers and takeovers, the more sure they were to qualify for TBTF treatment.
“That TBTF doctrine was to be extended during Greenspan’s Fed tenure to cover very large hedge funds (LTCM), very large stock markets (NYSE) and virtually every large financial entity in which the US had a strategic stake. Its consequences were to be devastating.
“Once the TBTF principle was made clear, the biggest banks scrambled to get even bigger.
“J.P.Morgan thereby paved the way to transform US banking away from traditional commercial lenders to traders of credit, in effect, into securitizers. The new idea was to enable the banks to shift risks off their balance sheets by pooling their loans and remarketing them as securities, while buying default insurance, Credit Default Swaps, after syndicating the loans for their clients.
“It was J.P. Morgan & Co. that led the march of the big money center banks beginning 1995 away from traditional customer bank lending towards the pure trading of credit and of credit risk. The goal was to amass huge fortunes for the bank’s balance sheet without having to carry the risk on the bank’s books, an open invitation to greed, fraud and ultimate financial disaster.
“That little step involved a complex leap of faith to grasp. It was based on illusory collateral backing whose real worth, as is now dramatically clear to all banks everywhere, was unknown and unknowable.
“That growing process of mortgage defaults in turn left gaping holes in the underlying cash payment stream intended to back up the newly issued Mortgage Backed Securities. Because the entire system was totally opaque, no one, least of all the banks holding this paper, knew what was really the case, what asset backed security was good, or what bad... They treat it like toxic waste.
“If the Wall Street MBS underwriters were to be able to sell their new MBS bonds to the well-endowed pension funds of the world, they needed some extra juice. Most pension funds are restricted to buying only bonds rated AAA, highest quality.
“The raters under US law were not liable for their ratings despite the fact that investors worldwide depend often exclusively on the AAA or other rating by Moody’s or S&P as validation of creditworthiness, most especially in securitized assets.
“The ratings given by Moody’s or S&P or Fitch are rather, “merely an opinion.” They are thereby protected as “privileged free speech,” under the US Constitution’s First Amendment. Moody’s or S&P could say any damn thing about Enron or Parmalat or sub-prime securities it wanted to.
“The securitization revolution was all underwritten by a kind of “hear no evil, see no evil” US government policy that said, what is “good for the Money Trust is good for the nation.”
“Monoline insurance became a very essential element in the fraud-ridden Wall Street scam known as securitization.
“By having a guarantee from a bond insurer with an AAA credit rating, the cost of borrowing was less than it would normally be and the number of investors willing to buy such bonds was greater.
“...it was not being uncommon for a monoline to have insured risks 100 to 150 times the size of its capital base. Until recently, Ambac had capital of $5.7 billion against guarantees of $550 billion.
“As the mortgages within bonds from the banks defaulted - sub-prime mortgages written in 2006 were already defaulting at a rate of 20 per cent by January 2008—the monolines were forced to step in and cover the payments.
“On February 3, MBIA revealed $3.5 billion in writedowns and other charges in three months alone, leading to a quarterly loss of $2.3 billion. That was likely just the tip of a very cold iceberg. Insurance analyst Donald Light remarked, “The answer is no one knows,” when asked what the potential downside loss was. “I don’t think we will know to perhaps the third or fourth quarter of 2008.”
“How much could the monoline insurers handle in a real crisis? They claimed, “Our claims-paying resources available to back members’ guarantees…totals more than $34 billion.
That $34 billion was a drop in what will rapidly over the course of 2008 appear to be a bottomless bucket.
“According to the Securities Industry and Financial Markets Association, a US trade group, at the end of 2006 there was a total of some $3.6 trillion worth of Asset Backed Securities in the United States, including of home mortgages, prime and sub-prime, of home equity loans, credit cards, student loans, car loans, equipment leasing and the like. Fortunately not all $3.6 trillion of securitizations are likely to default, and not all at once. But the AGFI monoline insurers had insured $2.4 trillion of that mountain of asset backed securities over the past several years. Private analysts estimated by early February 2008 that the potential insurer payout risks, under optimistic assumptions, could exceed $200 billions.
“None of that would have been possible without securitization, without the full backing of the Greenspan Fed, without the repeal of Glass-Steagall, without monoline insurance, without the collusion of the major rating agencies, and the selling on of that risk by the mortgage-originating banks to underwriters who bundled them, rated and insured them as all AAA.”
You very obviously didn’t bother to read the article. Read it, then come back and make an informed comment.
Yes our central bankers are certainly choosing door #2, but I wonder if their choice is irrelevant after a certain phase. If people flee to cash, and credit becomes scarce because of this fiscal conservatism, the effect could very well be a de facto increase in the reserve ratio, offsetting the Fed’s attempts to re-infuse credit, and shrinking overall dollar claims. A stronger dollar by deflationary default?
Just as Greenspan as new Fed chairman turned to his old cronies at J.P. Morgan when he wanted to grant a loophole to the strict Glass-Steagall Act in 1987, and as he turned to J.P. Morgan to covertly work with the Fed to buy derivatives on the Chicago MMI stock index to artificially manipulate a recovery from the October 1987 crash, so the Greenspan Fed worked with J.P. Morgan and a handful of other trusted friends on Wall Street to support the launch of securitization in the 1990’s, as it became clear what the staggering potentials were for the banks who were first and who could shape the rules of the new game, the New Finance.It was J.P. Morgan & Co. that led the march of the big money center banks beginning 1995 away from traditional customer bank lending towards the pure trading of credit and of credit risk. The goal was to amass huge fortunes for the bank’s balance sheet without having to carry the risk on the bank’s books, an open invitation to greed, fraud and ultimate financial disaster. Almost every major bank in the world, from Deutsche Bank to UBS to Barclays to Royal Bank of Scotland to Societe Generale soon followed like eager blind lemmings.
None however came close to the handful of US banks which came to create and dominate the new world of securitization after 1995, as well as of derivatives issuance.
Long but very good read.
You deserve an explanation for my conclusion that you didn’t bother to read the article.
You believe investors knew subprime loans were risky. Yet when a conservative pension fund buys a AAA-rated investment vehicle, they are shunning risk. If you had read the article, you would have learned the way very conservative investors seeking safe investments ended up eating massive risk.
You would understand the completely lack of transparency in the financials and understand how this is creating a liquidity crisis.
Please go back and read the entire article. You will learn a great deal about the cause of the financial pain we are all going to share for the next couple of years. Or more.
A must-read ping that may or may not be new information for you. I learned a few things. Example, I did not know CDOs went back as far as 1995.
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