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.
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!
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.
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.
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...
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“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.”
Long but very good read.
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.
It is worth thanking you again for posting an eye-opening must read. Thank you.
Ahhhh...I was missing the Captain. Glad he could make an appearance!
Hank
According to the Mortgage Brokers’ Association for Responsible Lending, a consumer protection group, by 2006 Liars’ Loans were a staggering 62% of all USA mortgage originations. In one independent sampling audit of stated-income mortgage loans in Virginia in 2006, the auditors found, based on IRS records that almost 60% of the stated-income loans were exaggerated by more than 50%.
Nice. I'd call them "Illegal Aliens' Loans" instead - the idea being to "let 'em in and give 'em loans so the ski jumper that is Wall Street can stay out over the tips of his skis"...for if he ever has to straighten up, he'll start flailing his arms like Eddie the Eagle and crash. ;)
Emigration to New Zealand or Chile is starting to look like a very attractive option.
Monoline insurance became a very essential element in the fraud-ridden Wall Street scam known as securitization. By paying a certain fee, a specialized (hence the term monoline) insurance company would insure or guarantee a pool of sub-prime mortgages in event of an economic downturn or recession in which the poor sub-prime homeowner could not service his monthly mortgage payments.... A cautious reader might ask the question, “Who insures these eleven monoline insurers who have guaranteed billions indeed trillions in payment flows over the past five or so years of the ABS financial revolution?”
No one, yet, was the short answer.
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.
OK, so what does the “average” guy do?
what would happen to us if we let the credit slip rather than bailing out thru the Fed?
A week ago, Moody's warned AMBAC and MBIA that they had one month to get backing, or be downgraded from AAA.
The downgrade will cause dominos to fall very quickly probably within a few days. Stock markets, pension funds, money market funds, banks.
There is a death watch over the big banks which are insolvent like BAC and Citigroup.
FDIC has been gearing up to handle tens of millions of depositors' claims.
As far as asset securitization, the process provided liquidity to the housing market such that has never been seen before. Hence the avid speculation. The process broke down, as it always has before, due to lax lending standards and greed.
The mistakes of the sub prime mess will not be made again in the same form. Something else will happen.
The same is true for corporate bonds.
The real estate *price* bubble artificially depressed default rates at the same time the higher prices were increasing the risk of capital losses below the value of the pledged collateral. Which is the common fad finance effect we have seen n times before and will see n times again.
The underlying driver is not fraud, let alone the silly conspiracy allusions the writer indulges early in the piece. It was and is, instead, the violent and unsustainable movement in US housing prices, in turn driven by whipsawing interest rates.
The Fed thought it had to go very low in the aftermath of the 2000 stock market crash and further after 9-11. It succeeding in preventing any deflation from those, and in getting the US economy out of a mild recession. But it left rates too low, too long, and raised them too gradually. If it had been a year or two faster to get to the 6% level that broke the speculative fever in the housing market, most of the excessives and the present losses would have been half the size they are now.
This too is par for the course, however. Central banks see low rate boom conditions as normal and neutral instead of stimulative, until excesses build up to obviously unsustainable proportions. All the political pressures on them are in this direction, as well.