I find it IMPOSSIBLE to believe that the 2.5% of US home mortgages that are in default have suddenly caused a worldwide financial crisis. I think there is something much more sinister than that going on here. These loans have been made in California for years. We didn’t just wake up a couple of weeks ago to this.
No way to prove the markets are being manipulated, let alone who. Yes it is possible. But with ACORN we can pin the tail on the DONKEY. Lets not talk about pissing away the Golden Goose.
It wasn’t the loans per se. The banks tried to protect themselves against defaults for the lowest cost, and to do that, they bought Credit Default Swaps from companies like AIG.
However, the CDS instruments were never regulated and AIG was not required to have enough capital to cover the policies in case of massive numbers of borrowers defaulting. No one thought that would ever happen.
Eliot Spitzer (the same idiot who had to resign later from the governorship of NY after he was caught with hookers) forced CEO Hank Greenberg out of AIG, and then the company went nuts with these policies.
As you probably know, AIG is being propped up by government loans. No telling if they will face any criminal prosecution.
CDS fraud is apparently in the trillions of dollars because they were written into the accounts as assets. They let the banks and brokerage houses lend even more money on high-return loans. The banks don’t have these CDS instruments on their books any more and are very reluctant to loan money to others, because the subprime “assets” are bundled as securities and will have to be unbundled, an extremely laborious process.
Read this article about Joseph Cassano and his infamous credit swaps.
http://www.portfolio.com/news-markets/top-5/2008/09/28/AIGs-Derivatives-Run-Amok
What a mess!
the problem is that so many institutions began buying into “derivatives”, complex contracts that accompanied mortgage backed securities. These things were so complex but no one cared because at the time of the housing boom they were worth so much. Then many of these properties went way down in value as the housing boom died.
The banks had to write off any asset that couldn’t be immediately sold as mark to market accounting rules dictated, and therefore their balance sheets didn’t reflect reality
Plus, banks have only a few investment opportunities and many of them bought stock in the FMs. The failure of the GSEs wiped out a lot of assets on the banks’ books, and now they are overleveraged.
Spot on! Its the credit swaps. The Fed has already committed more new money than all of the outstanding sub-prime mortgages. If you research the swaps, you'll puke. Greed beyond comprehension from the Wall Street Five! Seems every bank in the world has drunk the Kool-aid and is now stuck with worthless swaps! Like handing our free coke in every drug rehab house in the world.
What I understand is this:
These mortgages were bundled with other mortgages so there were maybe some bad along with good ones, and this was then sold as a package to someone like Lehman, etc. who resold them to clients. Then, trying to assuage any worry the client might have, Lehman (or whoever) sold what was basically insurance to the client guaranteeing the safety of the package. This insurance was a self-insurance by the banker. So it became a double whammy when the securities started not being worth what everyone thought.
The other problem was that since these were bundled, no one could tell exactly where the rot was so the whole package became unwanted and therefore worth very little.
This is basically what I learned from reading about what 60 minutes had to say about this last week.
65 trillion dollars in outstanding credit default swaps is the reason. THAT figure is big enough to create a worldwide financial crisis.
The problem is California style loan approval methods started to get made in the rest of the country.