Posted on 11/23/2012 2:28:04 PM PST by ex-Texan
Bad mortgage loans, obscured through complex and unregulated investment instruments, cost taxpayers billions
WASHINGTON—The U.S. economy is slowly making a recovering from a near-collapse and the worst recession since the Great Depression.
But what brought on the subprime mortgage crisis that led to huge financial losses, a decline in wealth for much of the country, a GDP drop of 5 percent for the period from Dec. 2007 to June 2009, and an official unemployment rate that peaked at 10.0 percent in Oct. 2009?
“Very few people understand [what happened],” said University of Maryland Professor Michael Greenberger at the Center for National Policy on Nov. 1. “I firmly believe that the president of the United States doesn’t understand. They don’t understand what went wrong.”
In layman’s terms, Greenberger attempted to explain the essence of how the near collapse of our financial system came about. It’s a story involving new complex financial creations that mask the risks that investors take. The story is also about the role of the federal government—that is, the taxpayers—in rescuing the banks, and the story is ultimately about “criminal” behavior that has eluded prosecution, says Greenberger. * * *
My main point was that government makes rules that it always exempts itself from.
Very well put. The banks might have resisted government pressure to make bad loans but when the AAA rated securitized mortgage investment fraud got going, the bankers happily followed the political pressure since they could dump their trash on other “investors”. And the “community organizer in chief” and congressional pimps now act like the mess was caused by someone else and we should turn to them for more regulations. Americans are too ignorant and foolish to function as a democracy and we deserve the upcoming financial disaster.
The mortgage and banking businesses are some of the most regulated things in the world.
So this paper must have come from a certain sector where menial tasks like fact-gathering are left to the apprentices, to be thankfully shucked off when they become journeymen. One has arrived when one need not bother sullying oneself with facts beyond the headlines, the "in" time series and thinly-disguised biographies/exposés of glamourous and powerful figures.
And again, once again, the rest of us reach for the Book Of Ecclesiastes.
NOPE
Natural market forces do not have the ability to create these artificial economic bubbles and there is enough proof going all the way back to the Tulip Bubble.
Only Govt. can create these massive bubbles. Natural business cycles self correct :
NOTICE WHO,WHERE AND WHEN IT BEGAN
Timeline of the United States housing bubble
1930s
1933-1939 The New Deal is a group of new laws created to fix problems in the Great Depression economy, including methods to increase home ownership.
1934 The National Housing Act of 1934, part of the New Deal, makes more affordable housing and home mortgages. It creates the Federal Housing Administration (FHA) (later United States Department of Housing and Urban Development, HUD) and the Federal Savings and Loan Insurance Corporation.
1938 Fannie Mae is founded by the government under the New Deal. It is a stockholder-owned corporation that purchases and securitizes mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.
1968 - 1991
1968: As part of the Housing and Urban Development Act of 1968, the Government mortgage-related agency, Federal National Mortgage Association (Fannie Mae) is converted from a federal government entity to a stand-alone government sponsored enterprise (GSE) which purchases and securitizes mortgages to facilitate liquidity in the primary mortgage market. The move takes the debt of Fannie Mae off of the books of the government.
1970 Federal Home Loan Mortgage Corporation (Freddie Mac) is chartered by an act of Congress, as a GSE, to buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market. The average cost of a new home in 1970 is $26,600 [2] ($140,582 in 2007 dollars). From 1960 to 1970, inflation rose from 1.4% to 6.5% (a 5.1% increase), while the consumer price index (CPI) rose from about 85 points in 1960 to about 120 points in 1970, but the median price of a house nearly doubled from $16,500 in 1960 to $26,600 in 1970.
1974: Equal Credit Opportunity Act imposes heavy sanctions for financial institutions found guilty of discrimination on the basis of race, color, religion, national origin, sex, marital status, or age.
1977: Community Reinvestment Act passed to encourage banks and savings and loan associations to offer credit to minority groups on lower incomes or owning small businesses 12 U.S.C. § 2901 et seq.).[3][4] Beforehand, the companies had been engaging in a practice known as redlining.
July, 1978: Section 121 allowed for a $100,000 one-time exclusion in capital gain for sellers 55 years or older at the time of sale.[5]
1980: The Depository Institutions Deregulation and Monetary Control Act of 1980 granted all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts, but with little regulatory oversight of competing banks; also exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits.[6] The cost of a new home in 1980 is $76,400 [7] ($189,918 in 2007 dollars).
1981: The Section 121 exclusion, allowing for a one-time exclusion in capital gain for sellers 55 years or older at the time of sale, was increased from $100,000 to $125,000.[5]
1981: Each Federal Reserve bank establishes a Community Affairs Office to ensure compliance with Community Reinvestment Act.[8][9]
1985–1991: Savings and Loan Crisis caused by rising interest rates and over development in the commercial real estate sector, and exacerbated by deregulation of savings and loan lending standards and a reduction in capital reserve requirements from 5% to 3%.[citation needed]
1986: The Tax Reform Act of 1986 eliminated the tax deduction for interest paid on credit cards, encouraging the use of home equity through refinancing, second mortgages and home equity lines of credit (HELOC) by consumers.[10]
1986–1991: New homes constructed dropped from 1.8 to 1 million, the lowest rated since World War II.[11]
1989: One-month drop in sales of previously owned homes of 12.6 percent.;[12] Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) enacted which established the Resolution Trust Corporation (RTC), closing hundreds of insolvent thrifts and moved regulatory authority to the Office of Thrift Supervision (OTS); required federal agencies to issue Community Reinvestment Act ratings publicly.[13]
1990: The average cost of a new home in 1990 is $149,800 [14] ($234,841 in 2007 dollars).
1991–1997: Flat Housing prices.
1991: US recession, new construction prices fall, but above inflationary growth allows them to return by 1997 in real terms.
[edit]1992 - 2000
1992:Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing increasing their pooling and selling of such loans as securities; Office of Federal Housing Enterprise Oversight (OFHEO) created to oversee them.[15][16]
1994: Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) repeals the interstate provisions of the Bank Holding Company Act of 1956 that regulated the actions of bank holding companies.
.
1995: New Community Reinvestment Act regulations break down home-loan data by neighborhood, income, and race; encourage community groups to complain to banks and regulators by allowing community groups that marketed loans to collect a brokers fee;[17] Fannie Mae allowed to receive affordable housing credit for buying subprime securities.[16]
CONT`D...
http://en.wikipedia.org/wiki/Timeline_of_the_United_States_housing_bubble
A problem with tossing around terms like LIBOR and market to market is that oftentimes neither the speaker nor the reader knows what these terms mean. Many readers are reluctant to admit their ignorance. The speaker is presumed to know what he is talking about, when he really does not. From this elevated position, he can then blame Bush or pursue any, oftentimes unrelated, pet peeve he may have.
I did read up on market to market a long time ago. My recollection is that “it sounds good” but, as so often is the case, really is not such a sound approach to be used on a uniform basis.
Frank and Dodd blocked all attempts to clean up this mess and the media failed to inform the public the truth about what was happening.
Yes, all of this is true. However, as so often happens, when the finger pointing process gets to a certain point where a villain can be reasonably assigned to take the blame, the process stops short of the actual perpetrators. I will attempt to explain.
As a retired banker whose career started in the 70's, I was witness to the planting of the actual seeds of this debacle. In those days, the portion of a bank's total loan portfolio (personal loans, corporate loans, credit card loans, mortgage loans et.al.) that was considered to be the most secure from loss was the home mortgage portfolio. At the end of every year when bank management was required by safe and sound banking regulations to establish reserves for the purpose of covering future potential losses of each of its separate and distinct loan portfolios the largest reserves were set aside for the riskiest loans (as determined by past experience). Unsecured loans (credit cards, etc.) posed the greatest risk to any bank. With good reason, the interest rates charged on those loans were considerably higher than other asset classes secured by some form of collateral. Collateral for those loans came in many different forms, assignments to physical property, life insurance, personal guarantees of third parties, the actual real estate being loaned against, being some of the most obvious.
Home mortgage loan were deemed to be the single most riskless of all the bank's various loan portfolios for the simple reason that a borrower had to come up with a significant equity stake in the form of a down payment of at least 20% in most cases. The borrower also had to demonstrate a solid financial ability to repay the loan as determined by annual income and the availability of other financial assets which could be easily converted to cash should the need arise. Over the years banks were able to develop a systematic series of criteria which when applied to each individual loan would satisfy bank management that there was a very good probability the loan would be paid on time and in the full amount. Foreclosure was not only a very rare occurrence but also had a devastating effect on the borrower's financial future. Home mortgage borrowers would do anything within their power to avoid default. Banks would normally book the mortgage and hold it in their own possession until it was paid off in full. Yes, it was possible to sell some of these loans to a government agency, but only those loans considered to be the least risky would be accepted under these limited programs.
So how could this situation mushroom into the financial disaster of 2007 and 2008? Quite simply, because the government mandated an easing of the time honored home mortgage lending practices that had served the financial community for so long. In 1977, the Democrat dominated Congress passed the Community Reinvestment Act (CRA) to encourage banks to lend to customers who did not meet the time honored lending criteria that served the banking community so well in the past. Part of the Act also required the bankers not to abandon "safe and sound" lending practices. In essence the Act said "abandon safe and sound banking criteria but, at the same time, don't become unsafe and unsound." Every banker with any semblance of financial acumen came to the same conclusion, "How the hell do you do that?"
The unanimous uproar of the objecting bankers caused the Administration to provide bankers with an outlet for those loans nobody wanted. Federal Agency criteria for accepting purchased loans were relaxed in order to provide an outlet to the banks for these toxic assets. The mortgage-backed securities market exploded as new products were developed on the behalf of the government's tax payer funded agencies who wanted to reduce the risks of their congressional mandated toxic portfolios. It is at this point that the professor's story begins (having avoided any mention of the above narrative). Yes investment bankers (Goldman Sachs, Bear Stearns, Lehman Brothers, etc.) saw an opportunity to make money through the development of derivative securities (that no one really understood) in order to spread the risk for the government directed relaxed credit standards. Yes, the investment vehicles were as flawed as the underlying mortgage loans. And, yes, the investment bankers did not disclose the underlying risks to the investors possibly because they either did not recognize risk or didn't want to (or couldn't) stop the money making gravy train. In the meantime, it became almost impossible to determine the originators of the loans, further obscuring the risk.
The long and the short of this whole debacle had its ultimate origin with the government. Just another failed government initiative like Social Security and Medicare. And here comes Obamacare.
You’re getting bad info, buddy.
Libor is not set by consensus. Libor is set by day-to-day market transactions. At least that’s the way it’s meant to be set.
The UK Financial Conduct Authority, led by Martin Wheatley, is taking down the British Bankers’ Association (BBA) overseeing Libor. Both US and British regulators have fined Barclays £290m. That’s just the start. By the time all is said and done, that number could easily top £30b.
The banking conspiracy is widespread and will ensnare a good number of bankers in the US and UK. The UK High Court is not pleased and is demanding some very embarassing information. This is a major scandal.
"It's the bankers' fault. Pure, unadulterated greed."
"Nope, it's the government's fault. Too many NINJA loans."
"It's the government's fault for not regulating those bastids."
[And anon]
A full and reasonably complete account of the mess will ostensibly be "balanced," but it really will provide a blow-by-blow view of the new economic fascism.
In a very real sense, a fascist is a socialist who's convinced himself that he's a capitalist. The "market," to the fascist mind, is an instrument for achieving socialist goals that works better than outright socialism. This mentality dovetails with fascist economic policy: businesspeople as servants of the State who have to be favoured because they work on incentives.
No, it isn't. My point is that estimating a company's net worth based on the present market value of their assets is prone to inaccuracy, and mandating the usage of such estimates will cause market distortions that make them even less accurate than they otherwise would be (e.g. if the market momentarily undervalues some kind of asset, a mark-to-market rule may compel companies to liquidate their holdings of that asset, reducing the market value further). I didn't mean to imply that people should be able to claim assets' worth as whatever they feel like, but rather that current market price isn't a good barometer.
Given a pool of interconnected assets, I don't think there's any accurate and non-game-able way of evaluating its value without analyzing all its constituents and their relations to each other and to other assets of similar types. If the volume of an asset that changes hands on a given day is a small portion of the total volume in existence, one can increase the apparent value of the asset by buying a small amount and deliberately overpaying for it. Mark-to-market will enable, rather than hinder, such techniques.
One of the founding fathers once said that our democracy cannot succeed unless the people operating it are virtuous. If the gov creates a stupid loophole that if exploited will destroy the country, will you exploit it for profit???? Subprime loans made with looser standards are marked loans. The investor who buys the loan knows that before he risks his money buying it. Liar loans are different. Bankers noticed that FM&FM were buying mortgage portfolios without checking them, the bankers exploited this oversight which resulted in toxic investments being unwittingly brought by investors and pension funds system wide till the real estate market popped and the toxic assets were exposed. The bankers who did this knew it can destroy the world financial system, but they did not care!!! Problem with your defense of bankers is bankers committed fraud and gov committed stupidity. One is a crime and the other is incompetence. They are not equal!!
It was the evil gov civil service that alerted the politically appointed heads of FMFM that liar loans were being found by random sampling and the policy of not auditing all the mortgage notes sold to them by the banks is not wise nor sustainable. The appointees hid the data from Congress when they briefed Congress on FMFM activity. These gov officials should go to jail.
GWB Sec of Treasury Summer was alerted by the FBI in 2004 about liar loans found in other white collar crime investigations, but the UST took the FBI info and did nothing. The Sec of Treasury Summers and these officials should also go to jail.
It was the CRA.
FMFM should never have existed in the first place. Government should have had no place in encouraging subprime mortgages in the first place.
It was set up to fail.
It should have been obvious to many people in government that something disastrously shady was going on. In a free market, those who buy and sell goods in such fashion as to improve the efficiency of their allocation create wealth and make money; those who buy and sell goods in such fashion as to allocate them inefficiently destroy wealth, but lose money. If many people are engaging in an activity which causes goods to be inefficiently allocated, but which is nonetheless profitable for them, that should set off some very loud warning bells. It should not be in anyone's interest for someone to receive a "loan" when there is no realistic scenario by which the money could ever be ultimately paid back. If market rules make it profitable for anyone to write such loans, that implies that such rules are allowing those people to enrich themselves with someone else's money. Whether or not one can immediately identify who is getting fleeced, it's clear that somebody must be, and that as long as the rules make it profitable for anyone to be writing such bogus loans, the problem will continue to get worse.
Problem with your defense of bankers is subprime loans are marked subprime before it is sold to investors. Marking a liar loan solid conventional mortgage is another matter. CRA is a stupid gov act, selling a liar loan as a AAA loan after encouraging an applicant to lie on it is another matter. If a few banks did this, I would not blame the bankers, but ALL the main banks were doing this. Like I said in an earlier post, if the gov created a loophole by stupidity if exploited would destroy the country, would you exploit it for profit???? Bankers including the innocent ones will have to take it on the chin for this debacle. Bad bankers are at fault, by where were the good bankers telling them to stop. Liar loans were a widespread practice, every banker knew about them, yet the good bankers did not report this to the US Treasury or local state officials? Old saying “if one black man out of 100 black men committed crimes, there is something wrong with that man, if 50 percent of black men commit crimes, there is something wrong with black men”. In terms of reputation, bankers today have a major PR problem with most Americans. They have no one to blame but their colleagues.
It makes total sense for banks to mark-to-market, but the Feral Reserve rejects it because they are crooks.
The immorality and greed of our super wealthy elites is not much different than that of the welfare parasite class as Jon Corzine and Franklin Raines, and almost every politician sent to Washington. What really is the difference between a Wall Street banker skimming pension and IRA money by speculating with billions of computer generated transactions and the faking of social security disability claims? Both steal from the middle class. The immorality is the same.
What we have to realize is the super rich today are corrupt self serving elitists and have little in common with the small businessman down the street maxing his credit cards to make next week’s payroll. The super rich have insulated themselves from risk by using their wealth to buy politicians who transfer their risk to the taxpayers. The true entrepreneur down the street bears all of the risk of his enterprise and if he makes one mistake loses everything.
If the Dems want to play the class warfare game, why don’t we one-up them. Establish a new tax classification for small to mid size businesses at a 15% rate. Perhaps even a zero rate for businesses below $100 million in sales. Then put in place a wealth tax (net worth tax) on the super rich. A 2% annual levy on net worth for citizens with a net worth of $500 million to $1 billion. A 4% levy for citizens with a net worth of over $1 billion. To prevent capital flight, the super rich who move more than 10% of their assets out of the country in one year will lose their citizenship, be exiled and banned from re-entering the country for life, and be banned from owning property or financial assets inside the USA. When they liquidate their assets the government will take 50% as a special capital tax.
I’d love to see the Dems scream if the Republicans actually went one up on them with a billionaires tax. Soros, Buffett, Gates, Oprah, the Kennedy’s and other wealthy progressives will never stand for a wealth tax. How will the Dems and the media spin opposition to a billionaire tax to their non-elite constituents?
“The same way as LIBOR.
It is simply a consensus as to the rate at which banks are willing to charge each other to loan money to each other, if needed for liquidity or other purposes.”
49 Post:
“Libor is not set by consensus. Libor is set by day-to-day market transactions.”
Could it be that you two are in violent agreement? Each individual agreement entails some sort of consensus, for example the price paid is the price received, the quantity sold is the quantity purchased. The same applies for the market as a whole.
I don't doubt that government can fine banks, rightly or wrongly. I have some doubt that the damage will be restricted to the banks.
Here in the US, many want to get tough on business. For example, businesses should be forced to pay for the health care of their employees. Case closed to many. Oh, gee whiz, businesses are hiring fewer people. Many can't see the connection. Higher minimum wage; higher black teenage unemployment - no connection. Higher UAW wages; more cars made in Alabama than Michigan - no connection. High malpractice awards in obstetrics; fewer obstetricians - no connection. It goes on and on and on.
Here are a few tips for recognizing quality thinking. Is there any acknowledgment of supply and demand? This should be understood or stated if we are talking about markets. Is there talk of greed? Unless they explain such talk carefully, it merely shows ignorance of markets. It's like blaming evil spirits as a response to natural events (strong winds, etc.). Does the author demand more government power and regulation, and also complains about government being in the pocket of business? This is bad logic. Why give power to government when you believe it will be abused? The right approach is to realize that as we move from consumer sovereignty to government (politician, bureaucrat) sovereignty, government and business will be in bed together. If the decisions that count are made by government, businesses and government will be talking to one another and working things out for their mutual advantage. The correct approach is for government to step back, and leave it to buyers and competing sellers to hash things out - to their mutual advantage.
Thank you for your post.
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