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To: presidio9

I actually learned something from your comment. For one thing, I thought the securitization process started in the 2000’s, not the 90’s. While it can be argued that we would have been better served if functions of these GSE’s were performed by smaller, competing private entities from the start, it seems clear that the corruption of these entities started (or at least accelerated) with the politically attractive idea to use the Community Reinvestment Act and these GSE’s to extend credit to virtually anyone.

Problem is, I can’t think of a political soundbite in which Gingrich can explain these issues. In politics, if you’re on defense, you’re losing. So Gingrich’s only alternative is to double down on those issues in which he’s on offense.


118 posted on 12/20/2011 5:30:27 AM PST by BCrago66
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To: BCrago66

Actually, FNMA was started in 1936, to provied more liquidity for lenders during the Depression. At that time, the secondary market was basically other banks and large institutions (pension funds mostly). The first mortgage-backed security was issued by GNMA in 1968. The market really took off in the late 70’s. If you can find it, I suggest reading Michael Lewis’ “Liar’s Poker.” It takes some liberties, but it is highly entertaining, and it gives a basic overview of how this occured. I worked with several of the people in the book.

After that time, the MBS market dealt with a crisis roughly every 10 years, in 1987, in 1998, and in 2008. The market itself is actually an excellent idea. The problem is that once you get into derivatives like CMOs (where I worked), there is just a heck of a lot going on with the cashflows, and it becomes very difficult to keep track of things. Back in the early 90’s Bear Stearns had multiple CRAY supercomputers devoted to the task, and pricing the more esoteric offerings still ended up being more art than science. The problem is that when you start explaining these things to your average physicist who is not involved in the market on a daily basis, his eyes glaze over pretty quickly. A plain vanilla MBS pass-through is already a fixed income derivative. A plain vanilla CMO tranche is a derivative of a derivative. More complext CMO structures are derivatives of derivatives. And so on. The MBS pass-through alone typically deals with a thousand or so individual mortgage loan cash flows. There’s just no easy way to dumb it down. And part of the problem we are dealing with now has to do with the credit derivative market. These were created as a hedge against more esoteric CMO structures. A major risk with holding a CMO is the undelying mortgagee’s ability to prepay their loans. This typically happens when interest rates go down and the homeowners refinance. The bondholder gets his money back earlier than he expected, and at the worst possible time: He now has to reinvest his capital in a lower rate enviornment. But on top of that, the price he paid on his initial investment was based on future interest rate payments that he is no longer entitled to. So his effective yeild is much less. This was a huge problem in the late 90’s. Orange County, Aspin Capital, Kidder Peabody. Credit derivatives offered bond holders the ability to sell some of this risk. So, essentially, even the least complex of these is already a derivative of a derivative of a derivative of a derivative. And then hotshots started speculating on the things.

As you can see, there is no simple way to explain this stuff to Joe Six Pack. Ron Paul is correct that the GSEs may not be constitutional, but there IS a place of mortgage securitization. And, BTW, there has been a HUGE non-agency MBS market since at least the early 90’s. The alternative is banks without free capital, and the significantly higher interest rates that go along with them.

The problem that most people have right now is that people hear the word Fanniemae, and they see it as the cause of all their problems. Personally, I have a big problem with bailouts, and lack of accountability in the financial markets. But even if I wasn’t a Gingrich fan, I would not have a big problem with what he did.


126 posted on 12/20/2011 3:58:48 PM PST by presidio9 (Islam is as Islam does.)
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