Blame abounds for housing bust
December 26, 2007 By Patrice Hill - First of three parts This year's housing bust is shaping up to be one of historic proportions. Sales and construction have sunk to levels not seen since the 1990 savings and loan crisis, while foreclosures and price drops are the largest since the Great Depression — and expected to get worse next year. Many parallels can be seen with earlier housing debacles. Each episode had some combination of easy money, loose lending, greed and fraud that turned a housing boom into a speculative bubble. But few housing bubbles have ended so badly as the one today, when the nation is confronting the prospect of mass foreclosures and family dislocations. John Stumpf, president of Wells Fargo & Co., the second-largest U.S. mortgage lender and a survivor of the housing busts of the 20th century, blames today's crisis on unscrupulous lending practices, which joined in a toxic mix with outright greed and extraordinarily low interest rates to send house prices soaring 90 percent between 2000 and 2006. When the bubble burst, house prices collapsed by 5 percent to 20 percent in cities nationwide. "We have not seen a nationwide decline in housing like this since the Great Depression," Mr. Stumpf told investors in New York last month as major banks and securities firms reported an accumulated $80 billion of losses on their portfolios of mortgage investments and widely cut back on lending as a result. Now the country faces a vicious cycle: As house prices fall, homeowners lose equity in their homes, which makes it more difficult or impossible for them to sell or refinance. Many are not able to refinance their adjustable-rate loans when the starter interest rates expire and reset to reflect higher market rates, and so they are faced with sharply higher mortgage payments they cannot afford to pay. The dilemma has sent defaults and foreclosures to historic levels — with potentially millions more in train in the next two years as more than $1 trillion in mortgages reset nationwide. As homes are sold under pressure, prices drop further and cast a pall over entire neighborhoods, driving down the value of homes of even creditworthy Americans and undermining their biggest source of wealth and security. State and local governments also have been hit hard by the declining revenues from property taxes and real-estate transactions, and the housing slump is dragging down the manufacturing and construction sectors. The whole mess threatens to sink the broader economy the longer it wreaks havoc on consumer confidence and spending power. While Americans have grappled with ballooning mortgages and adjustable interest rates in the past, the epidemic of resetting loans today is unprecedented and is the result of a bewildering array of mortgage options for consumers that banks and securities firms developed and mass marketed for the first time this decade. Consumers often were given the option of not paying principal on their loans and even deferring some interest. Many seemed unaware of the consequences of postponing their obligations and chose to make only minimal payments during the first few months or years, backloading their loans so that the payments increased sharply and even doubled after the interest rates reset. The complexity of the loans was exceeded only by the complicated schemes banks developed to package the loans and market them to sophisticated investors, which involved setting up off-balance-sheet investment vehicles and slicing mortgage securities into segments that supposedly allocated the risk of default away from top-rated tiers to junk-rated bottom tiers. Mr. Stumpf, a 30-year industry veteran, said even he was surprised when he read newspaper articles about what some banks were doing. Wells Fargo avoided the riskiest practices and, as a result, is not suffering the major losses that are crippling top lenders such as Countrywide and Citigroup, though it, too, made some unwise investments in home-equity loans, Mr. Stumpf said. "It's interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine," he joked. Easy money While the unprecedented wave of creative and sometimes questionable loans was a key cause of the housing bubble and ensuing bust, lenders were aided greatly by the lenient policies set by the Federal Reserve from 2000 to 2004, economists say. The housing boom started in the wake of the technology-stock bubble that burst in 2000, which ushered in the 2001 recession and prompted the Fed to dramatically cut interest rates. Housing was just beginning to emerge from a long slumber in the 1990s, as it took much of the decade to recover slowly from the preceding housing bust of 1990-91. As the economy slumped and financial markets sank in the wake of the September 11, 2001, terrorist attacks, the Fed accelerated its rate cuts, adding fuel to the budding housing boom. By mid-2003, the Fed had driven interest rates to the lowest in a generation, with rates on 30-year fixed-rate loans falling to a 40-year low, around 5 percent. The even lower short-term rates set by the Fed drastically cut rates on adjustable-rate mortgages as well as borrowing costs for banks and Wall Street firms, enabling them to invent an array of new mortgage products with irresistibly low starter rates, which appealed to home buyers. While the Fed's actions under former Chairman Alan Greenspan were applauded at the time, many economists now blame the central bank for nurturing the housing bubble. "The Fed played an important role" by encouraging people to shift resources to real estate speculation, said Michael D. Larson, analyst with Weiss Research. "The Fed replaced one bubble, mostly confined to the technology sector, with another, far-larger bubble, encompassing most of the housing market." Mr. Greenspan forcefully rejects such accusations. He contends the housing bubble and credit bubble that accompanied it were worldwide phenomena. Moreover, he maintains the only way the Fed could have stopped the bubble was to have raised interest rates sharply, which would have not only deflated the bubble, but brought down the economy with it. Mr. Larson also blames global investors — including many international banks and hedge funds — for misjudging the risks of the securities. And Wall Street firms, by setting minimal standards on the loans and then securitizing them for sale to distant investors, also "removed, minimized and postponed the consequences of poor lending decisions," he said. Global investors were thirsty for the high returns on subprime and exotic mortgages that were packaged as "collateralized debt obligations," and they trusted the high ratings assigned to most of the debt by Wall Street ratings agencies Moody's Investors Service and Standard & Poor's Corp. The global market "stressed quantity over quality" on loans, making it "easier and more profitable" for mortgage brokers and banks to convince consumers to take inappropriate loans, Mr. Larson said. Loose lending With their low introductory monthly payments and easy terms, the loans were easy to sell to the public. In many ways, mortgage brokers followed the playbook of auto dealers, who swamped their showrooms with people on car-buying binges in 2002 and 2003 by advertising zero-interest loans on their cars. As they did with the car loans, many borrowers who acquired subprime and exotic mortgages with low starter rates rarely looked at the loan's overall costs or terms other than the initial monthly payments that were loudly trumpeted in ads and brochures. Loans with introductory rates as low as 1 percent made the obligations of owning expensive houses appear to be easy or manageable and had the effect of driving up home prices as buyers armed with such loans surged into the market and bid up prices. Home sellers found they were able to raise prices by thousands of dollars from one sale to the next with seemingly no resistance. Even the highest-priced homes at the height of the boom in 2005 and 2006 sold quickly, sometimes within minutes with multiple bids. The new-found wealth for homeowners was just as intoxicating as the easy-money loans that transformed millions of former renters, even those with shaky credit ratings, into proud homeowners. Consumers didn't need to sell their homes to cash in on the double-digit gains in their home values; they used home-equity loans and cash-out refinancings instead. Many people used their homes like ATMs, refinancing once or twice a year to take out equity and using the cash to buy cars, go on vacations and make down payments on second homes or investment properties. By 2005, nearly every homeowner in America had refinanced at least once. The cash-outs, which typically extracted $20,000 to $30,000 from home equity, were an elixir for both consumers and the economy, enabling homeowners to supplement stagnant incomes while stimulating consumer spending, the biggest source of economic growth. Loans came not only with minimal payments but often required no down payments or income documentation, enticing millions of people to jump into the market for second homes and investment properties. Coastal resorts and Sun Belt cities like Miami and Las Vegas became lucrative profit centers for "flippers" who weren't interested in owning properties but only wanted to make quick profits buying and selling them. Cable television offered 24-hour housing channels and TV shows demonstrating how anyone could become a "flipper," putting down as little as $5,000 on a condominium and then reselling at a profit before construction was even finished. Greed stokes craze By the height of the housing boom in late 2005 and early 2006, millions of people had been pulled into real-estate speculation, which had become the new "Internet craze," said Stefan Swanepoel, author of the Swanepoel Trends Report on housing. Tales of making quick money in housing became a hot topic at cocktail parties, while cab drivers offered housing tips. "Anything containing the words 'home or real estate' seemed to be as hot as anything with a dot-com during the late 1990s," Mr. Swanepoel said. "The consumers' hunger seemed to have no end," he said, noting that the buying frenzy was nurtured not only by "a plate full of new mortgages," but "bullish customer confidence" and steady employment and income gains. Thomas Martin, president of the National Mortgage Complaint Center, which has heard from hundreds of homeowners stuck with mortgages they can't afford, said the phenomenon of the housing bubble can be summed up in one word: "Greed." "It was a game of musical chairs," he said. "At some point, the music would stop, and someone would get left without a chair," he said, including the banks, homeowners and pension funds experiencing losses today. Besides the "greedy mortgage industry" and the "suicidal" loans they peddled, Mr. Martin blames regulators and legislators in Congress who were "all asleep at the switch with respect to ridiculous mortgage products." Regulators did not seriously clamp down on questionable lending practices until last week, when the Fed approved tough new rules for lenders nationwide, cracking down on dangerous practices like offering loans to subprime borrowers with no income documentation, often called "liar loans." Congress until this year was largely uncritical of the wave of questionable mortgages and sought only to nurture home sales by heaping more subsidies on the industry. One of the last acts of Congress before it adjourned in 2006 was to accede to the wishes of the mortgage industry by enacting a new tax deduction for mortgage insurance. "The housing boom was good politics, " Mr. Martin said, noting the housing and lending industries are among the biggest campaign contributors to legislators. Moreover, Congress since the 1990s has pushed lenders to offer more credit to blacks, Hispanics and other minorities — a drive that led to an explosion of subprime mortgages that went disproportionately to minorities during the housing boom. The "democratization" of mortgage credit appeared to be a shining success until this year, when the subprime crisis emerged and precipitated a much broader credit crunch and retrenchment from loose lending practices. Widespread fraud also fed the crisis, Mr. Martin said, particularly the inflating of house assessments by appraisers under pressure from mortgage brokers, developers and real-estate agents eager to make sales at ever-higher prices. "The combination of blackmailing real-estate appraisers into inflated valuations, combined with insane mortgage products, creates the perfect storm for a real-estate disaster that could be our nation's most costly real-estate meltdown in history," he said. The Fed moved to ban such coerced appraisals as well as the "liar loans" that were the most widespread fraud perpetuated by individual borrowers. The FBI is pursuing 1,000 cases of mortgage fraud and estimates there were close to 36,000 instances of fraud nationwide. States' attorneys general also are pursuing hundreds of cases. In one notable case, New York Attorney General Andrew M. Cuomo is investigating reputed appraisal fraud in deals done by Washington Mutual, the largest savings and loan in the country and an aggressive marketer of subprime and exotic loans. Back to basics As the sordid tales of tainted loans and gigantic losses emerged this year, borrowers and lenders have returned to the basic practices that once made the U.S. mortgage market one of the safest investment havens on earth. Traditional 30-year, fixed-rate mortgages are back in style, with borrowers now shunning exotic mortgages such as "option ARMs" that they snapped up during the housing craze. Lenders require higher credit scores, larger down payments and bigger fees to cover their losses. To securitize the loans, banks are turning again to the federal lending agencies — Fannie Mae, Freddie Mac and Ginnie Mae — which had fallen out of favor and lost market share during the housing boom. While agency-sponsored loans constituted only 45 percent of the mortgage market in 2005 and 2006, they surged to 72 percent of the market this year. Subprime borrowers now are applying for help from the Federal Housing Administration, the federal home insurer created during the Great Depression to address that earlier housing crisis. The housing saga is far from over, many analysts say. With millions more mortgages resetting in the next two years, many more people could lose their homes. Banks, securities firms and investors could foot another $300 billion in losses, by some estimates. If consumers are daunted by bleak housing news and their loss of wealth and spending power, they could capitulate and send the economy into a recession, economists say. Already, consumer borrowing for home purchases and cash-out refinancings has plummeted from a $1.2 trillion annual rate in the first quarter of 2007 to $691 billion in the last quarter, according to Fed figures. David A. Levy of the Levy Forecasting Center said he expects the economy to muddle through, despite the Ponzi finance schemes that led to the housing collapse, and despite further drops in housing prices that could accumulate to 30 percent or more nationwide. "So far, the housing decline has occurred prior to serious weakness elsewhere in the economy," and that has prevented the problems from being even worse, Mr. Levy said.
Wednesday, December 26, 2007
Sunday, December 9, 2007
The Unintended Consequences of the Housing Bubble Bursting
The Unintended Consequences of the Housing Bubble Bursting (December 10, 2007) As the housing bubble pops with a reverberating shockwave heard round the world, we can be sure the players who inflated it did not intend or anticipate the ramifications now unfolding. Just as the teenagers racing down the cliffside highway with bellies full of alcoholic beverages did not intend to lose control of their vehicle and plunge off the cliff to their deaths, the mortgage brokers, investment bankers and their partners-in-fraud, the rating agencies, did not really intend to bring down the entire economy. Yet this is indeed the "unintended consequence" of the housing bust. Let's consider two "unintended consequences" which are emerging as the housing and mortgage-derivative markets break through the safety barrier and descend in a slow-motion cliff-dive. 1. As risk is "re-priced" higher, the cost of borrowing will rise. Frequent contributor Albert T. explains:
The problem with the bailout is that it devalues money by diluting the weighted average of money outstanding through bailing out people/firms whom shouldn't have got it. Ergo, stupid banks who took stupid risks and stupid borrowers. While we won't notice it right away, when the rate freeze is in effect in actuality it will reprice all new risk with a higher implied rate to compensate for the future freeze possibility, hence we will all pay higher rates to subsidize the current "crack addicts". (emphasis added-CHS) Once this happens two things will occur: five years from now instead of losing 30% on the loan, the bank will lose 70% except that 70% will be insured by the gov't as a thank you for the freeze. Hence we will have the doubling of our money supply on loans that weren't supposed to create it. In effect the gov't will allow banks to print money in the future to make up for the loss today. Albert sent in this link Homeowner bailout is a lousy idea (John Markman, MSM Money) and called attention to the following excerpt as evidence of another kind of risk repricing is already underway:
"Indeed, everywhere you look now is evidence that the subprime-debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial (COF) and Bank of America (BAC) had begun to soak customers by jacking up interest rates on balances for the slightest changes in their credit profiles." "If you so much as apply for a new credit card, according to testimony gathered at the hearing, your current card provider can boost your rates as high as 30% per year." In other words: since lenders now know the government may "freeze" the rates they've charged customers, they'll be re-pricing those rates higher to compensate for that possibility. If the government might step in and freeze the rates I am charging my customers, then it behooves me to raise rates on all customers now, not just the riskiest ones because, well, it's not longer a "risk-free world." The government might freeze all interest rates, or "low-risk customers" might soon become "poor-risk." How does this re-pricing hurt the economy? Since borrowing is the grease which lubricates the entire economy, re-pricing risk means higher borrowing costs for everyone-- regardless of Fed-Speak or the Fed dropping the Fed Funds Rate. This chart reveals how the ratio of mortgage debt to disposable income has risen far above the last housing bubble top in 1990. Simply put: people are spending more on debt service and this has reduced their remaining disposable income. The rubber band of debt service has already been stretched to extremes unseen in 30 years; so the question becomes, how much more can the rubber band be stretched before it snaps? Just to refresh our awareness of how critical debt/borrowing is to our current "prosperity," take a look at this chart: 2. As non-U.S. investors realize they have been handed hundreds of billions in losses, they will be wary of buying more U.S. debt. We are already hearing that the market for SIVs, CDOs and MBS (mortgage backes securities) is dead, over, gone, dried up, history. And just to refresh our awareness of how debt-based derivatives like CDOs and credit swaps have grown, look at this chart: How dependent is the U.S. on foreign/non-U.S. buyers of debt? Very. The standard number tossed around is the U.S. needs to offload $2 billion a day onto non-U.S. investors just to keep the U.S. debt/borrowing/spending machine humming. But now, as this article from the San Francisco Chronicle details, we have ripped off our non-U.S. investor friends and are busily shredding all evidence of fraud --even though we all know every step of the housing bubble, from appraisals to mortgage funding to securitizing of the mortgages to the rating agencies' "AAA stanp of approval" on those securitized loans was riddled with "wink-wink-nudge-nudge" fraud: MORTGAGE MELTDOWN Interest rate 'freeze' - the real story is fraud
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense. The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process. And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it. I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse." I can hear it all now--as no doubt you can, too. The non-U.S. pension or township or sovereign fund, realizing its supposedly "safe" U.S.-based investments are now worth 50% or 20% or perhaps 0% of the purchase price, now go to New York and hire a razor-sharp law firm to force the investment bank which sold them the garbage to buy it back, based on the fraud which permeates the entire pool of mortgages and debt. But oh my gosh, we didn't know it was fraudulent. Proving fraud, after all the emails have been deleted and the hard-drives crushed and the paper trails shredded will be very difficult, indeed. The "innocent" bankers will point to the rating agencies like Moodys, who will point to the mortgage underwriters and brokers, who will point to the originators and the appraisers, who will promptly declare bankruptcy or point to the realtors who forced them to support inflated valuations. And after all the attorneys' fees have been deducted from the paltry settlements reached years from now, there will be pennies left for the non-U.S. investors. We all know how this works because we've seen the play before in the aftermath of the dot-com debacle: investors lose $200 million due to fraud, the company settles for $11 million, the attorneys take $5 million for their work and the investors get a whopping 3% compensation. So how does this massive, seamless, trillion-dollar fraud hurt the U.S. economy? Just ask what happens when non-U.S. players tire of getting ripped off or become wary of "AAA low-risk" U.S.-based debt. What happens is this: when non-U.S. buyers of new debt vanish, then the great debt-churn-spending machine that is the U.S. economy grinds to a halt--or at least loses $700 billion a year in non-U.S. funding. Anyone who is an investor (as opposed to a "pusher" who needs to "fund the junkie's habit" so he can afford to buy more "product", i.e. the central banks of China and Japan) will turn away from U.S. debt (other than Treasuries) in complete disgust. Ask yourself this: if a national government might arbitrarily "freeze" or lower the interest rate being paid on a security, thereby lessening its value, how anxious are you to buy more of that nation's debt? If you do, you'll want a hefty risk-premium to compensate you for the unknown risks that the government will gerrymander your return in order to placate their banker buddies and restive domestic voters. Bottom line: as risk rises, so do borrowing costs. As non-U.S. investors shun new U.S. commercial and mortgage debt, those markets dry up. Since debt can no longer be sold to unwary non-U.S. "marks" (suckers), then who's left to fund $5 trillion in new mortgages? Essentially bankrupt U.S. banks? Negative-equity U.S. households? Negative savings rates Americans? If this sounds bleak, please consider this chart:
The problem with the bailout is that it devalues money by diluting the weighted average of money outstanding through bailing out people/firms whom shouldn't have got it. Ergo, stupid banks who took stupid risks and stupid borrowers. While we won't notice it right away, when the rate freeze is in effect in actuality it will reprice all new risk with a higher implied rate to compensate for the future freeze possibility, hence we will all pay higher rates to subsidize the current "crack addicts". (emphasis added-CHS) Once this happens two things will occur: five years from now instead of losing 30% on the loan, the bank will lose 70% except that 70% will be insured by the gov't as a thank you for the freeze. Hence we will have the doubling of our money supply on loans that weren't supposed to create it. In effect the gov't will allow banks to print money in the future to make up for the loss today. Albert sent in this link Homeowner bailout is a lousy idea (John Markman, MSM Money) and called attention to the following excerpt as evidence of another kind of risk repricing is already underway:
"Indeed, everywhere you look now is evidence that the subprime-debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial (COF) and Bank of America (BAC) had begun to soak customers by jacking up interest rates on balances for the slightest changes in their credit profiles." "If you so much as apply for a new credit card, according to testimony gathered at the hearing, your current card provider can boost your rates as high as 30% per year." In other words: since lenders now know the government may "freeze" the rates they've charged customers, they'll be re-pricing those rates higher to compensate for that possibility. If the government might step in and freeze the rates I am charging my customers, then it behooves me to raise rates on all customers now, not just the riskiest ones because, well, it's not longer a "risk-free world." The government might freeze all interest rates, or "low-risk customers" might soon become "poor-risk." How does this re-pricing hurt the economy? Since borrowing is the grease which lubricates the entire economy, re-pricing risk means higher borrowing costs for everyone-- regardless of Fed-Speak or the Fed dropping the Fed Funds Rate. This chart reveals how the ratio of mortgage debt to disposable income has risen far above the last housing bubble top in 1990. Simply put: people are spending more on debt service and this has reduced their remaining disposable income. The rubber band of debt service has already been stretched to extremes unseen in 30 years; so the question becomes, how much more can the rubber band be stretched before it snaps? Just to refresh our awareness of how critical debt/borrowing is to our current "prosperity," take a look at this chart: 2. As non-U.S. investors realize they have been handed hundreds of billions in losses, they will be wary of buying more U.S. debt. We are already hearing that the market for SIVs, CDOs and MBS (mortgage backes securities) is dead, over, gone, dried up, history. And just to refresh our awareness of how debt-based derivatives like CDOs and credit swaps have grown, look at this chart: How dependent is the U.S. on foreign/non-U.S. buyers of debt? Very. The standard number tossed around is the U.S. needs to offload $2 billion a day onto non-U.S. investors just to keep the U.S. debt/borrowing/spending machine humming. But now, as this article from the San Francisco Chronicle details, we have ripped off our non-U.S. investor friends and are busily shredding all evidence of fraud --even though we all know every step of the housing bubble, from appraisals to mortgage funding to securitizing of the mortgages to the rating agencies' "AAA stanp of approval" on those securitized loans was riddled with "wink-wink-nudge-nudge" fraud: MORTGAGE MELTDOWN Interest rate 'freeze' - the real story is fraud
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense. The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process. And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it. I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse." I can hear it all now--as no doubt you can, too. The non-U.S. pension or township or sovereign fund, realizing its supposedly "safe" U.S.-based investments are now worth 50% or 20% or perhaps 0% of the purchase price, now go to New York and hire a razor-sharp law firm to force the investment bank which sold them the garbage to buy it back, based on the fraud which permeates the entire pool of mortgages and debt. But oh my gosh, we didn't know it was fraudulent. Proving fraud, after all the emails have been deleted and the hard-drives crushed and the paper trails shredded will be very difficult, indeed. The "innocent" bankers will point to the rating agencies like Moodys, who will point to the mortgage underwriters and brokers, who will point to the originators and the appraisers, who will promptly declare bankruptcy or point to the realtors who forced them to support inflated valuations. And after all the attorneys' fees have been deducted from the paltry settlements reached years from now, there will be pennies left for the non-U.S. investors. We all know how this works because we've seen the play before in the aftermath of the dot-com debacle: investors lose $200 million due to fraud, the company settles for $11 million, the attorneys take $5 million for their work and the investors get a whopping 3% compensation. So how does this massive, seamless, trillion-dollar fraud hurt the U.S. economy? Just ask what happens when non-U.S. players tire of getting ripped off or become wary of "AAA low-risk" U.S.-based debt. What happens is this: when non-U.S. buyers of new debt vanish, then the great debt-churn-spending machine that is the U.S. economy grinds to a halt--or at least loses $700 billion a year in non-U.S. funding. Anyone who is an investor (as opposed to a "pusher" who needs to "fund the junkie's habit" so he can afford to buy more "product", i.e. the central banks of China and Japan) will turn away from U.S. debt (other than Treasuries) in complete disgust. Ask yourself this: if a national government might arbitrarily "freeze" or lower the interest rate being paid on a security, thereby lessening its value, how anxious are you to buy more of that nation's debt? If you do, you'll want a hefty risk-premium to compensate you for the unknown risks that the government will gerrymander your return in order to placate their banker buddies and restive domestic voters. Bottom line: as risk rises, so do borrowing costs. As non-U.S. investors shun new U.S. commercial and mortgage debt, those markets dry up. Since debt can no longer be sold to unwary non-U.S. "marks" (suckers), then who's left to fund $5 trillion in new mortgages? Essentially bankrupt U.S. banks? Negative-equity U.S. households? Negative savings rates Americans? If this sounds bleak, please consider this chart:
Sunday, November 18, 2007
Foreclosures Hit a Snag for Lenders
Foreclosures Hit a Snag for Lenders
By GRETCHEN MORGENSON
A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.
The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.
But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.
Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.
The ruling was issued Oct. 31 by Judge Boyko, and relates to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The bank is trustee for securitization pools, issued as recently as June 2006, claiming to hold mortgages underlying the foreclosed properties.
On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.
“This is the miracle of not having securities mapped to the underlying loans,” said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. “There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools.”
The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.
Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclose against a borrower and is required by law.
“The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized,” said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. “A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101.”
When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.
Because most foreclosures proceed without challenges from borrowers, few judges have forced trustees like Deutsche Bank and Bank of New York to prove ownership by producing a mortgage note in each case.
Borrower advocates cheered Judge Boyko’s ruling.
The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” The cases could be filed again in state court, however.
April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, who has been practicing foreclosure law since the late 1980s, said she rarely sees proof of ownership in cases involving securitization trusts. Her group has 30 to 50 such cases and not one of the lenders’ representatives has produced proof of ownership predating the foreclosure action.
“We see a trend toward judges having enough of this trampling of the rules and procedure and care and reverence with which lawyers and litigants and participants in the judicial process should comply,” Ms. Charney said. “Hopefully this will convince everybody that the time to work out these home loans is now.”
By GRETCHEN MORGENSON
A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.
The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.
But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.
Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.
The ruling was issued Oct. 31 by Judge Boyko, and relates to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The bank is trustee for securitization pools, issued as recently as June 2006, claiming to hold mortgages underlying the foreclosed properties.
On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.
“This is the miracle of not having securities mapped to the underlying loans,” said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. “There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools.”
The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.
Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclose against a borrower and is required by law.
“The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized,” said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. “A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101.”
When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.
Because most foreclosures proceed without challenges from borrowers, few judges have forced trustees like Deutsche Bank and Bank of New York to prove ownership by producing a mortgage note in each case.
Borrower advocates cheered Judge Boyko’s ruling.
The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” The cases could be filed again in state court, however.
April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, who has been practicing foreclosure law since the late 1980s, said she rarely sees proof of ownership in cases involving securitization trusts. Her group has 30 to 50 such cases and not one of the lenders’ representatives has produced proof of ownership predating the foreclosure action.
“We see a trend toward judges having enough of this trampling of the rules and procedure and care and reverence with which lawyers and litigants and participants in the judicial process should comply,” Ms. Charney said. “Hopefully this will convince everybody that the time to work out these home loans is now.”
Thursday, November 8, 2007
Paul vs. Bernanke on Value of the Dollar
Paul vs. Bernanke on Value of the Dollar
Candidate Rep. Ron Paul Faces Off With Fed Chairman
ESSAY By Z. BYRON WOLF
Nov. 8, 2007 —
When you are Ron Paul, your public enemy No. 1 is the chairman of the Federal Reserve.
Because when you are Ron Paul, although you are technically a Republican, you are really a libertarian, and your strict adherence to the gospel of the Constitution leads you to question why the Federal Reserve -- the consortium of 12 reserve banks that acts as the U.S. central bank -- even exists.
It doesn't say anything about any central bank in the Constitution. Not only that, the primary responsibility of the Federal Reserve -- to control the money flow and availability of currency on the open market -- is something that you, Ron Paul, find incorrigible. The government, you believe, creates inflation when it prints money and moves it willy-nilly into the market to control the very inflation you think it's causing by moving that money around in the first place. Counterpoint: The gold standard was too inflexible, and the average citizen suffers when the government can't give the markets more fuel in the form of money. (And for your information, here's a Fed-produced interactive feature on the Fed.)
But you, as Ron Paul, have your druthers. You'd get right on back to the gold standard, where each dollar represents a set amount of gold. This whole artificial currency is maddening to you (and it's a lot of the reason you're running for president, although you get more press for being the only Republican candidate openly in opposition to the Iraq War). In fact, if you became president, one of the many pieces of the federal government you'd work to abolish, along with the Internal Revenue Service and the Department of Education, is the Fed.
So, when you're not out on the stump running for president but back at your day job in Washington, D.C., a job you plan to keep should you fail in your quest for the White House, it's a good thing for you, as congressman Ron Paul, to sit on the Joint Economic Committee, which from time to time hears testimony from Ben Bernanke, chairman of your hated Federal Reserve.
During today's testimony questions from most senators and representatives on the committee had to do with the housing crisis and whether a recession was in the offing.
But when Paul squared off with Bernanke, things were a bit different. More like Bernanke was dealing with a combative grad student during office hours at Princeton.
After a diatribe about how the government and the Fed are trying to patch up market woes without addressing core problems, Paul pointed out, "Nobody says, 'Where does it come from?' And what is the advice that you generally get, and that is inflate the currency. They don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people. They say lower the interest rates.'"
But when people crow to the Fed to lower interest rates and make larger sums of money more accessible, argued Paul, they're not really asking for the interest rates to be lowered; they're asking for the government to print more money.
"But they never ask you, and I don't hear you say too often, 'The only way I can lower interest rates is I have to create more money. I have to lower the discount rate, I have to make it generous, I have to increase reserves, I have to lower the interest rates and fix the interest rates.'"
Later, Paul called it "a fallacy" that made the dollar "weaker" and "invites inflation."
"It is that not only have we had a subprime market in housing; the whole economic system is sub prime," Paul railed. "We artificially lower interest rates. And it wasn't under your tenure in office; it's been going on for 10 years and longer and now we're bearing the fruits of that policy."
Paul argued the government shouldn't be concerning itself with deceptive lending practices but with its deceptive monetary policy.
"The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there's so-called capital. There's money available. But it comes from what you have to do and the pressures put on you.
Several minutes into his questioning, Paul got to a question for Bernanke, though it was more of an entree to a larger debate: "How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?"
Bernanke answered saying, in the parlance of an average economist, he's just doing what Congress created the Fed to do.
"What we're trying to do is follow the mandate that Congress gave us," Bernanke said. "And the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree that we do see risk to inflation and we are taking those into account and we want to make sure that prices remain as stable as possible in the United States."
Paul countered that by putting more money on the market, Bernanke and the Federal Reserve are devaluing the dollar and robbing from Americans.
"There's a dollar crisis out there and people's money is being stolen; people who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed at 10 percent. But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy."
Bernanke argued that since Americans use dollars to buy their goods here in America, a devalued dollar will make imported goods more expensive.
Paul shot back, rounding out his five minutes of questions, "Yes, but not if you're retired and elderly and you have CDs and their cost of living is going up no matter what your CPI says. Their cost of living is going up and they are hurting."
It was an interesting exercise in theory, but Paul, even if he were to be elected president, probably would not have the votes in Congress to revamp the financial system, much less abolish the Fed.
A reason perhaps why none of this made wire or newspaper accounts of the hearing, all of which focused on Bernanke's contention that despite an intensifying slump in the housing market, slower than expected growth and higher inflation, he does not believe the country is headed for a recession and tried to divine where Bernanke's testimony signaled another interest rate cut.
Copyright © 2007 ABC News Internet Ventures
Candidate Rep. Ron Paul Faces Off With Fed Chairman
ESSAY By Z. BYRON WOLF
Nov. 8, 2007 —
When you are Ron Paul, your public enemy No. 1 is the chairman of the Federal Reserve.
Because when you are Ron Paul, although you are technically a Republican, you are really a libertarian, and your strict adherence to the gospel of the Constitution leads you to question why the Federal Reserve -- the consortium of 12 reserve banks that acts as the U.S. central bank -- even exists.
It doesn't say anything about any central bank in the Constitution. Not only that, the primary responsibility of the Federal Reserve -- to control the money flow and availability of currency on the open market -- is something that you, Ron Paul, find incorrigible. The government, you believe, creates inflation when it prints money and moves it willy-nilly into the market to control the very inflation you think it's causing by moving that money around in the first place. Counterpoint: The gold standard was too inflexible, and the average citizen suffers when the government can't give the markets more fuel in the form of money. (And for your information, here's a Fed-produced interactive feature on the Fed.)
But you, as Ron Paul, have your druthers. You'd get right on back to the gold standard, where each dollar represents a set amount of gold. This whole artificial currency is maddening to you (and it's a lot of the reason you're running for president, although you get more press for being the only Republican candidate openly in opposition to the Iraq War). In fact, if you became president, one of the many pieces of the federal government you'd work to abolish, along with the Internal Revenue Service and the Department of Education, is the Fed.
So, when you're not out on the stump running for president but back at your day job in Washington, D.C., a job you plan to keep should you fail in your quest for the White House, it's a good thing for you, as congressman Ron Paul, to sit on the Joint Economic Committee, which from time to time hears testimony from Ben Bernanke, chairman of your hated Federal Reserve.
During today's testimony questions from most senators and representatives on the committee had to do with the housing crisis and whether a recession was in the offing.
But when Paul squared off with Bernanke, things were a bit different. More like Bernanke was dealing with a combative grad student during office hours at Princeton.
After a diatribe about how the government and the Fed are trying to patch up market woes without addressing core problems, Paul pointed out, "Nobody says, 'Where does it come from?' And what is the advice that you generally get, and that is inflate the currency. They don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people. They say lower the interest rates.'"
But when people crow to the Fed to lower interest rates and make larger sums of money more accessible, argued Paul, they're not really asking for the interest rates to be lowered; they're asking for the government to print more money.
"But they never ask you, and I don't hear you say too often, 'The only way I can lower interest rates is I have to create more money. I have to lower the discount rate, I have to make it generous, I have to increase reserves, I have to lower the interest rates and fix the interest rates.'"
Later, Paul called it "a fallacy" that made the dollar "weaker" and "invites inflation."
"It is that not only have we had a subprime market in housing; the whole economic system is sub prime," Paul railed. "We artificially lower interest rates. And it wasn't under your tenure in office; it's been going on for 10 years and longer and now we're bearing the fruits of that policy."
Paul argued the government shouldn't be concerning itself with deceptive lending practices but with its deceptive monetary policy.
"The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there's so-called capital. There's money available. But it comes from what you have to do and the pressures put on you.
Several minutes into his questioning, Paul got to a question for Bernanke, though it was more of an entree to a larger debate: "How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?"
Bernanke answered saying, in the parlance of an average economist, he's just doing what Congress created the Fed to do.
"What we're trying to do is follow the mandate that Congress gave us," Bernanke said. "And the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree that we do see risk to inflation and we are taking those into account and we want to make sure that prices remain as stable as possible in the United States."
Paul countered that by putting more money on the market, Bernanke and the Federal Reserve are devaluing the dollar and robbing from Americans.
"There's a dollar crisis out there and people's money is being stolen; people who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed at 10 percent. But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy."
Bernanke argued that since Americans use dollars to buy their goods here in America, a devalued dollar will make imported goods more expensive.
Paul shot back, rounding out his five minutes of questions, "Yes, but not if you're retired and elderly and you have CDs and their cost of living is going up no matter what your CPI says. Their cost of living is going up and they are hurting."
It was an interesting exercise in theory, but Paul, even if he were to be elected president, probably would not have the votes in Congress to revamp the financial system, much less abolish the Fed.
A reason perhaps why none of this made wire or newspaper accounts of the hearing, all of which focused on Bernanke's contention that despite an intensifying slump in the housing market, slower than expected growth and higher inflation, he does not believe the country is headed for a recession and tried to divine where Bernanke's testimony signaled another interest rate cut.
Copyright © 2007 ABC News Internet Ventures
Tuesday, November 6, 2007
Foreclosure wave sweeps America
Foreclosure wave sweeps America
By Steve Schifferes BBC economics reporter, Cleveland, Ohio
A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis.
This could destabilise the US housing market and may also lead to further turmoil in financial institutions, who collectively own $1 trillion (£480.6bn) worth of sub-prime debt.
Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US "rust belt".
It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.
Families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods Michael J Calhoun Center for Responsible Lending
Many of these homes are now owned by the banks and investment pools owning the mortgages, and the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of such investment pools.
Cleveland is facing a rising crime wave, and the cost of demolishing the vacant houses alone will cost the city $100m of its tax base.
According to Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County, "Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city".
Sub-prime crisis growing
Sub-prime lending is spreading across the United States, especially in the booming housing markets of Southern California, Florida, Washington, DC, and New York City.
One in five US mortgages now falls in this category. As the credit crunch continues to bite "families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods," says Michael Calhoun of the Center for Responsible Lending, which tracks these issues.
Sub-prime mortgages carry a much higher risk of default by the borrower than other kinds of mortgage lending.
That is because most of them are "balloon" mortgages (technically known as hybrid-adjustable rate mortgages, or ARMs), which offer the borrower a fixed-rate loan for two or three years, and then switch to a much higher adjustable rate after that.
HAVE YOUR SAY Everyone is going to feel this credit crunch to some extent Turned Worm
Many of them are set to switch in the next two years, leaving borrowers unable to afford the higher payments.
There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's Joint Economic Committee.
Crisis origins
But why have so many people in the US taken out sub-prime mortgages?
The sub-prime lending market started as a way of lending to people with poor credit history - as long as they had collateral like a house that could be used to guarantee the loan.
It was particularly prevalent in inner-city areas, especially among black and Hispanic borrowers.
Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products.
Some customers were not told that their interest rates would go up sharply after two years; others were promised they could refinance their home before higher rates took effect.
Others found that when they had difficulties paying, huge unexplained fees were added to their bills, putting them further in debt.
Marion's story
One person hard hit is Marion Gardner, who lives in one of the worst affected sub-prime lending areas of Cleveland, known as Slavic Village.
A single parent, she had worked hard to buy a house where she could raise her two children and escape from the misery of the inner-city housing projects.
Two years ago Marion fell ill, and found she could not manage the stairs in her house.
She decided to refinance her home, using some of the money to buy an apartment where she could more easily manage.
She gave her old house to her two sons, expecting they would contribute to paying for the property she had struggled so hard to obtain. But the sons fell behind in their payments.
Marion went to her lender - Countrywide, the biggest sub-prime lender in the US - and offered to pay off all the arrears.
She said they accepted her offer, and began sending them $1,000 every month, using up her retirement savings.
But after six months she discovered that instead of clearing her arrears, her home was going to be foreclosed by Countrywide.
She still visits the house every day, trying to protect if from drug dealers and burglars, and leaves her dog in the backyard.
But she can see all along her street dozens of foreclosed properties that have been vandalised, boarded up, or gutted.
Now she has learned that a date has been set for the sheriff to come and evict her.
Deceptive practices?
Mark Seifert, the director of the East Side Organising Project (ESOP) in Cleveland, which has played a leading role in helping people affected by the sub-prime crisis, says Marion's story is typical.
SUB-PRIME CRISIS SERIES
Special reports on why bad US home loans are affecting us all
Friday: US housing crash
Monday: Financial meltdown
He says lenders engaged in deceptive practices and clients found it difficult to get any information at all when they got into arrears.
Mr Seifert says that ESOP - using protest tactics - has managed to get a few mortgage companies to sign a deal agreeing a uniform set of criteria to decide whether someone's mortgage qualifies for renegotiation rather than foreclosure.
But he says they have been unable to reach such an agreement with Countrywide, the nation's largest sub-prime lender - although its boss has promised to meet them.
Spreading to the suburbs
The crisis has spread beyond the inner city to the suburbs of Cleveland.
Last month over 200 people turned up at a church meeting to seek ESOP's help in avoiding foreclosure.
Some, such as Ron Todd, who lives in a suburb just south of the city, are in danger of losing their home after being made redundant by Northwest Airlines, a big local employer.
Others are worried that their neighbourhoods - and the property values of their own houses - will be ruined by the foreclosures all around them.
According to Claudia Coulton, co-director of the Centre for Urban Poverty at Case Western Reserve University in Cleveland, over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise.
She says the crisis is threatening to "overwhelm the government agencies and community organisations that address the problem".
Nationwide problem
Cleveland's situation is not unique.
All around the country, aid agencies report a "tidal wave" of foreclosure cases, says Sarah Gerecke, director of New York City's Neighborhood Housing Services.
PREDATORY LENDING PRACTICES
Ninja Loans: no income, no job, no assets
2/28: Mortgages that change from a fixed to a much higher adjustable rate after first two years
Prepayment penalties: High fees for trying to change terms of mortgage
She now employs six people full-time to provide mortgage debt counselling, up from one just two years ago, and could use another 12.
Her concern is that many recently regenerated neighbourhoods in New York will soon be blighted by crisis again.
Some people argue that the sub-prime lending crisis has been caused by irresponsible borrowers who lied about their income to cash in on the housing boom. Ms Gerecke disagrees. She says few of her clients would knowingly put their home at risk.
Many sub-prime borrowers report that mortgage brokers misrepresented the kind of mortgage they were being offered, their annual income, and even the value of their home.
Working together?
President George W Bush's administration wants to solve the foreclosure crisis by getting lenders and borrowers to renegotiate the terms of loans.
There is a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works Robert Steel US Treasury Under Secretary for Domestic Finance
It is pledging more money for advice services, and has been urging key lenders to take a more sympathetic approach.
Robert Steel, the US Treasury Under Secretary for Domestic Finance, told the BBC that the government's role was "to ensure that lenders and servicers are being flexible with regard to working with borrowers".
He added that no policy could eliminate foreclosures altogether because there was "a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works."
But according to Mark Zandi, chief economist for Moody's, only 1% of sub-prime mortgages have been renegotiated rather than foreclosed so far.
Ms Gerecke says a piecemeal approach involving millions of individual renegotiations will not work. Each case takes hours of negotiations, and the mortgage companies' loan loss departments are overwhelmed by the crisis.
A way out?
The only way out, says Ms Gerecke, would be national loan terms agreed for the whole industry.
One such plan has been proposed by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), one of the key banking regulators.
She told the BBC that sub-prime interest rates should not be reset if the borrower has kept up all payments and is not in arrears.
But such a deal is proving extremely difficult to reach, given that thousands of investors around the world own a share of these sub-prime mortgages.
Meanwhile Marion still sits in her Cleveland home every day, trying to stop it being vandalised even though she knows it is merely a matter of time before she will be evicted.
"I am just really working for the banks now, protecting their property from damage," she says.
Story from BBC NEWS:
By Steve Schifferes BBC economics reporter, Cleveland, Ohio
A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis.
This could destabilise the US housing market and may also lead to further turmoil in financial institutions, who collectively own $1 trillion (£480.6bn) worth of sub-prime debt.
Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US "rust belt".
It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.
Families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods Michael J Calhoun Center for Responsible Lending
Many of these homes are now owned by the banks and investment pools owning the mortgages, and the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of such investment pools.
Cleveland is facing a rising crime wave, and the cost of demolishing the vacant houses alone will cost the city $100m of its tax base.
According to Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County, "Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city".
Sub-prime crisis growing
Sub-prime lending is spreading across the United States, especially in the booming housing markets of Southern California, Florida, Washington, DC, and New York City.
One in five US mortgages now falls in this category. As the credit crunch continues to bite "families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods," says Michael Calhoun of the Center for Responsible Lending, which tracks these issues.
Sub-prime mortgages carry a much higher risk of default by the borrower than other kinds of mortgage lending.
That is because most of them are "balloon" mortgages (technically known as hybrid-adjustable rate mortgages, or ARMs), which offer the borrower a fixed-rate loan for two or three years, and then switch to a much higher adjustable rate after that.
HAVE YOUR SAY Everyone is going to feel this credit crunch to some extent Turned Worm
Many of them are set to switch in the next two years, leaving borrowers unable to afford the higher payments.
There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's Joint Economic Committee.
Crisis origins
But why have so many people in the US taken out sub-prime mortgages?
The sub-prime lending market started as a way of lending to people with poor credit history - as long as they had collateral like a house that could be used to guarantee the loan.
It was particularly prevalent in inner-city areas, especially among black and Hispanic borrowers.
Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products.
Some customers were not told that their interest rates would go up sharply after two years; others were promised they could refinance their home before higher rates took effect.
Others found that when they had difficulties paying, huge unexplained fees were added to their bills, putting them further in debt.
Marion's story
One person hard hit is Marion Gardner, who lives in one of the worst affected sub-prime lending areas of Cleveland, known as Slavic Village.
A single parent, she had worked hard to buy a house where she could raise her two children and escape from the misery of the inner-city housing projects.
Two years ago Marion fell ill, and found she could not manage the stairs in her house.
She decided to refinance her home, using some of the money to buy an apartment where she could more easily manage.
She gave her old house to her two sons, expecting they would contribute to paying for the property she had struggled so hard to obtain. But the sons fell behind in their payments.
Marion went to her lender - Countrywide, the biggest sub-prime lender in the US - and offered to pay off all the arrears.
She said they accepted her offer, and began sending them $1,000 every month, using up her retirement savings.
But after six months she discovered that instead of clearing her arrears, her home was going to be foreclosed by Countrywide.
She still visits the house every day, trying to protect if from drug dealers and burglars, and leaves her dog in the backyard.
But she can see all along her street dozens of foreclosed properties that have been vandalised, boarded up, or gutted.
Now she has learned that a date has been set for the sheriff to come and evict her.
Deceptive practices?
Mark Seifert, the director of the East Side Organising Project (ESOP) in Cleveland, which has played a leading role in helping people affected by the sub-prime crisis, says Marion's story is typical.
SUB-PRIME CRISIS SERIES
Special reports on why bad US home loans are affecting us all
Friday: US housing crash
Monday: Financial meltdown
He says lenders engaged in deceptive practices and clients found it difficult to get any information at all when they got into arrears.
Mr Seifert says that ESOP - using protest tactics - has managed to get a few mortgage companies to sign a deal agreeing a uniform set of criteria to decide whether someone's mortgage qualifies for renegotiation rather than foreclosure.
But he says they have been unable to reach such an agreement with Countrywide, the nation's largest sub-prime lender - although its boss has promised to meet them.
Spreading to the suburbs
The crisis has spread beyond the inner city to the suburbs of Cleveland.
Last month over 200 people turned up at a church meeting to seek ESOP's help in avoiding foreclosure.
Some, such as Ron Todd, who lives in a suburb just south of the city, are in danger of losing their home after being made redundant by Northwest Airlines, a big local employer.
Others are worried that their neighbourhoods - and the property values of their own houses - will be ruined by the foreclosures all around them.
According to Claudia Coulton, co-director of the Centre for Urban Poverty at Case Western Reserve University in Cleveland, over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise.
She says the crisis is threatening to "overwhelm the government agencies and community organisations that address the problem".
Nationwide problem
Cleveland's situation is not unique.
All around the country, aid agencies report a "tidal wave" of foreclosure cases, says Sarah Gerecke, director of New York City's Neighborhood Housing Services.
PREDATORY LENDING PRACTICES
Ninja Loans: no income, no job, no assets
2/28: Mortgages that change from a fixed to a much higher adjustable rate after first two years
Prepayment penalties: High fees for trying to change terms of mortgage
She now employs six people full-time to provide mortgage debt counselling, up from one just two years ago, and could use another 12.
Her concern is that many recently regenerated neighbourhoods in New York will soon be blighted by crisis again.
Some people argue that the sub-prime lending crisis has been caused by irresponsible borrowers who lied about their income to cash in on the housing boom. Ms Gerecke disagrees. She says few of her clients would knowingly put their home at risk.
Many sub-prime borrowers report that mortgage brokers misrepresented the kind of mortgage they were being offered, their annual income, and even the value of their home.
Working together?
President George W Bush's administration wants to solve the foreclosure crisis by getting lenders and borrowers to renegotiate the terms of loans.
There is a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works Robert Steel US Treasury Under Secretary for Domestic Finance
It is pledging more money for advice services, and has been urging key lenders to take a more sympathetic approach.
Robert Steel, the US Treasury Under Secretary for Domestic Finance, told the BBC that the government's role was "to ensure that lenders and servicers are being flexible with regard to working with borrowers".
He added that no policy could eliminate foreclosures altogether because there was "a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works."
But according to Mark Zandi, chief economist for Moody's, only 1% of sub-prime mortgages have been renegotiated rather than foreclosed so far.
Ms Gerecke says a piecemeal approach involving millions of individual renegotiations will not work. Each case takes hours of negotiations, and the mortgage companies' loan loss departments are overwhelmed by the crisis.
A way out?
The only way out, says Ms Gerecke, would be national loan terms agreed for the whole industry.
One such plan has been proposed by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), one of the key banking regulators.
She told the BBC that sub-prime interest rates should not be reset if the borrower has kept up all payments and is not in arrears.
But such a deal is proving extremely difficult to reach, given that thousands of investors around the world own a share of these sub-prime mortgages.
Meanwhile Marion still sits in her Cleveland home every day, trying to stop it being vandalised even though she knows it is merely a matter of time before she will be evicted.
"I am just really working for the banks now, protecting their property from damage," she says.
Story from BBC NEWS:
Monday, October 22, 2007
Mortgage Security Bondholders Facing a Cutoff of Interest Payments
Mortgage Security Bondholders Facing a Cutoff of Interest Payments
By VIKAS BAJAJ
For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now.
Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives.
Cutting off the cash flow, which is governed by rules and mathematical formulas that vary by security, is expected to accelerate in the months ahead.
Such a cutoff would be the latest blow to financial markets as investors try to anticipate the next problem that might shake confidence.
The stock market, which ended down sharply on Friday across the board, in a week that the Standard & Poor’s 500-stock index dropped 3.92 percent, has been battered by renewed concerns over the credit crisis and about some weak earnings reports.
With such a re-evaluation, owners of collateralized debt obligations — investment banks, hedge funds, insurance companies and public pension funds — may be forced to write down mortgage investments beyond the billions they have already written off. Some bonds, for example, may go from being valued at, say, 70 cents on the dollar to becoming largely worthless overnight, bankers and analysts say.
The adjustment could further erode the availability of credit to consumers and businesses.
Though many people in the mortgage market expect a shut-off of payments, the broader financial market has not focused on it. “At this point, it’s fair to say that everybody expects this shoe will drop,” said Mark Adelson, an independent mortgage securities consultant and analyst. “It’s a foregone conclusion. But when it happens, there will be a market reaction to it.”
From the period since July, the stock market has fallen, then posted several weeks of advances and, most recently, dropped back as investor sentiment about the weakness in housing and its broader effect on the economy waxed and waned.
A re-evaluation of payments by trustees who oversee the debt obligations is part of a long, complex chain reaction that is caused by the surge in mortgage delinquencies and home foreclosures. As more homeowners fall behind on payments and lose their homes, the pressure builds on large pools of mortgages that issue bonds to investors. Many of the riskiest of those mortgage bonds have been bought by the C.D.O.’s, which issue bonds of their own.
On Friday, Standard & Poor’s lowered the ratings on $22 billion in bonds backed by mortgages made to people with weak credit in 2006, citing the continued deterioration in the housing market. Another credit rater, Moody’s Investors Service, lowered a similarly large group of bonds earlier in the month.
It is unclear exactly how many bonds will be affected and how quickly. Investment banks issued some $486 billion in debt obligations linked to mortgages in 2006 and the first half of 2007. A majority of the bonds have high credit ratings, and the trustees of the debt obligations typically shut off lower-rated bonds first to accelerate payments to investors holding higher-rated debt.
When ratings on the bonds directly backed by mortgages are lowered, it forces the trustees to discount the value of their holdings in a calculation performed once a month. Some C.D.O.’s also hold bonds issued by other debt obligations, so it can take months for ratings downgrades to work their way through the system.
“It’s still the early stages of a very significant stress,” said John Schiavetta, a group managing director at Derivative Fitch, which rates the debt obligations.
He noted that C.D.O. deals varied significantly. In some, interest payments continue on all bonds regardless of their rating, which means that higher-rated bonds may be more vulnerable to losses. Fitch has downgraded 30 percent of the debt obligations in its rating portfolio and has put 15 percent more on watch for possible downgrading.
In the last two weeks, leading investment banks have written down about $20 billion, much of it in collateralized debt obligations and mortgage-related securities. Merrill Lynch wrote down $4.5 billion in debt linked to home loans and ousted two senior executives in charge of its bond division. UBS wrote down $3.4 billion and ousted the chief financial officer. Citigroup wrote down $1.3 billion from the deterioration in the value of mortgage-related securities.
Investment banks still hold billions more that could be under threat by the recent downgradings and a continued deteriorating in the mortgage market, said Brad Hintz, an analyst at Sanford C. Bernstein & Company. UBS, for instance, still holds about $20 billion in subprime securities.
But Mr. Hintz said it was difficult to determine how much more of the banks’ portfolios is vulnerable because the institutions have not disclosed many details about their holdings. The size of the recent write-downs surprised many analysts and investors because data provided by the banks earlier in the year suggested there was little to worry about.
“In the case of Merrill Lynch,” Mr. Hintz said, “when you analyzed the financials based on the second-quarter numbers, it didn’t look like they had a lot of exposure. There has been a breakdown in risk management.”
It is unclear what portion of the collateralized debt obligations issued by the investment banks is still on their balance sheets because they could not sell them to other investors. Merrill Lynch was by far the biggest issuer, underwriting $54 billion last year, almost twice as much as in 2005, according to Asset-Backed Alert, a trade publication.
A group of financial enterprises called structured investment vehicles also hold C.D.O.’s, although bankers say that subprime debt makes up only a small percentage of their assets. Problems with these investments has led big banks including Citigroup, Bank of America and JPMorgan Chase to develop a $75 billion rescue fund that could be used to buy risky mortgage securities and other assets from them, a move intended to ease pressure on an important part of the credit markets.
Yet for all the damage that has already been done, the real stress for investors in these securities lies ahead, industry officials say.
Most mortgage securities have not yet had significant losses, which are only recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction. Each mortgage security has a reservoir of excess cash to draw upon to pay bondholders when borrowers do not make monthly payments.
“As far as the security is concerned, it’s only once the property is effectively sold that a loss is recorded,” said Nicholas Weill, chief credit officer at Moody’s. “The process of foreclosure is a long process. It doesn’t just happen overnight.”
By VIKAS BAJAJ
For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now.
Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives.
Cutting off the cash flow, which is governed by rules and mathematical formulas that vary by security, is expected to accelerate in the months ahead.
Such a cutoff would be the latest blow to financial markets as investors try to anticipate the next problem that might shake confidence.
The stock market, which ended down sharply on Friday across the board, in a week that the Standard & Poor’s 500-stock index dropped 3.92 percent, has been battered by renewed concerns over the credit crisis and about some weak earnings reports.
With such a re-evaluation, owners of collateralized debt obligations — investment banks, hedge funds, insurance companies and public pension funds — may be forced to write down mortgage investments beyond the billions they have already written off. Some bonds, for example, may go from being valued at, say, 70 cents on the dollar to becoming largely worthless overnight, bankers and analysts say.
The adjustment could further erode the availability of credit to consumers and businesses.
Though many people in the mortgage market expect a shut-off of payments, the broader financial market has not focused on it. “At this point, it’s fair to say that everybody expects this shoe will drop,” said Mark Adelson, an independent mortgage securities consultant and analyst. “It’s a foregone conclusion. But when it happens, there will be a market reaction to it.”
From the period since July, the stock market has fallen, then posted several weeks of advances and, most recently, dropped back as investor sentiment about the weakness in housing and its broader effect on the economy waxed and waned.
A re-evaluation of payments by trustees who oversee the debt obligations is part of a long, complex chain reaction that is caused by the surge in mortgage delinquencies and home foreclosures. As more homeowners fall behind on payments and lose their homes, the pressure builds on large pools of mortgages that issue bonds to investors. Many of the riskiest of those mortgage bonds have been bought by the C.D.O.’s, which issue bonds of their own.
On Friday, Standard & Poor’s lowered the ratings on $22 billion in bonds backed by mortgages made to people with weak credit in 2006, citing the continued deterioration in the housing market. Another credit rater, Moody’s Investors Service, lowered a similarly large group of bonds earlier in the month.
It is unclear exactly how many bonds will be affected and how quickly. Investment banks issued some $486 billion in debt obligations linked to mortgages in 2006 and the first half of 2007. A majority of the bonds have high credit ratings, and the trustees of the debt obligations typically shut off lower-rated bonds first to accelerate payments to investors holding higher-rated debt.
When ratings on the bonds directly backed by mortgages are lowered, it forces the trustees to discount the value of their holdings in a calculation performed once a month. Some C.D.O.’s also hold bonds issued by other debt obligations, so it can take months for ratings downgrades to work their way through the system.
“It’s still the early stages of a very significant stress,” said John Schiavetta, a group managing director at Derivative Fitch, which rates the debt obligations.
He noted that C.D.O. deals varied significantly. In some, interest payments continue on all bonds regardless of their rating, which means that higher-rated bonds may be more vulnerable to losses. Fitch has downgraded 30 percent of the debt obligations in its rating portfolio and has put 15 percent more on watch for possible downgrading.
In the last two weeks, leading investment banks have written down about $20 billion, much of it in collateralized debt obligations and mortgage-related securities. Merrill Lynch wrote down $4.5 billion in debt linked to home loans and ousted two senior executives in charge of its bond division. UBS wrote down $3.4 billion and ousted the chief financial officer. Citigroup wrote down $1.3 billion from the deterioration in the value of mortgage-related securities.
Investment banks still hold billions more that could be under threat by the recent downgradings and a continued deteriorating in the mortgage market, said Brad Hintz, an analyst at Sanford C. Bernstein & Company. UBS, for instance, still holds about $20 billion in subprime securities.
But Mr. Hintz said it was difficult to determine how much more of the banks’ portfolios is vulnerable because the institutions have not disclosed many details about their holdings. The size of the recent write-downs surprised many analysts and investors because data provided by the banks earlier in the year suggested there was little to worry about.
“In the case of Merrill Lynch,” Mr. Hintz said, “when you analyzed the financials based on the second-quarter numbers, it didn’t look like they had a lot of exposure. There has been a breakdown in risk management.”
It is unclear what portion of the collateralized debt obligations issued by the investment banks is still on their balance sheets because they could not sell them to other investors. Merrill Lynch was by far the biggest issuer, underwriting $54 billion last year, almost twice as much as in 2005, according to Asset-Backed Alert, a trade publication.
A group of financial enterprises called structured investment vehicles also hold C.D.O.’s, although bankers say that subprime debt makes up only a small percentage of their assets. Problems with these investments has led big banks including Citigroup, Bank of America and JPMorgan Chase to develop a $75 billion rescue fund that could be used to buy risky mortgage securities and other assets from them, a move intended to ease pressure on an important part of the credit markets.
Yet for all the damage that has already been done, the real stress for investors in these securities lies ahead, industry officials say.
Most mortgage securities have not yet had significant losses, which are only recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction. Each mortgage security has a reservoir of excess cash to draw upon to pay bondholders when borrowers do not make monthly payments.
“As far as the security is concerned, it’s only once the property is effectively sold that a loss is recorded,” said Nicholas Weill, chief credit officer at Moody’s. “The process of foreclosure is a long process. It doesn’t just happen overnight.”
Friday, October 19, 2007
It’s Time for the Banks to Face the Hangman
It’s Time for the Banks to Face the Hangman
by Mike Whitney / October 19th, 2007
How can one defend a system that creates wealth by making the majority poor?
– Henry C. K. Liu
Officials in the Treasury Department — working with their colleagues at Citigroup, J.P. Morgan and Bank of America — have concocted a scheme to rescue the banks from their massive losses in mortgage-backed securities. The group is planning to set up a $100 billion emergency fund that will purchase non-performing assets for short-term debt. In truth, the fund is a bailout that provides the financial giants with an excuse for not reporting their enormous losses from bad bets.
The story first appeared in Saturday’s Wall Street Journal and was followed on Monday with a second headline piece:
“RESCUE READIED BY BANKS IS BET TO SPUR MARKET”
WSJ: “The high stakes plan to RESCUE BANKS FROM LOSSES on mortgage securities amounts to a big bet that a consortium of financial giants — AT THE PRODDING OF THE US GOVERNMENT — can PERSUADE INVESTORS TO POUR MORE MONEY INTO THE TROUBLED CREDIT MARKET.”
That’s right. The Treasury Dept is directly involved in a scam that saves the banks while trying to “persuade” investors to “pour more money” into toxic mortgage-backed sludge. Treasury Department officials clearly have a different idea of “moral hazard” than the rest of us.
The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell — because there are no buyers — and don’t want to take back on their balance sheets because they’ll be forced to increase their capital reserves. So they’ve decided to launch a public relations campaign to promote some goofy sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage improves.
The WSJ does a good job of disguising the real motive behind the new “Super-Conduit” (a.k.a. the Bailout fund) but in the last paragraph, buried in Section C-3, they reveal the truth:
“The goal is to reassure investors and make them more willing to buy its short-term debt.” So, the fund is really just a way of rearranging the marketplace until the next crop of gullible investors sprouts up and buys more mortgage-backed garbage.
Bloomberg’s Mark Gilbert puts it like this:
“It seems the way to reassure investors that it’s safe to buy the repackaged junk that has torpedoed credit markets in recent months is to repackage the least-junky bits of the junk into more palatable securities. The pyramid just grew another layer. . .
I can’t decide whether the Treasury’s willingness to patronize such a misguided effort is evidence that the situation is more desperate than anyone thought, or a positive sign that financial markets will continue to evolve and innovate and might eventually wrestle the subprime demon to the ground.”
Indeed.
Where are the regulators? The SEC and Treasury should be forcing the banks to be straightforward with the public and let them know about the hanky-panky they’ve been up to with their risky SIVs (structured investment vehicles) Citigroup alone has nearly $80 billion in off-balance sheets operations which are in distress. The bank accounts for “25% of the global SIV market. As of August, assets held by SIVs totaled $400 billion”.
SIVs are set up as a way to make money without taking the risk onto their balance sheets. “They issue their own short-term debt, usually at relatively low rates …then use the proceeds to buy higher yielding assets such as securities tied to mortgages.” (WSJ)
Ever since Bear Stearns blew up in late July, investors have been steering clear of any securities connected to real estate, which means the SIVs are getting the Double Whammy — they can’t sell their asset-backed commercial paper (because it’s mortgage-backed) and they find buyers for their collateralized debt obligations. (CDOs) To a large extent, the market is still frozen despite the upbeat cheerleading on the business pages. Clearly, the worst is yet to come.
How bad is it?
An article in yesterday’s Financial Times of London said that, “Only $9.9 billion of home equity loan securitizations have come to market since July 1 — A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST YEAR.”
The banks are in trouble. Big trouble. Main sources of revenue have dried up overnight and they’re stuck with hundreds of billions of debt. That’s why the papers broke the story on Saturday when there was NO chance of triggering a stock market crash.
Imagine the horror of investors around the world when they discover that the major investment banks are running these shabby “off-balance sheets” operations while concealing their real financial condition from their investors. Consider the disgust the public feels when they see Treasury officials bailing out the banks instead of ordering them to report their losses and get on with business.
Still, Wall Street nonchalantly leaps from one swindle to the next never considering the damage it’s doing to the credibility of the market.
Susan Pulliam summed it up like this in the Oct 12 edition of The Wall Street Journal:
“Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world’s most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors.”
“Hall of mirrors” is an understatement. The system is thoroughly opaque and crooked as a ram’s horn. The market’s new architecture, “structured finance,” is a dismal rip-off from start to finish. Consider the mentality of the hucksters who dreamed up “securitizing” subprime mortgages and selling them off as precious jewels in the secondary market. This was a blatant con job. How can the liabilities of “borrowers with bad credit” be traded to foreign investors and pension funds like they were valuable assets? And where were the regulators while this scam was going on?
Isn’t this sufficient evidence that the system is totally out of whack?
Wall Street avoids transparency like the plague. That is to be expected. But what about the government? It’s the government’s job to protect the investor and maintain the integrity of the system. Is that what Treasury Dept is doing or are they “LURING investors to buy debt issued by the rescue fund as part of the plan”? (Wall Street Journal)
“Luring”? Is that how Paulson sees it; like luring turkeys to the chopping block with a trail of breadcrumbs?
The idea of protecting the little guy has never occurred to anyone in the Bush administration. Their job is to shift wealth from one class to the other via equity bubbles and government bailouts — anything that advances the corporate agenda.
Presently, the banks are sitting on $200 billion in non-performing mortgage-backed securities (MBSs) and collateralized debt obligations. (CDOs) They are also holding another $300 billion in collateralized loan obligations (CLOs) from mergers and acquisitions that stalled after the Bear Stearns meltdown. If the present bailout doesn’t materialize, we’re likely to see bank closures and a plummeting stock market.
Shouldn’t the regulators have considered the probability of a crash before they allowed trillions of dollars of radioactive bonds to flood the market when no one had any idea of their real value? Wouldn’t that have been the prudent thing to do?
Now we know what they are worth. They’re worth nothing. That’s why the banks are running scared and refusing to put them up for auction. They’d rather sleaze them into a lofty-sounding superfund that masks their true value.
In the last two weeks the stock market soared on the news that the banks were reporting billions of dollars in losses. Investors were hoodwinked into believing the banks were being honest and had “come clean” about their financial condition. What a joke. In reality, the banks only reported roughly 5% of their potential losses; the rest were hidden in their off balance sheets operations.
Equities skyrocketed to new heights. Wall Street was euphoric.
Now we know the truth. It was all baloney.
The Wall Street Journal: “The new fund is designed to stave off what Citigroup and others see as a threat to the financial markets world-wide: the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale . . . . The ultimate fear: If banks need to write down more assets or are forced to take assets onto their books, that could set off a broader credit crunch and hurt the economy. It could make it tough for homeowners and businesses to get loans.”
It could “hurt the economy” and “make it tough for homeowners and businesses to get loans?” Ahhh, yes. It’s all clear now. The banks only cooked up this colossal bailout to make things better for us common people. How is it that we didn’t notice that before? Our problem is that we don’t see the magnanimity and altruism which drives the corporate agenda.
From the New York Times:
“The conduit (The bailout fund) is expected to start operating in 90 days and will stay in place for a few years until it has disposed of the assets it buys, according to people familiar with the negotiations. . . . To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings — AAA and AA — and debt that is backed by other mortgages, credit card receipts and other assets.”
We already know about the problems with the ratings agencies and how they are in bed with the investment banks. We also know that the whole purpose of the new fund is to off-load mortgage-backed tripe which is no longer sellable on the market. What we didn’t know is that the New York Times eagerly provides the peppy public relations narrative to assist big business in dumping its failing assets.
New York Times: “The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.”
Of course, they’ll pay full price because they want to be “made whole” again. The truth is, however, that these derivatives will probably only fetch pennies on the dollar unless they get another Wall Street PR face-lift.
Christian Stracke, market analyst from the research firm CreditSights, said the effort appears to be “an attempt to soothe tense investors in the debt market, rather than to provide substantive relief to the worst-hit mortgage securities.”
Stracke added, “For me, this is more of a P.R. blitz.”
Bingo.
The announcement of the forthcoming Master-Liquidity Enhancement Conduit or M-LEC further underlines the gravity of the problems facing the banking system. The fund creates a “buyer of last resort” so that these dubious assets won’t be sold on the market at fire-sale prices.
Citigroup appears to be the greatest beneficiary of the current plan. They have a number of Enron-type SIVs that could be at risk.
Again, the problems that are surfacing in the banking sector today are the direct result of Greenspan’s loose monetary policies coupled with the dismantling of the regulatory regime that was created following the 1929 stock market crash. We are now back to Square 1. All of the various scams and swindles which permeated that hyper-inflated market are now back in full-force foreshadowing a steep decline in investor confidence, increased market manipulation, and an unavoidable economic calamity.
“Structured finance” has transformed US markets into a carnival sideshow. Productivity and real growth have been replaced with never-ending credit expansion and speculative abuses. Reckless monetary policies and the behemoth current account deficit have destabilized the global economy a set the stage for a fiscal Armageddon.
The subprime mortgage crisis and subsequent shrinking of asset-backed commercial paper (ABCP) has thrown a wrench in the funding of daily corporate operations. These are the harbingers of an impending recession. As mortgages continue to default at a record pace; the aftershocks will continue to rumble through the credit markets where subprime loans have been “securitized” into bonds and leveraged at maximum levels. It’s just one domino knocking down the next.
The financial system is at greater risk now than any time in the last 80 years. Regrettably, the only remedies coming from the Fed are more currency-destroying rate cuts or hundreds of billions of dollars in repos to remove mortgage-backed bonds from the banks’ balance sheets. Neither of these solutions addresses the critical issues; they do not stabilize the market, reinvigorate lending, or restore investor confidence. They are merely band-aids on a sucking chest-wound. They won’t stop the bleeding.
The Fed’s monetary policies promote financial speculation that inevitably leads to equity bubbles. Under Greenspan’s stewardship, the country has lurched from the 1990’s bond bubble, to the dot.com bubble, to the subprime meltdown, to the liquidity crisis, to the credit crunch — all engineered at the Federal Reserve with ancillary assistance from the charlatans in the banking industry.
An article in China Worker, “Credit Crunch threatens Global Downturn” summarizes our present predicament it like this:
“Financial globalization has rebounded on the system. Capitalist leaders boasted that the near total integration of financial markets across the globe would provide lenders and borrowers everywhere with instant access to a completely liquid money market. New types of financial securities and sophisticated derivatives would spread the risk of borrowing so widely that it would eliminate risk entirely. While economies were growing and bubbles inflating, it appeared that — through derivatives trading — losses would be widely diffused among speculators, reducing risk to very low levels. Not even the most astute financial analysts could predict what would happen in the event of recession. The unanswerable question was: Who would ultimately bear the risks arising from widespread defaults or bankruptcies? The veteran investor, Warren Buffet, warned that derivatives would prove to be ‘weapons of mass destruction’.
The fantasy of financial alchemy transforming high risk gambling into low risk money-making has now been shattered.”
The author is right. “Structured finance” is a fraud. Risk has not been eliminated. In fact, it has exploded and become a system-wide problem. The dead wood is everywhere.
The banks are being crushed by a debt-load they generated through “securitization”. They need to accept responsibility for their poor judgment (or greed?) and report their losses. The Super-Conduit is just a dodge to put off the unavoidable day of reckoning. The whole wretched plan should be scrapped. No amount of financial chicanery will eradicate billions of dollars in bad bets. It’s time for the banks to face the hangman.
Mike Whitney lives in Washington state. Read other articles by Mike.
This article was posted on Friday, October 19th, 2007 at 5:02 am and is filed under Economics, Capitalism, Housing and Finance. Send to a friend.
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Douglas D. said on October 19th, 2007 at 5:20 am #
Whatever happened to “personal responsibility”? These banks need to pull themselves up by their bootstraps! See, my friends, this is the “soft bigotry of low expectations”! The Fed is creating a dependency cycle that will trickle down from generation to generation.
Tyler said on October 19th, 2007 at 6:12 am #
Great article. Even though, according to Paulson, “No taxpayer money” will be used to fund this new vehicle, the fact that the fundwas created at the behest or with the encouragement of the Treasury Department certainly provides an implicit guarantee from the US Government-much like Fannie and Freddie. If /when this fund fails miserably, and becomes a drag on the banks, then in a year some could claim that this was an invention of the government, so it needs to be bailed out to prevent it from destroying major banks.
by Mike Whitney / October 19th, 2007
How can one defend a system that creates wealth by making the majority poor?
– Henry C. K. Liu
Officials in the Treasury Department — working with their colleagues at Citigroup, J.P. Morgan and Bank of America — have concocted a scheme to rescue the banks from their massive losses in mortgage-backed securities. The group is planning to set up a $100 billion emergency fund that will purchase non-performing assets for short-term debt. In truth, the fund is a bailout that provides the financial giants with an excuse for not reporting their enormous losses from bad bets.
The story first appeared in Saturday’s Wall Street Journal and was followed on Monday with a second headline piece:
“RESCUE READIED BY BANKS IS BET TO SPUR MARKET”
WSJ: “The high stakes plan to RESCUE BANKS FROM LOSSES on mortgage securities amounts to a big bet that a consortium of financial giants — AT THE PRODDING OF THE US GOVERNMENT — can PERSUADE INVESTORS TO POUR MORE MONEY INTO THE TROUBLED CREDIT MARKET.”
That’s right. The Treasury Dept is directly involved in a scam that saves the banks while trying to “persuade” investors to “pour more money” into toxic mortgage-backed sludge. Treasury Department officials clearly have a different idea of “moral hazard” than the rest of us.
The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell — because there are no buyers — and don’t want to take back on their balance sheets because they’ll be forced to increase their capital reserves. So they’ve decided to launch a public relations campaign to promote some goofy sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage improves.
The WSJ does a good job of disguising the real motive behind the new “Super-Conduit” (a.k.a. the Bailout fund) but in the last paragraph, buried in Section C-3, they reveal the truth:
“The goal is to reassure investors and make them more willing to buy its short-term debt.” So, the fund is really just a way of rearranging the marketplace until the next crop of gullible investors sprouts up and buys more mortgage-backed garbage.
Bloomberg’s Mark Gilbert puts it like this:
“It seems the way to reassure investors that it’s safe to buy the repackaged junk that has torpedoed credit markets in recent months is to repackage the least-junky bits of the junk into more palatable securities. The pyramid just grew another layer. . .
I can’t decide whether the Treasury’s willingness to patronize such a misguided effort is evidence that the situation is more desperate than anyone thought, or a positive sign that financial markets will continue to evolve and innovate and might eventually wrestle the subprime demon to the ground.”
Indeed.
Where are the regulators? The SEC and Treasury should be forcing the banks to be straightforward with the public and let them know about the hanky-panky they’ve been up to with their risky SIVs (structured investment vehicles) Citigroup alone has nearly $80 billion in off-balance sheets operations which are in distress. The bank accounts for “25% of the global SIV market. As of August, assets held by SIVs totaled $400 billion”.
SIVs are set up as a way to make money without taking the risk onto their balance sheets. “They issue their own short-term debt, usually at relatively low rates …then use the proceeds to buy higher yielding assets such as securities tied to mortgages.” (WSJ)
Ever since Bear Stearns blew up in late July, investors have been steering clear of any securities connected to real estate, which means the SIVs are getting the Double Whammy — they can’t sell their asset-backed commercial paper (because it’s mortgage-backed) and they find buyers for their collateralized debt obligations. (CDOs) To a large extent, the market is still frozen despite the upbeat cheerleading on the business pages. Clearly, the worst is yet to come.
How bad is it?
An article in yesterday’s Financial Times of London said that, “Only $9.9 billion of home equity loan securitizations have come to market since July 1 — A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST YEAR.”
The banks are in trouble. Big trouble. Main sources of revenue have dried up overnight and they’re stuck with hundreds of billions of debt. That’s why the papers broke the story on Saturday when there was NO chance of triggering a stock market crash.
Imagine the horror of investors around the world when they discover that the major investment banks are running these shabby “off-balance sheets” operations while concealing their real financial condition from their investors. Consider the disgust the public feels when they see Treasury officials bailing out the banks instead of ordering them to report their losses and get on with business.
Still, Wall Street nonchalantly leaps from one swindle to the next never considering the damage it’s doing to the credibility of the market.
Susan Pulliam summed it up like this in the Oct 12 edition of The Wall Street Journal:
“Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world’s most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors.”
“Hall of mirrors” is an understatement. The system is thoroughly opaque and crooked as a ram’s horn. The market’s new architecture, “structured finance,” is a dismal rip-off from start to finish. Consider the mentality of the hucksters who dreamed up “securitizing” subprime mortgages and selling them off as precious jewels in the secondary market. This was a blatant con job. How can the liabilities of “borrowers with bad credit” be traded to foreign investors and pension funds like they were valuable assets? And where were the regulators while this scam was going on?
Isn’t this sufficient evidence that the system is totally out of whack?
Wall Street avoids transparency like the plague. That is to be expected. But what about the government? It’s the government’s job to protect the investor and maintain the integrity of the system. Is that what Treasury Dept is doing or are they “LURING investors to buy debt issued by the rescue fund as part of the plan”? (Wall Street Journal)
“Luring”? Is that how Paulson sees it; like luring turkeys to the chopping block with a trail of breadcrumbs?
The idea of protecting the little guy has never occurred to anyone in the Bush administration. Their job is to shift wealth from one class to the other via equity bubbles and government bailouts — anything that advances the corporate agenda.
Presently, the banks are sitting on $200 billion in non-performing mortgage-backed securities (MBSs) and collateralized debt obligations. (CDOs) They are also holding another $300 billion in collateralized loan obligations (CLOs) from mergers and acquisitions that stalled after the Bear Stearns meltdown. If the present bailout doesn’t materialize, we’re likely to see bank closures and a plummeting stock market.
Shouldn’t the regulators have considered the probability of a crash before they allowed trillions of dollars of radioactive bonds to flood the market when no one had any idea of their real value? Wouldn’t that have been the prudent thing to do?
Now we know what they are worth. They’re worth nothing. That’s why the banks are running scared and refusing to put them up for auction. They’d rather sleaze them into a lofty-sounding superfund that masks their true value.
In the last two weeks the stock market soared on the news that the banks were reporting billions of dollars in losses. Investors were hoodwinked into believing the banks were being honest and had “come clean” about their financial condition. What a joke. In reality, the banks only reported roughly 5% of their potential losses; the rest were hidden in their off balance sheets operations.
Equities skyrocketed to new heights. Wall Street was euphoric.
Now we know the truth. It was all baloney.
The Wall Street Journal: “The new fund is designed to stave off what Citigroup and others see as a threat to the financial markets world-wide: the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale . . . . The ultimate fear: If banks need to write down more assets or are forced to take assets onto their books, that could set off a broader credit crunch and hurt the economy. It could make it tough for homeowners and businesses to get loans.”
It could “hurt the economy” and “make it tough for homeowners and businesses to get loans?” Ahhh, yes. It’s all clear now. The banks only cooked up this colossal bailout to make things better for us common people. How is it that we didn’t notice that before? Our problem is that we don’t see the magnanimity and altruism which drives the corporate agenda.
From the New York Times:
“The conduit (The bailout fund) is expected to start operating in 90 days and will stay in place for a few years until it has disposed of the assets it buys, according to people familiar with the negotiations. . . . To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings — AAA and AA — and debt that is backed by other mortgages, credit card receipts and other assets.”
We already know about the problems with the ratings agencies and how they are in bed with the investment banks. We also know that the whole purpose of the new fund is to off-load mortgage-backed tripe which is no longer sellable on the market. What we didn’t know is that the New York Times eagerly provides the peppy public relations narrative to assist big business in dumping its failing assets.
New York Times: “The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.”
Of course, they’ll pay full price because they want to be “made whole” again. The truth is, however, that these derivatives will probably only fetch pennies on the dollar unless they get another Wall Street PR face-lift.
Christian Stracke, market analyst from the research firm CreditSights, said the effort appears to be “an attempt to soothe tense investors in the debt market, rather than to provide substantive relief to the worst-hit mortgage securities.”
Stracke added, “For me, this is more of a P.R. blitz.”
Bingo.
The announcement of the forthcoming Master-Liquidity Enhancement Conduit or M-LEC further underlines the gravity of the problems facing the banking system. The fund creates a “buyer of last resort” so that these dubious assets won’t be sold on the market at fire-sale prices.
Citigroup appears to be the greatest beneficiary of the current plan. They have a number of Enron-type SIVs that could be at risk.
Again, the problems that are surfacing in the banking sector today are the direct result of Greenspan’s loose monetary policies coupled with the dismantling of the regulatory regime that was created following the 1929 stock market crash. We are now back to Square 1. All of the various scams and swindles which permeated that hyper-inflated market are now back in full-force foreshadowing a steep decline in investor confidence, increased market manipulation, and an unavoidable economic calamity.
“Structured finance” has transformed US markets into a carnival sideshow. Productivity and real growth have been replaced with never-ending credit expansion and speculative abuses. Reckless monetary policies and the behemoth current account deficit have destabilized the global economy a set the stage for a fiscal Armageddon.
The subprime mortgage crisis and subsequent shrinking of asset-backed commercial paper (ABCP) has thrown a wrench in the funding of daily corporate operations. These are the harbingers of an impending recession. As mortgages continue to default at a record pace; the aftershocks will continue to rumble through the credit markets where subprime loans have been “securitized” into bonds and leveraged at maximum levels. It’s just one domino knocking down the next.
The financial system is at greater risk now than any time in the last 80 years. Regrettably, the only remedies coming from the Fed are more currency-destroying rate cuts or hundreds of billions of dollars in repos to remove mortgage-backed bonds from the banks’ balance sheets. Neither of these solutions addresses the critical issues; they do not stabilize the market, reinvigorate lending, or restore investor confidence. They are merely band-aids on a sucking chest-wound. They won’t stop the bleeding.
The Fed’s monetary policies promote financial speculation that inevitably leads to equity bubbles. Under Greenspan’s stewardship, the country has lurched from the 1990’s bond bubble, to the dot.com bubble, to the subprime meltdown, to the liquidity crisis, to the credit crunch — all engineered at the Federal Reserve with ancillary assistance from the charlatans in the banking industry.
An article in China Worker, “Credit Crunch threatens Global Downturn” summarizes our present predicament it like this:
“Financial globalization has rebounded on the system. Capitalist leaders boasted that the near total integration of financial markets across the globe would provide lenders and borrowers everywhere with instant access to a completely liquid money market. New types of financial securities and sophisticated derivatives would spread the risk of borrowing so widely that it would eliminate risk entirely. While economies were growing and bubbles inflating, it appeared that — through derivatives trading — losses would be widely diffused among speculators, reducing risk to very low levels. Not even the most astute financial analysts could predict what would happen in the event of recession. The unanswerable question was: Who would ultimately bear the risks arising from widespread defaults or bankruptcies? The veteran investor, Warren Buffet, warned that derivatives would prove to be ‘weapons of mass destruction’.
The fantasy of financial alchemy transforming high risk gambling into low risk money-making has now been shattered.”
The author is right. “Structured finance” is a fraud. Risk has not been eliminated. In fact, it has exploded and become a system-wide problem. The dead wood is everywhere.
The banks are being crushed by a debt-load they generated through “securitization”. They need to accept responsibility for their poor judgment (or greed?) and report their losses. The Super-Conduit is just a dodge to put off the unavoidable day of reckoning. The whole wretched plan should be scrapped. No amount of financial chicanery will eradicate billions of dollars in bad bets. It’s time for the banks to face the hangman.
Mike Whitney lives in Washington state. Read other articles by Mike.
This article was posted on Friday, October 19th, 2007 at 5:02 am and is filed under Economics, Capitalism, Housing and Finance. Send to a friend.
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Douglas D. said on October 19th, 2007 at 5:20 am #
Whatever happened to “personal responsibility”? These banks need to pull themselves up by their bootstraps! See, my friends, this is the “soft bigotry of low expectations”! The Fed is creating a dependency cycle that will trickle down from generation to generation.
Tyler said on October 19th, 2007 at 6:12 am #
Great article. Even though, according to Paulson, “No taxpayer money” will be used to fund this new vehicle, the fact that the fundwas created at the behest or with the encouragement of the Treasury Department certainly provides an implicit guarantee from the US Government-much like Fannie and Freddie. If /when this fund fails miserably, and becomes a drag on the banks, then in a year some could claim that this was an invention of the government, so it needs to be bailed out to prevent it from destroying major banks.
Friday, September 21, 2007
Era of Global Financial Instability
The Era of Global Financial Instability
Written by
Friday, 21 September 2007
by Mike Whitney
"Give me control over a nation's currency and I care not who makes its laws."
-Baron M.A. Rothschild
Wall Street loves cheap money. That’s why traders were celebrating on Tuesday when Fed chief Ben Bernanke announced that he’d drop interest rates from 5.25% to 4.75%. The stock market immediately zoomed skyward adding 336 points before the bell rang. The next day the giddiness continued. By mid-morning the Dow was up another 110 points and headed for the stratosphere.
Everyone on Wall Street loves Bernanke. He brings them candy and sweets and lets the American worker pay the bill.So far, the scholarly-looking Bernanke has shown that he is no different than his predecessor Alan Greenspan. Facing his first crisis, the new Fed chief chose to reward his fat-cat friends at the hedge funds and investment banks by savaging the dollar. As soon as he announced his plan to cut the Fed funds rate by .50 basis points; gold soared to $736 per ounce, oil shot up to $82 per barrel, and the euro climbed to a new high of $1.40. These are all the predictable signs of inflation. Food and energy prices will surely follow. The bottom line is that the investor class has been bailed out at the expense of everyone else who trades in dollars.Bernanke invoked the “Greenspan put”, which means that he used his power to protect his friends from the losses they should have incurred from their bad bets. Now, the big market players know that he can be counted on to bail them out whenever they make poor investment decisions. He’s also lived up to his nickname, “Helicopter Ben”; ready to deal with every new calamity by tossing trillions of freshly-minted US greenbacks into the jet-stream over the NYSE so elated traders can jack-up their PEs and fatten their bottom line . We think Bernanke should abandon the helicopter altogether and personally deliver pallet-loads of $100 bills to Wall Street’s doorstep, just like Bush does with contractors in Iraq. That way the fund managers can keep stoking the market with cheap cash without dawdling at the Fed’s Discount Window.
Despite the merriment on Wall Street, there is a downside to Bernanke’s actions. The Fed chief has shown foreign investors that he WILL NOT DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by investing in the US. It alerts them to the fact that the “strong dollar” policy is a fraud and that they’re better off getting out of US Treasuries and dollar-backed assets. Apparently, many have already gotten the message. Last month, foreign central banks and investors dumped $9.4 billion of US Treasuries and bonds compared to net purchases in June of $24.7 billion. That means that foreigners have stopped buying our debt which is currently $800 billion per year. That’s the last leg holding up the wobbly greenback. The dollar will undoubtedly fall precipitously.So, why would Bernanke weaken the dollar even more by lowering rates 50 basis points?Is he crazy or did he panic?We don’t know, but we do know that this is the beginning of Capital flight — -the sudden exodus of foreign investment from US debt and equities. Most likely, it will be accompanied by the hissssing sound of gas escaping from a punctured equity bubble followed quickly by a painful round of deflation, massive unemployment and the gnashing of teeth.
The size of the current account deficit, which peaked in 2005 at 6.8% of GDP, has dropped to 5.5% by the end of the second quarter of 2007. This is an indication that the maxed-out American consumer is running out of gas and that our foreign trading partners are slowing their intake of US dollars. Now comes the painful part. As the trade deficit shrinks, foreign investment will become scarcer and the dollar will tumble. That means interest rates will have to go up and American’s will face an agonizing economic downturn.This is all part of the Federal Reserve’s master-plan for reorganizing the US economy and political system. Since Bush took office in 2000, the dollar has been deliberately weakened; losing more than 40% of its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per euro in 2007) It has fared even worse against gold. The Fed “rubber stamped” Bush’s $400 billion per year tax breaks for the wealthy and looked on approvingly while $4 trillion of national wealth was transferred to foreign investors and banks via the current account deficit (the result of currency deregulation) Also, we now know that Alan Greenspan supported the plan to invade Iraq. He even shamelessly admitted that the war was really about oil which suggests that he was attempting to preserve the dollar’s link to petroleum. That linkage is what maintains the dollar’s position as the world’s “reserve currency”. These things indicate that the Central Bank plays a vital role in the policy decisions which are reshaping American life. We assume that the Fed’s members are equally supportive of the repressive police-state measures which have been put in place in anticipation of problems that will undoubtedly arise from the economic meltdown they have painstakingly engineered.The rate cuts tell us that the Fed is now planning to balance the current account deficit on the backs of the American middle class. Prices at the supermarket and gas pump will rise immediately; probably within the next few months if not weeks. It will be harder to get credit. Wages and living standards will decline. Stocks will fall. Consumer spending will shrivel.Surprisingly, Bernanke’s rate cuts don’t even address the underlying problems they are supposed to cure. Millions of homeowners who took out subprime and Alt-a loans are headed for foreclosure. Only a small percentage of these will benefit from the rate cuts and avoid default because of lower “resets” on their loans. Most of them will not qualify for refinancing UNDER ANY TERMS because they don’t meet the new standards for securing a loan. Banks and mortgage companies have become much stricter in their lending practices.
Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. It is a painless but hard-hitting educational tool and for all groups concerned with the present unsustainable monetary system in Canada and the United States.
The rate cuts don’t really help the banks or hedge funds either. Their stocks may lurch upward for a day or two, but that won’t last. Money is getting tighter and spending is down. It’s not a good time to be holding hundreds of billions in mortgage-backed liabilities (CDOs) which may have been levered many times their original-value. There’s no market for these CDOs. They’re turkeys. The debt will either have to be written off or the companies will be forced into bankruptcy.Rate cuts won’t stem the tide of insolvencies or fix the deeply-ingrained problems in the financial markets. All they will do is forestall the impending recession by sustaining abnormal levels of liquidity. But as consumer spending contracts and unemployment continues to rise; the Fed’s “band-aid” approach to these systemic problems will prove to be ineffective. Bernanke is sacrificing the one thing he’ll need most in the bumpy months ahead; his credibility.As economist and author Henry Liu says:
“A market that catches on to the impotence of central-bank intervention can go into free fall.”The most compelling argument for interest rate cuts was made by economist Martin Feldstein in a Wall Street Journal article “Liquidly Now”. Feldstein summarized the issue like this:
“Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable income.”“The subprime mortgage defaults have triggered a widespread flight from risky assets, with a substantial widening of all credit spreads, and a general freezing of credit markets. Official credit ratings came under suspicion. Investors and lenders became concerned that they did not know how to value complex risky assets.In some recent weeks credit became unavailable. Loans to support private equity deals could not be syndicated, forcing the banks to hold those loans on their own books. Banks are also being forced to honor credit guarantees to previously off-balance-sheet conduits and other back-up credit lines, further reducing the banks' capital available to support credit of all types.The inability of credit markets to function properly will weaken the overall economy in the coming months. And even when the credit market crisis has passed, the wider credit spreads and increased risk aversion will be a damper on economic activity.In addition to these general credit market problems, the decline of house prices and home building will be a growing drag on the economy….Falling house prices would not only cause further declines in home building but would also shrink household wealth and thus consumer spending.”Feldstein has a good understanding of the problem, but backpedals on the rsolution. He says:
“Fed action to lower interest rates cannot solve the credit market problems, but it would help the economy: by stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages”.Feldstein paradoxically wants rate cuts even though he admits that “lower interest rates cannot solve the credit market problems” but will just stimulate more wasteful “consumer spending”.That’s not a cure. That’s just more Greenspan snake oil.“Too much liquidity” is the problem not the solution. The reason the markets are so volatile and likely to implode at any minute is because every asset-class has been foolishly inflated by a monetary policy that followed Feldstein’s prescription. Now he wants to avoid the consequences of these misguided policies by reflating the bubble and destroying the dollar in the process. It’s a bad idea. The Fed’s cuts coincide with the dismal earnings reports from Wall Street’s investment giants; Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs. The four banks have taken a combined 22% haircut in the last quarter and are expected to sustain heavy losses from the billions of dollars of subprime CDOs they’ll have to either downgrade or write-off. So far, Bernanke’s rate cuts have diverted attention from the grim news and falling profits from America’s investment core.The big financials aren’t the only one’s feeling the pinch from the housing meltdown either. There are many others including Bank of America that announced “unprecedented dislocations” in credit markets will have a “meaningful impact” on third-quarter results at its corporate investment bank. “Chief Financial Officer Joe Price told investors at a conference in San Francisco, ‘These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months.”’ (Bloomberg News) Bernanke’s rate cuts are “thin gruel” for the banks bottom line, but they do offer a welcome distraction from the relentless drumbeat of bad economic news. The subprime sarcoma has spread to every part of the financial markets. It’s not just the steady up tick of foreclosures and mushrooming real estate inventory. The banks are also hoarding capital to cover their losses on unmarketable CDOs and leveraged buyouts (LBOs) which means that new mortgages will slow to a crawl even to credit-worthy applicants. An article in Bloomberg News gives us some idea of how quickly the market for housing-related bonds has deteriorated:
“Sales of US asset-backed securities, such as bonds that repackage subprime loans or credit card debts as well as collateralized debt obligations., FELL73% FROM A YEAR EARLIER to $30 billion last month, according to estimates from analysts at Deutsche Bank AG”. (Bloomberg News)Bernanke is just prolonging the pain by not allowing the market to complete its cycle so that bad debts to be written off and industry can retool for the future. He’s buying time for his banker-friends, but doing considerable damage to the dollar in the process. Jim Rogers, the chairman of Beeland Interests Inc. summed up the rate cuts like this:
"Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''Rogers is not alone in his conclusions.Even foreign leaders, like Venezuelan President Hugo Chavez, have commented recently on the worrisome state of US markets. Three days ago Chavez said on public television that we may be facing a "global financial earthquake" as the result of "irresponsible" US economic policies. Chavez quoted Nobel Laureate Joseph Stiglitz’s warning that we may be facing a major economic disaster which could lead to “widespread misery, hunger and severe unrest. And the United State is to blame.”Chavez added that the Bush administration "has had to inject $300 US billion into the private banks this month to avoid a collapse of the dollar and the world economy ….The dollar is going down, they don't see that it isn't supported by reality” and because it is "because its fiscal deficit is the largest in history."Chavez’s predictions appear to be accurate as we can see that gold has suddenly skyrocketed while the dollar continues to fall.The firestorm that began with the Fed’s low interest rates in 2002-2003 and evolved into the subprime-lending crisis of 2006-2007 is now threatening the stability of the entire financial system and the broader global economy. The reason for this is that mortgage debt is the foundation upon which all manner of bizarre-sounding debt-instruments are now resting. These debt-instruments (derivatives) greatly magnify the leverage on the underlying asset which is often is nothing more than a shaky subprime loan.According to Satyajit Das, a respected authority on derivatives trading, “A single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion — or eight times total global gross domestic product of $60 trillion.” (Are We Headed for an Epic Bear Market” Jon Markman)We are now seeing the first signs that this enormous debt-bubble is beginning to unwind. There’s very little the Fed can do to affect the inevitable crash that (we believe) they engineered. As defaults in housing continue to rise; the swaps and derivatives in the secondary market will implode. Trillions in market capitalization will vanish in a flash.US GDP for the last 6 years has largely depended on transactions involving the exchange of massively over-levered assets.
Production in the real economy has remained flat. The investment banks are at the epicenter of this controversial new system called “structured finance”. We continue to believe that the banks that depended on mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) (as well as asset-backed commercial paper) for the bulk of their income; are in deep trouble. Robert E. Lucas alluded to potential bank-woes in an article in the Wall Street Journal,
“Mortgages and Monetary Policy”:“There is an immediate risk of a payments crisis, a modern analogue to an old-fashioned bank run. Many institutions — not just banks – HAVE PAYMENT OBLIGATIONS THAT ARE FAR IN EXCESS OF THE RESERVES TO WHICH THEY HAVE IMMEDIATE ACCESS. Against these obligations they hold short-term securities that they believed could be liquidated on short notice at little cost. If some of these securities turn out not to be liquid in this sense (and especially if no one is sure who holds them) then everyone wants to get into Treasury bonds.”It‘s rare when we are in agreement with the far-right viewpoints of the WSJ’s Editorial page, but in this case, Lucas nailed it. The banks have “obligations that are far in excess of the reserves to which they have immediate access.” This is a direct result of the new market architecture of “structured finance” which stacks debt on debt until the whole system is pushed to the breaking point. Low interest rates can’t fix this “systemic” problem. Only fiscal policy can soften the blow of a deflating credit bubble. Economist Henry Liu offers this constructive “New Deal-type” proposal which is a sensible (and ethical) way to address the prospect of growing unemployment and increasing economic hardship for the middle and lower classes: “A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The US government should make use of the money that the banks cannot find worthy borrowers to lend to, with money-cautious investors seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation.” (“Either Way, It could be an Unkind Cut” Henry C K Liu, Asia Times)Liu is right. We should be enacting the policies which reflect our values on social justice and the equitable distribution of wealth. Instead, the system is being manipulated by an oligarchy of racketeers who have savaged the currency, drained our treasury, and paved the way for a painful cycle of deflation.
The US consumer is now being blamed for the massive current account deficit; as if shopping at Walmart for the lowest prices was a crime. But the Fed is the real culprit. They have been opposed to protective tariffs or currency regulation from the very beginning. No country in the history of the world has ever allowed its industrial base to be so ruthlessly decimated (offshoring, outsourcing, factory closures) just to feed the insatiable avarice of its criminal elites.The current account deficit is the logical upshot of “free trade”. And, free trade is the Orwellian moniker used to describe the millions of decent paying jobs which are sacrificed on the altar of globalization.
The workers had no part in creating this destructive self-aggrandizing system.Nor did they have any say-so in the design of the modern market, which is often referred to as “structured finance”. Structured finance has been promoted as a way of using capital more efficiency by distributing risk more evenly throughout the system. In fact, it has turned out to be a colossal swindle which is now threatening to break the banks and bring the stock market crashing down. It is essentially mortgage-laundering scheme concocted by the investment banks; winked-at by the so-called regulators, facilitated by the ratings agencies, and exploited by the hedge funds. The victims of this scam are the insurance companies, foreign investors, pension funds and over-leveraged homeowners. Their losses are liable to soar into the trillions of dollars.Fed chief Alan Greenspan enthusiastically endorsed every dodgy “structured finance” idea; including subprime lending, ARMs, Mortgage-backed securities, currency deregulation, credit expansion and structural changes to the financial services industry. These are the pavers on the road to perdition carefully put in place by the Federal Reserve.Author Gabriel Kolko summed up “structured finance” in a recent article “The Predicted Financial Storm Has Arrived”:“We are at an end of an era…Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level…..
Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important — or well-intentioned advice will not change this reality.”The people must take over control of their own currency again.
The Federal Reserve must be abolished.
Written by
Friday, 21 September 2007
by Mike Whitney
"Give me control over a nation's currency and I care not who makes its laws."
-Baron M.A. Rothschild
Wall Street loves cheap money. That’s why traders were celebrating on Tuesday when Fed chief Ben Bernanke announced that he’d drop interest rates from 5.25% to 4.75%. The stock market immediately zoomed skyward adding 336 points before the bell rang. The next day the giddiness continued. By mid-morning the Dow was up another 110 points and headed for the stratosphere.
Everyone on Wall Street loves Bernanke. He brings them candy and sweets and lets the American worker pay the bill.So far, the scholarly-looking Bernanke has shown that he is no different than his predecessor Alan Greenspan. Facing his first crisis, the new Fed chief chose to reward his fat-cat friends at the hedge funds and investment banks by savaging the dollar. As soon as he announced his plan to cut the Fed funds rate by .50 basis points; gold soared to $736 per ounce, oil shot up to $82 per barrel, and the euro climbed to a new high of $1.40. These are all the predictable signs of inflation. Food and energy prices will surely follow. The bottom line is that the investor class has been bailed out at the expense of everyone else who trades in dollars.Bernanke invoked the “Greenspan put”, which means that he used his power to protect his friends from the losses they should have incurred from their bad bets. Now, the big market players know that he can be counted on to bail them out whenever they make poor investment decisions. He’s also lived up to his nickname, “Helicopter Ben”; ready to deal with every new calamity by tossing trillions of freshly-minted US greenbacks into the jet-stream over the NYSE so elated traders can jack-up their PEs and fatten their bottom line . We think Bernanke should abandon the helicopter altogether and personally deliver pallet-loads of $100 bills to Wall Street’s doorstep, just like Bush does with contractors in Iraq. That way the fund managers can keep stoking the market with cheap cash without dawdling at the Fed’s Discount Window.
Despite the merriment on Wall Street, there is a downside to Bernanke’s actions. The Fed chief has shown foreign investors that he WILL NOT DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by investing in the US. It alerts them to the fact that the “strong dollar” policy is a fraud and that they’re better off getting out of US Treasuries and dollar-backed assets. Apparently, many have already gotten the message. Last month, foreign central banks and investors dumped $9.4 billion of US Treasuries and bonds compared to net purchases in June of $24.7 billion. That means that foreigners have stopped buying our debt which is currently $800 billion per year. That’s the last leg holding up the wobbly greenback. The dollar will undoubtedly fall precipitously.So, why would Bernanke weaken the dollar even more by lowering rates 50 basis points?Is he crazy or did he panic?We don’t know, but we do know that this is the beginning of Capital flight — -the sudden exodus of foreign investment from US debt and equities. Most likely, it will be accompanied by the hissssing sound of gas escaping from a punctured equity bubble followed quickly by a painful round of deflation, massive unemployment and the gnashing of teeth.
The size of the current account deficit, which peaked in 2005 at 6.8% of GDP, has dropped to 5.5% by the end of the second quarter of 2007. This is an indication that the maxed-out American consumer is running out of gas and that our foreign trading partners are slowing their intake of US dollars. Now comes the painful part. As the trade deficit shrinks, foreign investment will become scarcer and the dollar will tumble. That means interest rates will have to go up and American’s will face an agonizing economic downturn.This is all part of the Federal Reserve’s master-plan for reorganizing the US economy and political system. Since Bush took office in 2000, the dollar has been deliberately weakened; losing more than 40% of its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per euro in 2007) It has fared even worse against gold. The Fed “rubber stamped” Bush’s $400 billion per year tax breaks for the wealthy and looked on approvingly while $4 trillion of national wealth was transferred to foreign investors and banks via the current account deficit (the result of currency deregulation) Also, we now know that Alan Greenspan supported the plan to invade Iraq. He even shamelessly admitted that the war was really about oil which suggests that he was attempting to preserve the dollar’s link to petroleum. That linkage is what maintains the dollar’s position as the world’s “reserve currency”. These things indicate that the Central Bank plays a vital role in the policy decisions which are reshaping American life. We assume that the Fed’s members are equally supportive of the repressive police-state measures which have been put in place in anticipation of problems that will undoubtedly arise from the economic meltdown they have painstakingly engineered.The rate cuts tell us that the Fed is now planning to balance the current account deficit on the backs of the American middle class. Prices at the supermarket and gas pump will rise immediately; probably within the next few months if not weeks. It will be harder to get credit. Wages and living standards will decline. Stocks will fall. Consumer spending will shrivel.Surprisingly, Bernanke’s rate cuts don’t even address the underlying problems they are supposed to cure. Millions of homeowners who took out subprime and Alt-a loans are headed for foreclosure. Only a small percentage of these will benefit from the rate cuts and avoid default because of lower “resets” on their loans. Most of them will not qualify for refinancing UNDER ANY TERMS because they don’t meet the new standards for securing a loan. Banks and mortgage companies have become much stricter in their lending practices.
Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. It is a painless but hard-hitting educational tool and for all groups concerned with the present unsustainable monetary system in Canada and the United States.
The rate cuts don’t really help the banks or hedge funds either. Their stocks may lurch upward for a day or two, but that won’t last. Money is getting tighter and spending is down. It’s not a good time to be holding hundreds of billions in mortgage-backed liabilities (CDOs) which may have been levered many times their original-value. There’s no market for these CDOs. They’re turkeys. The debt will either have to be written off or the companies will be forced into bankruptcy.Rate cuts won’t stem the tide of insolvencies or fix the deeply-ingrained problems in the financial markets. All they will do is forestall the impending recession by sustaining abnormal levels of liquidity. But as consumer spending contracts and unemployment continues to rise; the Fed’s “band-aid” approach to these systemic problems will prove to be ineffective. Bernanke is sacrificing the one thing he’ll need most in the bumpy months ahead; his credibility.As economist and author Henry Liu says:
“A market that catches on to the impotence of central-bank intervention can go into free fall.”The most compelling argument for interest rate cuts was made by economist Martin Feldstein in a Wall Street Journal article “Liquidly Now”. Feldstein summarized the issue like this:
“Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable income.”“The subprime mortgage defaults have triggered a widespread flight from risky assets, with a substantial widening of all credit spreads, and a general freezing of credit markets. Official credit ratings came under suspicion. Investors and lenders became concerned that they did not know how to value complex risky assets.In some recent weeks credit became unavailable. Loans to support private equity deals could not be syndicated, forcing the banks to hold those loans on their own books. Banks are also being forced to honor credit guarantees to previously off-balance-sheet conduits and other back-up credit lines, further reducing the banks' capital available to support credit of all types.The inability of credit markets to function properly will weaken the overall economy in the coming months. And even when the credit market crisis has passed, the wider credit spreads and increased risk aversion will be a damper on economic activity.In addition to these general credit market problems, the decline of house prices and home building will be a growing drag on the economy….Falling house prices would not only cause further declines in home building but would also shrink household wealth and thus consumer spending.”Feldstein has a good understanding of the problem, but backpedals on the rsolution. He says:
“Fed action to lower interest rates cannot solve the credit market problems, but it would help the economy: by stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages”.Feldstein paradoxically wants rate cuts even though he admits that “lower interest rates cannot solve the credit market problems” but will just stimulate more wasteful “consumer spending”.That’s not a cure. That’s just more Greenspan snake oil.“Too much liquidity” is the problem not the solution. The reason the markets are so volatile and likely to implode at any minute is because every asset-class has been foolishly inflated by a monetary policy that followed Feldstein’s prescription. Now he wants to avoid the consequences of these misguided policies by reflating the bubble and destroying the dollar in the process. It’s a bad idea. The Fed’s cuts coincide with the dismal earnings reports from Wall Street’s investment giants; Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs. The four banks have taken a combined 22% haircut in the last quarter and are expected to sustain heavy losses from the billions of dollars of subprime CDOs they’ll have to either downgrade or write-off. So far, Bernanke’s rate cuts have diverted attention from the grim news and falling profits from America’s investment core.The big financials aren’t the only one’s feeling the pinch from the housing meltdown either. There are many others including Bank of America that announced “unprecedented dislocations” in credit markets will have a “meaningful impact” on third-quarter results at its corporate investment bank. “Chief Financial Officer Joe Price told investors at a conference in San Francisco, ‘These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months.”’ (Bloomberg News) Bernanke’s rate cuts are “thin gruel” for the banks bottom line, but they do offer a welcome distraction from the relentless drumbeat of bad economic news. The subprime sarcoma has spread to every part of the financial markets. It’s not just the steady up tick of foreclosures and mushrooming real estate inventory. The banks are also hoarding capital to cover their losses on unmarketable CDOs and leveraged buyouts (LBOs) which means that new mortgages will slow to a crawl even to credit-worthy applicants. An article in Bloomberg News gives us some idea of how quickly the market for housing-related bonds has deteriorated:
“Sales of US asset-backed securities, such as bonds that repackage subprime loans or credit card debts as well as collateralized debt obligations., FELL73% FROM A YEAR EARLIER to $30 billion last month, according to estimates from analysts at Deutsche Bank AG”. (Bloomberg News)Bernanke is just prolonging the pain by not allowing the market to complete its cycle so that bad debts to be written off and industry can retool for the future. He’s buying time for his banker-friends, but doing considerable damage to the dollar in the process. Jim Rogers, the chairman of Beeland Interests Inc. summed up the rate cuts like this:
"Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''Rogers is not alone in his conclusions.Even foreign leaders, like Venezuelan President Hugo Chavez, have commented recently on the worrisome state of US markets. Three days ago Chavez said on public television that we may be facing a "global financial earthquake" as the result of "irresponsible" US economic policies. Chavez quoted Nobel Laureate Joseph Stiglitz’s warning that we may be facing a major economic disaster which could lead to “widespread misery, hunger and severe unrest. And the United State is to blame.”Chavez added that the Bush administration "has had to inject $300 US billion into the private banks this month to avoid a collapse of the dollar and the world economy ….The dollar is going down, they don't see that it isn't supported by reality” and because it is "because its fiscal deficit is the largest in history."Chavez’s predictions appear to be accurate as we can see that gold has suddenly skyrocketed while the dollar continues to fall.The firestorm that began with the Fed’s low interest rates in 2002-2003 and evolved into the subprime-lending crisis of 2006-2007 is now threatening the stability of the entire financial system and the broader global economy. The reason for this is that mortgage debt is the foundation upon which all manner of bizarre-sounding debt-instruments are now resting. These debt-instruments (derivatives) greatly magnify the leverage on the underlying asset which is often is nothing more than a shaky subprime loan.According to Satyajit Das, a respected authority on derivatives trading, “A single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion — or eight times total global gross domestic product of $60 trillion.” (Are We Headed for an Epic Bear Market” Jon Markman)We are now seeing the first signs that this enormous debt-bubble is beginning to unwind. There’s very little the Fed can do to affect the inevitable crash that (we believe) they engineered. As defaults in housing continue to rise; the swaps and derivatives in the secondary market will implode. Trillions in market capitalization will vanish in a flash.US GDP for the last 6 years has largely depended on transactions involving the exchange of massively over-levered assets.
Production in the real economy has remained flat. The investment banks are at the epicenter of this controversial new system called “structured finance”. We continue to believe that the banks that depended on mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) (as well as asset-backed commercial paper) for the bulk of their income; are in deep trouble. Robert E. Lucas alluded to potential bank-woes in an article in the Wall Street Journal,
“Mortgages and Monetary Policy”:“There is an immediate risk of a payments crisis, a modern analogue to an old-fashioned bank run. Many institutions — not just banks – HAVE PAYMENT OBLIGATIONS THAT ARE FAR IN EXCESS OF THE RESERVES TO WHICH THEY HAVE IMMEDIATE ACCESS. Against these obligations they hold short-term securities that they believed could be liquidated on short notice at little cost. If some of these securities turn out not to be liquid in this sense (and especially if no one is sure who holds them) then everyone wants to get into Treasury bonds.”It‘s rare when we are in agreement with the far-right viewpoints of the WSJ’s Editorial page, but in this case, Lucas nailed it. The banks have “obligations that are far in excess of the reserves to which they have immediate access.” This is a direct result of the new market architecture of “structured finance” which stacks debt on debt until the whole system is pushed to the breaking point. Low interest rates can’t fix this “systemic” problem. Only fiscal policy can soften the blow of a deflating credit bubble. Economist Henry Liu offers this constructive “New Deal-type” proposal which is a sensible (and ethical) way to address the prospect of growing unemployment and increasing economic hardship for the middle and lower classes: “A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The US government should make use of the money that the banks cannot find worthy borrowers to lend to, with money-cautious investors seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation.” (“Either Way, It could be an Unkind Cut” Henry C K Liu, Asia Times)Liu is right. We should be enacting the policies which reflect our values on social justice and the equitable distribution of wealth. Instead, the system is being manipulated by an oligarchy of racketeers who have savaged the currency, drained our treasury, and paved the way for a painful cycle of deflation.
The US consumer is now being blamed for the massive current account deficit; as if shopping at Walmart for the lowest prices was a crime. But the Fed is the real culprit. They have been opposed to protective tariffs or currency regulation from the very beginning. No country in the history of the world has ever allowed its industrial base to be so ruthlessly decimated (offshoring, outsourcing, factory closures) just to feed the insatiable avarice of its criminal elites.The current account deficit is the logical upshot of “free trade”. And, free trade is the Orwellian moniker used to describe the millions of decent paying jobs which are sacrificed on the altar of globalization.
The workers had no part in creating this destructive self-aggrandizing system.Nor did they have any say-so in the design of the modern market, which is often referred to as “structured finance”. Structured finance has been promoted as a way of using capital more efficiency by distributing risk more evenly throughout the system. In fact, it has turned out to be a colossal swindle which is now threatening to break the banks and bring the stock market crashing down. It is essentially mortgage-laundering scheme concocted by the investment banks; winked-at by the so-called regulators, facilitated by the ratings agencies, and exploited by the hedge funds. The victims of this scam are the insurance companies, foreign investors, pension funds and over-leveraged homeowners. Their losses are liable to soar into the trillions of dollars.Fed chief Alan Greenspan enthusiastically endorsed every dodgy “structured finance” idea; including subprime lending, ARMs, Mortgage-backed securities, currency deregulation, credit expansion and structural changes to the financial services industry. These are the pavers on the road to perdition carefully put in place by the Federal Reserve.Author Gabriel Kolko summed up “structured finance” in a recent article “The Predicted Financial Storm Has Arrived”:“We are at an end of an era…Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level…..
Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important — or well-intentioned advice will not change this reality.”The people must take over control of their own currency again.
The Federal Reserve must be abolished.
Thursday, September 20, 2007
Shocked, Shocked
Shocked, Shocked! James Howard Kunstler
Written by
Thursday, 20 September 2007
by James Howard Kunstler
Alan Greenspan's memoirs are being flogged across the airwaves, bandwidths and printing presses, and the cohort of those who comment on public affairs in these media are shocked by the Maestro's confessions — first, that a housing bubble emerged out of his leadership in the banking sector, and second that the Iraq war is about oil. As usual, they're getting it all wrong — about as wrong as Al himself got it. But that is the way of things in this age of cultural dissipation and gross cognitive dissonance. Greenspan claims he had no idea that his cutting of interest rates to near zero would produce any irregularities in the US economy. Apparently he hadn't noticed that the Big Fund Boyz called him "Easy Al" for a reason. Or that when you introduce nearly free "money" (as in "available for lending") into a system of financial trade, the recognition of risk tends to evaporate. As the nation's chief bank regulator, Greenspan also apparently failed to notice the upsurge in dodgy lending practices previously only seen among mafia loan sharks, drug dealers, or twelve-year-olds playing Monopoly.But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches — given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the shit out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.Now, as to the shock of Al's revelation that the Iraq war is about oil — the media and the public have got this all wrong, too. The logic here seems to be that because the Iraq war is about oil it is therefore unnecessary, optional, a mistake, an indulgence, something we should not dirty our hands in. In fact, the Iraq war is not about oil, per se, so much as it is about America's behavior here at home, about the choices we make for how we live on this continent. None of those who complain most loudly about our military presence in Iraq have advanced any proposals for reforming how we live here — and hence for our enslavement to oil, much of the world's remaining supply of which happens to be in the neighborhood of Iraq. When these complainers start complaining about the ubiquitous acceptance of suburban sprawl and abject car-dependency — and this includes the environmental boy scouts out there who want to get merit badges for buying hybrid cars — then they will deserve to be taken seriously. Until then, the American people have got exactly the grinding war that they deserve. Let them whine about it all the way to the Nascar tracks, and let them console themselves with giant plastic bottles of Pepsi Cola and buckets of chicken raised on corn grown with oil byproducts.On CBS's "60-Minutes" show last night, Greenspan, in his new role as a private sector economic consultant made predictions for the coming months in the US economy. He declared that the financial sector would get over the current credit squeeze as if it were a mild case of indigestion brought on by one too many fried won-tons at the all-you-can-eat buffet, a mere burp, allowing the public to move on to the crab Rangoon and a helping of General Tsao's chicken. This gets back to the previous point about the Iraq war and oil in particular. Al doesn't get it. CBS's sycophant reporters don't get it. Nobody gets it. We are entering the zone of the long emergency in which the primary resource needed to run the industrial economies will become scarce, expensive, and profoundly destabilizing to markets and to normal life, such as it is known in this country. And the current problem in the markets is a reflection of the resource bankruptcy we are facing. Our problems are not about credit, they are about permanent insolvency. In his old age, Alan Greenspan's face — once darkly handsome in his youthful years as a jazz musician — has taken on the strange appearance of a circus clown. Something about the way his lips have settled into a kind of thick fatuous smile, even when he is apparently not amused by anything. Is it one of God's clever little tricks to leave him looking like a clown in his valedictory years, or has his face just resolved into the perfect embodiment of leadership for a clown nation?
Written by
Thursday, 20 September 2007
by James Howard Kunstler
Alan Greenspan's memoirs are being flogged across the airwaves, bandwidths and printing presses, and the cohort of those who comment on public affairs in these media are shocked by the Maestro's confessions — first, that a housing bubble emerged out of his leadership in the banking sector, and second that the Iraq war is about oil. As usual, they're getting it all wrong — about as wrong as Al himself got it. But that is the way of things in this age of cultural dissipation and gross cognitive dissonance. Greenspan claims he had no idea that his cutting of interest rates to near zero would produce any irregularities in the US economy. Apparently he hadn't noticed that the Big Fund Boyz called him "Easy Al" for a reason. Or that when you introduce nearly free "money" (as in "available for lending") into a system of financial trade, the recognition of risk tends to evaporate. As the nation's chief bank regulator, Greenspan also apparently failed to notice the upsurge in dodgy lending practices previously only seen among mafia loan sharks, drug dealers, or twelve-year-olds playing Monopoly.But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches — given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the shit out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.Now, as to the shock of Al's revelation that the Iraq war is about oil — the media and the public have got this all wrong, too. The logic here seems to be that because the Iraq war is about oil it is therefore unnecessary, optional, a mistake, an indulgence, something we should not dirty our hands in. In fact, the Iraq war is not about oil, per se, so much as it is about America's behavior here at home, about the choices we make for how we live on this continent. None of those who complain most loudly about our military presence in Iraq have advanced any proposals for reforming how we live here — and hence for our enslavement to oil, much of the world's remaining supply of which happens to be in the neighborhood of Iraq. When these complainers start complaining about the ubiquitous acceptance of suburban sprawl and abject car-dependency — and this includes the environmental boy scouts out there who want to get merit badges for buying hybrid cars — then they will deserve to be taken seriously. Until then, the American people have got exactly the grinding war that they deserve. Let them whine about it all the way to the Nascar tracks, and let them console themselves with giant plastic bottles of Pepsi Cola and buckets of chicken raised on corn grown with oil byproducts.On CBS's "60-Minutes" show last night, Greenspan, in his new role as a private sector economic consultant made predictions for the coming months in the US economy. He declared that the financial sector would get over the current credit squeeze as if it were a mild case of indigestion brought on by one too many fried won-tons at the all-you-can-eat buffet, a mere burp, allowing the public to move on to the crab Rangoon and a helping of General Tsao's chicken. This gets back to the previous point about the Iraq war and oil in particular. Al doesn't get it. CBS's sycophant reporters don't get it. Nobody gets it. We are entering the zone of the long emergency in which the primary resource needed to run the industrial economies will become scarce, expensive, and profoundly destabilizing to markets and to normal life, such as it is known in this country. And the current problem in the markets is a reflection of the resource bankruptcy we are facing. Our problems are not about credit, they are about permanent insolvency. In his old age, Alan Greenspan's face — once darkly handsome in his youthful years as a jazz musician — has taken on the strange appearance of a circus clown. Something about the way his lips have settled into a kind of thick fatuous smile, even when he is apparently not amused by anything. Is it one of God's clever little tricks to leave him looking like a clown in his valedictory years, or has his face just resolved into the perfect embodiment of leadership for a clown nation?
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