Don't blame Fannie, Freddie or the CRA for this mess

[da loser]

does that mean the derivatives that were in the trillions was part of the cause?

if i'm understanding the problem correctly

first you got bad loans made by banks, without the capital to cover it

then these derivatives allowed them to spend even more.

and when the bad loans defaulted, everything goes to crap.

and now you got banks that won't loan to each other because basically they're all leveraged and have no worth because they don't generate wealth, so of course no one has confidence in them.

sounds like some banks made some bad decisions and deserve to fail. and the answer is for the government to prop up the good banks so they can loan money to the real businesses generating wealth.

here's what i don't understand. why are nonfinancial businesses affected that have large cash reserves? shouldn't they be insulated from the problems?

 

[chess9]

Originally posted by: LegendKiller

Originally posted by: dphantom
What I will grant is the change in separating investment banks from other types of banks also played a role. A repub congress encourgaed by a dem president pushed trhough these changes to regulations. Deregulation had nothing to do with todays problem. It was the above and the expansion of the CRA plus active backing of loans to unqualified borrowers AND those who borrowed with no down just to flip a house a few weeks later that brought us to where we are.

Banks and places like CW no doubt had a role as they were making loans expecting house valuses to rise quickly. But they could make those loans knowing they had a market to sell the mortgages to. And that was backed by F and F and others. If F and F would back it - a GSE that would not be allowed to fail, then you bet everyone had a great incentive to borrow as much as possible to make as much as they could because they thought they were safe.

This is just so flat out stupidly wrong I don't know where to begin.

1. F&F only recently bought up the mortgages, even then, they bought up a pretty small portion of the mortgages, about 5% of them.

2. Banks were never *forced* to underwrite poor credits, nor to game the system with the plethora of exotic mortgages in their arsenal. If anything, CRA and GSE mortgages have both proven to be very credit worthy. CRA mortgages have a static pool default rate similar to many prime pools.

3. Deregulation was absolutely the reason behind this problem. Banks who lent, the ones with subprime and near-prime mortgage businesses (LEH, BSC..etc), were also the ones securitizing the mortgages through the investment banks. Since commercial banks could also be mortgages banks AND investment banks, through the elimination of Glass-Steagall, the conflict of interest increased (Deregulation in 1999 forced by the Republicans). You had some banks (GS for example) push out CDO paper, on one side of the bank, only to be shorting it using derivatives on another side. The conflict of interest is very clear, exactly what the regulation known as Glass-Steagall was supposed to prevent.

Through the process they had to hold the equity pieces of the securitizations, their way around that was to concentrate those into pools, CDOs. As the leverage got higher and higher, using CDO, CDO^2, and CDO^3...etc, the remaining pieces became more risky.

As a result of 2004 deregulation, banks were able to take on more and more of these assets through the issuance of debt, both short-term and long-term. The main driver behind the debt were SIVs (structured investment vehicles), which allowed the banks to push off the debt into off-balance sheet structures (another failed regulatory issue). SIVs issued short-term liabilities (asset backed commercial paper), with maturities of ~270 days, to fund assets of a weighted-average-life of 5+ years.

Obviously this is a big problem, especially if those assets start to take a dump. The ABCP market is finnicky, one problem sends investors running, nobody wants to take a loss. SIVs had no backup financing, which most banks offer for normal ABCP programs (letters of credit and liquidity). To make matters worse is that lines between traditional ABCP conduits and SIVs were blurred, hybrid conduits, or normal conduits with CDO debt, were allowed to blend, causing more confusion. Investors were scared about what could be next, this froze the CP markets.

After SIVs blew up, banks brought them on balance sheet, along with their other assets, which showed their leverage ratios to be 40:1, or worse. Normal leverage might be 10:1, or 5:1 for a well-run company.

Securitization structures had their own leverage (subordination). The rating agencies (not regulated), were able to poorly rate the transactions and allowed even more leverage than should have been possible. This is why the CDOs are now blowing up, because when the banks should have been able to get .70 out of a shitty mortgage for every $1 of face value, in a conservative structure, they got .85. That extra .15 should have been their equity in the transaction, reducing risk for the senior tranches of the bond.

Then, when they tried to put that .15 into a CDO, the rating agencies weren't diligent enough, nor regulated enough, to reduce the leverage and protect investors. Thus, the bonds (equity tranches and mezz tranches) were repacked at greater leverage than they should have been.

Naturally, as a wealth manager, you cannot dig through every investment possible, since all are complex, so you depend on the rating. Since the rating agencies were debautched, not regulated, and greedy, the ratings sucked. The RAs should have pushed back against the bankers, but they didn't. Regulations didn't force them to, so we all lose.

Add to that the lack of regulation for hedge funds, who can be levered 50:1, as well as the complex and almost completely unregulated derivatives market (CDS), you get a mix of deregulation and underregulation, that caused this whole problem.

One of the biggest fuckups was FAS140, which allowed lenders to securitize completely off balance sheet, while recognizing huge amounts of revenue up-front. Huge mistake.


You see, this problem is a massive circle-jerk of de/un-regulation. CRA was nothing more than a good-intentioned tool, same with the GSEs. It was really the banks and fund managers who were not watched over, that fucked it all up.

OMFG, we agree.

FAS140 is supposed to keep derivatives and options off the balance sheet to keep the balance sheets clean, as I understand it. Since they are leveraged, profits or losses could artificially eat up gains or losses if they are listed at current values, which are transitory.

Also, AIG played a huge role as they were bonding/insuring the A rated tranches as I understand this process. When the A rated tranches started losing value because of the loss of home values, then AIG was in trouble because it couldn't back the A tranches. Like a loose ball of twine, everything unraveled.

So, yes, this was a wholesale lack of regulaton by SEC, Treasury, F and F, and a few others. Congress was in their limos getting blow jobs so no one really expected them to be paying attention.

Who was minding the hen house while the foxes were multiplying like rabbits?

-Robert

 

[chess9]

Originally posted by: da loser
does that mean the derivatives that were in the trillions was part of the cause?

if i'm understanding the problem correctly

first you got bad loans made by banks, without the capital to cover it

then these derivatives allowed them to spend even more.

and when the bad loans defaulted, everything goes to crap.

and now you got banks that won't loan to each other because basically they're all leveraged and have no worth because they don't generate wealth, so of course no one has confidence in them.

sounds like some banks made some bad decisions and deserve to fail. and the answer is for the government to prop up the good banks so they can loan money to the real businesses generating wealth.

here's what i don't understand. why are nonfinancial businesses affected that have large cash reserves? shouldn't they be insulated from the problems?

Non-financial businesses, as you call them, can't borrow money to cover current costs and for operating capital. Huge problem of liquidity. This has been coming for a long time, btw.

Anyway, this means a lot of small to medium sized businesses could CLOSE if they don't get financing. BUT, their local Mom and Pop Bank from whom they borrow money usually can't get money from Chase, Citi, Wachovia (no longer known as Watch over ya'), etc.

The Treasury, per today's announcement is NOT going to guarantee interbank loans, so I don't know how investing in these big banks will actually help without liability guarantees. So, Mom and Pop Bank won't get any loans from the big fish banks.

Be worried, be very worried if these interventions don't work, IMHO. If markets don't stabilize and if the liquidity issues aren't solved, we could have massive unemployment.

I'm hoping after all the little Congressional and Treasury gimmicks they finally find one that works. So far, they've got two strikes and it's the top of the 9th inning.

-Robert

 

[LegendKiller]

Originally posted by: da loser
does that mean the derivatives that were in the trillions was part of the cause?

if i'm understanding the problem correctly

first you got bad loans made by banks, without the capital to cover it

then these derivatives allowed them to spend even more.

and when the bad loans defaulted, everything goes to crap.

and now you got banks that won't loan to each other because basically they're all leveraged and have no worth because they don't generate wealth, so of course no one has confidence in them.

sounds like some banks made some bad decisions and deserve to fail. and the answer is for the government to prop up the good banks so they can loan money to the real businesses generating wealth.

here's what i don't understand. why are nonfinancial businesses affected that have large cash reserves? shouldn't they be insulated from the problems?

What derivatives? CDS? Yes, they are part of the problem. Poorly regulated and uber-leveraged.

A large cash reserve is nice, but not practical, for most business. Even when it is "large", it isn't large enough for most businesses. Companies used debt to reduce funding costs and increase equity returns, it isn't a horrible idea, provided the debt market doesn't shoot itself in the dick like they've done.

 

[LegendKiller]

Originally posted by: chess9
OMFG, we agree.

FAS140 is supposed to keep derivatives and options off the balance sheet to keep the balance sheets clean, as I understand it. Since they are leveraged, profits or losses could artificially eat up gains or losses if they are listed at current values, which are transitory.

Also, AIG played a huge role as they were bonding/insuring the A rated tranches as I understand this process. When the A rated tranches started losing value because of the loss of home values, then AIG was in trouble because it couldn't back the A tranches. Like a loose ball of twine, everything unraveled.

So, yes, this was a wholesale lack of regulaton by SEC, Treasury, F and F, and a few others. Congress was in their limos getting blow jobs so no one really expected them to be paying attention.

Who was minding the hen house while the foxes were multiplying like rabbits?

-Robert

140 wasn't about derivatives really. If anything, 140 was to *prevent* derivatives and other silly stuff from going off BS, which is what Enron did.

140 QSPE assets have to be braindead and not manipulatable by the servicer, thus, derivatives cannot be owned, except hedging instruments.

It's intent was to require companies who sold assets to investors to not have to recognize those assets. That's great, but only works when the residual asset (equity tranche in a securitization structure) is sized, rated, and recognized in a truly honest way. If you lose your oversight there the entire system is undermined.

That's not even to get down into the whole idea of gain on sale, which is bullshit IMHO.

AIG sold CDS on tranches, I don't think they were an actual wrap provider, such as MBIA, AMBAC, FGIC, XL, among others. I never saw an ABS bond with an AIG wrap.

But yes, when tranches began to default AIG was required to pay event default amounts.

Agree 100% that it was the fox guarding the henhouse with regards to regulation. People blame interest rates, GSEs, or CRA, but don't even look past the skin-deep problem to get to de/under-regulation, which was the true cause of the problem.

It's funny, the same policies of the Republicans in the 1920s, poor regulation, failed to put a break on lending (low rates, again). The poor regulatory environment lead to massive margining, trusts, and tons of fraud, same as now.

 

[shira]

Originally posted by: Butterbean
The CRA absolutely got the ball rolling on this mess by perverting a financial venture into a tool for social (and Marxist) engineering. Banks were not forced to make loans but in a clever fashion quotas were still practically in place since banks in subprime areas were subject to reviews on how well the performed for the subprime market percentages - with community groups like ACORN and La Raza given a role in assessment (how retarded). As the ball rolled downhill and the financial institutions realised they were full of toxic items they did their own machinations to hide the problem and bury it in layers that even they lost track of.

In any case the subprime market exploded waaaaaaaay beyond what it should have been allowed to. There were people who saw the problem and tried to fix it but the ACORN/LaRaza/MoveOn, Marxist controlled Dem party blocked it - with creeps like Barney Frank scoffing that there was any problem:

'These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

http://query.nytimes.com/gst/f...eddie%20labaton&st=cse

Fannie and Freddie are mostly a Dem failure. Bush didnt help with his give aways to illegal aliens but even he was trying to get reform. The Marxists would have none of it. This is why they Dems aren't holding their usual Stalinist hearings into the manner - because they know their traitorous hearts are at the center of it.

Now we are just beginning to find out how many illegals were given houses by La Raza and ACORN et al. Nobody should be surprised because it was in news awhile this was going on:


"Undocumented residents being recruited for loans"


?There is a huge untapped market out there, but it is a controversial program,? said Sarah Lumbert, office director of San Diego's ACORN Housing Corp., part of a national group working with Citibank to provide tax-ID loans.

"ACORN members, advocates on housing issues for low-and moderate-income people and Citibank have quietly recruited applicants in the county for more than a year. Their program has ramped up slowly because applicants need to establish credit and hunt for an affordable home."

http://www.signonsandiego.com/...206/news_1n6loans.html

One central reason Obama is ahead is because the American sheeple have been led to believe by Stalinist (in-the-tank-for-Obama) media that Bush deregulation caused subprime mess. Of course McCain fecklessness helped this go uncorrected. Alas the sheeple are starting to realize the Dems stole their children's future and have enjoyed seeing the failure since it helped them (with gleeeee they tell media of insurance and bank risks to start panic). There is going to be a lot of trouble

Your analysis is moronic. The TOTAL value of sub-prime mortages was $1.3 trillion in March 2007. (Economic Background) As of May of 2008, 25% of those loans were in default. That's only $325 billion of sub-prime loans in default. And note that those loans weren't worthless: They're worth whatever the underlying properties were worth. If we assume the value of the average property securing sub-prime loans decreased in value 30%, that means less than $100 billion of loss due to sub-prime mortgages. But let's double that figure to account for losses that occurred before 2008. So arguably as much as $200 billion of loss is due to the sub-prime mess (note that this assume ZERO defaults would have occurred if F/F had enforced strict financing rules, which is an absurd assumption, and it also assumes the the loan-to-value for all those defaulted sub-prime loans was 100% or greater, another absurd assumption).

Yet the Stock market has lost an accumulated $8.8 TRILLION in value since its peak in October, 2007.

Please explain to us how Fannie Mae, Freddy Mac, and the CRA - which could arguably be blamed for at most $200 billion of loss - are responsible for the $8.8 trillion loss in the markets.

Come on. Dare ya.

 

[LegendKiller]

Originally posted by: shira

Originally posted by: Butterbean
The CRA absolutely got the ball rolling on this mess by perverting a financial venture into a tool for social (and Marxist) engineering. Banks were not forced to make loans but in a clever fashion quotas were still practically in place since banks in subprime areas were subject to reviews on how well the performed for the subprime market percentages - with community groups like ACORN and La Raza given a role in assessment (how retarded). As the ball rolled downhill and the financial institutions realised they were full of toxic items they did their own machinations to hide the problem and bury it in layers that even they lost track of.

In any case the subprime market exploded waaaaaaaay beyond what it should have been allowed to. There were people who saw the problem and tried to fix it but the ACORN/LaRaza/MoveOn, Marxist controlled Dem party blocked it - with creeps like Barney Frank scoffing that there was any problem:

'These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

http://query.nytimes.com/gst/f...eddie%20labaton&st=cse

Fannie and Freddie are mostly a Dem failure. Bush didnt help with his give aways to illegal aliens but even he was trying to get reform. The Marxists would have none of it. This is why they Dems aren't holding their usual Stalinist hearings into the manner - because they know their traitorous hearts are at the center of it.

Now we are just beginning to find out how many illegals were given houses by La Raza and ACORN et al. Nobody should be surprised because it was in news awhile this was going on:


"Undocumented residents being recruited for loans"


?There is a huge untapped market out there, but it is a controversial program,? said Sarah Lumbert, office director of San Diego's ACORN Housing Corp., part of a national group working with Citibank to provide tax-ID loans.

"ACORN members, advocates on housing issues for low-and moderate-income people and Citibank have quietly recruited applicants in the county for more than a year. Their program has ramped up slowly because applicants need to establish credit and hunt for an affordable home."

http://www.signonsandiego.com/...206/news_1n6loans.html

One central reason Obama is ahead is because the American sheeple have been led to believe by Stalinist (in-the-tank-for-Obama) media that Bush deregulation caused subprime mess. Of course McCain fecklessness helped this go uncorrected. Alas the sheeple are starting to realize the Dems stole their children's future and have enjoyed seeing the failure since it helped them (with gleeeee they tell media of insurance and bank risks to start panic). There is going to be a lot of trouble

Your analysis is moronic. The TOTAL value of sub-prime mortages was $1.3 trillion in March 2007. (Economic Background) As of May of 2008, 25% of those loans were in default. That's only $325 billion of sub-prime loans in default. And note that those loans weren't worthless: They're worth whatever the underlying properties were worth. If we assume the value of the average property securing sub-prime loans decreased in value 30%, that means less than $100 billion of loss due to sub-prime mortgages. But let's double that figure to account for losses that occurred before 2008. So arguably as much as $200 billion of loss is due to the sub-prime mess (note that this assume ZERO defaults would have occurred if F/F had enforced strict financing rules, which is an absurd assumption).

Yet the Stock market has lost an accumulated $8.8 TRILLION in value since its peak in October, 2007.

Please explain to us how Fannie Mae, Freddy Mac, and the CRA - which could arguably be blamed for at most $200 billion of loss - are responsible for the $8.8 trillion loss in the markets.

Come on. Dare ya.

I don't think I've ever seen a default number at 25%, data on that? Right now 25% of subprime may be in delinquent status. However, a large portion of those may be in the 0-30 delinquent bucket, which has high cure rates.

 

[shira]

Originally posted by: LegendKiller

Originally posted by: shira

Originally posted by: Butterbean
The CRA absolutely got the ball rolling on this mess by perverting a financial venture into a tool for social (and Marxist) engineering. Banks were not forced to make loans but in a clever fashion quotas were still practically in place since banks in subprime areas were subject to reviews on how well the performed for the subprime market percentages - with community groups like ACORN and La Raza given a role in assessment (how retarded). As the ball rolled downhill and the financial institutions realised they were full of toxic items they did their own machinations to hide the problem and bury it in layers that even they lost track of.

In any case the subprime market exploded waaaaaaaay beyond what it should have been allowed to. There were people who saw the problem and tried to fix it but the ACORN/LaRaza/MoveOn, Marxist controlled Dem party blocked it - with creeps like Barney Frank scoffing that there was any problem:

'These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

http://query.nytimes.com/gst/f...eddie%20labaton&st=cse

Fannie and Freddie are mostly a Dem failure. Bush didnt help with his give aways to illegal aliens but even he was trying to get reform. The Marxists would have none of it. This is why they Dems aren't holding their usual Stalinist hearings into the manner - because they know their traitorous hearts are at the center of it.

Now we are just beginning to find out how many illegals were given houses by La Raza and ACORN et al. Nobody should be surprised because it was in news awhile this was going on:


"Undocumented residents being recruited for loans"


?There is a huge untapped market out there, but it is a controversial program,? said Sarah Lumbert, office director of San Diego's ACORN Housing Corp., part of a national group working with Citibank to provide tax-ID loans.

"ACORN members, advocates on housing issues for low-and moderate-income people and Citibank have quietly recruited applicants in the county for more than a year. Their program has ramped up slowly because applicants need to establish credit and hunt for an affordable home."

http://www.signonsandiego.com/...206/news_1n6loans.html

One central reason Obama is ahead is because the American sheeple have been led to believe by Stalinist (in-the-tank-for-Obama) media that Bush deregulation caused subprime mess. Of course McCain fecklessness helped this go uncorrected. Alas the sheeple are starting to realize the Dems stole their children's future and have enjoyed seeing the failure since it helped them (with gleeeee they tell media of insurance and bank risks to start panic). There is going to be a lot of trouble

Your analysis is moronic. The TOTAL value of sub-prime mortages was $1.3 trillion in March 2007. (Economic Background) As of May of 2008, 25% of those loans were in default. That's only $325 billion of sub-prime loans in default. And note that those loans weren't worthless: They're worth whatever the underlying properties were worth. If we assume the value of the average property securing sub-prime loans decreased in value 30%, that means less than $100 billion of loss due to sub-prime mortgages. But let's double that figure to account for losses that occurred before 2008. So arguably as much as $200 billion of loss is due to the sub-prime mess (note that this assume ZERO defaults would have occurred if F/F had enforced strict financing rules, which is an absurd assumption).

Yet the Stock market has lost an accumulated $8.8 TRILLION in value since its peak in October, 2007.

Please explain to us how Fannie Mae, Freddy Mac, and the CRA - which could arguably be blamed for at most $200 billion of loss - are responsible for the $8.8 trillion loss in the markets.

Come on. Dare ya.

I don't think I've ever seen a default number at 25%, data on that? Right now 25% of subprime may be in delinquent status. However, a large portion of those may be in the 0-30 delinquent bucket, which has high cure rates.

I was arguing from the worst case. Triply worst case, actually. I wanted there to be no doubt that the greatest loss that could possibly be assigned to the sub-prime mortgages can't possibly account for more than a tiny fraction of the total market loss.

The real culprits are (1) those fancy derivatives, leveraged to the hilt, and propped up by credit-ratings that were nothing more than fantasies, and (2) $54 trillion of credit default swaps. The markets are currently in the process of de-leveraging much of those financial instruments to cover losses, causing huge sell-offs of assets.

 

[CallMeJoe]

Thanks to Robert (chess9), LegendKiller, and shira for their very informative (and well-informed) posts. It's great to have knowledgeable posters here to debunk our resident partisan hacks.

 

[LegendKiller]

Originally posted by: shira
I was arguing from the worst case. Triply worst case, actually. I wanted there to be no doubt that the greatest loss that could possibly be assigned to the sub-prime mortgages can't possibly account for more than a tiny fraction of the total market loss.

The real culprits are (1) those fancy derivatives, leveraged to the hilt, and propped up by credit-ratings that were nothing more than fantasies, and (2) $54 trillion of credit default swaps. The markets are currently in the process of de-leveraging much of those financial instruments to cover losses, causing huge sell-offs of assets.

Ok, just wanted to be clear on that. Your point is very valid and one I've made many times. There are some mortgage pools out there performing that badly, but not many.

One thing I caution against is to call the securitizations derivatives, if only because it muddies the waters as to what a derivative actually is. They are direct pass-through securities, equating them to CDS, futures/forwards, or options (what most call derivatives) can cause some confusion.

Otherwise, I completely agree with everything you say.

 

[Jhhnn]

The fringe faithful are in full blown denial- and they'll spare no mental gymnastics to place the blame somewhere, anywhere else than where it belongs, which is with the whole concept of deregulation replaced by self-regulation in the banking industry. Banks are clearly incapable of that. They were incapable of it in the 1920's, and they're just as incapable today. They've merely created more complex flimflams in the interim.

While it's good and constructive to push back with factual information, don't expect that the faithful will ever succumb to reason. Ever. They're as incapable of that as bankers are of self regulation.

 

[LegendKiller]

Originally posted by: Jhhnn
The fringe faithful are in full blown denial- and they'll spare no mental gymnastics to place the blame somewhere, anywhere else than where it belongs, which is with the whole concept of deregulation replaced by self-regulation in the banking industry. Banks are clearly incapable of that. They were incapable of it in the 1920's, and they're just as incapable today. They've merely created more complex flimflams in the interim.

While it's good and constructive to push back with factual information, don't expect that the faithful will ever succumb to reason. Ever. They're as incapable of that as bankers are of self regulation.

To be honest, there are some people in the banking industry that do have scruples to regulate themselves. However, they are usually in the minority and easily overpowered by the wealthy.

 

[Jhhnn]

Originally posted by: LegendKiller

Originally posted by: Jhhnn
The fringe faithful are in full blown denial- and they'll spare no mental gymnastics to place the blame somewhere, anywhere else than where it belongs, which is with the whole concept of deregulation replaced by self-regulation in the banking industry. Banks are clearly incapable of that. They were incapable of it in the 1920's, and they're just as incapable today. They've merely created more complex flimflams in the interim.

While it's good and constructive to push back with factual information, don't expect that the faithful will ever succumb to reason. Ever. They're as incapable of that as bankers are of self regulation.

To be honest, there are some people in the banking industry that do have scruples to regulate themselves. However, they are usually in the minority and easily overpowered by the wealthy.

You're right, of course, LK. I referred to the industry as a whole, not to each and every individual within it.

If we want private banking to survive, then we have to place constraints on it that will insure that w/o crises of over-leverage and govt bailouts. If current efforts at salvation fall short, then we'll tumble a lot further down, and be forced to build again virtually from scratch, the long way and the hard way.

The outcome is still very much in doubt, wouldn't you agree?

 

[heyheybooboo]

Originally posted by: LegendKiller

Originally posted by: Jhhnn
The fringe faithful are in full blown denial- and they'll spare no mental gymnastics to place the blame somewhere, anywhere else than where it belongs, which is with the whole concept of deregulation replaced by self-regulation in the banking industry. Banks are clearly incapable of that. They were incapable of it in the 1920's, and they're just as incapable today. They've merely created more complex flimflams in the interim.

While it's good and constructive to push back with factual information, don't expect that the faithful will ever succumb to reason. Ever. They're as incapable of that as bankers are of self regulation.

To be honest, there are some people in the banking industry that do have scruples to regulate themselves. However, they are usually in the minority and easily overpowered by the wealthy.

BB&T has always promoted integrity in free enterprise as their management culture - not as simply lip service or motto. I doubt that will change when John Allison retires.

 

[dphantom]

Originally posted by: LegendKiller

Originally posted by: dphantom
What I will grant is the change in separating investment banks from other types of banks also played a role. A repub congress encourgaed by a dem president pushed trhough these changes to regulations. Deregulation had nothing to do with todays problem. It was the above and the expansion of the CRA plus active backing of loans to unqualified borrowers AND those who borrowed with no down just to flip a house a few weeks later that brought us to where we are.

Banks and places like CW no doubt had a role as they were making loans expecting house valuses to rise quickly. But they could make those loans knowing they had a market to sell the mortgages to. And that was backed by F and F and others. If F and F would back it - a GSE that would not be allowed to fail, then you bet everyone had a great incentive to borrow as much as possible to make as much as they could because they thought they were safe.

This is just so flat out stupidly wrong I don't know where to begin.

1. F&F only recently bought up the mortgages, even then, they bought up a pretty small portion of the mortgages, about 5% of them.
Don't disagree at all

2. Banks were never *forced* to underwrite poor credits, nor to game the system with the plethora of exotic mortgages in their arsenal. If anything, CRA and GSE mortgages have both proven to be very credit worthy. CRA mortgages have a static pool default rate similar to many prime pools.

Never said banks were forced though in some cases certainly "encouraged to meet lending to certain areas".

3. Deregulation was absolutely the reason behind this problem. Banks who lent, the ones with subprime and near-prime mortgage businesses (LEH, BSC..etc), were also the ones securitizing the mortgages through the investment banks. Since commercial banks could also be mortgages banks AND investment banks, through the elimination of Glass-Steagall, the conflict of interest increased (Deregulation in 1999 forced by the Republicans). You had some banks (GS for example) push out CDO paper, on one side of the bank, only to be shorting it using derivatives on another side. The conflict of interest is very clear, exactly what the regulation known as Glass-Steagall was supposed to prevent.

Agree and I pointed that out quite clearly.

Through the process they had to hold the equity pieces of the securitizations, their way around that was to concentrate those into pools, CDOs. As the leverage got higher and higher, using CDO, CDO^2, and CDO^3...etc, the remaining pieces became more risky.

As a result of 2004 deregulation, banks were able to take on more and more of these assets through the issuance of debt, both short-term and long-term. The main driver behind the debt were SIVs (structured investment vehicles), which allowed the banks to push off the debt into off-balance sheet structures (another failed regulatory issue). SIVs issued short-term liabilities (asset backed commercial paper), with maturities of ~270 days, to fund assets of a weighted-average-life of 5+ years.

Obviously this is a big problem, especially if those assets start to take a dump. The ABCP market is finnicky, one problem sends investors running, nobody wants to take a loss. SIVs had no backup financing, which most banks offer for normal ABCP programs (letters of credit and liquidity). To make matters worse is that lines between traditional ABCP conduits and SIVs were blurred, hybrid conduits, or normal conduits with CDO debt, were allowed to blend, causing more confusion. Investors were scared about what could be next, this froze the CP markets.

After SIVs blew up, banks brought them on balance sheet, along with their other assets, which showed their leverage ratios to be 40:1, or worse. Normal leverage might be 10:1, or 5:1 for a well-run company.

Securitization structures had their own leverage (subordination). The rating agencies (not regulated), were able to poorly rate the transactions and allowed even more leverage than should have been possible. This is why the CDOs are now blowing up, because when the banks should have been able to get .70 out of a shitty mortgage for every $1 of face value, in a conservative structure, they got .85. That extra .15 should have been their equity in the transaction, reducing risk for the senior tranches of the bond.

Then, when they tried to put that .15 into a CDO, the rating agencies weren't diligent enough, nor regulated enough, to reduce the leverage and protect investors. Thus, the bonds (equity tranches and mezz tranches) were repacked at greater leverage than they should have been.

Naturally, as a wealth manager, you cannot dig through every investment possible, since all are complex, so you depend on the rating. Since the rating agencies were debautched, not regulated, and greedy, the ratings sucked. The RAs should have pushed back against the bankers, but they didn't. Regulations didn't force them to, so we all lose.

Add to that the lack of regulation for hedge funds, who can be levered 50:1, as well as the complex and almost completely unregulated derivatives market (CDS), you get a mix of deregulation and underregulation, that caused this whole problem.

One of the biggest fuckups was FAS140, which allowed lenders to securitize completely off balance sheet, while recognizing huge amounts of revenue up-front. Huge mistake.


You see, this problem is a massive circle-jerk of de/un-regulation. CRA was nothing more than a good-intentioned tool, same with the GSEs. It was really the banks and fund managers who were not watched over, that fucked it all up.

The rest I agree as well, simply didn't have time to make a long exposition out of it.

So I am not sure what your problem is with my comments except for my view of regulation/deregulation. If that makes me stupid, well FOAD.