Good Layman's guide to the financial crisis

[Ken White]

I'm refering to the one that thought it there was a supply of millions of mortgages that people couldn't afford and demand for millions of mortgages people couldn't afford that could possibly go wrong?

Thus my question -- all since WW II have had that inclination to one degree or another; as for market deregulation, see Carter J. and Clinton, W. For intervention See Johnson L. and Nixon, R.

Again, I suggest you're letting the prime culprits, our venal and corrupt Congress, slide.

If a bridge has too many supporting beams, there's nothing wrong with removing a few, but it's stupid to remove all the support.

Bad simile and feeds into your earlier error because those beams have been removed by several administrations and Congresses over the period of your short lifetime...

[slapout9]

[QUOTE=Cavguy;57244]

Slap,

Sorry for the delay. Had a paper to finish. A thrilling essay on how "Japanese Piracy" along the coasts of 16th century China was really not Japanese in origin.

Bottom line in short form-

1) Global economic hits almost always cause political instability. The meltdown in China (who owns a lot of our bad paper) has been worse.
2) Budget deficit. The rising costs of this bailout directly affect our ability to continue to spend $12bil/month in Iraq/Afghanistan, and potentially the willingness of the US public to support a half trillion dollar defense budget. Thus, this crisis may force a less aggressive US foreign policy out of necessity
3) Weakening of US economic leverage. Our economic power the "E" in "DIME" is weakened significantly. Issuing an additional $700 billion in debt will continue to lower the dollar's value as a currency. Many more nations are looking at moving to another currency (Euro?) for stability. This has long term effects in reducing global ties to our economy, which may make us less secure. (this is a long term, not tomorrow, problem)

Cavguy, no problem I am slow today myself. I think your number 2 is the big one. Going to put a lot of pressure as to the level of funding. Japanese Piracy?? are you going to post it here? Sounds really good.

[Rank amateur]

Thus my question -- all since WW II have had that inclination to one degree or another; as for market deregulation, see Carter J. and Clinton, W. For intervention See Johnson L. and Nixon, R.

For sake of clarity, I'm referring to the administration that took over right around the dotted blue line furthest to the right on the bottom charge.




Another analogy. You could argue that armies have caused more harm than good. If you keep weakening yours you'll eventually learn why you had an army in the first place, but reading the history books is a much less painful way to learn the lesson.

[Ken White]

For sake of clarity, I'm referring to the administration that took over right around the dotted blue line furthest to the right on the bottom charge.

Sigh. WHAT dotted blue line. Anyhow, why not just say what you mean? It ain't that hard...

You do realize that the Clinton / Rubin / Summers effort to extend US economic hegemony worldwide changed all the financial rules? That's what started this. And as I said, Congress bears considerable responsibility...

Another analogy. You could argue that armies have caused more harm than good. If you keep weakening yours you'll eventually learn why you had an army in the first place, but reading the history books is a much less painful way to learn the lesson.

That's an even dicier analogy...

I don't have an Army. Do you? Anyhow, you need to talk to Madeline Albright -- she's the one that insisted on using Armies for things for which they weren't designed...

[reed11b]

It is true as stated; however, replace the word 'forced' with 'allowed and / or encouraged' and your statement becomes quite erroneous.

Greedy lenders and equally greedy but risky purchasers both contributed but there was tacit government (read: Congressional) encouragement to do so. The Administration tried to rein in Fannie and Freddie in 2003 -- and Congress refused to allow it.

Same phenomenon that had lead to excessive credit card debt...

Vote 'em all out!!!

True, also in order to afford ANY reasonable home in many communities meant that lower middle-income famlies had to take whatever risks were offered. If housing had been truly affordable to the middle-class, then we could berate them for taking needless risks. I have a household income of a little under six-figures and I can not get approved for any housing except for a condo, unless I chose to take a risky mortgage. I chose not to, but I see easily why many did. In fact my wife and I often second-guessed our decision to not buy a home.
Reed

[bourbon]

Cue Howard Beale:

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's work, banks are going bust, shopkeepers keep a gun under the counter. Punks are running wild in the street and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know the air is unfit to breathe and our food is unfit to eat, and we sit watching our TV's while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be. We know things are bad - worse than bad. They're crazy.

It's like everything everywhere is going crazy, so we don't go out anymore. We sit in the house, and slowly the world we are living in is getting smaller, and all we say is, 'Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials and I won't say anything. Just leave us alone.'

Well, I'm not gonna leave you alone. I want you to get mad!

I don't want you to protest. I don't want you to riot - I don't want you to write to your congressman because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first you've got to get mad.

You've got to say, 'I'm a HUMAN BEING, Goddamnit! My life has VALUE!' So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, I'M AS MAD AS HELL, AND I'M NOT GOING TO TAKE THIS ANYMORE!'
- Network (1976)

The "shadow financial system" being a big key, as tequila notes, seems curiously missing from the current national discourse. This area also being home to massive cases of fraud and naked short selling.

Schmedlap, your targets are rather broad and miss out on two key ones: the massive expansion of capital available for investment in the past 20 years, and the extraordinary degree of overleveraging made possible by the growth of the "shadow financial system" that grew up to service that capital outside of the regulatory infrastructure that governs banks and thrifts. SIVs, hedge funds, private equity groups, etc. that became so profitable that the inevitably became enmeshed in and took over large parts of Wall St itself. That massive overleveraging is what has turned a standard housing bubble into financial apocalypse.

My sister works for Lehman, she's been kept on for the next couple weeks, I guess to sift ashes.

[Uboat509]

If housing had been truly affordable to the middle-class, then we could berate them for taking needless risks.

Home ownership is not a right, nor is it necessary to own the place where you live as you yourself have proven. We can absolutely berate people for taking needless risks with regard to this. Lots of people are quick to blame the government and the lenders, and certainly they bear a good part of the blame, but that should not absolve anyone of the personal responsibility in the choices they make.

SFC W

[Schmedlap]

We're really getting somewhere on this thread. I think that by tomorrow we will have narrowed down the culprit to one single person, because the problem really is that simple and clear cut. It was not a bunch of people exercising bad judgment, acting in bad faith, or behaving negligently. It was ONE bogeyman with evil intent and tremendous power and 20/20 foresight. I am not sure who that man is, but I suspect that he is part of a shadow network and that he is a neocon.

[J Wolfsberger]

I never thought I'd write this, but Hillary Clinton has a pretty solid approach: "Let's Keep People in Their Homes."

We're really getting somewhere on this thread. I think that by tomorrow we will have narrowed down the culprit to one single person, because the problem really is that simple and clear cut. It was not a bunch of people exercising bad judgment, acting in bad faith, or behaving negligently. It was ONE bogeyman with evil intent and tremendous power and 20/20 foresight. I am not sure who that man is, but I suspect that he is part of a shadow network and that he is a neocon.

I'm reasonably certain it was Karl Rove.

[Steve Blair]

I never thought I'd write this, but Hillary Clinton has a pretty solid approach: "Let's Keep People in Their Homes."



I'm reasonably certain it was Karl Rove.

No...Dr. Doom.

[bourbon]

We're really getting somewhere on this thread. I think that by tomorrow we will have narrowed down the culprit to one single person, because the problem really is that simple and clear cut. It was not a bunch of people exercising bad judgment, acting in bad faith, or behaving negligently. It was ONE bogeyman with evil intent and tremendous power and 20/20 foresight. I am not sure who that man is, but I suspect that he is part of a shadow network and that he is a neocon.

Are you denying there is a shadow financial system that, as tequila notes:

...grew up to service that capital outside of the regulatory infrastructure that governs banks and thrifts. SIVs, hedge funds, private equity groups, etc. that became so profitable that the inevitably became enmeshed in and took over large parts of Wall St itself.

Who's, "massive overleveraging is what has turned a standard housing bubble into financial apocalypse"? You reject this premise?

Naked In Wonderland, by Patrick Byrne. Forbes.com, September 23, 2008.

The financial and mainstream media for past couple years have been lampooning Patrick Byrne, thing is they aren't laughing now.

Yes, of course, bad judgment, bad faith, and negligent behavior by millions is a factor. I don't think anyone denies this. However, there are more important key factors.

[Ken White]

This absolute truth:

Home ownership is not a right, nor is it necessary to own the place where you live as you yourself have proven. We can absolutely berate people for taking needless risks with regard to this. Lots of people are quick to blame the government and the lenders, and certainly they bear a good part of the blame, but that should not absolve anyone of the personal responsibility in the choices they make.

SFC W

Trumps this equal truth:

Are you denying there is a shadow financial system that, as tequila notes:

Who's, "massive overleveraging is what has turned a standard housing bubble into financial apocalypse"? You reject this premise? . . .

Yes, of course, bad judgment, bad faith, and negligent behavior by millions is a factor. I don't think anyone denies this. However, there are more important key factors.

Among those factors being the complicity of Congress and the Financial industry, both of whom are also broadly guilty of "bad judgment, bad faith, and negligent behavior..."

[120mm]

I cannot emphasize enough how much this did NOT occur. Again, the majority of bad mortgages in the current crisis were not sold because the government "forced" them to do it. Absolutely not.

So... you weren't there when congress held hearings when they "castigated" the loan industry for the awful, incredibly outlandish and elitist (and sometimes racist/sexist) practice of "red-lining" people who couldn't afford to buy a house? I mean, the NERVE of lenders to suggest that broke people with insufficient (or even no) income shouldn't be able to buy a $1.5 million house if they should want to.

I seem to recall congress issuing threats to regulate the industry at that time. Perhaps I misheard, completely....

And, no, I am no big fan of the "Big Debt" industry. I think consumer debt is stupid, and America would be MUCH better off without it. I'm just pointing out that tequila is wrong about government not forcing lenders to "find a way" to get everyone into house debt.

I also seem to recall Bush crowing about how well it was working prior to the 2004 election.

[Watcher In The Middle]

Originally posted by Ski:

Mortgages have been bought and sold numerous times. Most lenders don't even know who actually owns the mortgage. That's a problem. You can't refi a loan because no one can identify what lending facility owns it.

There was an example I remember from a year or so ago. Dude in Miami owns a $3M house. Isn't making payments on the house. Lender calls him and says he owes. He says, "tell me who owns the mortgage and I'll pay them directly." Lender comes back two weeks later and says we don't know.

Dude is still living in his house.

It's worse than you think. I very, very recently wanted to take a look at a small RE mortgage backed CDO, to see how it was structured. In other words, what would it take in terms of effort, expertise/knowledge, time, and cost to unwind just one of these things - and what was supposed to be a simple one at that?

So I found a very very small CDO (lets say 8-10k mortgages, approx. total value of around $25 bil, or supposedly around $250k per financing. So I tried to see the paper (should be a pretty large amount of backup paper for 8-10k mortgages,).

Note: Never did see the paper. Should have been boxes & boxes & boxes. People I talked to weren't sure the paper wasn't still with the originating financial institutions. :eek

Well, the CDO is first broken down into "classes" (tranches; usually defined as as senior, mezzanine, and subordinated/equity).
Then, the paper (mortgages) are broken down into strips. The different strips, each with it's own risk element, go into the different classes (tranches). That's at it's most simple version.

So, the first goal is to figure out what's the "known world" of pieces of paper one has to deal with within this specific CDO. So, it's number of mortgage instruments times # of "strips" = extremely large pile of confetti.

Now, if you are going to have a bankruptcy court with the ability to adjust mortgages, you first have got to put all the appropriate strips back together to make a "complete single mortgage" which the court can then address.

If what I ran up against is any indication, this is going to be a task worthy of the Gods. Easy it is not. And btw, the folks who screwed this all up aren't even remotely capable of putting it all back together. They are all macro "big picture" types, while fixing this mess on a property-by-property basis is going to be a job for the folks who are out there digging ditches (not literally, but certainly not the wall street types). Most of them don't even know how to read a freakin legal description, much less what a Metes and Bounds legal description is. Or what a permanent parcel index number is, or a tax code is. They're pretty clueless about that type of stuff - not what they were being paid for.

And in my little research, I'm making a really giant assumption, which I have no idea if it's valid or not. And that is: I am assuming that (a) All the mortgages in (b) a single CDO have (c) all their "strips" contained in that same CDO. In other words, no strips or rights to strips from a specific CDO are contained in a totally different CDO. And right now, that's a question that has stumped everybody I've asked it of.

Folks, let me tell you, this all has terribly serious implications for the US housing market. Get ready for most all of us out here in the real world to feel a whole lot poorer - thanks, Wall Street!

I'll get you an updated post with a terminology link for all these different terms used by the so-called "Masters of the Universe". /sarcasm

[Watcher In The Middle]

on all this financial mumbo-jumbo are:

Risk Glossary.com link

and

Investopedia from Forbes

Both are extremely valuable resources.

Another thought:

The folks who designed all this stuff (CDO's, SIV's, etc.) are geniuses. No doubt about that. But it's like having geniuses who create a computer software application where you can add records to the end of time, but they just "happen" to forget to create sufficiently functional "Edit" routines to be able to correct these magnificent financial edifices when things don't go so well. It's like "Oh well, you're on your own. Good luck".

My .02

[Ski]

WITM

Yep - it's about as complicated as it gets and I fear there is no putting hupty dumpty back together again after this mother of all shell games.

I lay all of this down to the complexity of the global economic system. All of it. It's too complex too manage, too easy to mess up with ramifications for all, and it's too difficult to fix.

I'm at CGSC right now, and after the classes we've had on Joint, Combined and Interagency Operations, I think we are headed down the same path to an extent.

Other than Jim Bunning, no one has asked the question: "What happens if this all fails?"

[Watcher In The Middle]

Here's why:

The US real estate market in major areas will be seriously damaged for years. Imagine having at least 3 to 5 million homes (single family, condo, townhomes, etc.), plus god only knows how much commercial sitting out there vacant. And that's if we're lucky.

It could drive current RE values in many areas like CA, FL, NV, AZ, N IL, down 30%++ from where they are today. You are talking virtually no new construction in many areas, because why build, when you can buy rock bottom? If you can even get financing.

I mean, if you are getting a $5k federal tax refund next year, you might get a choice: $5k from the US Treasury, or a deed to a foreclosed FL condo (Your choice).

Anyway, I'm not going to continue on this particular train of thought - it's way too depressing.

You see people talking about this just being another RTC (Resolution Trust Corp.), only bigger. Not true - with the RTC, the banks & S&L's they took over still had all the mortgages held internally within the institutions. With this one, everything's spread out all over creation, and god only knows who's holding all the paper. World's biggest snipe hunt

As terrible as this sounds, I (personally) could see this being an opportunity, as I'd be one of the types who can figure out how to unwind these nightmares and put the strips back together, one property at a time. Could be doing one enormous amount of contract work piecing these "strips" back together for quite a long time. Course, IANAL or a Wall Street investment type, so probably not.

[jmm99]

no problems in who "owns" the mortgage - and who has standing to foreclose. In theory.

The idea was that the original documents would be physically transferred to a trustee (e.g., a national bank with trust powers). The servicing of those mortgages would be transferred to a mortgage servicing company - payments, discharges of mortgages when paid, etc.

Now, any right (or obligation) in a mortgage can be assigned. That, BTW, is the concept behind "stripping". To validly assign a right, you need a written assignment.

One right is the right to foreclose. That right could be assigned to the bank trustee with the original documents, or to the mortgage servicing company, or to a third party for that matter. The point is that there has to be documented paperwork at each step.

I've handled several matters, well before the present debacle, which involved "mortgage packages". For obvious reasons, I cannot go into the specific facts.

My conclusion reached, about 5-10 years ago, was that the entire system was completely FUBAR - original paperwork lost; step by step documentation missing; regulations that were decades behind modern banking practices; and regulators not regulating because they didn't know what to do - or were making up (I mean that literally) "regulations" to fit their desired outcome. Everybody was making a bundle - and, so, nobody gave a damn.

The following is not a recommendation of the product (foreclosure advice) being sold on the following webpage, but it does have a good article on:

Contesting a Foreclosure Lawsuit - Who Owns the Mortgage ?

http://www.foreclosurefish.com/blog/index.php?id=474

Obviously, the situation I saw 5-10 years ago has only gotten worse.

[Schmedlap]

This mess is one of the primary reasons that I am now in law school and finishing up my MBA on the side. My money is not earning anything in the market and probably will not for the foreseeable future, so I might as well spend it on something useful rather than watch it evaporate in my portfolio and depreciate faster than it earns interest in the bank.

[wm]

As I understand it, all of the CDO nonsense is based on making money on someone else’s debt—buying and selling it and taking a fee for arranging the meeting.

How about if we declare a “Jubilee?” Everyone gets all of their collateralized loans, their mortgages, auto loans, etc., written off. Folks get clear title to houses, cars, boats, trailers, etc. out right.

Seems to me that this then frees up a ton of bucks that everyday consumers today are using to pay off those loans. They can take all of this newly available cash to start investing in more traditional ways or in some new wonderful scheme that the investment whiz kids dream up. Government gets a big income boost because the ability to reduce one’s taxes based on mortgage interest deductions in Schedule A goes away. A lot of short term work at deed registries and the like across the country is created as liens are cleared and titles to property get released.
If a few investment banking “pimps” get stiffed, so be it—seems like they ought to reap some “rewards” for the risks that they transferred to others.