Wednesday, August 18, 2010

The Paranoid Side

I don't usually indulge in wild speculation, but an inner voice is tugging at me on this one.
What if the mortgage bubble was burst intentionally?
It is undeniable that it was a long time coming. Mortgage foreclosures ratcheted up in an orderly fashion, and the crisis was wholly foreseeable years before it occured.
The market conditions were perfect for the collapse. Low, low interest rates, extreme liquidity in the cash markets, and the revocation of Glass-Steagall in 1999 allowed the predators into the home mortgage market. NINJA loans abounded (no income, no job or assets), however. And there's the anomaly.
I've worked in commercial finance. I understand risk, I understand unsecured and secured debt. I lent money to businesses that had just been taken private under all sorts of wild scenarios, from leveraged buyouts to employee stock purchases.
In other words, I have a level of sophistication that surpasses your average loan officer at the branch on the corner.
It is impossible for me to believe that nearly one hundred percent of people with MBAs, people allegedly smarter than I, didn't see what I saw even in 2003 and 2004. Oh sure, some folks hedged against it and made a mint, but the number is truly very small. Very very small. But you mean to tell me that the assistant vice presidents at Lehman Brothers or Bear Stearns or even Goldman Sachs (who manages to thrive even in this shitty market today) didn't see this coming?
That JPMorgan Chase and Citibank and Bank of America suddenly developed a case of Trigg-inosis and went all Down's Syndrome in the very area they were expert in?
Yes, the securitized debt obligations that were repackaged, re-repackaged and in some cases re-re-repackaged were bloody impossible to trace. Which in your mind ought to be triggering bells and whistles.
Because someone was tracing them and knew exactly what was going on. No one develops a tool like that without understanding it so thoroughly that they can explain it comprehensively to someone authorized to approve its use. This isn't medicine where side effects happen. The quants have this stuff figured out to the nanosecond in some cases.
OK, so now...cui bono? Who benefits? That was the question that I could never get a handle on until today. See, apart from a handful of contrarians, no one really seemed to make a lot of money out of this. Yes, we TARPed and LARPed the hell out of the banking system, but that was all money that had to be paid back. Yes, it put banks on their feet, but it risked a helluva lot with little return apparent.
Then, this morning, I started to watch Crude Impact on LinkTV. And I started to think about peak oil. And in particular, oil prices.
See, starting in 2005, we should have been seeing price spikes on gasoline and other petroleum products, as demand began to surpass the annual production of all oil producing nations, by something on the order of 12 million barrels a year. Demand is driven by a growing economy.
Indeed, if you look at this chart, that's precisely what happened. But notice something else: by 2007, as the economy began cooling and people worldwide began contracting their purchases and going bankrupt in droves, the price of gasoline collapsed.
Just not to levels of pre-peak oil. In fact, prices have inched upwards ever since.
The peak oil mark has been known for some time now. This was a predictable occurence, one with few options to either forestall or minimize. We could not avoid or reverse the demand curve, because while much of it is reliant on American demand, more and more of it was going to India and China which was driving the demand.
What could be done by the parties interested was to collapse the world economy from a demand point of view. Harder job? Not for a world that has an insatiable need for more and new. Indeed, the past forty years of marketing has shown us that anyone can get rich not by making a better product but by making a better marketing plan. All that was needed was a way to draw huge amounts of money out of the economy quickly.
Enter the single biggest asset anyone will own: their home. You might pay a year's salary, more likely less, on a new car. But a house, you take a 30 year mortgage out because you need something on the order of ten times your annual take home pay to purchase one, and who wants to wait until they are fifty or sixty to finally buy a dream home?
All that had to be done was to roll those loans out over and over again to people who would incrementally buy more and more house, loading up with more and more debt, then pull the rug out: force foreclosure.
Ever wonder why adjustable rate mortgages had five year rate locks? Why not one year (which is what mine has)? Or three? Or ten?
It was five years to specifically set a target date for the collapse of the world economy.
But why? Here's what my theory is:
Remember when gas was $4 a gallon and people actually started to notice? Started buying hybrids in droves? Started riding public transportation? Turning off lights? Turning down the air conditioning?
Look around you. How much of that is still going on? Not much. Maybe you cut back on electricity because you can't afford a $300 air conditioning bill, but for the most part, people are back buying SUVs and driving everywhere.
But note the price of gas: it's just above $2.50 a gallon. We've gotten comfortable with expensive gasoline. Just about two years ago, when all this hit, it was around $1.50 a gallon.
We're being fucked in the ass, slowly and comfortably, not rushed and roughly as in 2005. We're not making as much money (all income studies point to an actual loss of wages over the past ten years), and we're spending more on energy.
Does anyone wonder why we still haven't seen the minutes of the Cheney energy task force from the first Bush administration?
I'm no wild-eyed crazy tin-foil-hat wearing nutcase, but this stinks. This may be the story of the century.