As Is So Often True....

...whenever there is a windfall, we can expect the parasitic maggots to dig in as deeply as possible and try to find new ways to make even more money:

The FBI is investigating Countrywide Financial, the nation's largest mortgage lender, for possible securities fraud, said a person familiar with the probe.

Investigators are focusing on whether Countrywide officials misrepresented the firm's financial position and the quality of its loans in securities filings, said the person, who declined to be identified because he wasn't authorized to speak about the inquiry. He described the inquiry as preliminary.

Countrywide is among at least 14 companies the FBI is checking for possible accounting violations related to the subprime lending crisis, including mortgage lenders, housing developers and Wall Street firms that package loans as securities.

Granted, it's a preliminary investigation and granted, there's no conclusive evidence of securities fraud.

Past history, however, is rife with instances where, when markets are booming, someone will try to grab even more of the windfall in profits and money raining down than is necessary.

The junk bond scandals of the 80s would, you'd think, have alerted investigators overseeing other market bubbles, since in that scandal, several of the biggest names involved in the marketing of sub-prime (there's that word again!) corporate debt were eventually convicted of securities fraud: names like Ivan Boesky and Michael Milken stand out in the convictions from those heady days of Reganomics.

Yes, change the world, indeed!

During the dot-com bubble, we saw corporations like Merrill Lynch and Citigroup cited and fined by the SEC for fraudulently humping stocks of companies like WorldCom, JDS Uniphase, Global Crossing, Cisco, and Lucent, all of whom eventually had to answer for some of their own greed.

I personally recall wondering how Cisco Systems could continually make precisely one penny more per share than analysts' estimates each quarter and then realizing there had to be fraud involved. You can't get a much clearer sign than that.

So it's not surprising that, in this latest bubble, there would be fraud going on. Shady mortgages, shady repackaging of those mortgages to shed the risks of the shady mortgages, those stick out as the most obvious strategies a nefarious executive could do in order to squeeze the undeserved buck out of investors and mortgagors.

There's probably more. These things don't happen in a vacuum. I would expect some allegations to be made regarding at least collusion if not conspiracy to commit fraud amongst lenders like Countrywide, DiTech, and other mortgage brokerages and lenders.

Hey, it was practically free money that was lying there for the taking! Who among us wouldn't scoop a little up if we saw a pile of cash in our driveways?

On top of this news, comes some other distressing financial developments, courtesy of Southern Atlantis, we see that the "D" word might have to be used soon:

During the Depression in the 1930's, banks suffered or shut down because their cash amounts and revenues through loans could not meet the balances of their depositors. The Federal Reserve at that time countered the need for cash that remaining banks had through special loans to those institutions. The term auctions the Fed is holding now serve the same purpose, though the interested or borrowing member banks are not mentioned. That, of course, works in the banks' favor: their stock prices don't take a hit, or, at worst, there's no run on the institutions.

OK, so what evidence do we have for this happening now?

Just these:

1) Citi sees $9 bln writedowns at U.S. investment banks

2) Goldman says can't rule out Fed emergency rate cut

The combination of lowered interest rates as well as writedowns of that magnitude will create a deep uncertainty amongst bank account holders. Can you say "run on the bank"?

Too, inflation is already roused, and the rate cut will not help that. Add now the economic slow down we've been experiencing, and you're talking about stagflation, something I've warned about since November of last year.

Another piece of this very complex and ugly puzzle is our foreign relations stances will not be helping us this go-round. Most other developed and -ing nations seem to be doing fine or at least hanging on (there's some trouble in Japan, but growth continues in China and India and Europe).

Normally, we might browbeat some of our allies and trade partners, but I fear that Bush's hubris and naïveté has cost us that potential tool in limiting the damage from a depression that could be as deep as the Great Depression of the late 20s and 30s of the last century.

The real scary part about all this for me is, I can't see the end game to this dip. There's not much good news laying about, no uptick in productivity, no surge in hiring, no growth sector that can't be attributed to inflation or exports.

2008 will not be fun.

I Had My Heart Broken Last Night

By a movie: Maxed Out.

The film, released in 2006, has proven to be more timely as the years have passed:

Maxed Out takes viewers on a journey deep inside the American style of debt, where things seem fine as long as the minimum monthly payment arrives on time. With coverage that spans from small American towns all the way to the White House, the film shows how the modern financial industry really works, explains the true definition of "preferred customer" and tells us why the poor are getting poorer while the rich keep getting richer. Hilarious, shocking and incisive, Maxed Out paints a picture of a national nightmare which is all too real for most of us."

You'd have to have a heart of stone not to be affected by some of the stories in this expose, juxtaposed against some of the cruel, callous and officious bullshit spewed by the people who are roasting, toasting, and burning to a crisp those who are least capable of handling the credit so cynically ladled on them by predatory lenders.

If you want an idea of why the subprime market worked so well despite nearly every single rational thought, this movie gets under the mechanics and tinkers with the very soul of why credit cards exist, how they work, and what the banks and their cronies in Congress and the Bush administration wish would happen to you.

Yes. You. There's not a one of us in this country, with the possible exception of the uberrich and propertied, who couldn't but for the grace of God be one of these stories: white, black, urban, suburban, rural...everyone could fall prey to these sharks with silk tongues wearing silk suits:

The most profitable niche of the industry is called "alternative" or "sub-prime"—euphemisms for a business formerly known as loan-sharking. They target those with less than perfect credit-people like Mark Mumma, whose frustration with the sub-prime credit card issuer Providian caused him to start the website www.providianfinancialsucks.com. From 2000-2002, Providian paid over $400 million to settle charges that it defrauded its customers. Soon after, a Providian director and the chairman of its compliance committee was appointed corporate crime czar by George W. Bush.

Right now, in this country people are going broke at a faster rate than they did during the Great Depression.

Sink your teeth into that statement for a moment. The event that triggered your parents and grandparents to squeeze each and every dollar for all it was worth was nothing compared to the firestorm headed our way: it could create a permanent underclass along the lines of sharecroppers of the post-Civil War South.

The stories in "Maxed Out" will leave you breathlessly angry and crying from rage and sympathy. As director James Scurlock puts it:

We're all led to believe that people get into financial trouble because they are irresponsible, but I've learned that most people are getting in trouble because the banks and credit card companies are setting their customers up to fail. Why? The more credit they give us, the more credit we need. When we inevitably fall behind, they can charge the huge late fees and the over-limit fees and the stratospheric interest rates that drive their profits.

I highly, highly, recommend this film. It will scare you into taking care to clean up your debts now.

Le Droit Du Seigneur & Economic Royalty

In feudal times, all who worked for the lord of the land submitted to droit du seigneur, which demanded, among other things, any virgin woman to be married was offered to the manorist first, in order to deflower her (aka prima nocti, or law of the first night).

Should she be silly or unlucky enough to become pregnant, well, that was her family's burden. In addition to spreading his genetic material (believing that peasants and serfs were of lesser blood, so "improving" his people), it was also a form of suppression: by humiliating his charges, they would be less likely to rise up in revolt or even to ask a boon of the lord.

Well, to no one's surprise, this elitist, royalist tradition continues today, albeit in a mutated form:

A Treasury-backed plan to stabilize a vital segment of the credit markets has been shelved, the banks involved said yesterday.

The strategy called for banks across the globe to create a $100 billion fund aimed at jump-starting the troubled market for short-term loans, acting like a credit card for companies.

But the architects of the plan, which was developed by Citigroup and other leading financial institutions at series of meetings convened by Treasury officials this fall, struggled to recruit other banks and called it quits this week.

This plan was a key privatized element of Bush's mortgage "bailout" plan, supposedly directed at borrowers but in truth, designed more to protect lenders.

The larger commercial banks, like Citibank or JP Morgan Chase, could afford to absorb some of the shortfalls and defaults that would cripple smaller lenders. The $100 million fund would limit their losses to this amount, and that risk would be spread out across a number of banks around the world.

Makes sense, right? This way, the credit markets don't dry up so quickly, and might even weather the storm.

So why is this being shelved?

Earlier this week, Paulson and the banks behind the plan said they were committed to its establishment. That changed yesterday after Treasury officials and the banks, which included Bank of America and J.P. Morgan Chase, said that the fund was "not needed at this time" because market conditions had improved.

Subtle, that.

Market conditions have improved, a little (read: bank earnings have stabilized), but the economy itself (and the money that goes to pay mortgages) has not. In business-speak, the banks took a look at the risk and realized they were a lot more likely to lose the entire $100 million than they were a month ago:

The plan would have helped major issuers of asset-backed commercial paper called structured investment vehicles (SIVs). These semi-independent funds, set up by Wall Street banks to make complicated investments, have suffered deeply from the credit crunch.

The SIVs issue short-term loans and invest that money in securities backed in many cases by mortgages. But after a wave of defaults and foreclosures swept across the nation, the value of the securities held by the SIVs plummeted. The debt markets panicked, and the SIVs found it impossible to sell off any holdings.

With those large losses and a climate of fear in the marketplace, the SIVs were unable to issue short-term loans.

Since then, many banks, in particular Citigroup, have moved more than $100 billion in troubled assets from their SIVs onto their own balance sheets, alleviating a key rationale for the rescue fund. The transfer means the banks are agreeing to back loans made by the SIVs.

Prima Nocti, indeed. These guys pumped the American homeowner full of their vile seed, and now walk away with millions of pregnant mortgages about to come due, which they can easily write off their books now. Essentially, the banks are telling Paulson, the Treasury Department and the Bush administration, "Screw you, this is your problem, you fix it!"

George Will, a man no one really need admire, has said one admirable thing in his life: the American capitalist system is designed to privatize profit, but socialize losses, except when it comes to the individual wage-earner. If a business loses it's headquarters in a foreclosure, that business can write that loss off. A human family? Eh. Not so much. If a bank forecloses on a mortgage it holds, it can write off that loss. I lend you a $100, and I have to go through hoops and garters to prove to the IRS there was indeed an actual loan if you can't pay me back. And our transaction was probably better documented than the banks!

Next year will be a pivotal year in the mortgage and credit markets. This move tells me the banks are expecting bigger problems than anyone anticipated.

Bush League Policies

When history looks at the Bush administration from the perspective of the American people, it's overwhelming conclusion will be "who did the policy really benefit, since it clearly didn't benefit the citizenry?"

Too, with today's announcement of "mortgage relief for homeowners," we should anticipate history. An historian's job is not easy, and bloggers should assist him (or her) in any way possible:

The plan hammered out by the U.S. Treasury Department in talks with mortgage industry leaders would bring relief to many of the 2 million homeowners who took out adjustable rate loans with low teaser rates due to move sharply higher in the next year or so.

Officials fear 500,000 Americans are at risk of losing their homes.

The initiative is designed to temporarily hold rates steady for subprime borrowers who could not afford to stay in their homes otherwise. A senior White House official said Bush would discuss the agreement at 1:40 p.m. (1840 GMT) on Thursday.

"No one wins when a house is foreclosed on -- the homeowner loses; the lenders lose; communities and neighborhoods lose; investors lose; and the economy suffers," the official said.

Ah, let's take a closer look at that, particularly in light of Hillary Clinton's analysis yesterday:

Clinton said mortgage lenders and brokers who lowered underwriting standards were also deserving of blame for the housing market mess, as were regulators who failed to provide adequate oversight.

She pinned some of the responsibility on ratings agencies for giving high marks to securities later deemed to be much riskier, and on speculators who bought multiple properties in the hope of profiting from a strong housing market.

She also pointed out that a mortgage was no longer a mortgage, but an "asset" underpinning a securities (a derivative), which could be bought and sold like a commodity.

This action spreads the risk of the loss (see the article I originally quoted) amongst the business community, in particular, away from the banks who lent the money in the first place!

So the lender doesn't lose, meaning there's got to be a better reason why banks and mortgage makers would agree to a rate freeze.

The White House is touting that the agreement will help over a million homeowners who face enormous rate increases in the next twelve months (roughly two million), and many of the 500,000 homeowners already in default on their mortgages:

The official said the plan could help more than a million qualified homeowners with subprime loans avoid foreclosure over the next couple of years. However, private-sector analysts said the numbers would likely be much lower.

"In theory, the plan could help as many as 750,000 subprime homeowners," said Mark Zandi, chief economist for Moody's Economy.com. "In practice, my sense is that it will probably help at best about 250,000 homeowners."

And so how does this plan work?

Under the plan laid out by the investor group, homeowners who have shown they are a reasonable credit risk, but who could not afford their homes with higher rates, would qualify for "fast-track" loan modification and the five-year interest rate freeze.

Borrowers who can afford their current loan terms would get help refinancing, but those who cannot and were poor credit risks would probably still lose their homes.

Ahhhhhhhhhhhhh, there's the "benefit" to banks! The bill does nothing to wipe out the really bad lending decisions that were made by the banks, meaning they can write them off, taking a one-time hit to earnings, once the freeze is in place. This frees up future earnings (and by extension, their stock prices) and bolsters their balance sheets long-term by wiping out the calculations needed to determine the bad debt expenses associated with the truly exploitative loans.

In effect, what this reform is saying is, if you could have afforded your mortgage five years ago under these new terms, then you can keep your house. If not, tough luck, sucker! We take your house AND all the equity you've built up in it, and will sell it off to make our mortgage back.

Yea. Bush "reform"...

By the way, lest you think this is a "red state" phenomenon....well...

YOU'RE RIGHT!

(h/t Instaputz for image)

Run, Bank, Run!

Many of you are familiar with bank runs only from the movie "It's A Wonderful Life," a particularly syrupy little piece of treacle your parents made you watch a billion times as a kid around Christmas:So George Bailey dips into his own pocket and rescues his bank with his honeymoon money.

Yea, that would happen. But bank runs were a significantly contributing factor to the Great Depression, which is why that scene had to be put in the movie.

Which brings us to today. Despite the attempts at reassurance by the central banks of both American and European governments that the sub-prime lending crisis is contained, there are many who are not getting the message, and rightfully so. It is NOT contained, and banks are working feverishly behind the scenes to put out this wildfire before it spreads.

The defaults on subprime mortgages and the subsequent defaults on securities that are derived from those shaky, questionable loans, will mean less liquidity for some major institutions in the world. Less liquidity, less cash, and suckers people like you and me who deposited money with these institutions stand to lose our investments.

Thus, today's story has some very ominous overtones:

LONDON (Reuters) - Fears grew on Saturday that panic among savers at British bank Northern Rock will see a run of withdrawals after reports that 1 billion pounds ($2.01 billion) had already been taken out.

The Bank of England stepped in on Friday to rescue Northern Rock, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds after a global credit crunch hit the bank's ability to raise cash in money markets.

Saturday's Financial Times said customers had withdrawn 1 billion pounds on Friday, or about 4 percent of deposits.

Citing a source familiar with the situation, the paper said a quarter of that amount was withdrawn from branches and more via the Web site, despite problems accessing online accounts.

It will be impossible to even gauge the impact of this run for some days. The fact that people can electronically move their money out means they can't even easily stop the flow or limit it. Northern Rock could go bone dry on Monday, and no one would know until Wednesday.

And this is after the Bank of England has stepped in to do a George Bailey!

Bank runs have their own unique momentum, fueled by rumour and truth in a volatile mixture. The conservatives have played this paranoia for their own benefit for seven years now, and I suspect we're about to see it blowback big time on them. Just try to stop Americans from withdrawing money, and you'll realize that all those terror rumours and anti-liberal, anti-human, anti-gay, anti-immigrant ghost stories took their toll on our psyches.

This won't be the last bank run, nor will it be the worst. And this depression could be worse than anything we've ever seen.

Money. Money, Money, Money Moneyyyyyy!

Sorry, gang, it's Sunday, I know, and hardly the day you want to think about mooney and markets and economics...hell, my hangover has me hating writing this more than you hate reading it.

But it's important:

Global central banks, including the European Central Bank and the Bank of Japan, added more than $300 billion of extra cash to the banking system over the last 48 hours to stabilize credit markets.

"Central banks like the Fed and ECB are adding liquidity, and that has done a lot to calm the markets," said Rafael Martorell, chief dealer at BNP Paribas in New York.

That helped U.S. stocks recover from an early plunge, sending currency traders rushing to sell their newly acquired yen.

Recently, the Japanese currency has slipped when equity markets rose because investors could borrow in low-yielding yen to finance purchases of other risky assets. When stocks slid, the yen firmed as investors unwound those carry trades and bought back yen.

The Dow was down nearly two hundred points Friday morning, even after the Fed injected $19 billion. When that barely bumped it up to a hundred point loss, the Fed funneled another $16 billion. That made the markets go into positive ground, briefly, and it took an additional $3 billion to keep them about flat for the day.

$38 billion. About the cost of the Iraq invasion for a month and a half.

Shove it, Bush, seriously. This isn't the only news of the week that should be deeply tied (literally) to Bush's psychotic obsession with warmongering. The heavy price we've paid to secure perhaps ten percent of the known oil reserves could have basically bought us 25% of them without any military intervention whatsoever. Oh, but then there's the Republican obsession with not signing international treaties to contend with, but let's face facts: a trillion dollars buys a lot of goodwill.

Back to the stock markets. The Fed will have exhausted its ability to intervene in the markets probably by Wednesday. My guess is Bernake spent much of the weekend on the phone with the banks who control the Federal Reserve with his hat in hand, trying to find bail out money. All it will take is one banker to say no, and the entire house of cards collapses by Tuesday.

Why is this happening?

Two words: housing woes. Last year, 46% of home sales returned to the seller less than five percent equity. Since most mortgage require at least that much in a down payment, 46% of Americans either lost money or barely got back their down payment in selling a house.

I'd estimate maybe another 30% got back between 5 and 10% in equity, so about 3/4 of Americans who sold a house last year broke even. Maybe. It might be much much higher.

People have financed this recent economic growth, as feeble as its been, on their credit cards and home equity loans. Now, there will be no more home equity loans and credit card growth.

And you know who will be bailed out? Not the home owners, but the banks, who will keep lending money faster and faster and just get deeper and deeper in debt. Meanwhile, watch as people try to file bankruptcy only to find out that they can't, that they'll have to pay back each and every penny they borrowed...

The New Math Of A False Economy

(graphic courtesy tengrain at mockpaperscissors.com)
As my long-time readers know, I'm a wonk for economic stuff. Hazard of my avocation, I suppose, needing to stay on top of the economy and make decisions based on my observations. So I stumbled across this story, and started reading it, when I found a paragraph that I think can help explain and tie together some loose threads that have been floating on the periphery of your field of perception lately:

"The negative housing wealth effects on consumer spending could be more pronounced than anticipated," Zandi warned, estimating that a third of U.S. households tapped a substantial amount of home equity in recent years to support spending.

But with stagnant or falling home values, and rising mortgage delinquencies, consumer spending's sole support looks to be wage and income growth, and this at a time when households are being heavily taxed with higher energy prices.

Energy costs rose only 2.9 percent in 2006. But in the first three months of this year, they shot up at an annual rate of 22.9 percent, accounting for about 41 percent of the increase in U.S. consumer prices.

The Consumer and Producer Price indices that are so heavily reported by the mainstream media purposely ignore energy and food prices, due to their volatility. Personally, I think that's a mistake: first, we have much better tools to measure these and to factor out volatility now, and second, these are two core purchases that consumers must make, so to say "inflation was only 3% last year," while food and energy prices were up together anywhere around ten percent is a lie designed to make the administration look good.

But I digress.

Take a closer look at the excerpt I posted: you'll note that the past several years' economic growth has been generated not by wage and income increases (which have remained stagnant to down. It wasn't until 2004 that the final leg irons of recession, consumer income, surpassed the levels at the end of the Clinton administration and even that's not factoring in inflation), but by borrowing against the equity in our homes.

An increase in debt, in other words. Debt can be defined as an advance against income you hope to receive in the future, and interest payments a hedge against the lender losing all that money if your gamble fails.

The optimistic presumption the average American lives on is things are going to get better: my company will make more money. They'll pay me a higher wage. I'll be able to pay off my debts.

Not so much, anymore. Wages have stagnated for nearly thirty years while the banking industry has gone to great lengths to fool consumers into believing they are worth more money than they truly are.

I suppose to a large extent, bankers can be blamed for this situation. Anyone with half a brain who spends a little time studying the overall economic state of this nation would have tightened their lending rules, not expanded them, in order to keep their balance sheets honest and their mortgages current. And banks are chock-a-block with MBAs from Ivy League schools who are trying desperately to learn the lessons I learned on the streets of Noo Yawk: don' lend someone money what can't pay youse back, unless youse is prepared to break deir bot' legs.

See, another side of this comes out in the quarterly earnings report that banks have to prepare for their shareholders. Obviously, if I'm Chase Manhattan, I have to keep my earnings higher than Citibank in order to keep my investors from moving their money there. New loans generate gobs of short term income. Old loans do not. The shell game is to keep those fees and surcharges rolling in (which is why the penalties on credit cards have also become so exorbitant: that's pure profit).

That "immediacy culture" pervades right down to the administrative level, as those Ivy League MBAs are thrown into competition with each other to come up with "the next insanely profitable cash cow." To the winner goes the spoils: make the bank the most money, and you get the corner office, the bigger bonus, the trips to Hawaii.

No one thinks long term, so no one looks long term, so in truth, no one saw this coming, but it is.

We're already in the soup on this, and there's not much to do to bail Americans out. The government could try but thanks to Bush and his tax cuts for the wealthy and his invasion of Iraq, the government has no money either and the money it has borrowed is not going to be allowed to go to its people who need it most.

In effect, we'll all be wage slaves to China. And we've seen what their standard of living is like.

After that, the future gets murky. Obviously, taxes on the wealthy will skyrocket. They have to, particularly as baby boomers retire in greater numbers each year and the pool of productive tax paying Americans dwindles. Taxes on all of us will go up, as well.

Suppose for a second, though, that they don't. Some political pressure keeps honest politicians from talking about tax increases. It becomes a political third rail.

We can't cut spending sufficiently to offset the loss in revenue. Aside from Social Security (which is funded separately anyway) and defense, there's not a whole lot the government spends money on that could scale up to free hundreds of billions of dollars for domestic spending programs that would now go from discretionary to mandatory, unless the sight of people dying in the streets is somehow magically made palatable to Americans. Events of the past week indicate Americans wouldn't want that on their TVs.

About the only places we could cut are defense. And defense. And homeland security.

I think we all know what that means.

So by destabilizing the American economy for decades if not centuries to come, Bush has created the single most dangerous breeding element for the domestic security of Americans: a weakened economy with not enough money to spend on protecting us all.

Thanks, Dumbya.

Bush
economy
mortgages
taxes

Why You Should Care About Subprime Loans

You've read a lot about the sub-prime mortgage market lately and how people from Ben Bernanke to the average shmoe with a few bucks stashed away in his 401(k) are worried, but all you've heard is a lot of reassuring talk amidst the smoke from a distant fire.

There's a reason the Fed chairman has had to reassure the public, twice now: he's protecting his cronies:

In good times, unsustainable loans still turned a profit; the lenders reaped short-term fees and quickly sold the loans to investment banks which chopped them up, repackaged them, and flipped the debt to hedge funds and institutional investors. Now the gravy-train is derailing, and as CFR’s Sebastian Mallaby argues in the Washington Post the investment banks could be exposed as the real scoundrels of the subprime blowup. The banking giants “bamboozled ratings agencies into assigning misleadingly high credit scores to some mortgage-backed bonds,” Mallaby says. This enabled them to pawn off bad debt, disguised as good debt, to unwitting investors.

How far will the damage extend? Bloomberg, in the article cited above, says subprime housing-loan woes could spill over into the auto-loan industry, where highly speculative loans are also prevalent. The issue has global ramifications as well: In late February, subprime concerns sent stock markets tumbling on fears of a U.S. economic slowdown. Even though subprime loans aren’t nearly as common internationally as they are in America, a U.S. credit crunch could still suck liquidity out of global financial markets. Testifying before Congress on March 28, the U.S. Federal Reserve Chairman Ben Bernanke said the subprime issue thus far has had only minimal effects on the broader U.S. economy. But some factors remain unknown. Perhaps the most frightening question is what happened to all that bad debt the investment banks pawned off. Hedge funds, the Financial Times’ Gillian Tett points out, are often masters at using tricky paperwork to cover up their losses. But somewhere, somebody is taking a heavy hit right now. Tett wonders: “Where are the bodies buried?”

The bodies, indeed.

As always in American history, there are parallels to be compared. In this instance, in our own lifetime, we have just such a parallel: the 1989 junk bond bust. Created by the Reagan administration tax cuts, which accelerated depreciation on assets purchased, and exacerbated by President Jimmy Carter's relaxation of regulations on the banking industry (Regulation Q), junk bonds became ubiquitous in the 1980s, through the efforts of investment bankers like Michael Milken, as a financing mechanism in mergers and acquisitions. In a leveraged buyout (LBO) an acquirer would issue junk bonds to help pay for an acquisition and then use the target's cash flow to help pay the debt over time. Basically, it became cost effective to borrow large sums of money at high interest, purchase the stock of a company, take it private, gut it, and all the while, make money (on a tax and cash basis) for the investors.

While screwing everyone else. Eventually this house of cards had to crumble.

Likewise with the sub-prime debacle, as the CFR article notes, enormous sums of money were made in a grand game of hot potato, where the loser is the one holding all the default mortgages at the end.

Namely, the US taxpayer. Remember, Republicans like to privatize profit while socializing losses. We will end up paying for this, just like we ended up paying for the savings and loan crisis (which was an ancillary impact of the junk bond market collapse). A good blogger would point out that a certain former Senator from Tenessee and former TV star with presidential aspirations worked as a lobbyist for the S&L industry. Didn't you, Senator Thompson?

That one was cheap: only $106 billion

There is $7 trillion in mortgages out there. Most of that is safe. But if even $1 trillion (not an unlikely number, since this crisis now spans some six years of mortgage lending before anyone took note and the annual mortgage market in the US is north of a trillion dollars a year, including refinancings and second mortgages), if even $1 trillion is at risk, that could create an economic collapse that would make the Great Depression look like a day at the beach.

tags technorati : sub-prime mortgages Fred Thompson

Like A Wave Caught On The Sand....

Riiiiiiiiiight:

TOKYO (Reuters) - U.S. Treasury Secretary Henry Paulson said on Tuesday that a weakened housing market will not have a major impact on the U.S. financial sector, which he described as quite healthy.

In a roundtable session with reporters during a visit to Tokyo, Paulson said the housing downturn had had some impact on certain types of mortgages but he did not see it as a major problem.

"Some of the credit issues are there, but they're largely contained," Paulson said.

Yea. *AHEM*

NEW YORK - Mounting concerns on Wall Street that mortgage lenders might be hurt by increasing defaults and delinquencies sent investors fleeing Monday from some of the biggest names in the industry.

The meltdown among lenders that specialize in home loans to people with weak credit, known in the industry as subprime lenders, again ravaged stock prices. Financial institutions from Britain's HSBC Holdings PLC to subprime leader Countrywide Financial Corp. sank amid reports of strained portfolios as loans went bad.

Some 31 sub-prime lenders have gone into technical default since January 1st of this year, which is essentially a run on the bank to frame it (simplistically) in terms we might comprehend.

The housing boom of the nineties was largely financed by these firms, like Countrywide and Ditech, who would lend first and second mortgage money at sub-prime adjustable rate mortgages. Most of these mortgage promised that, for the first five years, you would pay a very low introductory interest rate with no paydown of your principal. After five years, the rate would then be allowed to float to prime plus a premium, based on your credit history, payment record and current financial situation. Also, you'd have to start making payments against the principal.

All this made a lot of sense when the loans were 2.5% and the prime was 3.25%, and the housing market was robust. Over the course of the Bush administration, however, prime lending rates have nearly doubled, meaning that folks who took out those mortgages will now face almost a thousand dollars more each month in payments than they had last year. Too, there's no way to sell the house for a profit, since the housing market has stalled and as more of these properties go into default, will drop further, faster, and harder. Supply and demand, you see.

You might think this means nothing to you: after all, you have credit cards, maybe you own your own house but you have a regular mortgage and a good credit rating...you'll be fine.

And likely, you will. Unless you have health issues, and need to take out a second mortgage because your insurance won't cover your therapy. Or you get divorced. Or your spouse dies. Or you lose your job.

Now think back to the passage of the new bankruptcy law, which makes it nearly impossible for you to get a clean slate anytime in your lifetime (although Donald Trump has a few loopholes to jump through).

See where this is going? Instead of providing for the American dream, what has happened over the past half dozen years or so is precisely the opposite: a shell game that is designed to fatten the wallets of the uberrich to the detriment of you and I.

We ought to be pissed as hell at these developments. These "bankers" were no better than crack dealers, except they didn't use a gun to keep you in line.

Just a lawyer.

Oh...and Paulson? He's just the delaying tactic until the smart money can get out of this very volatile and very dangerous market.

Related Story: Eclipses and Market Crashes

mortgages
sub-prime lenders
snarkasm, snarcasm, snarky
Bush