cognitorex

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There are some interesting side issues to the sub prime housing crisis that are not so generally discussed. Are free markets efficient, as the GOP/corporate mantra goes, or prone to excess and economic dislocation? Who pays for the economic dislocation, those receiving the bonuses prior to the crash or John and Jane Doe? If the total housing market is in effect a commodity subject to ups and downs why were the financial big boys all invested in an ever upward scenario? Who lends trillions collateralized by a commodity with little or no equity margin? Greenspan et al, to some degree knowingly, destroyed the S&Ls so Wall Street could get their hands on mortgage paper. This sub prime crisis is actually Part Two of the earlier S&L takedown.

Also, while considering the effects of Congress, the Fed and Corporate (Bank) America's destruction of one institution, i.e. the Savings and Loan Industry, ask again why Bush, the GOP and Wall Street say trust us that privatizing social security is a guaranteed boon to our aging citizens.

First, the myth that free markets operate efficiently: In the 60's, financial institutions' equity got hammered by overlending to REITs. Then, as a result of a Latin America lending binge in the 70's and 80's, several household name banks disappeared via mergers. Followed on by the the S%L crisis which happened when the biggest commercial banks and investment houses talked Greenspan et al into deregulating these economically safe and efficient entities in order that they could get their hands on what would become known as securitized debt or mortgage obligations. Without legislation to destroy the Savings Industry's niche, what we now call the sub prime fiasco could not have occurred. It is interesting to note that this is actually the S&L debacle, Part two.

My labored point is that the financial big boys go on binges. They regularly wipe out enormous chunks of their equity capital and in so doing they wipe out their lending capacity. If free markets were efficient this would not occur. In this fiasco the financial industry bought crap assets. Forget both the borrower and the broker who made the loans. Billions of these mortgages were known to entail a high degree of risk and yet they were bought at par so to speak. There is no evidence of market efficiency here. The supposed best, biggest and brightest bought junk.

Let's hear Alan Greenspan's (hilarious) euphemism on this subject: "Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction." (As I said the big boys, hedge funds, etc bought crap loans.)(Hence gov't intervention.)

Another different light that could be shed on the Collateralized Mortgage crash is that, in overview, housing is or became a commodity. I was a lender in the oil patch in the early eighties when the collective equity of the Texas and other Southwest banks seemingly disappeared overnight. A barrel of oil had risen to $26-28 and when it fell to $12, a domino of bad loans left the US Government as the Southwest's banker.

Leading up to our present liqiuidity crisis, all housing became commodified. It had to increase in price for the sub prime CMO purchase and sale system to stay afloat. What I find interesting here is that there are written and unwritten rules that the financial world follows when retail or wholesale customers or the institutions take a position in a commodity. Common sense as well as in-place regulations mandate that a sensible liquid margin be in hand before, in this case, a person or an industry bets trillions on the price direction of a commodity or particular asset.

A regulator presenting a case for earlier intervention by using this commodity analogy might have presented a simpler, more cogent and forceful argument. Saving John and Jane Doe from resetting mortgages was not an argument likely to get a patient ear from our entwined Corporate America and Congressional decision makers.

And harken well to the underlying economic rationale and philosophy espoused when George Bush, the GOP and Wall Street attempt to entice the public that placing their retirement benefits in security related private accounts is a guaranteed boon to their retirement well being. The banks and the Fed and their Congressional enablers had their way with the Savings and Loan Industry and the results have not been pretty. When they come asking for commissions on the nation's social security assets ask them to explain that bit about how markets only rise in value.

Labels: ARM loans, CMOs, Greenspan, housing, sub prime