cognitorex

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John and Jane, brokers, sit in their mortgage originator store front office. They spy a couple reading their window adverts.
"Come in, come in. And how are you lovely folks today?"
"Good." "Good."
"May we ask you if you rent or own?"
"Ah, you rent. $900 a month and it's tight. We see." (They huddle a moment.)
"Folks, we've assessed your case and our thinking is if you sign right here for a thousand a month mortgage, we'll see that you get a quarter of a million dollars to get that home you have your eye on. How's that?"
"Don't you have to write down all your credit card debt?" "No. Your application looks great, just as it is."
"And what will your mortgage and mortgage rate be at the end of the initial term? No one can say for sure but the standard operating procedure is that you come back and refinance with the new higher value of your home". "Everybody does, just SOP, right Jane?"
"SOP, everybody does."
"You're curious how we get paid. Well, it comes from the lender's part of the deal. It isn't a lot but we get to put good folks in great homes. That's a big reward right there."
"All set? See ya later. You're welcome, thank you."
John and Jane high five, laughing!
"What a couple of con artists those two are, borrowing a quarter mil on their credit record."

Labels: 1929, application enhancement, bankruptcy, CDOs, foreclosures, Great Depression, mortgage brokers, sub prime

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"Who's knocking on our door ?" the CFO of a huge investment bank asked.
"Why it's the government Banking Auditor. It's his day of the week to ask us to mark our assets to market."
"Are we in shape for his visit?"
"Uhm, Yes and no. Sorta good news, bad news."
"What's the good news?"
"We've done the math and we figure our remaining mortgages on the books, good and bad, are worth $43 billion, so we're okay."
"What's the bad news?"
"Uhm, well, nobody will buy any mortgage paper at the moment and some righteous auditors have been saying, no valid quotes, no value."
"That's absurd. That would mean we have negative equity."
"Shhh! He's leaving. Bernanke's got him on the phone."

Labels: bankrupt, Bernanke, cmo, collaterized mortgages, leverage, sub prime

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What Greenspan (and Paulson) euphemistically call 'mis pricing risk' by the nation's financiers is more aptly described as their collective purchasing of 90% to 100% leveraged commodity accounts.
At the end of the day, homes are a commodity. There are laws regulating the purchase and financing of commodities; there are strict margin requirements and lots of bold print that purchasing a commodity carries a high degree of risk, to wit, you may lose your shirt.
Having thought about this for a moment, the question becomes who in their right mind would set out to purchase someone else's commodity position which had little or no equity, just the position holders' promise to pay interest on the borrowed funds?
If you have access to buyers that accept the premise that housing always increases in value, then by all means, create or buy this type of account, warehouse them and resell them. It's a business plan. I package and sell, you package and sell, just be mighty careful when the music stops because at that point you own these crap assets that you intend to sell off to others. Merrill Lynch got caught and burned warehousing several billions.
Gold is a commodity which has the flavor of always going up but yet there are margin requirements. Housing, given that the number of buyers always increases and they ain't making any more land you know, seems a sure bet "over time." Near term however it's a commodity, subject to rises and falls in interest rates, recessions, speculative fevers and inflation.
The banks, etc are idiots for placing their firms' equity in jeopardy by creating and holding no equity housing accounts.
But. And this is a huge but as we head into an election year. Imagine if Mr. Bush had wooed America into placing social security assets into private accounts (because the stock market always goes up ye brethren.)
What would have occurred is that the housing speculation bubble would have lasted six to eighteen months longer as Wall St. packaged and sold retail strips of near worthless housing accounts to the nation's social security network.
Just, dad gum, think about that. These financial critters move capital back and forth on any pretense as long as they can wet their beaks as they package and sell these often unnecessary products ad infinitum. They're sorta kinda like having a somebody who up and mows your lawn four times a week. If ya don't put some controls on them you're surely headed for the poor house.

Labels: commodity accounts, Greenspan, krug awakes, margin, Paulson, private accounts, social security, sub prime

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As the big boys say in Alcoholics Anonymous, "I've spilled more booze than you've even thought of drinking." Likewise the shear waste and uneconomic spillage in US capitalistic practice is an unseen, mind boggling sum of money.

Having personally inked $$ billions of loan deals and met folks destined for both the White House and for jail the most important thing I would like each voter (and economist) to know is:

"The gross dollar value of the rank waste and economic inefficiencies in 'big boy' capitalism is more than sufficient to many times fund both Social Security and Medicare shortfalls."

When the corporate and financial types declaim that there isn't enough money to pay reasonable taxes and/or to provide a broad safety net for the disenfranchised folks in our society tell them to shut their greedy yaps. Offer them the following deal.

"You make sure the poor can eat and get medical necessities and we'll let you continue to take a small bite out of all the capital flows that wash around financial centers, including embezzlement like bonuses and commissions for your daily toil and for your latest bubble-like ponzi-smacking get-rich fiasco(s). But, be aware of our recognition that the Pound Sterling and the Euro, currency representatives for the full-out 'Socialism' of Europe, are hands down taking the Dollar to the cleaners. Significant change is needed and the broom is in your hands."

"For the moment!"

Labels: bubble, Citigroup, medicare, safety net, social security, sub prime

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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

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I see writings everywhere that people are upset with legislation to not allow a few tens of thousands of 'resetting' mortgages to default. Damn those stupid borrowers they say. Let the free market work. To me this is horrendously uninformed and naive thinking. I say.
What you espouse seems so right; so logically straight forward. It, however, for the most part is simply dead wrong and off target.
Forget entirely who made the loans, both the borrower and the initial lender. Trillions of dollars of mortgage loans were made and having been made these promises to pay became assets; account receivables to the hedge funds and institutions that subsequently purchased them.
Any middling good economist knew that excesses were going on and that with a rise in interest rates a ton of these CMO assets would default or otherwise decline in value.
So,and nevertheless, the pros, the hedge funds and their mega wealthy clients and other financial institutions still gobbled up these assets.
There was indication aplenty that the ratings were hyped on CMOs and that the financiers were buying some portion of junk assets. Caveat emptor.
In summary, the big boys bought crap assets and being leveraged their entire equity is exposed. As and if the free market was nakedly allowed to operate the big boys equity and concomitant lending resources would evaporate.
Hence the government steps in and says, "You know, the two hundred billion in mortgages that are shaky? Well, we're going to going to say that they are okay for the next cycle at least."
And you say, "Oh, they're now okay and no one needs to write off their equity and go out of business. How swell is that?"
Bottom line. The government cares not a whit that Jane, Joe, Dick or Harry will default and lose homes. They care that the big boys will tank due to their stupidity and that the credit resources of America will then hemorrhage.
Unfortunately, allowing the free market to work in this instance could be a mega disaster for all so the big money guys will of necessity be bailed out.
Jane and Joe, not so much.!

Labels: bail out, cmo, collaterixed mortgages, collaterized mortgages, mortgage markets, Saudi arms, sub prime

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2006 Wall Street bonuses; $25 Billion. 2007 Sub prime losses: $25 billion.

As the big boys on Wall Street direct trillions in capital flows to derivatives, rank speculation and the latest hot packaged products like sub-prime mortgages they wet their beaks, like the mob, at every turn.
Why not place a one one hundreth of a per cent tax on these flows to fund the financial and social dislocation costs caused by the the financial industry's recurring greed driven excesses?
It would be a manifest boon to American workers who toil at multiple jobs to create this capital and certainly smooth out a glaring economic pratfall.
The banks and major financial institutions go on binges as a matter of their nature. REITS, Latin American lending, S&Ls;, hi-tech bubble and now sub prime loans have each wiped out an enormous amount of the financial industry’s equity capital. To rebuild equity, subsequent financial instruments such as car loans, mortgages and credit cards must carry higher profit margins. Thus Jane and John Doe have to pay a penalty to rebuild this equity base.
We know these binges occur and have a deposit insurance mechanism in place (the Federal Deposit Insurance Corp -FDIC) which forces the bankers to set aside emergency money so that the deposit base of banks and their customers will not evaporate.
Likewise we need a Federal Credit Insurance Corp so that when these binges wipe out financial equity there is a source of credit (i.e.loans) available.
Banks do two things. They hold deposits and they offer loans. We insure that these bingers will not take American’s deposits with them as they go bust from time to time. Why not extract a minuscule fee from each credit offering in order that the availability of credit will not be so totally hemorrhaged as to affect gross interest rates, the dollar’s standing, prices and inflation?

ps. I mentioned this idea to a bright staunch corporate conservative friend who said that the idea is 100% valid and worthy; but without a guaranteed mechanism that the dreaded Dems could not keep increasing the tax, for him it was dead on arrival.

Labels: fdic. FCIC, sub prime

Labels: banks, excessive risk, mortgages, sub prime, Two Americas

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Sub Prime Loans Sink Market! - Why is anyone surprised?

SHODDY BANK FINANCIAL PRACTICES ANNUALLY WASTE or SPILL the COMBINED REQUIREMENTS of MEDICARE and SOCIAL SECURITY

As regularly as the sun rises in the East, capitalism, as practiced in America today, spills, wastes or loses more financial resources every year than the total requirement of Medicare and Social Security combined.
From pure greed comes excessive risk taking.
The U.S. financial industry regularly goes on speculative binges that enrich work-a-day bankers and thieves alike until the (as always predicted) pyramid-like lending excesses end in catastrophe.
I recommend the enactment of a Value Added Tax mechanism. Add a one hundredth of one per cent tax on all financial transactions. Presto, the social programs for the average Joe and Jane would be well funded.--Who do you think (always, always, always) has to replace the lost capital in the banking sector or otherwise pay for the shoddy greedy self serving financial excesses in the first place? You guessed it, the same Janes and Joes that get sucker punched with the old, "Gee whiz, there just doesn't seem to be any money left over for you."

Labels: financial practices, mortgages, sub prime