I still can't believe it, how the democrats managed to fuck up this housing market and then blame republicans and capitalism. They are far better actors and politicians than conservatives. To demos, all that matters is power and the ends justify the means. Some lib in here, I can't remember who, actually thought subprime mortagages were not a cause in this mess, and freddie and fannie were minor players. That somehow, CDS were invented out of vacuum so that wall street would lend to people with bad credit out of the goodness of their heart, or greed of their wallet. unbelieveable Nice gameplan libs, browbeat the banking industry to lend money to your constituents, then actually blame the republicans and capitalism when it blows up. It 's also the same gameplan for entitlements, set up a ponzi scheme and get gov't cash to your people by claiming moral high ground, as it blows up you will kick and scream about greedy conservatives not paying their fair share. You have won, you have bought enough of the population to guarantee your success and our slide into the dull gray world of socialism. Congratulations. That was simply brilliant busing in drunken, homeless morons to the polls, and also locking in wall street at the same time. Also now that you will legalize tens of millions of uneducated mexicans, you have certain lock on future power. You also have certainly sealed the end of america as we know it. In the end, it is a cultural problem. People bought the idea that gov't should take care of them, even non-americans. People thought they were entitled to far more than they could produce, coutesy of left politicians telling them so. One more blast from the past, take a look at the workings of our new dear leaders. Get used to bowing to the new obama left, Che Guevara flags and all. Remember that Che was Castro's executioner- ends justify the means. Article from 2002: http://www.usatoday.com/money/covers/2002-05-21-fannie-mae.htm In 2002 the criticisms were mounting, fannie and freddie were involved in over 40% of all US mortgages, and therefore almost all the subprimes. ...A partial list of critics: Federal Reserve Board Chairman Alan Greenspan; activist Ralph Nader; investor Warren Buffett; FM Watch, a group of financial services companies; and assorted free-market think tanks. Throw in the editorial page of The Wall Street Journal, which recently compared the firms' risk hedges with those of fallen energy giant Enron, and it becomes clear that good works and image-building advertising might not save Fannie and Freddie from the boiling pot.... In February, The Wall Street Journal's editorial page looked askance at the companies' use of derivatives in managing their combined multitrillion-dollar debt. "The more we've looked," said the editorial, "the more they look like poorly run hedge funds: lots of leverage and snarkily hedged risk. The word Enron ring any bells?"... Nader stands as the lone lefty sounding the alarm. Buffet is curious, he wanted controls then but now sides with Obama- guess he is just trying to stay off Che's execution list. Notice how freemarket think tanks are wary, as well as the Wall Street Journal which was warning of precisely what has come to pass... Step 2: The secondary mortgage market. The lender resells the mortgage to Fannie Mae or Freddie Mac, freeing capital so that the lender can make more mortgage loans. Step 3: Packaging. Fannie Mae and Freddie Mac package a group of mortgages as mortgage-backed securities and sell them to investors, who want the interest. Or they buy and hold the mortgages originated by lenders. So fannie and freddie found ways to put earrings on a pig they were chartered to buy, subprimes. Conservatives and free market types saw through the scheme, but guess who blocked the attempts to stop the obvious time bomb, you got it- the very folks now taking power and gonna 'fix this mess'. We are so fucked in the ass... Baker, the Louisiana (republican) congressman, says SEC reporting and long-term financial stability will be probed at his hearing next month. Baker's preference is to set Fannie and Freddie loose from their charters to compete on an equal basis with other financial companies. That, he acknowledges, is too ambitious to accomplish any time soon. For now, he says, he'll settle for more effective government controls. Democrats who control the Senate are sympathetic to Fannie and Freddie, and likely to block any changes that Baker is able to push through the Republican-controlled House. Baker says he's in the fight for the long haul, comparing his efforts to melting an iceberg with a blow-dryer. After years of effort, he says, "I'm just now beginning to see the first few drops of water." Republicans wanting sound regs, democrats blocking.
Once again Mav Fannie only hold around 10% of the entire subprime market. Still think that 10% is responsible for the massive increase? Look here: You may have gathered by now that CDSs are basically insurance for people who invest on bonds. The only reason its not called credit default insurance, is to keep if from being regulated. There is one crucial difference though. When you take out insurance on your house so that if it catches on fire you get paid back, you have to OWN the house. With CDSs you don't have to actually own the bond, or be invested in the loan to buy insurance on it. You may be thinking "Why would you want insurance on something you aren't invested in"? Well what if you saw that there was a hurricane coming toward Miami. You could buy insurance on every single house there, knowing that a few of them would get wiped out and you would rake in the cash. At the same time, lets say you had information that told you the hurricane was actually going to miss Miami. You then could sell the CDSs on the houses and you would just make boat loads off of the premium when the hurricane misses. In short, CDSs have become a way to bet on our against certain bonds. Ok so finally we have an understanding of how CDSs work and how bonds work. Just one more thing though to tie it all together. Most people think that when you get a loan for your house, that the lender has money of their own, they lend it to you and you pay them back interest which is how they make their money. Sure that's the case sometimes, but most of the time the "lender" only holds the loan for a little while before your loan, along with many others gets packaged with other loans similar in size, length and risk profile, and then is turned into something called a Collateralized Mortgage Obligation (CMO) and is sold on the bond market. So basically in a reverse way, anyone in the US can put money into a bond, or CMO to be more specific, that money then gets put into a lender like Washington Mutual or Lehman who then use the money to lend to people to buy houses. This is commonly referred to as the secondary mortgage market. As you may have guessed, the riskier loans are packaged into higher risk CMOs that yield higher interest. The more risky the higher the interest rate pay out, but the more likely you may lose all your money if borrowers start to default. So in essence, the bond market provides the funding for the mortgage market. Now that all that is out of the way, let's see what this has to do with today. How we can put all of this together to equal an epic financial crisis? A lot of the blame seems to fall on subprime loans. And surely they do deserve it, but thats drastically over simplified. If you look at this graph you will see that the amount of originated subprime loans increased dramatically starting around 2002-2003, but why? Subprime loans have been around for a long time, why the sudden spike in subprime loans originated? As we now know mortgage loans are just a product of the bond market. Collaterlized Mortgage Obligations (CMOs) to be more specific. The vast majority of loans made are bought by the secondary market (before you go thinking just Fannie Mae, remember fannie mae only holds around 10% of all the subprime market). So now that we know the mortgage market is merely a reflection of the bond market we can ask a more informed question: what caused a spike in the demand for risky subprime back mortgage bonds? They were always there, why did the demand for them suddenly increase, causing ultimately subprime lending to increase? <img src="http://www.irvinehousingblog.com/wp-content/uploads/2007/03/subprime-mortgage-portion-of-market.jpg"> Enter the CDS. With the advent of the CDS, bond holders could insure themselves against any losses. So why not bet on the high paying, risky bonds? Worst case is that you make nothing, if the bond holders default you get your money back and if they don't default you might as well be printing money. Basically the demand for high yield, risky debt soared because of the false sense of security CDSs provided. Do you think its a coincidence that the CDS market grew 1000% (one thousand) between 2002 and 2007? The exact SAME time the subprime lending increased (see the chart)? Of course not. The demand for subprime-backed bonds grew, which in turn means lenders on main street started doing all they could to close more subprime loans to satisfy the now subprime addicted secondary market, hence the drastic increase is subprime loans and CDSs. All of this because bond holders could now, ostensibly, eliminate their risk. That is where the subprime mess started. <img src="http://www.credit-deriv.com/credit%20derivatives%20growth.JPG"> CDSs in themselves though aren't bad. They serve a good purpose. But some of you are wondering how on earth so much debt could be insured. The answer: it can't, but no one knows that. The reason no one knows is because CDSs are completely unregulated, and as a result there is no transparency in the market.The big financial companies were doing something called "netting". The value, or spread, of the CDS terms would of course fluctuate and they could take advantage and ostensibly insure everything. For example. Lets say you want to buy $10 million in risky subprime bonds, you want the nice return but you dont want the risk. You come to me and we enter into a CDS for lets say 2% of the total value per year. You're off the hook, but I am on the hook for the $10 million. I don't like all this risk though and want to protect my principal investment. Next week the market improves a bit and I go to another person, call them Bob, and say I want to insure $10 million worth of the same risky subprime bond. Bob says ok, i'll do it for 1.75% of total value per year. Perfect! Now I'm making 0.25% risk free, but I didn't tell you that. I have a CDS with Bob. The market starts to head south a bit. Bob then is like "Uh oh, I'm on the hook for $10 million", looking to protect himself he goes to another person and says "I need to insure $10 million I have in this risky subprime bond", they agree because its likely they are insured VIA a CDS by someone else. I'll do it for now he has 0 risk. Do you see the problem here? When the markets are unregulated and not transparent it was impossible to see that the risk was just being transferred around so much that everyone thinks they are completely covered when actually if there is a default there is not going to be enough money to go around. Now what happens if I, you, Bob or anybody else defaults? If you default, I default, Bob defaults and so on down the line. This is exactly what the financial companies were doing when subprime loans started to default, large companies holding billions in debt began to say "Ok I'm insured, where is my money" the company that sold the CDS to them (the insurer) then went to another company and said the same thing untl eventually they get back around to the original company. So where does the money come from. Since CDSs arent regulated no one has any idea of the solvency of the company who they just bought this "insurance" from. Imagine not knowing for sure if your car insurance company has enough money to actually pay for your car if you have an accident. So basically if one company fails the rest of them default as well. Now we know why certain companies were propped up so quickly. All this because CDS are evil? No. Because they HAVE zero regulation. Imagine the stock market during the 1920's and you get some idea of what is going on in the $50 trillion CDS market, right now, TODAY. You really can't even say there is a "market" because CDSs don't have any centralized exchange, the deals are just done via email or instant message. The government was forced to bail out these companies because the potential domino effect would have been too much for us to handle. Now we have to us tax payer dollars to keep these companies alive in order to prevent a total meltdown. This is nothing more than the worlds largest casino. It's out there right now and its worth more than the stock market, futures market, bond market, insurance market, gaming market and the real estate market. Only all of those industries are regulated. The CDS market isn't. It's like the wild west out there. Our most respected financial institutions are really less respectable than any casino. Thats a hard truth to swallow. I'm a believer in free markets. I do like less government intrusion and I think there are areas where we need to drastically reduce government involvement. However this should be proof to you that as much as we need less government, there are some very important places in which we need more. I hope now we can all get a sense of why more regulation is needed and how deregulation is largely responsible for this meltdown. Deregulation isn't always a bad thing, but I think when things get this out of control we can see that a change is needed and in this case, it looks like we really need some big government. Everything you just read seems to be lost on congress. I understand of course that congress is looking to another stimulus package, and no doubt that will help. However I believe that until we do something about this unregulated CDS market , our problems will persist. We need to set up an exchange for CDSs and set up a regulatory body to preside over said exchange, perhaps a new branch of the CFTC.
Again and sadly you miss the whole point, fannie and freddie are directly or indirectly inolved in about half of all mortgages, not 10%. You seem to have no understanding of the secondary market. More importantly, they instigated the entire CDS market fiasco, in fact they used them. Without fannie and freddie and the liberal browbeating, the CDS mortgage market will have no need to implode or even be created in the first place.
Which political party wanted poor people in homes? Which political party blocked attempts at stopping the problem early? that's pretty much all one needs to know
Did you even read what I just wrote? You obviously didn't. Maybe you should. Oh and Im not defending FNMA, Im sure you are right but the fact is you are blaming the crisis on subprime loans, and then blaming FNMA which only holds 1/10th of all subprime loans AND whose subprime loans are less risky than the other 90% due to their stricter conforming guidelines,
jon, they may directly hold only 10% but they indirectly guarantee almost all the rest. Even when a place like countrywide made an equity loan, some of those loans found their way in security bundles that had implicit guarantees from GSEs. CDS's were the markets's way of saying 'holy shit' I can't believe these loans. CDS were promoted by fannie and freddie, they may not have directly owned everything but they were intimately involved in securitization and CDS.
To be fair, the democrats couldn't have succeeded without a great deal of help from the GOP. If the republican leadership had not abandoned conservative principles, we would have had a chance. But now we have a race to the bottom to see who can give away more money. And most voters are cheering them on as they try to elbow in front of Corporate America in the Handouts Line. Peoples is sooooo stooopid.
No doubt. I'm not disagreeing with the fact that FNMA was part of the problem, and that they used CDS to attempt to insure their debt, it sounds exactly right, but FNMA is a drop in the ocean compared to whats going on in the rest of the secondary market. FNMA is doing exactly what I described above, but the fact is a whole lot of other companies are doing the same thing. You are singling FNMA out in order to satisfy some conservative wet dream in which you can blame everything on democrats. I dont blame either political party, I blame BOTH. To say the dems are responsible for the housing mess because they supported a company who is only a small part of a massive problem is stupid. Futhermore your argument only supports my point that deregulated CDSs are what caused everything. CDSs and the lack of transparency in the CDS market made it seem like everything was fine and dandy. The funding of loans on main street is a direct product of what the secondary bond market wants. If lenders can't sell em, they don't fund them. Thats what the underwriting process is FOR. I have no doubt that FNMA was doing this as well, but I'm not sure why you choose one small part and say thats the sum of the problem. The blame game is pointless. If you want to blame anything, blame our leaders for allowing a completely unregulated , $50 trillion casino to run our country.
The bill that repubs drew up was never even brought to a vote, in a house which was controlled by the majority repubs. Incompetence on both sides.
Generalissimo Bush's Ownership Society. No El Presidente, don't use taxpayer money to help people make downpayments! No El Presidente, there's a reason for a homeownership gap and it shouldn't be solved! Paulson's here, it's over. <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/kNqQx7sjoS8&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><embed src="http://www.youtube.com/v/kNqQx7sjoS8&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" width="425" height="344"></embed></object> <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/eW9viaJatpo&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><embed src="http://www.youtube.com/v/eW9viaJatpo&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" width="425" height="344"></embed></object> <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/ugeqexHzVNQ&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><embed src="http://www.youtube.com/v/ugeqexHzVNQ&color1=0xb1b1b1&color2=0xcfcfcf&hl=en&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" width="425" height="344"></embed></object>