AMERICAN CONSERVATISM IN 2008 AND BEYOND

Less than 1% of the graduates of a LAW SCHOOL end up being professors at the law school they graduated from. MOST law school graduates go on to practice law!!

...express thoughtfulness, intelligence, and competent debate.

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The answer is in the links I posted this morning while I don't accept your opinion that ALL banks are in trouble. All the banks are inter-related via the Federal Reserve and all banks that bought Fannie Mae/Freddie Mac bundled loans incurred the debt, sometimes knowingly, sometimes unknowingly, but all banks were not careless and/or didn't bow to government pressure though all the big banks received the same pressures.

Okay educate me. Explain these things and how you see them as contrary to what I said. Do be prepared to back up your opinion however.

Quote:

...express thoughtfulness, intelligence, and competent debate.

Consider some of the things you, Okie, Ican, ... write, in this very light, Foxy.
This normally surfaces right about this time, when you start to discern that your "arguments" sound pretty shallow.

It's your equivalent of a caffeine boost.

Nope. Let's hear your definition of the terms you used and how they relate to/dispute anything I said first. Show me that you have a clue about what you're talking about.

TIP to those who like long cuts and pastes: In addition to the link, please break them up into separated paragraphs, highlight subtitles, etc. to make them easier to read. It's tough addressing a long gray blob of type with no clue as to what might be in it.

I accept that as your opinion, Cyclop. But until you contradict the links I posted, it is your opinion only and I can assume that you can't back it up with anything. You have provided absolutely nothing to suggest that you are doing anything other than parroting the leftwing talking points. That is certainly your prerogative and is fine if that is what you like to do. But don't think it constitutes any rebuttal of any kind for the opinion/information I have posted.

The current financial crisis has many causes, some long-term and structural. I focus here, however, on three immediate aspects of the crisis: the trigger, how problems generated by that trigger spread through the markets, and how this produced the liquidity freeze that persuaded Mr. Paulson and Mr. Bush to act (unsuccessfully thus far).

The Trigger: Teaser-Rate Mortgages

The media talks about “sub prime mortgages” " by which it means mortgage loans to borrowers with less than stellar credit. The real problem, however, was the advent and widespread use of teaser-rate mortgages in both the prime and sub prime markets. A teaser-rate mortgage allows a borrower to make relatively small payments for several years. At some point, the rate jumps dramatically, and the borrower faces much higher monthly payment obligations.

Not surprisingly, borrowers loved this innovation. Teaser-rate loans allowed folks who otherwise could never have afforded to own a home to buy one, at least until the rate reset. But it wasn’t just sub prime borrowers who liked teasers. Teasers sold like hotcakes; loan originators made correspondingly fabulous profits.

(Some have tried to blame teaser-rates on the Community Reinvestment Act of 1977, which encouraged lending to minorities and lower income Americans. But that act only applied to commercial banks. A majority of this crisis’s teaser-rate loans were made by unregulated originators not subject to the act. More fundamentally, there is no evidence the present crisis started in 1977. Teaser-rate mortgages first became widespread after Mr. Bush took office in 2001.)

In any event, it’s not hard to predict what happens when rates reset. All of a sudden, buyers who have been paying $1,000 per month face monthly payments of $4,000. Many, perhaps most, go into default.

The possibility that this would become a major problem became apparent as early as 2005. (I actually wrote that fall predicting the current crash.) Mortgage economists began publishing reset schedules " schedules of how many billions or trillions of dollars of mortgages would reset and when. In effect, those tables offered a rough schedule of how many mortgages would go into default and when.

As defaults increased in number, lenders ended up holding large amounts of As defaults increased in number, lenders ended up holding large amounts of foreclosed property. When they tried to convert the property into cash, they put downward pressure on housing prices. And this, in turn, made financing and refinancing more difficult and further defaults more likely " even of non-teaser loans. (A perfect vicious cycle, and we’re not remotely near the end of it. In parts of the country, more half the homes offered for sale are now foreclosures. Banks are desperate to get those homes off their balance sheets and are dumping them much faster than the market can absorb them.)

The Spread: Securitization and Debt Chains

But why did Lehman Brothers and AIG go under? After all, they don’t make mortgage loans. I turn next to how the problem spread.

Assume that A borrows from B to buy a home, giving a mortgage on the home to secure her debt. B then borrows from C, using A’s mortgage as security. C in turn borrows from D, using B’s obligation as security. And so on.

Now assume that A’s mortgage goes bad. What happens to B, C, and D? Answer: all the loans up the chain go bad as well.

And this isn’t all. If the loan is secured (as mortgages and many other links in debt chains are), the lender is typically less interested in the creditworthiness of the borrower. The lender relies primarily on the collateral, not the borrower, for assurance of repayment.

As a result, each financial intermediary can be thinly capitalized. So a company with $10.1 billion in assets and $10 billion in debt may have a small amount of net equity. Indeed, the more thinly capitalized a company, the higher the return it can make on its capital.

Unfortunately, what this means is that when A’s mortgage goes bad, it’s not just the loans up the chain that go bad " financial intermediaries in the chain often go bust as well. A thinly capitalized intermediary cannot absorb many losses. And that is why teaser-rate mortgage defaults triggered and are still triggering defaults and failures across the entire financial sector. Almost everyone was in the debt-chain business and extended themselves to the max to take advantage of the extraordinary profit opportunities of that business.

I’ve explained the transmission mechanism in terms of debt because readers have an intuitive understanding of how debt works. In fact, however, many of the most important links in the chain were not technically “debt.” Some were shares in “mortgage pools”; some, “derivatives”; some, “credit default swaps.” What they all had in common was that each transferred some risk of default up the chain to someone else. Wall Street sometimes calls links in such debt chains “toxic waste,” because today no one wants them.

AIG, for example, held about $500 billion in “notional exposure” on credit default swaps. In English, it was at risk to the tune of about $500 billion if mortgages down the chain went bad. When mortgages began to go bad in large numbers, the market realized that AIG might not be able to cover its obligations and began to sell AIG stock seriously short. Lenders stopped lending. End of story.

What made this more than just a corporate problem was that AIG was a domino at the head of many long chains of dominoes. If AIG had gone, some believed the world would have faced immediate economic collapse. So the US government bought an 80% stake in AIG in exchange for enough money to allow AIG to dissolve gracefully " over a couple of years " instead of imploding overnight.

Almost everyone was in the debt-chain business and extended themselves to the max to take advantage of the extraordinary profit opportunities of that business.

But, in my opinion, supported by those links I posted, there was considerable pressure applied by the government for financial institutions to take on risky or dangerous mortgages. It is my opinion, supported by those links I posted, that this was the #1 and most important factor in the current economic collapse and without it, we would not be in the closest thing we have seen to a depression since the 1930's.

Mainstream economists agree that FDR's big mistake was attacking the depression half-heartedly. Thus, Obama is attacking full force. A piece in the Huffington Post states, in part....