AMERICAN CONSERVATISM IN 2008 AND BEYOND

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collapse the largest economy in the world.

I did summarize it into one sentence and asked Cyclops to rebut it. He couldn't.

AIG sold billions in insurance policies underwriting those bonds. When the bonds began to crash and the insureds began filing claims, AIG was paying out billions instead of taking in billions. And because AIG's own stock was falling in the process and a declining economy resulting in fewer people needing insurance of any kind, it didn't have enough to cover the claims.

Remember that Fannie Mae and Freddie Mac were bundling high risk loans with a few good loans to give the bundles respectability and pawning them off on the banks. A whole bunch of little investments became big huge chunks of investments. As long as the housing values kept going up, there was no problem. But when the housing values plunged and all those loans started defaulting, that's when the house of cards collapsed.

Foxfyre wrote:

AIG sold billions in insurance policies underwriting those bonds. When the bonds began to crash and the insureds began filing claims, AIG was paying out billions instead of taking in billions. And because AIG's own stock was falling in the process and a declining economy resulting in fewer people needing insurance of any kind, it didn't have enough to cover the claims.

No, that's false.

A "declining economy resulting in fewer people needing insurance of any kind" or "AIG's own stock was falling in the process" wasn't the reason that AIG couldn't pay out those hundreds of billions of dollars.

You're making this up.

Foxfyre wrote:

Remember that Fannie Mae and Freddie Mac were bundling high risk loans with a few good loans to give the bundles respectability and pawning them off on the banks. A whole bunch of little investments became big huge chunks of investments. As long as the housing values kept going up, there was no problem. But when the housing values plunged and all those loans started defaulting, that's when the house of cards collapsed.

And again, you're just posting something that is mostly unrelated. Even if Fannie and Freddie had been "bundling high risk loans with a few good loans" and "pawning them off on the banks" - how would that involve AIG insuring those CDOs?

You're missing a link here.

Oh yeah. You keep offering your opinion and I keep posting links that show how you are wrong, not that I believe for a minute that you've read any of them. So far you have posted zero links showing how you are right. My request was for you to provide information from any credible source that would back up your opinion that it was not government policy or the CRA that started the snowball rolling on this financial crisis.

I read this morning that some of the more financially stable European nations are wanting President Bush back.

Foxfyre, in 1913, we introduced so-called progressive or graduated income taxes.

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners " which essentially constitutes the entire Western banking system.

Why Is AIG Backing Fannie / Freddie 'Enhanced' Mortgages?
by: Bruce Krasting
February 25, 2009

Bernanke laid it on the line today. I heard him say that the Fed and Treasury were going to provide debt and equity capital to many of the Nation's banks. Failure to do so was not an option. He pledged that the Risky Lending Standards of the past would be eliminated. He promised to ‘fix’ the errors that had been made by the misguided bankers.

It sure sounded good. The market even liked it. It is bunk. The following is an example of how Lending Standards are set in DC. You decide. Are these good lending standards? Is this good business practice? The following is happening on a very regular basis. The numbers are big.

Fannie Mae (FNM) and Freddie Mac (FRE) have always had terms for a Conforming mortgage. A Conforming mortgage requires 20% equity from the buyer. That makes for a good borrower. That is a ‘good’ lending standard.

Many years ago the Agencies and the insurance industry created a carve-out to the Conforming mortgage definition. If an 'approved’ insurance company was willing to take a first loss on the loan portion that was in excess of 80% then the Agencies would buy the mortgages. No more 20% down.

This practice morphed. It started with 10% equity, 10% mortgage insurance. It ended with "3% equity, 23% insurance. These are terrible lending standards. The borrowers have no risk. Fannie Mae and Freddie Mac bought as much of this “enhanced” paper that they could. The yields were great and how could they lose if the likes of AIG (AIG) were going to guarantee the first loss?

This of course ended very badly. The insurers got crushed. It is not clear what their claims-paying abilities are any longer. Fannie and Freddie are big losers on the enhanced book of business as well. The losses on the enhanced mortgages far exceeded the 10"20% that was insured. The only ones who made out were the regional banks that originated and sold the risky loans to the Agencies. FNM recently reported that its default rate on enhanced loans was five times larger than on loans that had the traditional 20% down. Bad lending standards make for bad loans.

These questionable standards are 'business as usual' today at Fannie and Freddie. They continue to buy pools of mortgages where the required equity of a borrower has been replaced with an insurance company's promise to pay. The incredible part is that one of those “approved’ insurers continues to be AIG.

Twenty-two percent of Fannie's 08 business was enhanced. AIG was one of the biggest providers of the PMI coverage.

AIG owes its existence to the taxpayers. Yet they are writing first loss insurance on high risk mortgages. With this questionable promise to pay attached, the loans can be sold to another ward of the state, FNM. These are terrible lending standards and it is bad business practice. The taxpayers are at risk to both sides of this transaction. If history is a guide 'we' will ultimately suffer losses from both AIG and FNM on this business.

The PMI/AIG/FNM connection is understood by Geithner. Lockhart and Bernanke. They are aware of the entire PMI time bomb within the Agencies. That they are allowing this to continue today does not evoke much confidence in Bernanke’s claim to end the Reckless Lending Standards of the past.
http://seekingalpha.com/article/122484-why-is-aig-backing-fannie-freddie-enhanced-mortgages

I see your rationale there, and, while we remain at somewhat differing places on what a flat tax is, I agree there is much room for mischief in those for 90% of us while increasing tes. For instance, a President who promises to cut taxes n we'll begin seeing promises that 90% of us will barely notice the tax increases while the very rich see their taxes go up a lot......and so on.

Foxfyre wrote:

Quote:

I see your rationale there, and, while we remain at somewhat differing places on what a flat tax is, I agree there is much room for mischief in those for 90% of us while increasing tes. For instance, a President who promises to cut taxes n we'll begin seeing promises that 90% of us will barely notice the tax increases while the very rich see their taxes go up a lot......and so on.

Uh, didn't we see a prelude to this when Biden had shifting definitions of income relating to tax brackets?

JM

Cyclop, dear, you apparently don't even understand the information in your own link. It in no way rebutts anything I've said but simply explains the mess that AIG is in. I certainly have no problem believing that that AIG is in a mess. But the article does not rebutt any part of my take of what got us into this financial mess that we're in. It didn't start with AIG.

Yes. It did start with the CRA and I have posted several credible sources backing up my assertion about that while you have posted zero--nada--not a single credible source rebutting that. I don't think you can.

Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs
Thursday, October 02, 2008 | 07:00 AM
in Credit | Derivatives | Fixed Income/Interest Rates | Psychology/Sentiment | Real Estate | Taxes and Policy

"It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did."

-Robert Gordon, American Prospect
>

I have been meaning to get back to this issue, but events in the market have kept me a tad busy.

Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE's role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

These memes have become a rallying cry -- cognitive dissonance writ large -- of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.

I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

• The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

• What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

• Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?

The answer to all of the above questions is no, none, and nothing at all.

The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron's, there is plenty of things to be angry at D.C. about -- but this ain't one of them.

If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed's part in supervising bank lending, allowing banks to give money to people who couldn't possibly pay it back.

The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with -- which they promptly did.

There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

Shame on them for their foolishness or cowardice.

Whenever I see a CRA proponent blathering, I have a "Star Trek moment." That's when Captain Kirk proves to some random alien computer that its basic programming is logically inconsistent. It's the AI (artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .

"You can fool some of the people some of the time and some of the people all of the time. That's usually enough."

-MILTON BERLE

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