A Feast of Termites
What Do Politicians, Subprime Loans, & Short Sellers Have In Common?
Sep 24, 2008
- 1999: Gramm-Leach-Bliley Act passes Congress, signed by President Clinton, allowing traditional banks to merge with Huge Investment Banks (HIB's) & insurance companies. Before giving it the large support it ultimately got, Democrats made a chief stipulation: the Community Reinvestment Act had to be strengthened. Subsequently, lending to higher credit risk people relaxed significantly.
- 1998-2004: GSE-giant, Fannie Mae's, .CEO Franklin Raines & CFO J. Timothy Howard commit earnings fraud
- Mortgage pooling: Via a method called “tranching”, pools are separated into tranches: from a AAA rating, down to junk level. The lowest level would take the first losses but paid very high yields for the risk they took. The HIB's, with credit-agencies' help, would then take those lower level tranches and split them again, and, “Through the alchemy of finance, HIBs took Subprime mortgages and turned 96% of them into AAA bonds.” (1)
- 09/2003: Oil begins rising above $30 a barrel and does not stop until $146 a barrel in June 2008. Nearly every sector of the economy becomes more costly, hurting those with less disposal or discretionary incomes first.
- 10/2003: Treasury Secretary, Jack Snow, on behalf of the administration testifies before Senate Banking Committee, voicing great concern over the expansion of Fannie & Freddie, and their taking on larger exposure to risk due to this new system. Congressional claims, largely voiced by Democrats, that doing so would unfairly target lower income/minorities kills any reform.
- 2007: GSE Reform Bill creates a regulator overseeing Freddie & Fannie. The parallels with the failure of the Federal Home Loan Bank Board (FHLBB) during the Savings & Loan scandal is striking. There too regulators were placed in the position of encouraging expansion of the very firms they were supposed to regulate.
- 11/2007: Massive numbers of high risk Subprime mortgagees begin defaulting and/or foreclosing on their homes. With them were all their loans in the investment pipeline, turning that “paper” “bad”.
- Concurrently: All segments of housing, which had been making marginal (or, windfall) profits and future estimates based on these additional risky customers, begin seeing profits decrease sharply.
- 03/2008: Bear Stearns balance sheet was highly leveraged towards these, now, junk bonds. Legitimate selling mixing with naked short selling begins wholesale dumping of its stock.
The web that is the financial world could not confine the coming meltdown to Bear Stearns, however. The question became how exposed each firm was, not whether they were or not. Credit, being based on responsibility and trust--from the truck driver to Fortune 500 companies--could not be lent, nor could these securities be used as collateral because no one knew what they might contain
Meanwhile, selling of all kinds began in earnest. The legitimately concerned sellers were joined by the naked ones. Always looking for an opportunity, the latter pounced on this clear opportunity without mercy. It was systematic. After Bear, like a swarm of termites on a board of wood, they moved onto Lehman, then AIG. By the time the feast had moved to Morgan Stanley it had less to do overleveraging, and more to do with irresponsibility on every level...oh, yeah, and greed.
1) http://news.moneycentral.msn.com/ticker/article.aspx?symbol=US:C&feed=MY&date=20080922&id=9171988)
* All hyperlinks are notations referring to other works. The rest are matters of public record.
 |
