It's The Economy, STUPID!.....

[we vs us]

quote:Originally posted by Conan71

Originally posted by FOTD

WVU- personal accountability and responsibility never goes out of style.  People are given plenty of warning and information in writing about the loans they are signing.  Consumer credit reforms of the '70's and '80's ensured that.  If they aren't getting proper disclosure then there should be an investigation for fraud.

Well, actually, one of the problems with this credit bubble has been that unsophisticated investors were offered ridiculous terms on enormous loans, primarily because the institutions extending the enormous loans could turn around and sell them off.  

Formerly (like, back around 2000), mortgages were extended only to "sophisticated investors," http://www.investopedia.com/terms/s/sophisticatedinvestor.asp" which is an industry-accepted definition.    

So, start making loans to people who your own industry knows will be unable to pay the loans back and you'll reap the whirlwind. Dumb dumb dumb.  Not to say that the subprime homeowners themselves don't share some of the blame, but simply by dint of ignorance of a system that the BANKS don't even understand at this point.

[Conan71]

Wevus, not much different than when adjustable rate mortgages were being written in the '80's with a bunch of confusing bond indexes, adjustments with the prime on the second full moon of the month, etc.  People used ARMS to buy more house than they could at a fixed rate.  Instead of being patient and saving more down money, they forge ahead and believe that the rate only goes up in adverse conditions.

There was plenty of disclosure for these borrowers.  No one held a gun to their head and said: "buy or die".  Same with the latest crop who got chumped.

We aren't talking entirely about a bunch of poor work-a-day schleps who are in trouble.  There are plenty of $300K-plus properties fixing to go tits up that young professionals are living in.  A fellow who used to work for me was talking about the remarkable miracle that he could build a 12,000 sq. ft. home in Wagoner County- someone who had been living in a mobile home out in Prattville just over 10 years ago.  

His solution was one of these interest-only notes.  He had plenty of warning from myself and others, but his vanity wouldn't allow him to see the folly.  He started getting screwed by a contractor, yada, yada, yada...lost his largest sales account, and guess what?  It's going into foreclosure.  He lost his biggest account because he had sole-source priveledges and got greedy.  He lost his house because he got caught up in vanity building a monument to his greed.  He's a good friend, but I don't shed a tear for him.  It's hardly a tragedy perpetuated on him by a heartless lender.

The packaging and selling of loans from one investor or financial institution to another investor or financial institution is nothing new.  That's gone on for decades.  Read any loan docs you've got from a past or current loan, there's quite likely a clause in it which gives them the right to sell or re-assign your debt to another institution at their discretion.  Re-selling or re-assigning mortgages has not caused this failure.  It's people throwing common sense aside buying over-priced properties and taking out all sorts of bizarre loans to help them squeeze into that house.

[we vs us]

quote:Originally posted by Conan71

Wevus, not much different than when adjustable rate mortgages were being written in the '80's with a bunch of confusing bond indexes, adjustments with the prime on the second full moon of the month, etc.  People used ARMS to buy more house than they could at a fixed rate.  Instead of being patient and saving more down money, they forge ahead and believe that the rate only goes up in adverse conditions.

There was plenty of disclosure for these borrowers.  No one held a gun to their head and said: "buy or die".  Same with the latest crop who got chumped.

We aren't talking entirely about a bunch of poor work-a-day schleps who are in trouble.  There are plenty of $300K-plus properties fixing to go tits up that young professionals are living in.  A fellow who used to work for me was talking about the remarkable miracle that he could build a 12,000 sq. ft. home in Wagoner County- someone who had been living in a mobile home out in Prattville just over 10 years ago.  

His solution was one of these interest-only notes.  He had plenty of warning from myself and others, but his vanity wouldn't allow him to see the folly.  He started getting screwed by a contractor, yada, yada, yada...lost his largest sales account, and guess what?  It's going into foreclosure.  He lost his biggest account because he had sole-source priveledges and got greedy.  He lost his house because he got caught up in vanity building a monument to his greed.  He's a good friend, but I don't shed a tear for him.  It's hardly a tragedy perpetuated on him by a heartless lender.

The packaging and selling of loans from one investor or financial institution to another investor or financial institution is nothing new.  That's gone on for decades.  Read any loan docs you've got from a past or current loan, there's quite likely a clause in it which gives them the right to sell or re-assign your debt to another institution at their discretion.  Re-selling or re-assigning mortgages has not caused this failure.  It's people throwing common sense aside buying over-priced properties and taking out all sorts of bizarre loans to help them squeeze into that house.

I mean, sure.  You can turn down that obscene credit offering. Or the company that extends it could actually do what it always used to do, and just not offer the loan in the first place.  The money isn't just sitting under a bridge somewhere waiting to be picked up; it's extended by a company that evaluates you and should understand that you're a bad risk.  That's been standard procedure for years and years.  What you don't seem to acknowledge is that an entire industry shrugged off its own best practices in its rush to get EVERYONE and their dog into debt.

Your friend who got out of Prattville should never have been given the loan in the first place.  That's all.  He was a bad risk, and someone bet on him big time anyway.  He wasn't particularly savvy but someone didn't care and said, here, have our money to build your dream house.  And your Prattville friend said, "Awesome!"  Now the people who loaned him the money are stuck and he's stuck, too, because he just wasn't smart enough to pull it off. He didn't know he wasn't smart enough, but I guarantee that the bank who gave him money knew he wasn't smart enough.  And they did it anyway.

And as for loans being packaged and resold, of course that's standard stuff.  But it was standard -- and safe -- because the packaged loans were to trustworthy buyers who had their own capital (ie a downpayment) also on the line.  It was in no one's interest to default. The problem now is, they've packaged millions of these subprime loans and sold them off . . . and when these loans default the CDOs and other instruments the financial sector has used to pacakge them will turn to junk.  And worse, because they've been packaged and repackaged sold and resold -- much more than they ever have in the past, BTW -- no one knows who's holding the bag. Who has to pay the debt? No one knows.

[cannon_fodder]

At this point, Wevus, both the borrowers and the lenders (originators win, but no one will buy the notes anymore) are aware that neither wins with crappy loans to unqualified buyers.  Any institution still buying sub prime notes for face deserves what they get (as they did before).  Any borrower looking at a radical loan that has not heard of the sub prime crisis probably has no business looking to buy a house.

So, at this juncture, what do you feel needs to be implemented?

And are these implementations designed to stop poor borrowers from getting loans? Remember, the Clinton administration set benchmarks to encourage banks to offer sub prime loans and those remain.   Just curious what you think the solution is (both currently and to protect against this in the future).

IMHO all parties got burned by their own greed.  A few got caught up unexpectedly, but that was ignorant home buyers and corporations lacking due diligence so my sympathy there is reduced, though not lacking.  It would seem the repossessions and corporate losses might be enough to discourage both sides in the future.  Any massive corporate or housing bailout will only send the message that personal responsibility really is dead.   Make whatever bad choice you want and Tax Payers who have been careful will bail you out...

[we vs us]

And thanks for the welcome, Cannon Fodder.  My beef with personal responsibility is not that it's not an excellent moral virtue, but rather that it's virtually impossible to legislate.  How do you write law to encourage people to be better people?  Do we want to go with my definition of better or yours?  We can ask my wife, and I guarantee she'd have a third, equally compelling definition.  It doesn't have any specifics attached to it, and exists only as a codeword to get people of a certain political bent riled up about where their tax money is going (inevitably to those who aren't worthy of it).  

So what's your personal responsibility policy prescription?  What shall be our first law to enact that will improve the personal responsibility of all in the US?

[Conan71]

Wevus, I've acknowledged that in this thread and others.

Junk bonds, sub-primes, Wall Street buying up packages of CFS "collectible debt".  CFS- now there was a folly.  Institutional investors buying chunks of previously charged-off debt that originated from people who had run from credit card companies.  Talk about high risk!

There's no shortage of investors looking for high returns in the double digits.  These lenders and investors know the risk when they start this crap and they expect some sort of help when the bottom finally falls out.

Maybe this is a big enough cataclysm to realize that high risk doesn't mean easy high returns, but a good chance you will lose your donkey.

This was a case where common sense was thrown out on both sides of the closing table.  The lender throwing out common sense in no way should justify a lack of personal accountability on the part of the borrower.

[we vs us]

quote:Originally posted by cannon_fodder

At this point, Wevus, both the borrowers and the lenders (originators win, but no one will buy the notes anymore) are aware that neither wins with crappy loans to unqualified buyers.  Any institution still buying sub prime notes for face deserves what they get (as they did before).  Any borrower looking at a radical loan that has not heard of the sub prime crisis probably has no business looking to buy a house.

So, at this juncture, what do you feel needs to be implemented?

And are these implementations designed to stop poor borrowers from getting loans? Remember, the Clinton administration set benchmarks to encourage banks to offer sub prime loans and those remain.   Just curious what you think the solution is (both currently and to protect against this in the future).

IMHO all parties got burned by their own greed.  A few got caught up unexpectedly, but that was ignorant home buyers and corporations lacking due diligence so my sympathy there is reduced, though not lacking.  It would seem the repossessions and corporate losses might be enough to discourage both sides in the future.  Any massive corporate or housing bailout will only send the message that personal responsibility really is dead.   Make whatever bad choice you want and Tax Payers who have been careful will bail you out...

I'm no economist, but domestically our credit needs to be tightened (which I gather it already has considerably), and standards need to be enforced within the industry.  I also think that there should be some very harsh rules about how credit and debt should be packaged for secondary markets.  Transparency is crucial for investments, and right now there isn't much for the CDOs and other instruments.

(Keep in mind, I'm also talking about the international credit crisis, which is related to, but not entirely the same as our housing crunch).  

Finally, disclosure rules have to get much much simpler (I'm talking about to the buyer). There should be a one page statement summarizing the borrowers obligations, and a schedule of their debt as interest rates rise.  

In the end, I think we're just going to disagree about where the blame lies on this one.  The home buyer at this point is just one small link on a very long international chain, and in my opinion, a huge industry has arisen almost overnight to take advantage of the subprime people's gullibility and to exploit their lack of sophistication.  

BTW, there have always been subprime borrowers, and the risks of them losing their property has always been there. So, it's not a market that's going away, and I think Clinton relaxed the rules primarily to encourage home-ownership amongst the poor.  Not a bad thing on the face of it, but it should come with some serious counseling and education.  I also, BTW, don't think that policy of Clinton's is to blame for this in the least.  It's super-low interest rates (ie cheap mone) that were sustained for years.

[cannon_fodder]

I agree.

Clinton is not to blame.  While he encouraged offering sub-prime loans to get poorer people into home ownership (a dubious goal both economically and environmentally) it has been a long standing policy of the government.  Any fool politician (all of them) could have done it.

Simple disclosure rules would be VERY welcome.  I would hate ANOTHER forum to be shuffled over the table and signed without looking at it... perhaps this could be a service of the loan company?  What's more, some people wouldn't care.  But it would help SOME people.

and yes, I think we will disagree on the cause.  While I readily admit that originators steered people to bad loans to make money, there is plenty of blame on those who took the loans as well as the megacorps who then bought the notes.  With the buyers gone (massive write downs ensure tighter credit), the origination of such notes should slow down.  

Frankly, industries of every persuasion exist to exploit people.  If you want to phrase it as such, that is what a consumer economy is based on.   It is much easier to stop the problem at the consumer side (those who stand to lose) than on the seller side (who will be making money).  And frankly, if we try to remove any more personal responsibility and stop all exploitation every marketing professional in the world is screwed.  A leap, I understand - but you know what I mean.

No easy solution, but certainly all parties involved suffering (foreclosures, write downs, and loss of jobs for originators) will go a long way in correcting it for the next 50 years anyway.

[Conan71]

quote:Originally posted by we vs us

quote:Originally posted by cannon_fodder

At this point, Wevus, both the borrowers and the lenders (originators win, but no one will buy the notes anymore) are aware that neither wins with crappy loans to unqualified buyers.  Any institution still buying sub prime notes for face deserves what they get (as they did before).  Any borrower looking at a radical loan that has not heard of the sub prime crisis probably has no business looking to buy a house.

So, at this juncture, what do you feel needs to be implemented?

And are these implementations designed to stop poor borrowers from getting loans? Remember, the Clinton administration set benchmarks to encourage banks to offer sub prime loans and those remain.   Just curious what you think the solution is (both currently and to protect against this in the future).

IMHO all parties got burned by their own greed.  A few got caught up unexpectedly, but that was ignorant home buyers and corporations lacking due diligence so my sympathy there is reduced, though not lacking.  It would seem the repossessions and corporate losses might be enough to discourage both sides in the future.  Any massive corporate or housing bailout will only send the message that personal responsibility really is dead.   Make whatever bad choice you want and Tax Payers who have been careful will bail you out...

I'm no economist, but domestically our credit needs to be tightened (which I gather it already has considerably), and standards need to be enforced within the industry.  I also think that there should be some very harsh rules about how credit and debt should be packaged for secondary markets.  Transparency is crucial for investments, and right now there isn't much for the CDOs and other instruments.

(Keep in mind, I'm also talking about the international credit crisis, which is related to, but not entirely the same as our housing crunch).  

Finally, disclosure rules have to get much much simpler (I'm talking about to the buyer). There should be a one page statement summarizing the borrowers obligations, and a schedule of their debt as interest rates rise.  

In the end, I think we're just going to disagree about where the blame lies on this one.  The home buyer at this point is just one small link on a very long international chain, and in my opinion, a huge industry has arisen almost overnight to take advantage of the subprime people's gullibility and to exploit their lack of sophistication.  

BTW, there have always been subprime borrowers, and the risks of them losing their property has always been there. So, it's not a market that's going away, and I think Clinton relaxed the rules primarily to encourage home-ownership amongst the poor.  Not a bad thing on the face of it, but it should come with some serious counseling and education.  I also, BTW, don't think that policy of Clinton's is to blame for this in the least.  It's super-low interest rates (ie cheap mone) that were sustained for years.

I agree with you it is just about impossible to legislate personal responsibility.  That's right up there on my list of things government should not do like legislate morality.  But that is where the government can act to protect those without common sense or personal restraint- restrict the sources of those problems.  

Lenders can do a better job of policing themselves.  It shouldn't have to come down to government regs.  

The main reason I have railed so loudly about the bankruptcy reform of a few years ago (or was it a couple?) is that it essentially affirms the preditory lending practices of credit card companies.  I mean giving credit card debt an almost equal status with student loans and taxes in personal bankruptcy is ludicrous.  In other words Congress and President Bush gave credit card lenders near unlimited security on their loans.

I honestly don't know where the solution lies.  On one hand, you can wind up putting the dream of home ownership out of reach of some people who might turn out to be great borrowers just to try and prevent any defaults.  For the time being, I think the banks and investors in sub-prime mortgages have learned their lesson.

[we vs us]

quote:Originally posted by Conan71

quote:Originally posted by we vs us

quote:Originally posted by cannon_fodder

At this point, Wevus, both the borrowers and the lenders (originators win, but no one will buy the notes anymore) are aware that neither wins with crappy loans to unqualified buyers.  Any institution still buying sub prime notes for face deserves what they get (as they did before).  Any borrower looking at a radical loan that has not heard of the sub prime crisis probably has no business looking to buy a house.

So, at this juncture, what do you feel needs to be implemented?

And are these implementations designed to stop poor borrowers from getting loans? Remember, the Clinton administration set benchmarks to encourage banks to offer sub prime loans and those remain.   Just curious what you think the solution is (both currently and to protect against this in the future).

IMHO all parties got burned by their own greed.  A few got caught up unexpectedly, but that was ignorant home buyers and corporations lacking due diligence so my sympathy there is reduced, though not lacking.  It would seem the repossessions and corporate losses might be enough to discourage both sides in the future.  Any massive corporate or housing bailout will only send the message that personal responsibility really is dead.   Make whatever bad choice you want and Tax Payers who have been careful will bail you out...

I'm no economist, but domestically our credit needs to be tightened (which I gather it already has considerably), and standards need to be enforced within the industry.  I also think that there should be some very harsh rules about how credit and debt should be packaged for secondary markets.  Transparency is crucial for investments, and right now there isn't much for the CDOs and other instruments.

(Keep in mind, I'm also talking about the international credit crisis, which is related to, but not entirely the same as our housing crunch).  

Finally, disclosure rules have to get much much simpler (I'm talking about to the buyer). There should be a one page statement summarizing the borrowers obligations, and a schedule of their debt as interest rates rise.  

In the end, I think we're just going to disagree about where the blame lies on this one.  The home buyer at this point is just one small link on a very long international chain, and in my opinion, a huge industry has arisen almost overnight to take advantage of the subprime people's gullibility and to exploit their lack of sophistication.  

BTW, there have always been subprime borrowers, and the risks of them losing their property has always been there. So, it's not a market that's going away, and I think Clinton relaxed the rules primarily to encourage home-ownership amongst the poor.  Not a bad thing on the face of it, but it should come with some serious counseling and education.  I also, BTW, don't think that policy of Clinton's is to blame for this in the least.  It's super-low interest rates (ie cheap mone) that were sustained for years.

I agree with you it is just about impossible to legislate personal responsibility.  That's right up there on my list of things government should not do like legislate morality.  But that is where the government can act to protect those without common sense or personal restraint- restrict the sources of those problems.  

Lenders can do a better job of policing themselves.  It shouldn't have to come down to government regs.  

The main reason I have railed so loudly about the bankruptcy reform of a few years ago (or was it a couple?) is that it essentially affirms the preditory lending practices of credit card companies.  I mean giving credit card debt an almost equal status with student loans and taxes in personal bankruptcy is ludicrous.  In other words Congress and President Bush gave credit card lenders near unlimited security on their loans.

I honestly don't know where the solution lies.  On one hand, you can wind up putting the dream of home ownership out of reach of some people who might turn out to be great borrowers just to try and prevent any defaults.  For the time being, I think the banks and investors in sub-prime mortgages have learned their lesson.

I think we agree more than we disagree, but I've got to say that lenders have proven at this point that, without a doubt, they need better regulation.  Obviously, the industry has proven that it's more than willing to cast off its own rules if some quick money can be made.   Honestly, better gov't oversight might actually help make the transactions more transparent and help delineate who holds whose debt.  Putting fair rules into place has the potential to calm the markets rather than stifle them.    

The problem with the tough-love approach to the upcoming foreclosure wave (as Cannon Fodder suggests) is that the wave is unprecedented and massive.  I've seen numbers that quote up to 1 trillion$ in value this year alone will be lost, and that anywhere from 20 -30million home owners will default. I'll google for verification on that, but even if the number is only 10million, we're in a pickle.  And it may be that the health of the entire economy demands a bailout, else it drag us all down with it.  Time will tell, I guess.

[Conan71]

quote:Originally posted by we vs us


I think we agree more than we disagree, but I've got to say that lenders have proven at this point that, without a doubt, they need better regulation.  Obviously, the industry has proven that it's more than willing to cast off its own rules if some quick money can be made.   Honestly, better gov't oversight might actually help make the transactions more transparent and help delineate who holds whose debt.  Putting fair rules into place has the potential to calm the markets rather than stifle them.    

The problem with the tough-love approach to the upcoming foreclosure wave (as Cannon Fodder suggests) is that the wave is unprecedented and massive.  I've seen numbers that quote up to 1 trillion$ in value this year alone will be lost, and that anywhere from 20 -30million home owners will default. I'll google for verification on that, but even if the number is only 10million, we're in a pickle.  And it may be that the health of the entire economy demands a bailout, else it drag us all down with it.  Time will tell, I guess.

Yes we do agree more than we disagree.

Greed will outrun common sense and morals on just about any day.

It's a lot easier and more expedient to go to the source of the problem and mitigate it.  IOW, crack down on a few thousand lenders instead of trying to educate and (for lack of better description) rehabilitate millions of borrowers.  If there weren't sub-prime mortgages in the first place, then you wouldn't have sub-prime defaults, yes?

I do think bankers need to take a long look ata appraisers and tighten the reins on them.  All appraisals should be blind and the appraiser should not know the agreed-upon sales price in the first place.  Anyone else notice who has been through this, that in those instances that the appraisal is almost always within .5% to 1% of the sales price?

Housing starts and housing sales has been considered an economic indicator and a sign of overall American prosperity.

The reality of this situation that I think a lot of people, including the media have missed is that there's not beeen a sharp rise in unemployment prior to this, nor a slowdown in productivity which is commensurate with the rate of defaults.  There are lots of people defaulting on mortgages who have held the same job or stayed in the same line of work for years.

I used to work in consumer lending.  When we would buy a package of loans from a closed financial institution, our legal costs went up.  People assumed since their bank or A-class lender went out of business, they no longer owed their debt and just quit paying, thinking they just got a free car, furniture, or a forgiven signature loan.

There's also a monkey-see monkey-do mentality.  "Well my cousin isn't paying his note, nothing's happened to him, so I'm not goign to pay mine either."

I realize that is not the bulk of these defaults, but those are in there as well.  20 to 30mm foreclosures sounds way, way high to me.  I don't think it will be anywhere that bad.

[FOTD]

I'll agree with some of what you say but will tell you we are still in deep do do with the credit situation. This will take many moons to be alleviated and our Fed is not helping. If anything, they seem to be procrastinating the inevitable crunch. Credit card debt is the next big hurdle...I thought conservatives believed in letting free markets behave without government intervention.

And look who is stepping in to buy our debt and bail out the banks. Dubai. Let's see, two years ago everyone was freaked out when they were hired to man our ports but nobody seems bothered we are being taken over by China and Arab dictators.

[Conan71]

quote:Originally posted by FOTD

I'll agree with some of what you say but will tell you we are still in deep do do with the credit situation. This will take many moons to be alleviated and our Fed is not helping. If anything, they seem to be procrastinating the inevitable crunch. Credit card debt is the next big hurdle...I thought conservatives believed in letting free markets behave without government intervention.

And look who is stepping in to buy our debt and bail out the banks. Dubai. Let's see, two years ago everyone was freaked out when they were hired to man our ports but nobody seems bothered we are being taken over by China and Arab dictators.

Wasn't quite two years ago, and that was a bizarre plant on Bush when he was hung over from another kegger and coke binge.  "Uh, yeah every good 'mercan should, ah, support, giving Dubai control of our fine 'mercan ports."

Dubai profiting off us?  Natural progression.  China is finally investing in infrastructure to get them out of the 5th century B.C.  They have other priorities than U.S. debt and I predict they are less than 24 months from major economic upheaval/recession.  The reasons are numerous, PM me if you want to know why.

How can The Fed help alleviate stupidity in lending and borrowing?  What government-spawned miracle are you waiting on from The Fed?  What's going to happen is banks and investment houses greasing the skids with '08 candidates for a great bail-out at the cost of the taxpayers.  I honestly think I'm ready to quit sales and get into politics.  I could spend other people's money, draw a six figure income (unless I set my sights low enough on being a Tulsa city councilor) and have zero compunction about the consequences to anyone else because I'd know regardless what happens after my first term, I've got first class welfare guaranteed for life.

Credit card debt is no hurdle to Washington anymore.  Didn't you hear that Congress and President Bush gave MBNA and Citibank carte blanche (excuse the pun) a couple of years ago?  Anyone who voted for an incumbent after that fiasco and complains about their credit card debt should be removed from the gene pool.  

I know I harp on that all the time, it never affected me personally, it was just a watershed moment when I finally realized that lobbyists and not citizens are running DC.  That was so incredibly out of step with conservative thinking that I almost registered as a Democrat the next day.

[Double A]

I told you so...


It's Not 1929, but It's the Biggest Mess Since

By Steven Pearlstein
Wednesday, December 5, 2007; D01

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

At the center of this still-unfolding disaster is the Collateralized Debt Obligation, or CDO. CDOs are not new -- they were at the center of a boom and bust in manufacturing housing loans in the early 2000s. But in the past several years, the CDO market has exploded, fueling not only a mortgage boom but expansion of all manner of credit. By one estimate, the face value of outstanding CDOs is nearly $2 trillion.

But let's begin with the mortgage-backed CDO.

By now, almost everyone knows that most mortgages are no longer held by banks until they are paid off: They are packaged with other mortgages and sold to investors much like a bond.

In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next.

With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired.

It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.

What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value.

One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent.

And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.

As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio.

Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans.

And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.

It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

[FOTD]

dropped %20 in one month? Uh Oh....the republicans are going to be forced to eat each other before long.

http://www.pensitoreview.com/2007/12/22/poll-republican-approval-of-bush-on-economy-plummets/


Poll: Republican Approval of Bush's Handling of the Economy Plummets
Jon Ponder | Dec. 22, 2007
Republicans' approval of Pres. Bush's handling of the economy dropped 20 percentage points in the last month, according to American Research Group:

It suggests a wave of financial insecurity among Republican voters and could be a portentous sign of weakness inside Bush's base.
45 percent of Republicans disapprove of the way George W. Bush is handling the economy. In November, 25 percent of Republicans disapproved of Bush's handling of the economy.

That's quite a drop in a key indicator. It suggests a wave of financial insecurity among Republican voters and could be a portentous sign of weakness inside Bush's base.

Among all voters, 71 percent disapprove of Bush's handling of the economy, while 28 percent approve.

Overall, 32 percent approved of Bush's job performance versus 66 percent who disapproved.