2008 Financial Crisis The Causes and Costs of the Worst Crisis Since the Great Depression

[g5000]

Part VIII

The first CDO was built out of about a billion dollars of corporate loans.

Broker-dealers like to give names to the toys they make, and this first CDO was called "BISTRO". It was an acronym for something, but I can't remember what.

I want to make it very, very clear that there was absolutely nothing evil whatsoever about the original design and intent of CDOs. They are a beautiful thing to behold. Kind of like a Smith & Wesson.

But in the wrong hands...we'll see what happened.

This first CDO, though, strictly blue chip companies. And by "blue chip", I mean companies which could absolutely be depended upon to repay their corporate loans.

Good stuff!

But then they bumped up against a regulatory problem.

You see, federal regulations require lenders to put aside a certain amount of cash (or other commodities as liquid as cash) for every dollar they loan. This is so they can absorb the occasional default on a loan in a big pile of loans such as you would find in a billion dollar security.

Well, JP Morgan didn't like having to tie up some cash which would not be allowed to be put to work making more cash. They hated the idea to have that money just sitting there growing moss in the unlikely event one of these blue chips defaulted.

And that's when the Credit Default Swap (CDS) came riding in on a pale horse. And hell followed with it.

 

[Lesh]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

In actuality Fed policies PREVENT boom and busts.

Since the creation of the Fed re has been one Depression. Prior to that there was one about every ten years

 

[BuckToothMoron]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Are you Republican?

You don’t need to be a Republican to understand that artificially altering fair market conditions has consequences beyond what central banks intend. History is full of examples.

 

[g5000]

Part IX

The Credit Default Swap (CDS).

If you borrow $200,000 to buy a house and it burns down, you still have to pay back that $200,000. And you have no house.

That totally sucks.

So you buy insurance. In fact, for a government backed loan, you are required to buy insurance.

Cool. All is good.

But what about the other end of this deal? You loan $200,000 to someone and then they default. They don't pay you back. FUCK! You're out 200 grand!

And that is what the CDS was invented for. It was insurance a lender could buy to cover the risk of default.


But here is where our politicians really screwed the pooch, ladies and gentlemen. Pay attention.


The inventors, sellers, and buyers of CDS did not want a CDS to be called "insurance". In federal law, there are all kinds of rules surrounding any insurance product. And the free wheeling marketeers HATE regulations. They dodge and evade them as much as possible.

So let's not call a CDS insurance any more, mm-kay? SHHHH! (*wink wink*)

We will call a CDS a...ummm...hmmm...aha! We will call it a "derivative"! Yeah, that's it.


And the politicians went for it! They wrote laws excluding derivatives from pretty much any kind of regulation whatsoever. Even though some prescient wiseass called derivatives "financial weapons of mass destruction".

To draw a red line around derivatives where the banks didn't want negroes regulators to go, we were given the Community Reinvestment Act Commodities Futures Modernization Act (CFMA).

All these brand new derivatives had to be "modernized", you see. Heh.

From section 117 of the CFMA (passed by a GOP Congress, signed into law by a Democratic President):

This Act shall supersede and preempt the application of any State or local law that prohibits or regulates gaming or the operation of bucket shops

Now ask yourself why the CFMA had to have a provision in it which exempted Wall Street from state laws which apply to CASINOS and rip-off joints.

Ask yourself why this law which so brazenly stomps on states rights was not protested by Fox News or Libertarians or the ghost of Ronald Reagan.

 

[Lesh]

CDOs come in many forms but the particular ones that caused the 2008 crash were BETS made against what was supposed to be an ever rising housing market.

If you play craps they were like the side bets (that only morons bet on). Banks were betting small amounts of money (relatively) against large payouts that someone else's loan tranches would fail. Financial institutions like AIG were glad to take this "free money" because the mortgage companies had gotten the ratings agencies to rate garbage loans as triple A. That part was essentially FRAUD (for which no one has paid a price). Mortgage companies actually made the situation worse by INTENTIONALLY building loans that would likely fail...selling them off...and then betting against them

Nice huh?

The Fed began raising interest rates and the whole house of cards fell apart and who got hurt?

Not the banks...not the big investors. Middle class homeowners who lost their homes and middle class workers who lost their jobs and retirements

ANd the biggest reason this occurred was because of a relaxation of regulations that allowed banks to get involved in "insurance" etc.

 

[g5000]

Part X

So the good people at JP Morgan went to the regulators and said, "Hey, what if we buy insurance a CDS from somebody which will cover any losses from defaults? Then will you lift the requirement we set aside some cash to cover defaults?"

And the regulators were like, "Gee, it seems you have found a fascinating and wonderful work-around! Go for it!"

So JP Morgan was able to sell all those cups to all those investors for all that money flowing from all those blue chip companies, and didn't have to set aside any money for a rainy day.

And since they were blue chip companies, that meant the risk of anyone defaulting was incredibly low, and so the people who sold them the insurance policy CDS only charged them a few pennies!

And everyone lived happily ever after.


Oh, wait...

 

[g5000]

CDOs come in many forms but the particular ones that caused the 2008 crash were BETS made against what was supposed to be an ever rising housing market.

If you play craps they were like the side bets (that only morons bet on). Banks were betting small amounts of money (relatively) against large payouts that someone else's loan tranches would fail. Financial institutions like AIG were glad to take this :free money because the mortgage companies had gotten the ratings agencies to rare garbage loans as triple A. That part was essentially FRAUD (for which no one has paid a price). Mortgage companies actually made the situation worse by INTENTIONALLY building loans that would likely fail...selling them off...and then betting against them

Nice huh?

The Fed began raising interest rates and the whole house of cards fell apart and who got hurt?

Not the banks...not the big investors. Middle class homeowners who lost their homes and middle class workers who lost their jobs and retirements

ANd the biggest reason this occurred was because of a relaxation of regulations that allowed banks to get involved in "insurance" etc.

I'm getting to that.

 

[g5000]

Part XI

Now why didn't anybody want to call a CDS what it is? Why didn't they want to call it insurance?

Because insurance has this annoying thing called an "insurable interest" requirement.

This simple regulation prevents homicides, arsons, and all kinds of other nasty things. Man, I hate regulation!


If you own a house, you buy fire insurance against that house because you stand to lose money if it burns down.

If the house of someone across town burns down, you don't suffer a financial loss. This means you do not have an "insurable interest" in that stranger's house.

You cannot buy fire insurance against a stranger's house because of the insurable interest requirement.

The reason you cannot buy insurance against a stranger's house is pretty obvious. There would be a shitload of arsons. A guy could buy insurance against a stranger's house, make a single premium payment, and then torch that stranger's house to the ground and collect the insurance.

If there wasn't an insurable interest requirement for life insurance, we could all insure that black guy down the street and then lynch the shit out of him and make some profit at the same time! U-S-A! U-S-A! U-S-A!

So not all regulations are bad, eh? Some save lives and money.

But imagine if you could buy fire insurance against a stranger's house. Imagine if everyone could.

A $200,000 house could have ten policies against it by strangers. Now if the house burns down, the insurance company isn't out $200,000. It is out $2 million!!!

And that is the problem with CDS. They do not have an insurable interest requirement. They are totally unregulated.

That is why all the players went out of their way to get the regulators not to call a CDS "insurance".

But why would they do that? Isn't that fucking CRAZY!?!

Yep.

But we are talking about people who have moral qualms about lynching for profit, so to speak.

With a CDS, a person could bet against your mortgage burning down. Not kidding.

Now think about that.

If you are an arsonist, what's a sure way to guarantee a bunch of mortgages are going to burn to the ground?

You lend money to people you know can't possibly make the payments. Then you build a CDO out of those mortgages. Then you build a synthetic CDO on top of that toxic CDO.

But since there isn't even an insurable interest requirement for CDS, you can go out and find toxic mortgages which you didn't even make, and pack them into your synthetic CDO!

Then you sell the tranches for that synthetic CDO to some mushroom investors who you don't tell you built this whole firetrap. They have no idea you are on the other side of the bet, because you used a broker-dealer at Goldman Sachs as your cutout.

Then you throw the match and collect the insurance.

And that, ladies and gentlemen, is exactly what ABACUS 2007 AC-1 was all about.

FMI: Factbox: How Goldman's ABACUS deal worked | Reuters

 

[g5000]

Part XII

I got a little ahead of myself in that last installment. Ahem. Sorry about that.


All right. JP Morgan needed someone to sell them a CDS. So they went to the biggest insurance company on Earth.

American International Group. Which I shall henceforth call "AIG".

AIG took a look at BISTRO, and they said to themselves, "There's no way any of these blue chip companies will default on their loans! No fricking way! So whatever we charge JP Morgan for insuring (*cough*) BISTRO, it's all free money!"

AIG was feeling giddy, and only charged JP Morgan peanuts for the CDS.

And everyone lived happily ever after.


Oh, wait...


Here's a funny thing.

Remember that regulation which said lenders had to set aside some cash in the event someone in the security defaulted?

Remember how JP Morgan got around that by buying a CDS?

Yeah. So then AIG sold them a CDS.

But since a CDS is a totally unregulated derivative, and not insurance, there was no requirement for AIG to set aside some cash in the event someone in BISTRO defaulted!

Presto!

So guess what AIG did after it sold the CDS to JP Morgan?

They didn't set aside any cash in the even JP Morgan would someday come to collect on a default. Nothing. Nada. Zip. Zilch.

I shit you not.

This is what became known in the derivatives world as "we have eliminated risk from the lending business!"

I wish I was joking. I really do.

 

[william the wie]

Risk management is touted as higher return for lower risk therefore by all definitions it is in fact as much an oxymoron as cruel to be kind or living death.

There are many low risk ways to invest. DIP/DRIP plans with discounts to market price

low PEG ratios

increasing dividends for five or more years

And this list can be extended but most people including the professionals are more interested in bragging rights than actual returns.

 

[g5000]

Part XIII

Well, once word got out that some magicians had managed to eliminate risk from lending money to borrowers, the world began beating a path to AIG's door.

And once word about CDOs got out, and that you didn't have to set aside any cash for defaults so long as you bought a CDS from AIG, then the fucking world was set on fire with a feeding frenzy of fees.

The broker-dealers began securitizing the shit out of loans so they could build CDOs which they could then sell to investors and sop up as much as that $70,000,000,000,000 as they could.

"We have found a way to transfer seventy fucking trillion dollars to borrowers without any risk! Let's par-tay!"

Crazy, right?

Here's the problem.

There are only so many "blue chip" borrowers on the planet. And they can only borrow so much money. They are not capable of borrowing anything even close to $70 trillion.

"We are just going to have to lower our standards, folks, so we can get us even MOAR middle man fees!"

And that is just what all the broker-dealers did.

Loans were the fodder for building CDOs, and CDOs were the way to make fees. So they needed to keep the CDO-building industry going. In order to keep the industry going after all the blue chip borrowers were tapped, they lowered their borrowing standards.

Here's the food chain:

Borrower > broker > broker-dealer > investor

Now how smart do you have to be if you are a broker and a broker-dealer (Lehman) gives you a pile a cash and tells you to get someone to borrow it, in exchange for a broker's fee?

"Lend it to anyone you can find!"

Why, you don't have to be very smart at all. You could be a bartender one day, and a real estate broker the next! U-S-A! U-S-A! U-S-A!

In fact, Lehman Brothers, in order to sustain their CDO building empire, bought their own chain of brokers to feed the pipeline. They were shoveling cash from their mushroom investors into the hands of these stumbling fucks who in turn were throwing it at anyone who could fog a mirror.

It had fuck-all to do with the CRA. That's why when Dick Fuld was asked by an idiot Republican who had clearly been drinking Fox News's piss how much the CRA had had to do with the collapse of Lehman Brothers, the goon answered, "De minimus."

 

[g5000]

I will finish this up later tonight.

 

[Bush92]

What Caused the 2008 Financial Crisis and Could It Happen Again?

I still don't understand the cause of the financial crisis. I try to wrap my head around it.

What does this mean?

The Gramm-Rudman Act was the real villain. It allowed banks to engage in trading profitable derivatives that they sold to investors. These mortgage-backed securities needed home loans as collateral. The derivatives created an insatiable demand for more and more mortgages.

I think if I could understand this paragraph I would better understand the financial crisis of 2008.

Have we recovered? Or how long will it be?

Allowed Clinton administration to watch minority voters get high risk loans they could not afford. Typical of how Democratic Party uses minorities for votes.

 

[BuckToothMoron]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

In actuality Fed policies PREVENT boom and busts.

Since the creation of the Fed re has been one Depression. Prior to that there was one about every ten years

You’re assuming the creation of the Fed has stymied depressions/recessions and it seems you believe this to be the first government charted bank. Neither is true. In the 100 years prior to the creation of the Federal Reserve there were 129 months of recession/depression. In the 100 years after, there have been 196 months and the longest was the Great Depression under the Feds watch.

 

[g5000]

Part XIV

Let's circle back to interest rates, and then back to the GSEs.

After the dot com bubble popped, and 9/11 happened, our country suffered a recession. As it turned out, the only business sector which was performing well during that recession was the real estate market. And so, in order to stimulate the economy, a couple things happened.

First, the Federal Reserve (the "Fed") lowered interest rates. They did this to make it easier to gain access to that $70 trillion.

During recessions, people don't move money around as much as they do during boom times. Some people focus all their attention on how much money is in circulation. They get all in a tizzy whenever the Fed "prints money", but they are ignorant of the velocity at which that money moves around.

When the Fed lowers interest rates, it is trying to speed up the velocity of money. It is trying to get you to hold onto money for less time and get it moving around. And during that post dot com slash 9/11 recession, the Fed wanted to give a boost to the housing market.

So that happened.

Now about those GSEs some hacks blame for everything (when they aren't blaming negroes and the CRA).

As I mentioned somewhere at the top of this series of posts, the GSEs totally dominated the secondary mortgage market for several decades. "Secondary mortgage market" is just another way of saying they bought the mortgage paper from lenders, bundled them up, and sold them on to investors.

For decades, the GSEs made up about 95 percent of the secondary mortgage market. Now that's what I call domination!

Wall Street was jealous. They wanted in on the action. Then someone invented the CDO and the CDS, and suddenly Wall Street saw its opening.

We have to talk about regulations again. Sorry.

Because they were backed by the government, the GSEs were not allowed to make risky loans. They had to make good loans to good borrowers. Really, really boring loans. Serious yawners. The secondary mortgage market was boooooooriiiinnnngggggg for decades.

But then along came the derivatives. Dunh-dunh-dunnnnnnnnh! "We've removed all risk from the mortgage market! We can lend money to ANYBODY!"

As the brokers and broker-dealers ran out of good borrowers with good loans to stuff into the hotcake CDOs, they began lowering their standards. They began deliberately seeking out higher risk borrowers.

A higher risk borrower pays a higher interest rate because they are a risk. Higher interest rate = MOAR profits. Yay!

A loan to a good risk borrower is called a prime loan. A loan to a lower or bad risk borrower is called a "subprime (or sub-prime) loan".

Now, in the minds of hacks, a "subprime loan" and "a loan to a negro" are the same thing. They will deny it, but that's exactly what they picture in their heads.

They will say, "No, it means a loan to a 'low income' person!", pretending they don't really mean negroes.

As for subprime being a loan to a low income person isn't even true, either. Not necessarily. I will explain.

I have a credit score of 815. I'm not bragging, I am using this as an illustration.

Because I have a credit score of 815, does that mean I can borrow a billion dollars?

Nope. I'm not a casino owner on this third marriage who runs a fraudulent university. I'm just a middle class schmoe.

I can safely borrow a few hundred thousand dollars, and be considered a good risk. Therefore, I would get a prime loan.

But what if I borrowed a million dollars? I am a pretty big risk for a million dollars. So if you loaned me a million dollars, you would have to do it with a subprime loan. You would have to charge me a much higher interest rate than if I borrowed $300,000.

And that is exactly what most subprime loans were. They weren't loans to negroes, they were loans to middle class people biting off WAY more than they could chew. And they used those loans to not only buy McMansions, they then turned around and took out Home Equity Lines of Credit (HELOC) to buy SUVs, boats, motorcycles, Disney vacations, hookers and blow.

 

[Lesh]

I will finish this up later tonight.

Thank you. Perfect explanation

 

[Lesh]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

In actuality Fed policies PREVENT boom and busts.

Since the creation of the Fed re has been one Depression. Prior to that there was one about every ten years

You’re assuming the creation of the Fed has stymied depressions/recessions and it seems you believe this to be the first government charted bank. Neither is true. In the 100 years prior to the creation of the Federal Reserve there were 129 months of recession/depression. In the 100 years after, there have been 196 months and the longest was the Great Depression under the Feds watch.

View attachment 225955

How many "bank panics" between 1929 and 2007?

None?

Oh...

 

[g5000]

Part XV

Wall Street began moving into the subprime business in a large way in the early Oughts. This really bit into Fanny and Freddy's business, because the GSEs were restricted to making prime loans while Wall Street was going gangbusters with derivatives and subprime loans.

So then the GSEs started moving into the subprime business and buying CDS. They were the followers, not the leaders.

Nevertheless, the GSEs lost their domination of the secondary mortgage market. By 2005, their market share had shrunk to something like 30 percent.

Suddenly, the secondary mortgage market wasn't boring any more. It was flashy. It was the shit. It was hookers and blow for everyone!

In order to steal more market share from the GSEs, there had to be a transfer of ownership of our politicians. The GSEs had totally owned them for decades, but then Wall Street began donating large sums to EVERY politician. Not just Republicans. After all, Chuck Schumer is the Senior Senator from New York, which is where Wall Street is, and so he raked in YUGE sums from the broker-dealers, too.

Wall Street gave our politicians a narrative. A narrative that, if you were paying attention, made our politicians look schizophrenic.

The narrative we were suddenly given around 2004 or so was that the GSE portfolios were getting too big. They were making too many loans. Our Republican President at the time said their portfolio posed a "systemic risk", and they needed to slow down. The Democrats, whose turn it was to wear the Party of No hat, disagreed.

In some circles, this Republican President is portrayed as a hero. "He tried to stop the runaway train, but that fag Barney Frank got in his way!"

It's a tidy story, but it is total bullshit.

The part about Frank wanting the train to keep going is true, but the part about the President trying to stop the train is total bullshit.

You see, that Republican President had never been owned by the GSEs. And while he was trying to rein them in, he was very busy greasing the wheels of that train for Wall Street.

Read this post and see if this guy strikes you as someone who felt we needed to stop this silly business of lending to negroes: President Bush Calls for Expanding Opportunities for Home Ownership

"We certainly don't want there to be a fine print preventing people from owning their home. We can change the print, and we've got to."

The Republican President did everything he could to relax the underwriting laws of the Universe so Wall Street could keep on building their CDOs and reaping their fees.

Here's one of the worst deregulations:
Final Rule Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities Rel. No. 34-49830 June 8 2004

The Commission is amending Rule 15c3-12 (the “net capital rule”) under the Securities Exchange Act of 1934 (the “Exchange Act”) to establish a voluntary, alternative method of computing net capital for certain broker-dealers.

Bush's SEC voted unanimously in 2004 to waive the net capital rule for the 5 biggest broker-dealers. That waiver led directly to the demise of those broker-dealers.

All five of the broker-dealers who were given that extra special treatment by the SEC no longer exist as independent companies or converted into bank holding companies so they could be bailed out.

Bear Stearns was the first to go under. Then Lehman Brothers went under. Then Merrill Lynch went under.

Goldman Sachs and Morgan Stanley converted to bank holding companies so they could receive bailout money. Goldman was also bailed out by former Goldman Sachs CEO, Hank Paulson, who was Bush's Secretary of Treasury. Goldman Sachs received 100 cents on the dollar for their CDS's from AIG.

 

[g5000]

Federal Reserve Policies Cause Booms and Busts | Richard M. Ebeling

"Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

In actuality Fed policies PREVENT boom and busts.

Since the creation of the Fed re has been one Depression. Prior to that there was one about every ten years

You’re assuming the creation of the Fed has stymied depressions/recessions and it seems you believe this to be the first government charted bank. Neither is true. In the 100 years prior to the creation of the Federal Reserve there were 129 months of recession/depression. In the 100 years after, there have been 196 months and the longest was the Great Depression under the Feds watch.

View attachment 225955

Before the Fed, recessions were more frequent, longer lasting, and deeper.

That's a simple fact.

 

[g5000]

List of recessions in the United States - Wikipedia, the free encyclopedia

Take a good look at the list of recessions in that link, and take special note of the length and depth of each one. Notice how the ones of the 19th century were longer and more frequent than those of the 20th century.