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

[eagle1462010]

 

[g5000]

Part XVI

Almost there. I can see the light at the end of the tunnel. There are a few more culprits who need to be called out.

That's why we need to circle back to AIG now.

Remember when AIG sold that first CDS to JP Morgan for the BISTRO CDO? If you understand that sentence, then I congratulate you for sticking it out this far. Well done!

Anyway, AIG didn't set any money aside in case JP Morgan came calling to collect on that insurance policy in the event a blue chip company defaulted.

And they continued to not set money aside as the CDS market exploded! They thought the universe would end before they would ever see the day when a CDO imploded.

No, literally. They actually believed the actual universe would end before such a thing would happen.

And if every CDO was of the same Smith & Wesson quality as that first one (BISTRO), they would have been right.

And everyone would have lived happily ever after.

But they weren't the same quality. Because Wall Street was making "toxic loans" to anyone who could draw a breath, and that is what was ending up in CDOs. A "toxic loan" is one in which the broker making the loan knew the borrower didn't have a chance in hell of ever paying off their mortgage.

I mentioned earlier that most of the subprime loans were made to middle class borrowers. However, it is definitely true that subprime loans were also being made to "low income borrowers".

The thing is, the hacks would have you believe the broker-dealers were FORCED to make those loans to the negroes. But now you know the opposite is true. The banks were forcing themselves on the lower income people.

This actually happened: Poor people would be attending church, and suddenly their preacher would introduce a mortgage broker and tell them Jesus want the congregation to listen to this motherfucker and Jesus was going to make them all rich. I kid you not.

Let me ask you something. If you have two people sitting at a table with a mountain of forms, and one of those people was poorly educated in an urban shithole school and was trapped in a redline area earning less than a survival wage, and the other person worked for an institution with CENTURIES of hard learned lessons about risk and lending, which one is the most culpable when that loan inevitably defaults?

That's right. The lender. That's why these loans were called "predatory loans".

Sure, the borrower should have known there was no way to make a $1400 a month payment on a less than subsistence wage.

But you see, good old Bush said we could and should "change the fine print". Then presto! Your monthly payment has just magically dropped to $300!

Whaaaaaat!?!

 

[well named]

g5000

Thanks for an entertaining read so far. I don't know enough on this subject to either be certain you got everything right or to criticize anything you said, but the story as you've told it lines up with my rather vague understanding of things, with a lot of interesting details I hadn't seen before. Do you have a professional background in finance or something related?

 

[g5000]

Part XVII

The subprime borrowers were given a leg up by Wall Street. Actually, it was an ARM up. Nyuk-nyuk-nyuk.

Adjustable Rate Mortgage. ARM. You start with a low, low monthly payment. After three or five years, your mortgage "resets", and suddenly your monthly payment skyrockets!

Just how predatory were these loans? We'll have to do some math. I'll try to keep it as simple as possible.

Let's say you borrow $200,000.

Every monthly payment you make on a mortgage pays a little of the principal (the original amount you borrowed), and a little of the interest. After 30 years, you are all paid off.

For a $200,000 loan, that works out to about $1400 a month, give or take.

Let's say the principal is about $500 of that monthly payment. Most of your monthly payment for the first several years is interest.

If you get an ARM, and your monthly payment is only $300, then you aren't even paying down the principal!

You are short $200. You know what the holder of that paper does? They roll that missing $200 into the balance you owe.

So after your first monthly payment, your balance is now $200,200. After your second monthly payment, your balance is $200,400. The amount you owe is actually going UP!

After three years, when your mortgage resets, your new balance is $272,000 instead of the original $200,000. So now your monthly payment shoots up from $300 to $1600 a month instead of $1400 a month.

This is called a "negative amortization" loan, and that is exactly what millions of subprime borrowers were tricked into.

On a below subsistence income, you cannot afford the new $1600 a month payment. So your only choice is to either refinance (right back into ANOTHER predatory loan) or sell your house.

 

[g5000]

Part XVIII

Certain investors are required by their by-laws to only invest in the very safest investments. Investments are rated by their risk. The very best risks are rated AAA. These ratings are assigned by "ratings agencies". Standard & Poor's, Fitch, and Moody's being the most well known in the US.

These ratings agencies are paid by the financial institutions whose products they rate. Conflict of interest, anyone?

Public employee pension funds are required to invest in AAA investments.

The BISTRO CDO was rated AAA because it was made of loans to blue chip companies and because it was insured by a CDS.

In the beginning, most of the measurement of risk was weighted by the quality of the borrowers. But after the invention of the CDS, the broker-dealers and the investors begin to delude themselves that risk no longer existed in CDOs.

And remember, AIG believed this, too, and so they were not setting aside any cash for a rainy day.

That is, until December 2006.

CDS were sold by the financial products division of AIG. Thus it was called AIG-FP.

One day, two guys working at AIG-FP began to wonder how it was possible all these millions and millions and millions of loans were being made all over the globe without any risk.

They were aware that subprime loans were on the rise, but they had assumed the brokers and broker-dealers had some self control. The guys at AIG assumed only about 5 percent of the loans in all those CDOs they were insuring were subprime.

But they decided, just in case, to take a close look at all those CDOs and see what was in them.

And that's when their hair and teeth fell out. They discovered that of the new CDOs being cranked out at that time, 90 PERCENT WERE SUBPRIME. And not just subprime, but fucking more toxic than ground zero at Hiroshima on August 6, 1945.

Those two guys ran to their boss, and he didn't want to believe them. But when you have two bald toothless guys dribbling on your desk and slashing their wrists, you think to yourself, "Maybe I should listen to these guys."

So he did. And he believed them.

That's why in December 2006, AIG announced it would no longer issue credit default swaps.

And then they tried to convince themselves they had stopped in time, seeing as how they had not put a cent aside for a rainy day.

But boy oh boy, were they wrong. Wrong as wrong could be. They were way, way, way too late.

Coincidentally (yeah, sure), that is the same time when Hank Paulson quit his job as Goldman's CEO and went to work for President Bush as Treasury Secretary.

 

[g5000]

Part XIX

The ratings agencies people had no idea how to comprehend CDOs and how safe they were. The broker-dealers would call them in and say, "Trust us! Look, here's a really complicated calculus formula we use, and it says everything is fine."

Then the ratings agencies people would say to themselves, "Well if we don't give these CDOs a AAA rating, then those firms will go somewhere else and we will lose the fees."

So the ratings agencies gave these towers of toxicity AAA ratings, and because of that, public employee pension funds bought them, insurance companies bought them, and college endowments bought them.

Here's something not too many people know: Insurance companies don't make their profits from premiums. There is actually a very thin margin between what they receive in premiums and what they pay out to hospitals. They take that thin margin and invest it in CDOs and stocks and bonds and shit.

So when these CDOs blew up, all those public employee funds and all those colleges and all those insurance companies lost their asses.

And that is a big reason there was a skyrocketing rise in state and local taxes, college tuition, and insurance.

There is some poetry in all this, though.

One of the biggest cheerleaders in the deregulation of derivatives was Larry Summers.

Larry Summers was President Clinton's Treasury Secretary.

After serving Clinton, Summers went on to manage Harvard's college endowment fund. He drank his own derivatives bongwater and lost $2 billion of Harvard's money.

Oh, here's the funny thing about that calculus formula the financial institutions were using to measure risk: It assumed housing prices would always rise. If you plugged a negative number into it, it imploded.

Just like the world economy did.

 

[g5000]

Part XX

Three years have gone by and people are finding their mortgages have reset and they can't afford the new monthly payment. So they try to refinance, but millions of mortgages have reset at the same time, and the risk of rolling all that increased principal is too great, and they are turned down.

So the real estate market is suddenly flooded with houses. When you increase supply, prices drop.

Oh, shit!

You borrowed $200,000 but you were in a negative amortization loan and so now you owe $272,000. House prices are dropping, and you can't even sell your house for the original amount of $200,000!

So what do you do?

You foreclose, that's what you do. You default and walk away.


You stop making monthly payments. You and millions of other borrowers stop paying.

The revenue stream starts drying up.

Uh oh.

Imagine all those investors standing by the river with their cups.

The ones with the little cups get to go first.

The stream is drying up. The people with the bigger cups find that by the time their turn comes around, there's no more water in the stream.

It's all gone.

No worries! We bought a CDS! Yay! Get AIG on the phone.

Uh oh.

AIG doesn't have any money to pay off those policies they sold.

SAY WHAT!?!?!

AIG was taking all that "free money" from the investors and now they can't meet their obligations.

Holy shit!

And that's how AIG went belly up and had to be bailed out by us taxpayers.

Good old Hank Paulson, formerly of Goldman Sachs, made sure Goldman Sachs received 100 cents on the dollar for their CDS and did not take a loss.

Not everyone was that lucky to have a man on the inside looking out for them. A lot of pension funds lost their asses. Firemen, policemen, teachers. They all ate the big one.

 

[g5000]

Part XXI

By the end, loans were being made to people who couldn't even make their first mortgage payment.

How is this possible?

Because the people handing the borrowers the money had "no skin in the game". Before the ink was even dry on the mortgage note, they had passed it up the food chain to the next sucker.

At the end of the line were the public employee pensions, municipalities, college endowment funds, Saudi princes, and you and your pathetic little 401k.

Your money manager had been sold a bill of goods. Toxic waste that Moody's and the broker-dealer had assured him were AAA. His head was fogged by hookers and blow, and he blew it.

So now that CDOs were toxic from top to bottom, even the investors with little tiny cups were finding the river was as dry as Hillary's vag.

Bummer.

 

[g5000]

I'm fricking tired. I feel like I left a lot out. Maybe I'll add some more tomorrow.

I should. Things didn't get really ugly until after AIG stopped peddling CDS. Things got openly fraudulent. Really, really crooked shit.

Like ABACUS AC-1.

Also, you should know at least one more important thing. This disaster was GLOBAL. This was a global derivatives bubble.

If all it was was a subprime bubble, we could have survived it easily. Especially if all it was was some bad loans made to blacks.

This blaming the CRA thing is utter bullshit. I like to ask people if they noticed all their white neighbors on their street who foreclosed and thought to themselves, "I had no idea Biff was a Negro!"

I like to ask them how the negroes of Iceland bankrupted Landsbanki.

 

[g5000]

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?

The Meltdown was too complicated to explain in a few paragraphs - and while some of the movies on it (The Big Short, Too Big to Fail, Inside Job) are very good, I'd imagine they'd be tough to follow without an investing and/or financial background. I've seen a few good videos on YouTube, but the same issue may apply.

Barron's has a piece on the 7 best books written on the Meltdown: The 7 Best Books About the Financial Crisis

I wouldn't use a political website as a source on the Meltdown. Most of the opinions will be partisan in nature, so they'll be very skewed. And there are a lot of people whose only "knowledge" of what happened came from political sources. Which means there's a lot of detail they simply don't know.

It's an interesting story and a cautionary tale, though. Good luck.
.

The best book on the financial crisis is this one: https://www.amazon.com/Traders-Guns-Money-unknowns-derivatives/dp/0273704745/&tag=ff0d01-20

You will notice it was published two years before the crash.

 

[SmokeALib]

Banks are again handing out credit like candy. A financial collapse could easily happen again - and soon.

 

[Faun]

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.

Also notice there has been a recession under every Republican president except for Trump (so far).

 

[Faun]

You mean the Gramm-Leach-Bliley Act?

 

[SaxxyBlues]

Thank you g5000 your explanation has helped me a lot. Thank you for lending your time and expertise.

 

[william the wie]

A major problem is that China is inflating out the wazoo as are most emerging markets. The Fed is trying to keep that inflation out.

 

[SaxxyBlues]

Banks are again handing out credit like candy. A financial collapse could easily happen again - and soon.

One indication I have, State Farm went up $200 a month on my auto insurance. I had to move on....

 

[eagle1462010]

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.

Also notice there has been a recession under every Republican president except for Trump (so far).

Allowed too big to fail to self regulate.

 

[LordBrownTrout]

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...

You didn't know that your money is not redeemable in gold, silver or any other commodity did you. They are backed by nothing now.

 

[LordBrownTrout]

Banks are again handing out credit like candy. A financial collapse could easily happen again - and soon.

One indication I have, State Farm went up $200 a month on my auto insurance. I had to move on....

Mine went down 180 a month.

 

[LordBrownTrout]

Part XVI

Almost there. I can see the light at the end of the tunnel. There are a few more culprits who need to be called out.

That's why we need to circle back to AIG now.

Remember when AIG sold that first CDS to JP Morgan for the BISTRO CDO? If you understand that sentence, then I congratulate you for sticking it out this far. Well done!

Anyway, AIG didn't set any money aside in case JP Morgan came calling to collect on that insurance policy in the event a blue chip company defaulted.

And they continued to not set money aside as the CDS market exploded! They thought the universe would end before they would ever see the day when a CDO imploded.

No, literally. They actually believed the actual universe would end before such a thing would happen.

And if every CDO was of the same Smith & Wesson quality as that first one (BISTRO), they would have been right.

And everyone would have lived happily ever after.

But they weren't the same quality. Because Wall Street was making "toxic loans" to anyone who could draw a breath, and that is what was ending up in CDOs. A "toxic loan" is one in which the broker making the loan knew the borrower didn't have a chance in hell of ever paying off their mortgage.

I mentioned earlier that most of the subprime loans were made to middle class borrowers. However, it is definitely true that subprime loans were also being made to "low income borrowers".

The thing is, the hacks would have you believe the broker-dealers were FORCED to make those loans to the negroes. But now you know the opposite is true. The banks were forcing themselves on the lower income people.

This actually happened: Poor people would be attending church, and suddenly their preacher would introduce a mortgage broker and tell them Jesus want the congregation to listen to this motherfucker and Jesus was going to make them all rich. I kid you not.

Let me ask you something. If you have two people sitting at a table with a mountain of forms, and one of those people was poorly educated in an urban shithole school and was trapped in a redline area earning less than a survival wage, and the other person worked for an institution with CENTURIES of hard learned lessons about risk and lending, which one is the most culpable when that loan inevitably defaults?

That's right. The lender. That's why these loans were called "predatory loans".

Sure, the borrower should have known there was no way to make a $1400 a month payment on a less than subsistence wage.

But you see, good old Bush said we could and should "change the fine print". Then presto! Your monthly payment has just magically dropped to $300!

Whaaaaaat!?!

Wut!!!!!!!!!!!! I bought two houses and didn't fall prey to any of these practices. I read the fine print and rejected it. Wut!!!!!!!!!