A little honesty about the financial meltdown

[MintJulep]

Two excellent articles on the major role that government intervention played in causing the housing crisis and the resulting financial meltdown.

From Investor's Business Daily and Forbes:

Stop Covering Up And Kill The CRA (http://www.ibdeditorials.com/IBDArticles.aspx?id=312766781716725)
Investor's Business Daily
EXCERPT:

Fact: The 1977 law [the Community Reinvestment Act or CRA] was only lightly enforced until Clinton added teeth to it in 1994 and launched an anti-redlining campaign against banks, led by Ludwig, Housing Secretary Henry Cisneros (and later Andrew Cuomo) and Attorney General Janet Reno that lasted into this decade.

Minority homeownership rates, which had been flat, began a steep rise in 1995, and home prices soon followed, stoked by easier lending. Numerous bank officials complain that they still feel pressured by CRA regulators to make inner-city loans they know are at great risk of defaulting.

Myth: The CRA could not have led to financial Armageddon, because the overwhelming share of subprime mortgages came from lenders that were not banks and not regulated by the CRA.

Fact: Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA.

Last year, when the bubble burst, bank subprime loans totaled $142 billion, dwarfing those made by lenders.

What's more, the biggest subprime lender, Countrywide, while not subject to the law, still came under federal pressure to make risky loans in minority communities.

Clinton created a separate department at HUD to police "fair lending" at Fannie and Freddie and also at lenders like Countrywide, which became Fannie's biggest client. In 1994, Countrywide became the nation's first mortgage lender to sign with HUD a "Declaration of Fair Lending Principles and Practices."

As a result, Countrywide made more loans to minorities than any other lender — and not surprisingly, was one of the first lenders swamped by loan defaults.

Other lenders felt the heat from Reno's Justice Department, which prosecuted them for failing to operate enough branches in black neighborhoods. Reno put the entire banking industry on notice about the CRA and her enforcement program.

Myth: The CRA did not force anyone to do subprime loans or take excessive risks.

Fact: Subprime loans were the vehicle banks used to satisfy CRA compliance, and Clinton and his regulators encouraged their use.

Before Clinton took office, subprimes were virtually unheard of. By the time he left, they made up more than 9% of the market for mortgage originations. Today they're 20%.

"It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA," ex-Fed chief Alan Greenspan said in recent testimony on the roots of the crisis.
Clinton pushed banks to grant mortgages to minorities with poor credit by using "flexible" underwriting standards — or risk being branded racist. Rules were weakened to the point where welfare and unemployment checks were accepted as qualifying income.

Myth: Greedy investment bankers, who securitized and sold subprime mortgages, drove us to the credit crisis, not government.

Fact: Clinton's regulatory policies led to the creation of this new risk on Wall Street. His CRA amendments created the subprime market, and only after he pressured Fannie and Freddie to socialize the risk and guarantee the profit from the subprime loans did Wall Street get involved in a big way.

The exotic securitizations that have gotten so much of the blame were a symptom, not the cause, of the crisis.

The architects of the crisis want to divert attention from their own culpability by blaming the markets rather than their own regulations mandating that banks make high-risk loans based on race.
In fact, regulations had almost everything to do with this mess. And instead of strengthening them to atone for the alleged "sins of capitalism," we should be abolishing them. (http://www.ibdeditorials.com/IBDArti...12766781716725 (http://www.ibdeditorials.com/IBDArticles.aspx?id=312766781716725))

The Government Did It (July 2008) (http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html)
Forbes


EXCERPT:For too long, the refrain has gone, Congress and the administration have been asleep at the wheel when they should have been steering the economy by expanding government control over the housing and financial markets. Economist Paul Krugman slams the administration's "free-market ideology"; he urges Bush to "reverse course now" and "seek expanded regulation."

All this overlooks a crucial fact: There has been no free market in housing or finance. Government has long exercised massive control over the housing and financial markets--including its creation of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) (which have now amassed $5 trillion in liabilities)--leading to many of the problems being blamed on the free market today. . . .

It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers' expense) by multiple government bodies.

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

According to one enforcement agency, "discrimination exists when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants." Note that these "arbitrary or outdated criteria" include most of the essentials of responsible lending: income level, income verification, credit history and savings history--the very factors lenders are now being criticized for ignoring.

The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to "promote homeownership," not to apply sound lending standards.

Of course, lenders not only sold billions of dollars in suspect loans to Fannie Mae and Freddie Mac, contributing to their present debacle, they also retained some subprime loans themselves and sold others to Wall Street--leading to the huge banking losses we have been witnessing for months. Is this, then, a free market failure? Again, no.

http://www.forbes.com/2008/07/18/fan...0718brook.html (http://www.forbes.com/2008/07/18/fan...0718brook.html)

[Smurf-Herder]

What needs to undergo more scrutiny is Chris Dodd and Barney Frank's close relationships and sweetheart deals with the two main lending institutions mentioned, being ranking members and now chairmen of the Senate and House Financial Services and Banking committees; as well as people appointed by Obama for positions in his administration who had past employment with them, receiving huge bonuses upon leaving to be a part Obama's crew.

There's a lot more going on here than the obvious.

[The Professor]

1. The single best post i've yet seen on dcj because it points sharply to that particular pin, subprime, that popped our overblown balloon and put us in this place

2. It was not DE-regulation that got us here but rather the opposite, some form of OVER direction, ie, a POLITICAL AGENDA to float ten million folks in flats they frankly can't afford

3. Since it is pointedly NOT in the interest of the lending industry and used, in fact, to be against the law, to ok half million dollar mortgages to people with nothing down, no qualify, negative amortization... The existence of TEN MILLION such suicidal, upside down arrangements is sign certain of that POLITICAL AGENDA to OVER regulate

4. Before Clinton took office subprimes were unheard of

5. Exotic securitizations are the symptom, not the cause, in that they couldn't exist, at least not in their present toxic form, if 10,000,000 of em weren't default in the first place

6. Paul Krugman (LOLOLOLOLOLOL!!!!!) demagogues "free market ideology," he PRECISELY knows better, knows CERTAIN that TEN MILLION home loans arranged at such a strained effort, accounting practices ala alchemy, necromancy---intricate adjustables, killler balloon payments, artificially friendly monthlies, lines of credit vs no equity, vs negative equity, even negative down payments, cash OUT---10,000,000 loans so freakishly bizarre to a certain sector of Americans not quite equipped, doggone it, to pay back all this crap---that aint free market, professor paul, and you KNEW THAT before YOU were an UNDERgrad, LOLOLOL!!!

7. DCJ's (!!!) very own The Prof kicks Pulitzer Paul's puny, posturing ass!

8. i know, but nobel doesn't alliterate as well, even with the P-rize, LOLOL!

9. There is no exoneration for ex Pres W who bragged repeatedly about the explosion of minority home ownership in his time, he probably still does

10. ACORN is all over it, acorn OPENLY pushes subprime practices, indeed, protested outside bankers' homes in chicago, took over board meetings in chicago, demanding---lend to us, lend to us---acorn's pink t-shirts were outside a citigroup in san francisco in february---don't throw us outta our houses---obama and assoc of COMMUNITY ORGANIZERS for reform now are as close as, well, a SEED and a very tall, smiley TREE!

11. keep em zinging, there, clifford, YOU are on a roll, LOL!

12. finally, CULPABLE is the MISTER dodd, absolutely, and MIST.. and, umm, bawney fwank---yes, absolutely---and also, franklin raines, obama's economic adviser, former fannie boss forced out for accounting gimmickry, all subprimey, which MISTER franklin raines walked away from personally enriched to the tune of 90 million dollars (as most of you already know)

Fannie Mae Scandal Topples Two Execs
Email Page | Print | Bookmark

--------------------------------------------------------------------------------

As expected, the growing accounting scandal swirling around Fannie Mae claimed the careers of two of its top executives.

CEO Franklin Raines and CFO Timothy Howard were forced out Tuesday night by the mortgage finance corporation's Board of Directors. KPMG, the firm that approved the company's accounting was also fired.



Fannie Mae has been under investigation for three months by the Securities and Exchange Commission (SEC), The Department of Justice, and The Office of Federal Housing Enterprise Oversight (OFHEO), the federal office charged with oversight of both Fannie Mae and its sister corporation Freddie Mac. Last week the SEC ruled that Fannie must restate its earnings back to 2001. Experts estimated that this could result in $9 billion in lower earnings over the four year period in question and might substantially impact its ability to meet its capital requirements. Experts, however, said that this should have no impact on mortgage rates.

Since the accounting irregularities emerged, Raines had fought hard to retain his job but said in front of Congressional investigators last fall that he would hold himself accountable if the SEC said that there were significant accounting irregularities.

According to USA TODAY, OFHEO director Armando Falcon told the Board of Directors that if they did not act he would declare the company out of compliance with its capital requirements allowing him to take unilateral action against management.

Meanwhile, several Senators and Congressmen have signaled their intention to tighten federal controls on both Fannie and Freddie which enjoy certain perks not available to their competitors. In return for these privileges, both have numerous mandates from Congress and other agencies to increase home ownership, particularly among low income and minority citizens.

--------------------------------------------------------------------------------

Posted Dec 22 2004, 08:00 AM
Filed under: Franklin Raines, Timothy Howard, Fannie Mae Scandal

source:

http://www.mortgagenewsdaily.com/12222004_Fannie_Mae_Scandal_Topples_Two_Execs.asp

[Smurf-Herder]

Fannie Mae, Freddie Mac execs now offering advice to Obama

"In the aftermath of the U.S. government takeover, attention has focused on three Democrats with close ties to Obama who served as Fannie Mae executives: Franklin Raines, former Clinton administration budget director; James Johnson, former aide to Democratic Vice President Walter Mondale; and Jamie Gorelick, former Clinton administration deputy attorney general.

All three Obama-related executives earned millions in compensation from Fannie Mae.

Johnson earned $21 million in just his last year serving as Fannie Mae CEO from 1991 to 1998; Raines earned $90 million in his five years as Fannie Mae CEO, from 1999 to 2004; and Gorelick earned an estimated $26 million serving as vice chair of Fannie Mae from 1998 to 2003, according to author David Frum, a fellow at the American Enterprise Institute.

All three have been involved in mortgage-related financial scandals.

In 1998, according to the Washington Post, Gorelick, as Fannie Mae vice chairman, received a bonus of $779,625, despite a scandal in which employees falsified signatures on accounting transactions to manipulate books to meet 1998 earning targets. The moves, in turn, triggered multi-million-dollar bonuses for top executives.

Gorelick was embroiled in another controversy over an alleged conflict of interest when a 1995 memo she authored as deputy attorney general surfaced while she was a member of the 9/11 commission.

The memo, which became known as the "Gorelick Wall," appeared to establish barriers that barred federal anti-terrorist criminal investigators from accessing various federal records and databases that may have assisted them in their criminal investigations.

According to the Associated Press, Raines and several other Fannie Mae top executives were ordered in a civil lawsuit to pay nearly $31.4 million for manipulating Fannie Mae earnings over a period of six years to trigger their massive bonuses.

Raines was also forced in the settlement to give up Fannie Mae stock options valued at $15.6 million.

Last year, the Securities and Exchange Commission alleged Freddie Mac had engaged in accounting fraud from 2000 to 2002, imposing a $50 million fine on the company and on four executives fines for amounts ranging from $65,000 to $250,000.

Raines currently advises Obama on housing policy.

Johnson was appointed to head Obama's vice presidential selection committee, until a controversy concerning an alleged $7 millions in questionable real estate loans he received on favorable terms from failed sub-prime mortgage lender Countrywide Financial surfaced and forced him to step down."

Complete story: http://www.worldnetdaily.com/index.php?pageId=75586

[The Professor]

1. so HERE's where the adults have been hanging, man, i need to look around more, i've kinda been trapped in some little chuckie cheese world...

2. the corruption is thicker than the humor, and that's DESPITE the presence of ms gorelick, who never fails to elicit LOL's almost limitless (you have GOT to admire The Prof's ear for alliteration! i know i do!)

3. franklin raines, O's econ-whisperer, was forced in civil lawsuit to pay back 50 million dollars in cash and (now worthless) stock options

4. mr raines' days at fannie, says the SEC, were characterized by the EXACT practices employed by mr kenneth ENRON lay who got SO famous as Kenny Boy he was a nitely lead in on letterman

5. the media's double standard, here, is as blatant as mr raines' personal and professional corruption is thick

6. and then there's dodd, who got a sweetheard deal on this own home from countrywide, the number one subprimer in the land, who was also the number one recipient of AIG cash, just ahead of bigears himself, dodd also said he didn't grandfather those nasty, headline grabbing bonuses, then said he did, then said he didn't and mr geithner did, and all the while mr dodd chaired Senate Banking which forced downward lending on fannie and fred and countrywide... why, dodd was a specially noted Friend of Angelo (google it)

7. ms gorelick's wall, the way i remember it, made it harder for fbi to talk to cia, etc, when investigating single young men with muslim names taking flight classes yet showing no interest in learning to land...

thanks for the very interesting reads, DCJ at its best, i am far more POWERFUL once more for learning what you good people put forth

cliff

oh, yes, mr johnson, i'd of course forgotten that little tale as the media have so thoroughly dropped it, thanks for the reminder and clarifications, too

this is all very very important stuff because it is the truth about exactly what went wrong with our economy

it was this political pressure on lenders to LOAN DOWN (to the tune of ten million subprimed mortgages) that did us

cliff

[Smurf-Herder]

Here's another part of the puzzle - that most people are scared to touch:

Lawmaker Accused of Fannie Mae Conflict of Interest

Friday, October 03, 2008

WASHINGTON — Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank’s efforts to deregulate Fannie Mae throughout the 1990s.

So did Frank’s partner, a Fannie Mae executive at the forefront of the agency’s push to relax lending restrictions.

Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank's relationship with Herb Moses, who was Fannie’s assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie.

Both Frank and Moses assured the Wall Street Journal in 1992 that they took pains to avoid any conflicts of interest. Critics, however, remain skeptical.

"It’s absolutely a conflict," said Dan Gainor, vice president of the Business & Media Institute. "He was voting on Fannie Mae at a time when he was involved with a Fannie Mae executive. How is that not germane?

"If this had been his ex-wife and he was Republican, I would bet every penny I have - or at least what’s not in the stock market - that this would be considered germane," added Gainor, a T. Boone Pickens Fellow. "But everybody wants to avoid it because he’s gay. It’s the quintessential double standard."

A top GOP House aide agreed.

"C’mon, he writes housing and banking laws and his boyfriend is a top exec at a firm that stands to gain from those laws?" the aide told FOX News. "No media ever takes note? Imagine what would happen if Frank’s political affiliation was R instead of D? Imagine what the media would say if [GOP former] Chairman [Mike] Oxley’s wife or [GOP presidential nominee John] McCain’s wife was a top exec at Fannie for a decade while they wrote the nation’s housing and banking laws."

Frank’s office did not immediately respond to requests for comment.

Frank met Moses in 1987, the same year he became the first openly gay member of Congress.

"I am the only member of the congressional gay spouse caucus," Moses wrote in the Washington Post in 1991. "On Capitol Hill, Barney always introduces me as his lover."

The two lived together in a Washington home until they broke up in 1998, a few months after Moses ended his seven-year tenure at Fannie Mae, where he was the assistant director of product initiatives. According to National Mortgage News, Moses "helped develop many of Fannie Mae’s affordable housing and home improvement lending programs."

Critics say such programs led to the mortgage meltdown that prompted last month’s government takeover of Fannie Mae and its financial cousin, Freddie Mac. The giant firms are blamed for spreading bad mortgages throughout the private financial sector.

Although Frank now blames Republicans for the failure of Fannie and Freddie, he spent years blocking GOP lawmakers from imposing tougher regulations on the mortgage giants. In 1991, the year Moses was hired by Fannie, the Boston Globe reported that Frank pushed the agency to loosen regulations on mortgages for two- and three-family homes, even though they were defaulting at twice and five times the rate of single homes, respectively.

Three years later, President Clinton’s Department of Housing and Urban Development tried to impose a new regulation on Fannie, but was thwarted by Frank. Clinton now blames such Democrats for planting the seeds of today’s economic crisis.

"I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president, to put some standards and tighten up a little on Fannie Mae and Freddie Mac," Clinton said recently.

http://www.foxnews.com/story/0,2933,432501,00.html

[Independent Harry]

ahh nothing like publications with a Wall Street Agenda blaiming the government...

[Smurf-Herder]

ahh nothing like publications with a Wall Street Agenda blaiming the government...

You're completely ignoring all the evidence before you that show a Democrat Wall Street agenda, as well as conflicts of interest and corruption.

Your argument is a double-standard - at the very best. But the evidence is overwhelmingly against the Democrats.

[The Professor]

Here's another part of the puzzle - that most people are scared to touch:

Lawmaker Accused of Fannie Mae Conflict of Interest

Friday, October 03, 2008

WASHINGTON — Unqualified home buyers were not the only ones who benefitted from Massachusetts Rep. Barney Frank’s efforts to deregulate Fannie Mae throughout the 1990s.

So did Frank’s partner, a Fannie Mae executive at the forefront of the agency’s push to relax lending restrictions.

Now that Fannie Mae is at the epicenter of a financial meltdown that threatens the U.S. economy, some are raising new questions about Frank's relationship with Herb Moses, who was Fannie’s assistant director for product initiatives. Moses worked at the government-sponsored enterprise from 1991 to 1998, while Frank was on the House Banking Committee, which had jurisdiction over Fannie.

Both Frank and Moses assured the Wall Street Journal in 1992 that they took pains to avoid any conflicts of interest. Critics, however, remain skeptical.

"It’s absolutely a conflict," said Dan Gainor, vice president of the Business & Media Institute. "He was voting on Fannie Mae at a time when he was involved with a Fannie Mae executive. How is that not germane?

"If this had been his ex-wife and he was Republican, I would bet every penny I have - or at least what’s not in the stock market - that this would be considered germane," added Gainor, a T. Boone Pickens Fellow. "But everybody wants to avoid it because he’s gay. It’s the quintessential double standard."

A top GOP House aide agreed.

"C’mon, he writes housing and banking laws and his boyfriend is a top exec at a firm that stands to gain from those laws?" the aide told FOX News. "No media ever takes note? Imagine what would happen if Frank’s political affiliation was R instead of D? Imagine what the media would say if [GOP former] Chairman [Mike] Oxley’s wife or [GOP presidential nominee John] McCain’s wife was a top exec at Fannie for a decade while they wrote the nation’s housing and banking laws."

Frank’s office did not immediately respond to requests for comment.

Frank met Moses in 1987, the same year he became the first openly gay member of Congress.

"I am the only member of the congressional gay spouse caucus," Moses wrote in the Washington Post in 1991. "On Capitol Hill, Barney always introduces me as his lover."

The two lived together in a Washington home until they broke up in 1998, a few months after Moses ended his seven-year tenure at Fannie Mae, where he was the assistant director of product initiatives. According to National Mortgage News, Moses "helped develop many of Fannie Mae’s affordable housing and home improvement lending programs."

Critics say such programs led to the mortgage meltdown that prompted last month’s government takeover of Fannie Mae and its financial cousin, Freddie Mac. The giant firms are blamed for spreading bad mortgages throughout the private financial sector.

Although Frank now blames Republicans for the failure of Fannie and Freddie, he spent years blocking GOP lawmakers from imposing tougher regulations on the mortgage giants. In 1991, the year Moses was hired by Fannie, the Boston Globe reported that Frank pushed the agency to loosen regulations on mortgages for two- and three-family homes, even though they were defaulting at twice and five times the rate of single homes, respectively.

Three years later, President Clinton’s Department of Housing and Urban Development tried to impose a new regulation on Fannie, but was thwarted by Frank. Clinton now blames such Democrats for planting the seeds of today’s economic crisis.

"I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president, to put some standards and tighten up a little on Fannie Mae and Freddie Mac," Clinton said recently.

http://www.foxnews.com/story/0,2933,432501,00.html

they broke up?

oh, that is sad

so many marriages these days...

LOLOLOL!

herb moses

bawney and herb

such a CUTE couple

i'd heard of bawney's boyfriend's fanny

i mean, fannie

i'd heard of this, but i never even knew herb's NAME

the media protect the MARBLE MOUTHED MUMBLER from MASSACHUSETTS as close as if he'd KILLED a girl driving DRUNK and just LEFT HER there to go establish an ALIBI

a bit off topic, now, but someone out there is unaware and might find interesting the time BEFORE HERB when bawney ran a HOMOSEXUAL CALL BOY OPERATION out of the BASEMENT of his BOSTON home

and the pretty little CALL BOY, it turns out, was a congressional PAGE

i wonder if HERB knew ALL about bawney's past

and it didn't MATTER to him?

you gotta admire HERB's ability to GET OVER stuff

which just makes their BREAKING UP all the more strange and DIFFICULT to take

those of us who KNEW EM, man, we'da never even SUSPECTED

it's just got to be the STRESS of working inside the beltway

dealing with poppa rotzi

the flirtations

the DRUGS

just like MADONNA

which only serves to make all of us look at and admire all the more a relationship to weather those storms like mr BILL's and ms HILLARY's

surviving all those broken lamps and thrown-across-the-room ashtrays

love HURTS

LOL!

i think i've exhausted my material, here

time to let some other wannabe dennis miller take over

bawney's surely good for a few more laughs

***

yes, that is also true, while bawney was dominating and dictating to house financial services

his boyfriend was fannie's asst director and presumably making out hand over fist (sorry)

1. the corruption on the part of hi ranking dems---dodd, bawney, mr raines, mr johnson, coming close to and actually touching president bigears himself---their responsibility for SUBPRIME which killed us, their obscene PROFITEERING from the failure...

2. the media's utter silence, eagerly laying down, actual ACCOMPLICEs concerning matters that, were that a republican, would be bigger to them, more bruited than larry craig's wandering, tapping foot...

a very UNpretty picture, all that

less defense for the goings on exposed in the 10 or so posts above

than for all the combined idiocies committed by bigears, the stupid kid socialist

and we've all seen how NO ONE will step forward to defend obama

pathetic

thanks for the WORD

it's POWER

cliff

[Zackman]

ahh nothing like publications with a Wall Street Agenda blaiming the government...
It does NOT suprise me ...

That that's all you got!

:lmao2:

[bairdi]

Sep 18, 2008
The Real Reason for the Global Financial Crisis…the Story No One’s Talking About

[Part I of a three-part series looking at how so-called “credit default swap” derivatives could ignite a worldwide capital markets meltdown.]

By Shah Gilani
Contributing Editor

Are you shell-shocked? Are you wondering what’s really going on in the market? The truth is probably more frightening than even your worst fears. And yet, you won’t hear about it anywhere else because “they” can’t tell you. “They” are the U.S. Federal Reserve and the U.S. Treasury Department, and they can’t tell you what’s really going on because there’s nothing they can do about it, except what they’ve been trying to do - add liquidity.

At the exchange rate yesterday (Wednesday), 35 trillion British Pounds was equivalent to U.S. $62 trillion (hence, the 35 trillion Pound gorilla). According to the International Swaps and Derivatives Association, $62 trillion is the notional value of credit default swaps (CDS) out there, somewhere, in the market.

This isn’t the first time Money Morning has warned readers about the dangers of credit default swaps. And it won’t be the last.
The Genesis of a Derivative Boom

In the mid-1980s, upon arriving in New York from Chicago with an extensive background trading options and futures (the original derivatives), I was offered a job at what was then Citicorp [today's Citigroup Inc. (C)]. The offer was for an entry-level post in the bank’s brand new OTC (over-the-counter, meaning not exchange traded) swaps and derivatives group. When I asked what the economic purpose of swaps was, the answer came back: “To make money for the bank.”

I declined the position.

It used to be that regulators and legislators demanded theoretical, empirical, and quantitative measures of the efficacy of new tradable instruments being proposed by exchanges. What is their purpose? How will they benefit the capital markets and the economy? And, what safeguards will accompany their introduction?

Not any more. In the early 1990s, in order to hedge their loan risks, J. P. Morgan & Co. [now JPMorgan Chase & Co. (JPM)] bankers devised credit default swaps.

A credit default swap is, essentially, an insurance contract between a protection buyer and a protection seller covering a corporation’s, or sovereign’s (the “referenced entity”), specific bond or loan. A protection buyer pays an upfront amount and yearly premiums to the protection seller to cover any loss on the face amount of the referenced bond or loan.
Typically, the insurance is for five years.

Credit default swaps are bilateral contracts, meaning they are private contracts between two parties. CDSs are subject only to the collateral and margin agreed to by contract. They are traded over-the-counter, usually by telephone. They are subject to re-sale to another party willing to enter into another contract. Most frighteningly, credit default swaps are subject to “counterparty risk.”

If the party providing the insurance protection - once it has collected its upfront payment and premiums - doesn’t have the money to pay the insured buyer in the case of a default event affecting the referenced bond or loan (think hedge funds), or if the “insurer” goes bankrupt (Bear Stearns was almost there, and American International Group Inc. (AIG) was almost there) the buyer is not covered - period. The premium payments are gone, as is the insurance against default.

Credit default swaps are not standardized instruments. In fact, they technically aren’t true securities in the classic sense of the word in that they’re not transparent, aren’t traded on any exchange, aren’t subject to present securities laws, and aren’t regulated. They are, however, at risk - all $62 trillion (the best guess by the ISDA) of them.

Fundamentally, this kind of derivative serves a real purpose - as a hedging device. The actual holders, or creditors, of outstanding corporate or sovereign loans and bonds might seek insurance to guarantee that the debts they are owed are repaid. That’s the economic purpose of insurance.

What happened, however, is that risk speculators who wanted exposure to certain asset classes, various bonds and loans, or security pools such as residential and commercial mortgage-backed securities (yes, those same subprime mortgage-backed securities that you’ve been reading about), but didn’t actually own the underlying credits, now had a means by which to speculate on them.

If you think XYZ Corp. is in trouble, and won’t be able to pay back its bondholders, you can speculate by buying, and paying premiums for, credit default swaps on their bonds, which will pay you the full face amount of the bonds if they do actually default. If, on the other hand, you think that XYZ Corp. is doing just fine, and its bonds are as good as gold, you can offer insurance to a fellow speculator, who holds the opinion opposite yours. That means you’d essentially be speculating that the bonds would not default. You’re hoping that you’ll collect, and keep, all the premiums, and never have to pay off on the insurance. It’s pure speculation.

Credit default swaps are not unlike me being able to insure your house, not with you, but with someone else entirely not connected to your house, so that if your house is washed away in the next hurricane I get paid its value. I’m speculating on an event. I’m making a bet.

The bad news is that there are even worse bets out there. There are credit default swaps written on subprime mortgage securities. It’s bad enough that these subprime mortgage pools that banks, investment banks, insurance companies, hedge funds and others bought were over-rated and ended up falling precipitously in value as foreclosures mounted on the underlying mortgages in the pools.

What’s even worse, however, is that speculators sold and bought trillions of dollars of insurance that these pools would, or wouldn’t, default! The sellers of this insurance (AIG is one example) are getting killed as defaults continue to rise with no end in sight.

And this is only where the story begins.
The Ticking Time Bomb

What is happening in both the stock and credit markets is a direct result of what’s playing out in the CDS market. The Fed could not let Bear Stearns enter bankruptcy because - and only because - the trillions of dollars of credit default swaps on its books would be wiped out. All the banks and institutions that had insurance written by Bear would not be able to say that they were insured or hedged anymore and they would have to write-down billions and billions of dollars in losses that they’ve been carrying at higher values because they could say that they were insured for those losses.

The counterparty risk that all Bear’s trading partners were exposed to was so far and wide, and so deep, that if Bear was to enter bankruptcy it would take years to sort out the risk and losses. That was an untenable option.

The Fed had to bail out Bear Stearns.

The same thing has just happened to AIG. Make no mistake about it, there’s nothing wrong with AIG’s insurance subsidiaries - absolutely nothing. In fact, the Fed just made the best trade in its history by bailing AIG out and getting equity, warrants and charging the insurance giant seven points over the benchmark London Interbank Offered Rate (LIBOR) on that $85 billion loan!

What happened to AIG is simple: AIG got greedy. AIG, as of June 30, had written $441 billion worth of swaps on corporate bonds, and worse, mortgage-backed securities. As the value of these insured-referenced entities fell, AIG had massive write-downs and additionally had to post more collateral. And when its ratings were downgraded on Monday evening, the company had to post even more collateral, which it didn’t have.

In short, what happened in one small AIG corporate subsidiary blew apart the largest insurance company in the world.

But there’s more - a lot more. These instruments are causing many of the massive write-downs at banks, investment banks and insurance companies. Knowing what all this means for hedge funds, the credit markets and the stock market is the key to understanding where this might end and how.

The rest of the story will be illuminated in the next two installments. Next up: An examination of the AIG collapse, followed by a look at how bad things could get, and what we can do to fix the problem at hand. So stay tuned.

[Editor's Note: Contributing Editor R. Shah Gilani has toiled in the trading pits in Chicago, run trading desks in New York, operated as a broker/dealer and managed everything from hedge funds to currency accounts. In his new column, "Inside Wall Street," Gilani promises to take readers on a journey through the "shadowy back alleys" of the U.S. capital markets - and to conduct us past the "velvet rope" that guards Wall Street's most-valuable secrets - in an ongoing search for the investment ideas with the biggest profit potential. If the whipsaw markets we're experiencing lead to the so-called market “Super Crash” that many analysts fear, shrewd investors won't have to worry. The reason: They will be able to capitalize on the once-in-a-lifetime profit plays that we detail in a new report. For a copy of that report - which includes a free copy of CNBC analyst Peter D. Schiff's New York Times best-seller, "Crash Proof: How to Profit from the Coming Economic Collapse" - please click here.]

http://www.moneymorning.com/2008/09/18/credit-default-swaps/

[Cat slave]

Fannie Mae, Freddie Mac execs now offering advice to Obama

"In the aftermath of the U.S. government takeover, attention has focused on three Democrats with close ties to Obama who served as Fannie Mae executives: Franklin Raines, former Clinton administration budget director; James Johnson, former aide to Democratic Vice President Walter Mondale; and Jamie Gorelick, former Clinton administration deputy attorney general.

All three Obama-related executives earned millions in compensation from Fannie Mae.

Johnson earned $21 million in just his last year serving as Fannie Mae CEO from 1991 to 1998; Raines earned $90 million in his five years as Fannie Mae CEO, from 1999 to 2004; and Gorelick earned an estimated $26 million serving as vice chair of Fannie Mae from 1998 to 2003, according to author David Frum, a fellow at the American Enterprise Institute.

All three have been involved in mortgage-related financial scandals.

In 1998, according to the Washington Post, Gorelick, as Fannie Mae vice chairman, received a bonus of $779,625, despite a scandal in which employees falsified signatures on accounting transactions to manipulate books to meet 1998 earning targets. The moves, in turn, triggered multi-million-dollar bonuses for top executives.

Gorelick was embroiled in another controversy over an alleged conflict of interest when a 1995 memo she authored as deputy attorney general surfaced while she was a member of the 9/11 commission.

The memo, which became known as the "Gorelick Wall," appeared to establish barriers that barred federal anti-terrorist criminal investigators from accessing various federal records and databases that may have assisted them in their criminal investigations.

According to the Associated Press, Raines and several other Fannie Mae top executives were ordered in a civil lawsuit to pay nearly $31.4 million for manipulating Fannie Mae earnings over a period of six years to trigger their massive bonuses.

Raines was also forced in the settlement to give up Fannie Mae stock options valued at $15.6 million.

Last year, the Securities and Exchange Commission alleged Freddie Mac had engaged in accounting fraud from 2000 to 2002, imposing a $50 million fine on the company and on four executives fines for amounts ranging from $65,000 to $250,000.

Raines currently advises Obama on housing policy.

Johnson was appointed to head Obama's vice presidential selection committee, until a controversy concerning an alleged $7 millions in questionable real estate loans he received on favorable terms from failed sub-prime mortgage lender Countrywide Financial surfaced and forced him to step down."

Complete story: http://www.worldnetdaily.com/index.php?pageId=75586

"They" are giving the prez advice???? Hes stupid and out of touch enough
to take it.

[Smurf-Herder]

"They" are giving the prez advice???? Hes stupid and out of touch enough
to take it.

IMO, they got sweetheart positions in his crew, because they all have the same agenda. Not as much that he's stupid - but that he's in on it.

[Cat slave]

I was talking to a friend last night whose career is in finance. This entire mess
goes back to lax requirements to demonstrate credit worthiness. People can
lie, exaggerate their incomes....say they make 8,000 bucks a month and they
get by with it. They can get "prequalified" with bogus information. The employment is only checked by verifying that they are employed where they
say they are....salary is not verified. They could get the property with only
enough down to cover the title.

Now WA is again dabbling where they have no place dabbling and handing new
bills that could with one fell swoop take down a number of legal loan companies.

Sure there are greedy lenders, but again, people werent pulled off the street
screaming and struggling. They did their part with the help of the government
to get their houses, which so many couldnt even furnish....big house...no furniture etc., didnt read what they signed and figured they would get bailed
out no matter what.

Easy money/loans = likely default!

[Smurf-Herder]

I was talking to a friend last night whose career is in finance. This entire mess
goes back to lax requirements to demonstrate credit worthiness. People can
lie, exaggerate their incomes....say they make 8,000 bucks a month and they
get by with it. They can get "prequalified" with bogus information. The employment is only checked by verifying that they are employed where they
say they are....salary is not verified. They could get the property with only
enough down to cover the title.

Now WA is again dabbling where they have no place dabbling and handing new
bills that could with one fell swoop take down a number of legal loan companies.

Sure there are greedy lenders, but again, people werent pulled off the street
screaming and struggling. They did their part with the help of the government
to get their houses, which so many couldnt even furnish....big house...no furniture etc., didnt read what they signed and figured they would get bailed
out no matter what.

Easy money/loans = likely default!

Shit!

That means I could have possibly bought a house on my income, and rented it out as apartments to pay the mortgage; and had a second income as a landlord - theoretically.

[The Professor]

1. credit default swaps are AFTER THE FACT, if the securities they were bundling, moving around and "insuring" weren't subprime-ishly BOGUS, the COLLAPSE wouldn't have COLLAPSED when it COLLAPSED

2. BEFORE THE FACT, or at its INCEPTION, is the ORIGINAL practice of SUBPRIME, the obvious result of POLITICAL AGENDA to force lenders to loan down, to put people in houses they just can't pay for

3. people were allowed to qualify for half million dollar mortgages with no downs and no qualifies, monthlies were falsely friendly for 2 or 3 years which is when those suicidal adjustables and bankrupting balloons were all scheduled to kick in

4. the entire PONZI, then, was based on the intention of that upside down homeowner to REFINANCE in the interrum

5. with the housing market perpetually UP, the reasoning went, within that 2 or so year window, before the suicide clause kicked in, homeowners were to PARLAY the EQUITY they'd now ACCRUED in their always APPRECIATING property into a more STABLE loan, ie, a 30 year fixed

6. when the housing market suddenly stopped rising, the balloon popped

7. folks found themselves in homes on which they owed a half million suddenly worth 200G

8. with a monthly increased on schedule to 3000 bucks

9. ie, they're upside down and unable to afford to stay

10. CDS's and the bundling of those securites are secondary, ie, after the fact

cliff

[Independent Harry]

It does NOT suprise me ...

That that's all you got!

:lmao2:

again zackman, if you look at the census data, the story these guys are running do not support the facts.

The issue didn't start happening until 2004 when 2 things happened. 1. The Bush administration started pushing institutions to offer 100% financing and getting everyone in a home initiative, and 2. The OCC stopped auditing the financial instruments known as CDO's.

This is the attempt of wall street to walk away from their shit pile smelling rosey...

[Zackman]

again zackman, if you look at the census data, the story these guys are running do not support the facts.

The issue didn't start happening until 2004 when 2 things happened. 1. The Bush administration started pushing institutions to offer 100% financing and getting everyone in a home initiative, and 2. The OCC stopped auditing the financial instruments known as CDO's.

This is the attempt of wall street to walk away from their shit pile smelling rosey...
I don't dispute that the Bush administration jumped right on the ban wagon and pushed "home ownership" for people who should have stayed renters. I'm sure you've seen the video of the GOP warning the likes of Maxine Waters and Barney Frank about needing to stop the madness. There's lots of blame to be spread around. Much worse than Ken Lay and Enron. Were's the media?

We disagree on the origins of this mess. Obama is not concerned about the origins, he wants to "look forwand and not back." That should tell you something.

96 month car loans should be against the law. 60 months is pushing it in my view.

[Independent Harry]

I don't dispute that the Bush administration jumped right on the ban wagon and pushed "home ownership" for people who should have stayed renters. I'm sure you've seen the video of the GOP warning the likes of Maxine Waters and Barney Frank about needing to stop the madness. There's lots of blame to be spread around. Much worse than Ken Lay and Enron. Were's the media?

We disagree on the origins of this mess. Obama is not concerned about the origins, he wants to "look forwand and not back." That should tell you something.

96 month car loans should be against the law. 60 months is pushing it in my view.

Yes it tells me that just like all politians he is 1. either being paid very well to not look back, or 2. feels that looking back and actually persecuting the people would not be productive because of our loose legal system that is run by how much money you have.

I personally say prosecute the fuckers. But that's me. Obama is probably to a certain degree owned by Wall Street. So he's just doing what ever other politician would do. Again, that's why I voted for Ron Paul in the primaries beacuse I wanted someone who would really do something different.

[Cat slave]

Two excellent articles on the major role that government intervention played in causing the housing crisis and the resulting financial meltdown.

From Investor's Business Daily and Forbes:

Stop Covering Up And Kill The CRA (http://www.ibdeditorials.com/IBDArticles.aspx?id=312766781716725)
Investor's Business Daily
EXCERPT:

Fact: The 1977 law [the Community Reinvestment Act or CRA] was only lightly enforced until Clinton added teeth to it in 1994 and launched an anti-redlining campaign against banks, led by Ludwig, Housing Secretary Henry Cisneros (and later Andrew Cuomo) and Attorney General Janet Reno that lasted into this decade.

Minority homeownership rates, which had been flat, began a steep rise in 1995, and home prices soon followed, stoked by easier lending. Numerous bank officials complain that they still feel pressured by CRA regulators to make inner-city loans they know are at great risk of defaulting.

Myth: The CRA could not have led to financial Armageddon, because the overwhelming share of subprime mortgages came from lenders that were not banks and not regulated by the CRA.

Fact: Nearly 4 in 10 subprime loans between 2004 and 2007 were made by CRA-covered banks such as Washington Mutual and IndyMac. And that doesn't include loans made by subprime lenders owned by banks, which were in effect covered by the CRA.

Last year, when the bubble burst, bank subprime loans totaled $142 billion, dwarfing those made by lenders.

What's more, the biggest subprime lender, Countrywide, while not subject to the law, still came under federal pressure to make risky loans in minority communities.

Clinton created a separate department at HUD to police "fair lending" at Fannie and Freddie and also at lenders like Countrywide, which became Fannie's biggest client. In 1994, Countrywide became the nation's first mortgage lender to sign with HUD a "Declaration of Fair Lending Principles and Practices."

As a result, Countrywide made more loans to minorities than any other lender — and not surprisingly, was one of the first lenders swamped by loan defaults.

Other lenders felt the heat from Reno's Justice Department, which prosecuted them for failing to operate enough branches in black neighborhoods. Reno put the entire banking industry on notice about the CRA and her enforcement program.

Myth: The CRA did not force anyone to do subprime loans or take excessive risks.

Fact: Subprime loans were the vehicle banks used to satisfy CRA compliance, and Clinton and his regulators encouraged their use.

Before Clinton took office, subprimes were virtually unheard of. By the time he left, they made up more than 9% of the market for mortgage originations. Today they're 20%.

"It's instructive to go back to the early stages of the subprime market, which has essentially emerged out of the CRA," ex-Fed chief Alan Greenspan said in recent testimony on the roots of the crisis.
Clinton pushed banks to grant mortgages to minorities with poor credit by using "flexible" underwriting standards — or risk being branded racist. Rules were weakened to the point where welfare and unemployment checks were accepted as qualifying income.

Myth: Greedy investment bankers, who securitized and sold subprime mortgages, drove us to the credit crisis, not government.

Fact: Clinton's regulatory policies led to the creation of this new risk on Wall Street. His CRA amendments created the subprime market, and only after he pressured Fannie and Freddie to socialize the risk and guarantee the profit from the subprime loans did Wall Street get involved in a big way.

The exotic securitizations that have gotten so much of the blame were a symptom, not the cause, of the crisis.

The architects of the crisis want to divert attention from their own culpability by blaming the markets rather than their own regulations mandating that banks make high-risk loans based on race.
In fact, regulations had almost everything to do with this mess. And instead of strengthening them to atone for the alleged "sins of capitalism," we should be abolishing them. (http://www.ibdeditorials.com/IBDArti...12766781716725 (http://www.ibdeditorials.com/IBDArticles.aspx?id=312766781716725))

The Government Did It (July 2008) (http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html)
Forbes


EXCERPT:For too long, the refrain has gone, Congress and the administration have been asleep at the wheel when they should have been steering the economy by expanding government control over the housing and financial markets. Economist Paul Krugman slams the administration's "free-market ideology"; he urges Bush to "reverse course now" and "seek expanded regulation."

All this overlooks a crucial fact: There has been no free market in housing or finance. Government has long exercised massive control over the housing and financial markets--including its creation of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ) (which have now amassed $5 trillion in liabilities)--leading to many of the problems being blamed on the free market today. . . .

It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers' expense) by multiple government bodies.

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

According to one enforcement agency, "discrimination exists when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants." Note that these "arbitrary or outdated criteria" include most of the essentials of responsible lending: income level, income verification, credit history and savings history--the very factors lenders are now being criticized for ignoring.

The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to "promote homeownership," not to apply sound lending standards.

Of course, lenders not only sold billions of dollars in suspect loans to Fannie Mae and Freddie Mac, contributing to their present debacle, they also retained some subprime loans themselves and sold others to Wall Street--leading to the huge banking losses we have been witnessing for months. Is this, then, a free market failure? Again, no.

http://www.forbes.com/2008/07/18/fan...0718brook.html (http://www.forbes.com/2008/07/18/fan...0718brook.html)





Great post there LL!!! Watch the hackles raise up on the libruls. Fact is
never taken into consideration by them.