blamebrampton (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
blamebrampton) wrote2008-10-13 11:54 pm
blamebrampton) wrote2008-10-13 11:54 pm
Entry tags:
Politics alert, with a touch of ranting
I'm a bit crankypants today, which comes partly from having been dealing with students again (ARGH! Why so LAZY?) and partly from being so far behind in my life. So you may want to skip my political ranting.
It will come as no surprise to anyone who has listened to my previous cheer at living in countries with public health care that I am a pinko commie at heart. But many of my dearest friends and a few relatives are conservatives. While I don't agree with private health care, I do believe in a reasonable amount of deregulation and am annoyed at people who live on benefits for no reason (while, at the same time, wanting to protect those who are on benefits for a reason, and yes, I recognise the big grey area in the middle, but can we just boot the obvious freeloaders?)
Anyway, this is all preamble to two things that have really raised my narkometer today.
If you are a Republican in the US, and your Presidential candidate is gracious and gentlemanly, YOU DO NOT FUCKING BOO HIM! You say, "Gee, John, you sound like the guy who was by far the better candidate in the 2000 race before the extreme Rove-Cheneyfication of the GOP and bankruptcy of our nation's economy and political soul. Maybe we should go back to those times?"
Fuckers.
Also, in economic news I have now read the third editorial in a non-loony publication that suggests the reason for the current economic disaster was – essentially – lending money for homes to black folks and Latinos. Bzzzzt! I am sorry, that answer is INCORRECT!
Many commentators have rushed to lay the blame on loan defaulters and declared that the urge to lend money to poor Americans was the source of the problem. Not so.
Enter Moody's, Standard & Poor's and Fitch. These are bond-rating firms. If you've ever had anything recommended to you as a AAA-rated stock, that rating came from one of these firms. Ten years ago, a mortgage came from your bank, and was repaid by you over 10 to 30 years. But around that time, Moody's et al realised that this was an untapped sector of the market. They packaged up thousands of mortgages into securities and then gave them AAA ratings. The banks received their money quickly, which meant they had more money to lend, and which also meant that relaxed their standards for those they were lending to. House prices went up, because there was more money in the marketplace in the form of loans. Because there were loads of mortgages being signed, there was more product to be packaged into securities.
It wasn't just banks, non-bank lenders came in on the act, too, because there was enough money in the market to allow them to package mortgages DESPITE THE FACT THEY HAD NO DEPOSITS TO OFFSET THEIR MORTGAGE RISKS, which was the one thing that had always made bank mortgages a relatively safe prospect.
This is the important bit. Investors INVESTED in these securities because they were given triple-A ratings by Moody's, Standard & Poor's and Fitch. It wasn't a case of investors being stupid, they had every reason to believe that the product they were putting their money into was a good product.
The bond-rating agencies made money hand over fist through this period. The investment banks that sold the products rated by the agencies also made money hand over fist. But at the end of the day, the things that were being represented by those investments were not worth as much as the investors believed they were, and the banks had put a huge percentage of their available funds (remember that almost all of every bank's worth is in its assets rather than in the cash it has on hand, there ARE NO GOLD RESERVES HIDING) out into the market and had far less cash on hand than they needed.
In 2007 the ratings agencies began to downgrade these securities. Investors who had thought they had put their money into something safe and guaranteed found out that it was instead invested in something risky and unguaranteed. They then tried to sell out of these investments while they were still worth something.
Now, sometimes people sell things that have underlying value (like the Australian dollar, which is currently woefully undervalued. Buy up big! And I don't say this solely because I have to buy euros in under three weeks.) When this happens, savvy investors snap up bargains and the value of the thing sold soon returns to something akin to its intrinsic value. The problem with these securities is that their intrinsic value was much less than the investors were led to believe, so the price kept going down, down, down. In the money-happy environment of two years ago, bank and non-bank lenders had been lending sums that were greater than the worth of the properties that secured them.
In April of this year, The New York Times ran an extensive article discussing the problem. It has an excellent breakdown of the ratings agencies' mechanisms for providing a spread of ratings for subprime mortgage packages, which you should read, since I can't explain it very well (it's on page 3).
However, there are two important factors. The first is that the ratings agencies were paid for ratings by the investment banks, so the people who were constructing flawed investments were also paying for their ratings. It was in the agencies' best interests to have as many high-rated securities as possible, because the more money that came into the investment banks, the more money that came into the ratings agencies.
The second is that the volume of trade increased exponentially over the last 10 years. There simply wasn't time for the ratings agencies to stay abreast of the market as a whole. This was most notable in the Enron collapse, and two years ago the SEC identified it as a major problem. Investment banks were aware of the flaws in the system and basically constructed products that, on the surface, met the agencies' criteria for ratings, but which were not fundamentally sound.
It's like students who study enough to pass, but who don't really know their subject (little buggers!). It's bad enough if they are journalism students, but you wouldn't want one as your doctor, or investment banker.
In the end, entire nations such as Iceland were investing in securities that they believed to be high-quality and highly insured, and which turned out to be rubbish. And for that the blame falls squarely on the institutions that packaged those investments and the agencies that rated them.
If these packages had not existed, or if they had been rated as highly risky, the losses would have been restricted to individual banks, or to investors who were prepared to deal with high risk.
Now, you may ask what about the huge market gains of the last 10 years before the crisis hit? And I would make rude hand gestures at you. The market did boom, but it boomed stupidly and the costs were not worth it. We had plenty of substantive growth through the 80s, and 90s and the 'crashes' of those periods were simple market corrections, unlike the current gutting of the international economy.
So the next person you hear saying that it's the fault of the po' black folk – slap them like they were Richard Fuld.
I had something nice to say, I might make a separate post ...
It will come as no surprise to anyone who has listened to my previous cheer at living in countries with public health care that I am a pinko commie at heart. But many of my dearest friends and a few relatives are conservatives. While I don't agree with private health care, I do believe in a reasonable amount of deregulation and am annoyed at people who live on benefits for no reason (while, at the same time, wanting to protect those who are on benefits for a reason, and yes, I recognise the big grey area in the middle, but can we just boot the obvious freeloaders?)
Anyway, this is all preamble to two things that have really raised my narkometer today.
If you are a Republican in the US, and your Presidential candidate is gracious and gentlemanly, YOU DO NOT FUCKING BOO HIM! You say, "Gee, John, you sound like the guy who was by far the better candidate in the 2000 race before the extreme Rove-Cheneyfication of the GOP and bankruptcy of our nation's economy and political soul. Maybe we should go back to those times?"
Fuckers.
Also, in economic news I have now read the third editorial in a non-loony publication that suggests the reason for the current economic disaster was – essentially – lending money for homes to black folks and Latinos. Bzzzzt! I am sorry, that answer is INCORRECT!
Many commentators have rushed to lay the blame on loan defaulters and declared that the urge to lend money to poor Americans was the source of the problem. Not so.
Enter Moody's, Standard & Poor's and Fitch. These are bond-rating firms. If you've ever had anything recommended to you as a AAA-rated stock, that rating came from one of these firms. Ten years ago, a mortgage came from your bank, and was repaid by you over 10 to 30 years. But around that time, Moody's et al realised that this was an untapped sector of the market. They packaged up thousands of mortgages into securities and then gave them AAA ratings. The banks received their money quickly, which meant they had more money to lend, and which also meant that relaxed their standards for those they were lending to. House prices went up, because there was more money in the marketplace in the form of loans. Because there were loads of mortgages being signed, there was more product to be packaged into securities.
It wasn't just banks, non-bank lenders came in on the act, too, because there was enough money in the market to allow them to package mortgages DESPITE THE FACT THEY HAD NO DEPOSITS TO OFFSET THEIR MORTGAGE RISKS, which was the one thing that had always made bank mortgages a relatively safe prospect.
This is the important bit. Investors INVESTED in these securities because they were given triple-A ratings by Moody's, Standard & Poor's and Fitch. It wasn't a case of investors being stupid, they had every reason to believe that the product they were putting their money into was a good product.
The bond-rating agencies made money hand over fist through this period. The investment banks that sold the products rated by the agencies also made money hand over fist. But at the end of the day, the things that were being represented by those investments were not worth as much as the investors believed they were, and the banks had put a huge percentage of their available funds (remember that almost all of every bank's worth is in its assets rather than in the cash it has on hand, there ARE NO GOLD RESERVES HIDING) out into the market and had far less cash on hand than they needed.
In 2007 the ratings agencies began to downgrade these securities. Investors who had thought they had put their money into something safe and guaranteed found out that it was instead invested in something risky and unguaranteed. They then tried to sell out of these investments while they were still worth something.
Now, sometimes people sell things that have underlying value (like the Australian dollar, which is currently woefully undervalued. Buy up big! And I don't say this solely because I have to buy euros in under three weeks.) When this happens, savvy investors snap up bargains and the value of the thing sold soon returns to something akin to its intrinsic value. The problem with these securities is that their intrinsic value was much less than the investors were led to believe, so the price kept going down, down, down. In the money-happy environment of two years ago, bank and non-bank lenders had been lending sums that were greater than the worth of the properties that secured them.
In April of this year, The New York Times ran an extensive article discussing the problem. It has an excellent breakdown of the ratings agencies' mechanisms for providing a spread of ratings for subprime mortgage packages, which you should read, since I can't explain it very well (it's on page 3).
However, there are two important factors. The first is that the ratings agencies were paid for ratings by the investment banks, so the people who were constructing flawed investments were also paying for their ratings. It was in the agencies' best interests to have as many high-rated securities as possible, because the more money that came into the investment banks, the more money that came into the ratings agencies.
The second is that the volume of trade increased exponentially over the last 10 years. There simply wasn't time for the ratings agencies to stay abreast of the market as a whole. This was most notable in the Enron collapse, and two years ago the SEC identified it as a major problem. Investment banks were aware of the flaws in the system and basically constructed products that, on the surface, met the agencies' criteria for ratings, but which were not fundamentally sound.
It's like students who study enough to pass, but who don't really know their subject (little buggers!). It's bad enough if they are journalism students, but you wouldn't want one as your doctor, or investment banker.
In the end, entire nations such as Iceland were investing in securities that they believed to be high-quality and highly insured, and which turned out to be rubbish. And for that the blame falls squarely on the institutions that packaged those investments and the agencies that rated them.
If these packages had not existed, or if they had been rated as highly risky, the losses would have been restricted to individual banks, or to investors who were prepared to deal with high risk.
Now, you may ask what about the huge market gains of the last 10 years before the crisis hit? And I would make rude hand gestures at you. The market did boom, but it boomed stupidly and the costs were not worth it. We had plenty of substantive growth through the 80s, and 90s and the 'crashes' of those periods were simple market corrections, unlike the current gutting of the international economy.
So the next person you hear saying that it's the fault of the po' black folk – slap them like they were Richard Fuld.
I had something nice to say, I might make a separate post ...
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:)
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only you could make me spit out my coffee over predator lending. but in all seriousness, it's one of the reasons why i'm NOT a homeowner (yet). my credit is slightly tarnished due to my identity being stolen as a child, yet i've still been offerend home loans and whatnot. i just laughed in their faces.
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Our banks have been fairly level-headed compared to many (and I point happily to our policy of some state control of banks), but I still think we're going to see a big reduction on the housing market here as well. Which would be good for me personally, since flats like the one I showed you the other day will no longer cost three fucking million NOK, but it'll suck hairy monkey balls for a lot of people. I'm wavering between sticking to my my ingrained social democratic conscience and tending towards the selfish on this one. :/
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In Germany, the same argument is made for loans made to the "new Bundesländer" (the former GDR). Obviously, big business has a pretty tight grip on the media.
Refreshing, your rants!
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Sadly, I cannot wholly agree with your strictures (1)
As I have noted elsewhere, the coincidence of (firstly) the quango-isation of Fannie and Freddie (with the consequent investiture of the two quangos with the aura of governmental backing and authority) with (secondly) the governmental insistence upon the relaxation of mortgage requirements, was the first step on this road to Avernus on which we now find ourselves. The ratings given to SFCDOs and similar securitised obligations, like their valuation in money, were, it now appears, inflated, but that inflation is due in no small measure to the anomalous position of Fannie and Freddie, which appeared to be and were presumed to be acting as effective agents of the Treasury in making subprime loans (here used to include all non-A mortgages, including perfectly creditworthy Alt-A obligations). As one example amongst many of the way in this market deformation muddled the ratings, the size and quango-ification of Fannie and Freddie made ‘counterparty risk’ assessments go wildly astray: a direct and proximate caus of the rating errors of which you complain. You have begun your analysis, that is to say, with the second step.
The problem of subprime lending is that, in part as a response to a perceived problem of ‘red-lining’ – which remedy was persisted in even once it was found that there was no significant problem of red-lining – and in part for ideological-cum-’pork’ reasons, government pressure was exerted upon the market to encourage the purchase of homes by buyers who were not able to put down a significant equity stake from the starter’s gun forward. This is not a problem of racialism or of a response to racialism, this is not even a problem of creditworthiness per se, it is a classic problem of undercapitalisation.
Re: Sadly, I cannot wholly agree with your strictures (2)
Re: Sadly, I cannot wholly agree with your strictures (2)
Not, I think, hypocritical as such. Pragmatic.
Re: Sadly, I cannot wholly agree with your strictures (2)
Re: Sadly, I cannot wholly agree with your strictures (1)
Americans, God bless them.
Re: Americans, God bless them.
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And doubters out there need only talk to bank tellers. Anyone who is a bank teller (or is related to one) can tell you that a few years ago, the job changed dramatically. It was no longer about providing friendly service to depositors, encouraging people to open savings accounts, checking accounts. Instead it became a stressful, pressured-filled trial of a job that was suddenly about selling loans to anyone and everyone that walked in the door. Qualified or not.
In fact, at one particular bank (possibly others that I am unfamiliar with) they created a new sort of product. One in which the lendee was able to decide how much they paid a month. Sounds great right? Except that the lendees, largely, chose the lower payment, as expected by the lender, only to find as time went on, that their payments were only barely touching the interest, not only leaving the principal untouched but accumulating more interest. Nice, huh?
This is how default happens, bank executives, when people owe more than the thing they're funding is worth.
My sister works at such a place, and about 2 months ago, in a big head-scratching 'Uh-oh!' moment of realization, the powers that be ordered them to stop making loans altogether.
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No matter which side people are on when it comes to the recent "bailout," they should realize that the $700 billion is being pulled out of thin air. The only argument is where to put this phantom money. If it hadn't have gone to the stock market, it would have gone somewhere else. There is no caution exercised when it comes to printing money. And people wonder why the economy is in crisis???
*sigh*
But yeah, "Blame it on the Blacks" is a popular argument for assholes everywhere. THAT needs to change.
I do love the issues you bring up. You should get some kind of medal for making-people-think-ism. :p
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*hugs*
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Btw, this line:
WIN!
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