Politics alert, with a touch of ranting
Oct. 13th, 2008 11:54 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
blamebramptonI'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 ...
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
Re: Sadly, I cannot wholly agree with your strictures (2)
Date: 2008-10-14 02:49 pm (UTC)Why do you never ask the difficult questions on gardening or textiles?
I am still trying to understand the whole picture. However, in the interim ...
Fannie Mae was converted to a stockholder-owned agency in 1968. For most of that 40 years things were fine. The relaxation of government standards for mortgage requirements that you speak of was hardly contemporary, Clinton first softened standards in 1999, 31 years later.
While the average American may have believed that Fannie Mae and Freddie Mac were government-backed, the same average American believes that Creationism is a science and cannot tell you where your spleen is. But to suggest that the average banker believed this is akin to suggesting that Creationism is taught at MIT and that the world-leading surgeons at the Johns Hopkins cannot tell you where your organs are located.
Now, that 1999 reduction in standards. On the one hand, I am all for home ownership and many stockholders were also in support of the decision due to the fact that it represented higher profits. It did increase the amount money and assets in the community and was a deregulatory move that, of itself, wasn't disastrous, especially when the anti-predatory lending rules of 2000 were put in place.
The private lending sector (NOT backed by either of the FMs) aggressively marketed to people who were not able to meet the reduced standards of Fannie Mae, mortgages aggressively sold (I feel that predatorily sold is not too strong a description) in this market were STILL swept up into securities and the risk onsold as soon as was humanly possible from the original lender.
So, as far as I can tell, and I freely admit that I am still working this all out step by laborious step, the sequence of events went something along the lines of the following:
1. Fannie Mae and Freddie Mac allowed lending to mortgagees with lower standards of credentials than had been allowed in the past.
2. They made, overall, a large profit and were seen as very attractive to shareholders.
3. Other participants in the market took advantage of the removal of regulation in 1999 and, more radically, in 2004 to sell mortgages to customers that were even less equipped to pay.
4. This increased activity in the market drove up house prices, requiring borrowers take larger mortgages, whether they be at the 'good' end of the subprime market, or the 'bad' end.
5. The other participants in the mortgage market sold their risk on and the investment banks who bought that risk packaged it in ways that concealed the genuine levels of risk.
6. The new participants mentioned in point 3 were driven by the investment firms mentioned in 5.
7. While the collapse of the subprime market alone would have (and did) see Fannie Mae and Freddie Mac (as well as a number of other mortgage lending institutions) take substantial hits, these hits were due to the fact that lending and depositing banks have tiny sums of actual capital and massive amounts of assets. At the end of the day, these banks still *owned* things, which meant that government bailouts of them were buying *things*, in this case mortgages and property.
8. The investment banks trading in complex products constructed from the mortgage-backed securities on the other hand, were playing with *not-things*. When they suddenly had no money, they had nothing else to take its place.
I readily accept that my understanding could still be flawed, I am not an economist. But, to my mind, saying that they were all misled by the fact that Fannie Mae and Freddie Mac weren't really government-backed is to say that the people who were running those investment banks were all stupid.
I don't think that can be true. I think they were fully aware of the risks they were running and just expected to keep getting away with them.
And I do fully agree that undercapitalisation is at the root of the problem, I just see the point at which things spiralled from acceptable risk to ludicrous greed as being a separate point.
I'll keep going with this, but it will take me some time, as I REALLY need to learn Italian now!