The british explain the recent economic scares

I'm not entirely sure if this is two comedians working a sketch or it's a serious explanation of the economic mess we have watched yesterday and today. I lean toward the explanatory idea. John bird and John fortune, of whom I became aware because I saw these U-tube clips on Atrios.


(7.02 minutes)

What to do about sub prime mortgages in foreclosure

The mortgage market is, as we all know now, in a Hell of a Mess. Not only are the still unknown and growing character and level of problems growing and adversely effecting the American and the world economies, people are getting evicted from their homes (So?) and worse, bankers are losing big money (oh the horror!) The Federal Reserve bankers and the government's economic experts are trying to protect the economy, the mortgage bankers and their lenders are trying to stem their (self-inflicted) losses, and a lot of people who thought they owned their home are trying to figure out how to keep it.

Here are two interesting articles on the subject, one from the point of view of the home owners and one from the point of view of the mortgage bankers who are trying to get the government to bail them out of the results of their poor judgment.

As we watch this crisis slowly play out, let's keep in mind who brought it to us. To that list of luminaries, we can add the Bush administration's mismanagement of its voluntary and unnecessary war in Iraq, at least according to Professor Stiglitz and another Clinton administration economist, Linda Bilmes, in their just published book, The Three Trillion Dollar War, which pulls together their research on the true cost of the war.

There are some borrowers who bought into deals that were too good to be true. The real blame belongs to the bankers and lenders who (according to their own statements when trying to prevent regulations on their industry) are sufficiently sophisticated to understand the risk they took, and worse, Alan Greenspan who was knowingly manipulating the economy to pay for an unforgivable war. They share the blame with the idiots in the Bush administration who refused to listen to experience when they invaded Iraq.

For the combined arrogant greed of the bankers and lenders and the stupidity of the self-blinding politicians and the people who put them in office, we all will be paying for the next century.

Who's to blame for the credit mess?

Michael Brush at MSN Money provides a list of who is to blame for the credit mess. I'd like to just give you the names and then send you to the article for the reasons.

1. Alan Greenspan - Federal Reserve Chairman who encouraged the housing bubble and the shoddy loan underwriting
   
2. Countrywide CEO Angelo Mozilo - Mortgage broker who knew how badly the loans were being underwritten, but joined the crowd to maintain market share.
   
3. Christopher Ricciardi - he turned Merrill Lynch into the "Wal-Mart of the Collateral Debt Obligations (CDO) industry." He packaged the bad loans into securities (CDO's)and sold them. So did a lot of others, but he was the largest purveyor of crap.
   
4. Ralph Cioffi and Jim Kelsoe - Cioffi ran a hedge fund for Bear Sterns that was trying to buy higher than market-level interest returns to invest in, and borrowed money to do it. Kelso ran the biggest mutual fund specializing in subprime-related instruments at 'Regions Morgan Keegan Select High Income'
   
5. The ratings agencies - The three largest ones are 'Standard & Poor's',' Moody's Investors Service' and 'Fitch Ratings'. The rating agencies competed with each other to offer the highest ratings indicating that the debt instruments were secure investments. Institutions like Merrill Lynch would then give the business to the rating agency that promised in advance to give the highest rating. Since the rating agencies are paid by the institutions that sell the debt obligations, any rating agency that failed to give a high rating had no business and was not paid.
   
6. Mortgage brokers - Brokers are salespersons who get paid when they make loans. The more loans, the more pay. They were paid to lower standards so as to to generate more loans. When the decision was whether to refuse to issue unethical loans or to make more money, they went with greed over ethics. There is no oversight or licensing to ensure that loan standards are maintained. A large number of mortgage brokers are independent operators with no oversight at all.
   
7. The lawyers drawing up the mortgage-loan contracts - The contracts were so complicated that they knew that very few mortgage buyers would or even could read them, but they did not provide any summary of the dangers and risks involved in the contracts they were writing. The lawyers, like all the other players in the game, get paid only for loans that are sold, so they didn't want to warn the customers and run any off before they signed the contracts.
8. Add also the free market conservatives (both Republican and Democrat) - they object to government oversight of standards, procedures and ethics on a misplaced theoretical basis. A similar attitude towards not regulating banks prior to the Great Depression was a major cause of the disaster we call the Depression. Life insurance and health insurance had a similar history before the states began regulating sales, underwriting and issuance of policies. People would start companies, sell policies, collect premiums, then not pay off or even close the company rather than pay off. Sales of pharmaceuticals had a similar history of criminality and lack of ethics before the FDA was created.

This is not all of the individuals and groups who are at fault, but this is a representative sample.

A common thread through all of this is that the players only got paid for completed mortgages, and there was no regulation of any kind to maintain high underwriting standards. Is it any wonder that with all these players who got paid only when they completed a sale, there was a great deal of pressure to get everyone to finance or refinance homes? Alan Greenspan is first on this list for encouraging the use of ARM's and junk mortgages back in 2004,then taking no action to improve underwriting standards and quality of the mortgages being sold, among his other crimes.

Another hint of the severity of the sub-prime credit problems.

Merrill Lynch has appointed a replacement for CEO Stanley O'Neal, who resigned in October when Merril announced a third quarter write-down of $8.4 billion that resulted in a $2.3 billion loss. for Merrill Lynch. The replacement CEO, John Thain, was a surprise, since it was widely known that Merrill Lynch was talking to BlackRock CEO Larry Fink. According to CNBC:

CNBC has learned that Fink said he would take the job but only if Merrill did a full accounting of its subprime exposure. At that point, Merrill, which owns 49% of BlackRock, moved in a different direction and decided to go with Thain instead.

That suggests to me that Merrill Lynch knows that there are a lot more bombs in the Sub-prime investments, and they don't want those bombs to surface until everyone else in the market is having similar problems, or until they can slowly work their way out of those bad loans without anyone making a big issue of it.

At this point, I am speculating. If Merrill is out there on their own, the government will not bail them out, but if everyone is having the same problem at the same time, the government can be expected to be forced to act to protect the overall financial markets and the economy.

The fed is hurting low income workers - Ahh, so what?

Want to know why so many people are having their homes foreclosed now? It's not too hard to understand if you know the history. Robert Reich published an interesting article on his blog about the subprime home loan debacle and who is to blame. It's short and easy to understand, so go read it.

Bonddad describes the subprime mortgage loan mess

The Subprime mortgage loan originators have been having a set of real problems for the last few months as the value of homes they have loaned money to buy drops. This is a direct result of the housing bubble, which burst last Summer, and the nunmber of highly risky loans used to buy many of those homes.

Go read Bonddad's excellent description here.

Everyone has known this was coming since at least 2004 when then Federal Reserve Chairman Greenspan told people to use any loans they could get to buy real estate. The fact is, real estate building and sales have been the mainstay of the American economy since 2002. It was beginning to slow down, and Greenspan knew that only real estate-related business activity could keep the economy going.

The assumption was that the rest of the economy would pick up before the bottom fell out. Only that hasn't happened.