katec

10 Stupid Moves That Created This Mess

Aryamehr,

We never fail to learn from the past! We need regulations which would alleviate more ownership from the US Government. It is strange how everyone thought that Mr. Greenspan was such a genius!! We all know that George W was never elected to be our President. Let us all hope that we are in for a change but a mess for President-elect Obama to clean up or whoever would have been elected!


On Jan 01 12:12 PM Aryamehr wrote:

> As a mortgage banker I saw it all. In 1998 I decided to enter the
> mortgage lending business for a third time. Initially wholesale lending
> worked its cogs, according to the prevailing market parameters. Securitization
> as intended brought about the efficiencies purported by those free
> market advocates of deregulation and the world took heed. As we now
> know securitization of the mortgage industry was on the 'menu de
> fare' of almost every member of the OECD countries. During this same
> period the 'world's central bank,' the Federal Reserve, and I say
> this with emphasis, took a reckless glide path towards lower interest
> rates, even when small bubbles began to manifest themselves in the
> latter part of 2003. The Economist magazine did a perfect job of
> heralding a brewing bubble, however most of those in the financial
> community continued to enjoy the party under its host, Mr. Greenspan.
> Since Mr. Greenspan was given complete latitude under his supervisor,
> Mr. Bush, a nincompoop of the first order; probably and hopefully
> the only one in US history. To make matters worse traditional lending
> standards were compromised: lenders no longer were obligated to hold
> on to the MBS and the CDO they created, once the loans were originated
> they were sold off to disparate investors; AIG, GE, Pension Funds,
> Private Hedge Funds, the GSE’s (FNM & FRE) and many Foreign Investors.
> The investors hedged their losses by buying credit default swaps
> (CDS) under the presumption that this instrument insured them against
> any possible defaults. This all worked well so long as the assets
> they were securitizing performed, however you would have to be an
> idiot to believe real estate values would continue to climb at 20%
> a year while most peoples wages were barely keeping up with the artificial
> rate of inflation (2-3%). In retrospect the media didn’t take much
> time to promulgate the underpinnings of an investment community gone
> wild. The dominos began to fall; Countrywide, Bear Stearns, Lehman
> Brothers, Indymac, Uncle Freddie and Aunty Fannie, AIG, Washington
> Mutual, Wachovia et al. To put things in a laconic perspective: what
> these entities did was create conduits off their balance sheets called
> structured investment vehicles (SIVs) that allowed them to avoid
> banking and insurance regulators. The Banking and Insurance industry
> have rules and regulations that would have barred a lot of the business
> practices that took place had the regulators done their jobs, however
> allowing the financial community to do as they please under the pretext
> of financial innovation is what got us into this mess. Now that the
> underpinnings of this feeding frenzy have been divulged we know that
> CDS are not ersatz forms of insurance and ABS absent of traditional
> governance and regulation are very risking investments. Had it not
> been for the Tax payer benevolence under the troubled asset relief
> program (TARP), I would surmise that the entire financial community
> would have been brought to their knees and the mighty dollar would
> have been toppled from its vaunted mantel. Nevertheless, the bail
> out will do its job, given sufficient time but the financial community
> will need to go through a metamorphosis, from opacity to unequivocal
> transparency if faith in these surviving entities is to be restored.