Archive for October 15th, 2008
“po black folks tanked my 401(k)!”
Wednesday, October 15th, 2008An entertaining internet exchange between Rolling Stone’s Matt Taibbi and National Review’s Byron York:
B.Y.: Did I suggest that headwinds are unfair? But on the financial meltdown in particular, if you’re suggesting that that is a Republican creation, or even more specifically a McCain creation, I think you’re on pretty shaky ground.
M.T.: You don’t think the unregulated CDS market was a major factor in the current crisis? Were you watching when AIG almost went under? Were you watching the Lehman collapse?
B.Y.: I think that Fannie Mae and Freddie Mac were also major factors. And I believe that many of the problems in the mortgage area can be attributed to the confluence of Democratic and Republican priorities: the Democrats’ desire to give mortgages to people, particularly minorities, who could not afford them, and the Republicans’ desire to achieve an "ownership society," in part by giving mortgages to people who could not afford them. Again, I believe that if you are suggesting that the financial crisis is a Republican creation, or even more specifically a McCain creation, I think you’re on pretty shaky ground.
M.T.: Oh, come on. Tell me you’re not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm’s Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That’s like five times the size of the holdings in the NYSE. And it’s all speculation by Wall Street traders. It’s a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.
Credit Default Swaps. Totally unregulated. It’s an insurance policy with no financial asset to backup the policy. $62 trillion in insurance policies out there with no ability to pay.
So, let’s say I own "A Bank" with $100 million in mortgage assets. These are the houses that my customers own that I have provided mortgages for. If the customer can’t pay their mortgage I get the house. Based on that $100 million asset, I ask "B Bank" for $1 billion in loans. The housing market is going up, lots of money around, no risk to "B Bank" right? The "B Bank" gives me the loan for $1 billion.
That’s $1 billion in unsecured debt for "B Bank" however. Maybe it’s a bit risky after all! So what does "B Bank" do? They obtain $1 billion worth Credit Default Swaps from AIG. AIG tells "B Bank" that if my "A Bank" does not pay back the $1 billion I owe then they will pay them up to $0.40 on the dollar of the outstanding loan. Again, the housing market is going up, lots of money around, no risk to AIG right?
See where this is going?
AIG has all these customers paying them for Credit Default Swaps. It’s insurance, but they don’t call it insurance because it would then have to be regulated. If it was regulated then AIG would need to be able to back up the insurance with a financial asset in order to make the payoff if necessary.
But AIG does not have the assets. In addition, AIG get loans from "C Bank" based upon the fact that they are collecting "premiums" for billions of dollars of "insurance policies" that they are never going to have to pay on. The housing market is going up, lots of money around, no risk right?
Until the housing bubble bursts. Housing values fall, people can’t pay their mortgages.
Customers can’t pay their mortgage to "A Bank". "A Bank" can’t pay it’s loans to "B Bank". "B Bank" tries to collect on the Credit Default Swap payment but there are thousands of other banks trying to do the same thing and AIG does not have the money to cover the Swaps. AIG gets tapped out quickly and then can’t pay "C Bank".
The money does not evaporate, it never really existed. Time for a bailout!
So, the question is, who are you going to blame?
The people who tried to take advantage of a favorable housing market to get into a home, maybe for the first time? (poor minorities)
The bank who gave them the loan under the assumption that they would be able to refinance the loan once their home increased in value? (Fannie and Freddie and similar banks)
Or the colossal Ponzi scheme that was built on top of the housing market in order to get rich off trading securities that never ever existed? (Bear Stearns, etc.)
Or the politicians who fought for the deregulation in the financial markets that allowed for the Ponzi scheme in the first place? (John McCain, Phil Gramm)
I’ll let you guess who I would blame.
Michael Greenberger on NPR’s Fresh Air
Wednesday, October 15th, 2008A good primer on the current financial crisis.
Greenberger is a professor at the University of Maryland School of Law and the director of the University’s Center for Health and Homeland Security.
sand pit
Wednesday, October 15th, 2008
I hereby lobby Baba to include a sand pit in the state championship cyclocross race this year.
