“po black folks tanked my 401(k)!”
October 15th, 2008 |An 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.
17 Responses to ““po black folks tanked my 401(k)!””
Quick question; are you for the redistribution of wealth?
Since you brought up blame…
I ordered a pair of road pedals produced by a French bike and bike part company. When my pedals arrived I opened the box to find 2 right pedals.
The website I bought them from is sending me a new pair (hopefully 1 right and 1 left pedal), but I think the problem must have originated further up the food chain.
My pick: Ponzi scheme by the banks. Notice to banks; Im willing to run your business into the ground for 1/100th the salary of any your recently fired CEO’s. Please contact me at One on One, Ill be the guy with a beer in his hand.
are you for the redistribution of wealth?
I don’t know what that means. Specifically, I don’t know what you mean by that.
generally I blame everyone… as some of those loans were made to people who should have known better (i.e. those with enough education that they should have triple checked the paper work).
But even some of those people got tricked into bad loans (I know of one person who had a verbal agreement with the loan officer. When she showed up for closing it was an ARM she didn’t want. Her fault for going through with it, their fault for being greedy and making her feel trapped.)
But… I agree the the bulk of blame goes up stream from the lender. None of the banks, mortgage companies, etc. event tried to figure out the real worth of what they had. Cause real estate always goes up right? Bubbles never happen.
(Course besides Krugman, The Economist was also warning of a real estate bubble, just not as loud.)
Course this is still some how Carter’s and Clinton’s fault cause they’re democrats. No republican could ever be at fault.
A co-worker of mine blamed the whole crisis on “people in north mpls” foreclosing. Regardless of your political beliefs, I don’t think the math works out. North really isn’t that big of an area compared to the rest of the twin cites and even during the boom it’s was hard to find a house in North that was going for more than $200K. Where as in the ‘burbs its not hard to find $500K houses that are now $300K houses. I believe this is a microcosm the entire problem. Even if I’m wrong, there’s more than enough blame to go around outside of North.
As far as those poor, stupid suckers that defaulted on their home loans is concerned, IT DOESN’T MATTER! I don’t get how anyone can blame them for this economic mess. Yes, they made a bad decision, but they only hurt themselves.
On the other hand, the lenders and financiers had a responsibility to their businesses, and they totally failed. They could have done due diligence on the home buyers, but they didn’t. They took on way more risk than they could handle, and even worse they traded it to their buddies like it was solid gold. Pure speculation!
During last week’s meltdown one figure that I heard was that money left mutual funds accounts to the tune of 43 billion (previous high was 6 billion). Where did that money go? As far as they could tell it went into cash reserves, not treasury bonds or even commodities. This is bad. It means people are cashing out and hunkering down. A recipe for long recession.
The only question in my mind is how/when will those that walked away from this speculative runup with bags of cash, or those that simply are wealthy enough to still have bags of cash start reinvesting? If they decide to take a little recession vacation and sit back, then we will all suffer.
pcomeau-agree with you 100%, nice response.
Smithers, didn’t you post something earlier about this being a deregulation issue (maybe I saw it elsewhere, I’ve read so much in the past 3 weeks)? This post contradicts that. This is not a dereg issue but rather a LACK of regulation to begin with. It was one giant loophole (much like tax loopholes for large corporations). Let’s face it; if what you describe is completely accurate, AIG used a loophole to get around being regulated (what little regulation was in place, that is).
What a freaking mess.
And, oh-by the way; this whole issue of “consumers need to start spending again or the economy won’t recover”. WHY should I spend again? Because my raises are keeping up with inflation (cost of food, utilities)? Because the cost for me to borrow money is staying steady or decreasing, making borrowing money more attractive? I’m battening down the hatches, man. Digging a burrow and I’m hibernating for the foreseeable future.
As much as I love Obama, there’s nothing I’ve seen in his campaign that compels me to go back to spending. I’m lower middle class and I don’t see any positive change coming my way (and no, I don’t think a tax break is the way to do it-I’m more freaked out about our nation’s HUGE debt than I am desirous of a tax break). Selfish, but whatever….
I think we should talk about you and your new obsession with cross-racing and it’s effect on the current economic crisis.
Maybe everything would have been ok if you wouldn’t have “crossed-over”. A butterfly flaps it’s wings in China and causes a hurricane in the Gulf. Smither’s takes up cross and the financial markets got to hell…
http://skibbertarian.blogspot.com/2008/10/housing- mess.html
@Lynne: Just because you are lower middle class does not mean that you have to act like it. Get some more credit cards and buy that TV you want. Bills are never due today, they are always due tomorrow!
This post contradicts that.
No one is perfect, I am only 95%.
Dear lord, imagine what would have happened if Smithers had taken up mountain biking. In 24 hour races. On a singlspeed. I can feel the earth opening up under my feet…
@Lynne
I don’t know if smithers really contradicted himself regarding deregulation and lack of regulation.
Unlike what the conservative press wants people to believe, that there is on simple cause to all of this, its a complex issue.
The deregulation, iirc, was in loosening up who you could make loans to and not having banks adhere to CRA requirements. The lack of regulation would be at a different level, i.e. the insurance level.
Insurance, traditionally, is one of the most regulated industries so I’m not surprised AIG tried to find ways around it.
just a thought.
@Smithers: LOL, what the h*ll was I thinking??? Thanks for getting me back on track. Time to go buy that rack stereo system I’ve been wanting…online of course, since it’s now after 9pm and the stores are closed. Yay for consumerism.
@pcomeau: Ok, good point. I worked in banking for 9 years and insurance for 10. Both were regulated, and as I recall the govt. deregulated them during the time I was in both industries (such as allowing banks to invest in higher risk funds and allowing insurance carriers to carry lower reserves, if I recall correctly). (And sorry Smithers, I can’t get you a good deal on your home/auto insurance)
Of COURSE AIG tried to find a way around regulation; the entire time I worked in both industries, incredible resources were spent finding ways around the regulations. It’s just kind of sick that a loophole of this magnitude existed.
Agreed that there are so many issues/factors that have finally blown up. I won’t say unfortunately all at the same time, as I don’t believe it could have happened any other way.
What really worries me is what’s next for Average John and Jane American. We’re told to spend, spend, spend to stimulate the economy. Ok, so we do that and Wall Street gets back on track and banks begin lending again. The govt. creates an effective program to keep people in their homes. Things start to turn around. Then what? We’re stuck with this astronomical deficit, and where is the money going to come from to pay that down? If it’s from taxes, h*ll will freeze over before it comes from large business. As has been the case for years, it will come from Average John and Jane and their small business. But they’ve already overspent themselves at the urging of the govt. right now (and likely at higher rates than before this mess came crashing down around us), they get little or no raises and their taxes go up. And then we get another recession…how scary is it that the way out of this “recession” (sorry, I think it’s a full blown depression) is for the govt. to get into overwhelming debt and for Americans to keep spending money they don’t have.
@Lynne Oh no! we’ve both worked in the insurance industry.
(I was in a IT shop at an insurer in St. Paul during the 90s).
Yup I agree I too got to hear about how to not pay a claim, how regulated we were, etc.
And in the end I also agree with your worry that we’re getting stuck with the bill. I do believe some form of bail out was warranted but I was hoping they would put more oversight into it (silly me.)
The monatary policy of the Federal Reserve is the ignitor for this whole mess.
The Federal Reserve is supposed to balance inflation vs. recession. Greenspan overreacted after 9/11 and was too late to re-adjust.
I blame the Greenspan reserve for keeping interest rates so low that banks had all the cheap money they wanted and T-note yields dropped too low for investors looking for a “safe” place to keep their money.
The primary setting your home loan is not Fannie and Freddie. They’re secondary institutions buying mortgages from your primary lender, and generally have stringent requirements for the types of loans they buy. Fannie Mae and Freddie Mac didn’t invent Sub-Primes, they just had to buy them after their partner banks had sold them. They actually got into the Sub-Prime party late. The reason they floundered it because they lack the diversity of a bank invested in multiple forms of bonds and securities.
@skidsy: To make matters worse, I don’t remember the articles/websites I read in March, but my understanding is that the “pool” of funds for mortgages is separate and is not affected by any drop/change in the prime. That’s got to figure into this somehow, although I haven’t wrapped my brain around how yet.
@pcomeau: I was in underwriting and then claims. Some of the things I saw as an underwriter were pretty hard to swallow.
I should probably send my computer in for a good cleaning or something so I don’t have access to the news for a while. Today’s articles make things look far, far worse for John and Jane Doe: http://lynnebikeblog.blogspot.com/2008/10/i-cant-s tand-it-gotta-make-comment.html (I’m not into plugging my blog, it’s just that it would be too much for a comments section)