said by BWX:Freddy and Fanny was and IS out of control. That is a quasi government entity that started this entire financial meltdown. It was government giving out loans for McMansions ...
That's a gross over-simplification. To the extent that it's false.
There were many factors contributing to the meltdown:
1. Community Reinvesment Act (CRA) legislative and regulatory changes of
... - 1992, requiring Freddie/Fannie to devote a percentage of their loans to "affordable housing."
... - 1995, requiring banks to lend money to so-called "red-lined" areas (changing the anti-redlining standard from proving loans were at least considered on their merits, not just their geographic location, to a standard which required a percentage of loans to actually be made by geographic location regardless of merits).
... - 1999, repeal of the Glass-Steagall Act which required banks to keep casino-like investment services separate from their commercial deposit business (guaranteed by the government's FDIC).
2. President Bush's "Ownership Society" policy contributed significantly to the problem of lowered lending requirements.
Although originating in 1995, and increased in 1999 under President Clinton[1], sub-prime lending actually exploded under President Bush:
said by "Wash. Post" :In 2001 [a year before President Bush's election], HUD researchers warned of high foreclosure rates among subprime loans.
"Given the very high concentration of these loans in low-income and African American neighborhoods, the growth in subprime lending and resulting very high levels of foreclosure is a real cause for concern," an agency report said.
But
by 2004 [two years into the Bush Presidency], when HUD next revised the goals, Freddie and Fannie's purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.That year,
President Bush's HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more."
For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.
"That was a huge, huge mistake," said Patricia McCoy, who teaches securities law at the University of Connecticut. "That just pumped more capital into a very unregulated market that has turned out to be a disaster."
In 2003, [fannie/freddie] bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals. --»
www.washingtonpost.com/w ··· 6_2.html I think that's an important point because those who toss the
socialism word-bomb often suggest
democratic socialism -- while ignoring
republican socialism.
For example, President Bush didn't stop HUD. And, that happened at a time when Republicans controlled the House, Senate
and Presidency for 4 years! (Jan. 2003 to Jan. 2007.)
At the height of the maddness!. Just 18 months before the meltdown began!
Not only that, but Republicans controlled Congress (both the House and Senate) for 6 years between Jan. 1995 to Jan. 2001.
In other words, Republicans were the Congress who gave us the two problematic CRA revisions ('95 and '99). They were also the Congress of '99 which barred states from regulating Credit Default Swaps (regulation which had been on the books since the 1907 Panic). And, they controlled the agenda (committees, bringing bills to the floor) for an astonishing 10 years during the 12 years that we are told today (by Republicans) should have been obvious to everyone a problem was brewing. Not a single revision brought to the floor for a vote!
At the signing of the '99 CRA deregulation Greenspan, McCain and Gramm looked like they were peeing down their legs.[2]
3. Greenspan held interest rates too low, too long.
This had the effect of inducing investors into riskier investments in search of better returns. As we will see, that was fuel for the the growing derivatives market (casino).
4. Bernanke raised interest rates too high, too fast.
This was like a short squeeze on all the sub-prime borrowers (who had essentially bet on low interest rates).
If anyone should have known the huge dependence on low interest rates, Bernanke should have. (He should have also understood the dependence of the peripheral derivative market. But, since it was unregulated, he couldn't know.).
5. The "carry trade."
Japan's "lost decade" created nearly free money. Investors could borrow the yen at almost 0% interest, and invest it in another currency.
Like point #3 above, this was a toxic combination for the growing derivatives market which produced exceptional yield with no apparent risk (which unregulated derivatives hid very well).
6. The growth of unregulated (over-the-counter) derivatives.
A cross between naked shorting (betting against a stock you don't actually own, which is banned by the SEC without heavy margin requirements) and insurance (which is regulated by states to require the insurer maintain adequate capital reserves to pay claims in a worst-case scenario.).
It was this market of exotic financial vehicles which was unregulated and completely opaque. The chairperson of the CFTC recommended they be regulated in 1997. But, she was beat down by Greenspan (an ideologicial libertarian), Rubin (former chairman of Goldman Sachs) and Summers (now an economic adviser to President Obama).[3]
As a result of non-regulation:
According to the British Bankers Association, the CDS market expanded from just $180 billion in 1996 to a stunning $20 trillion a decade later. That’s a 111-fold expansion in this esoteric, opaque market. And by all accounts, it continued to grow LAST year [2007] as well — to a whopping $57.9 TRILLION, according to the Bank for International Settlements. --»
moneyandmarkets.com/Issu ··· CDS-2279It was
this growth of unregulated "bets" used as insurance which contributed the most to demand for sub-prime mortgages. Investors eager to buy mortgaged-backed securties (MBS) which were based upon Collateralized Debt Obligations (CDO) and "synthetic CDOs" -- CDOs based upon Credit Default Swaps (CDS) mirroring the inverse (default potential) of real assets.
This led to greater demand for more mortgages which Wall St. banks could package and sell on the market as securitized investment vehicles:
said by "Barr testimony" :Despite the fact that CRA appears to have increased bank and thrift lending in low- and moderate-income communities, such institutions are not the only ones operating in these areas. In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005.
More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts. Although reasonable people can disagree about how to interpret the evidence, my own judgment is that the worst and most widespread abuses occurred in the institutions with the least federal oversight. --»
financialservices.house. ··· 1308.pdf The worst part of these derivatives were Credit Default Swaps (CDS). These allowed owners of toxic assets to "sell" risk like insurance.
However, unlike insurance, anyone could sell risk -- even when they had no interest in the insured item. It was like me buying car insurance on your car when I had no financial stake in your car.
And, anyone could sell CDS contracts (insurance) without regulation of their capital reserves (ability to pay claims). Nor any visibility of an underwriter's exposure to any particular risk. Nor, their exposure to any counterparty (an entity selling risk, who's eggs may be in one overweighted basket).
That made it more like a "side bet" than insurance.
However, CDSs were used like insurance. For example, they were used by banks to reduce the risk associated with assets held by the bank, and thereby reduce the bank's capital reserve requirements.
For example:
This excerpt from a recent Minyanville column pretty much sums up the problem:
"A hedge fund trader once told me that they insured/sold 50 times their capital in CDS with the counterparty being a very large, well-known investment bank.
"When I asked him if he was worried about that kind of leverage, he responded by saying that is the bank’s problem because if he is wrong about writing all these insurance policies (in the form of CDS), they can only lose their investment capital in the fund." --»
www.moneyandmarkets.com/ ··· ds-25793No doubt that a financial meltdown can change the calculus of social institutions, making them greater burdens to maintain. And, Europe has had a history of greater dependence on social institutions.
But, it is incorrect to suggest that social institutions were
the cause of the meltdown (and continuing fallout).
CRA and "ownership-society" social engineering were strong factors. As were poor monetary policy, and non-enforcement of extant regulations.
But, (IMO) the leading component was unregulated, opaque derivatives which were at the heart of obscuring risk. Turning sub-prime mortgages into AAA-rated bonds sold on the open market.
Nobody held a gun to the head of private investors who were literally pouring cash into mortgaged-backed securities. They saw high yields with low risk due to the opaque gimmicks which were performed in the background to structure sub-prime mortgages into AAA-rated bonds. They created the demand for Wall St. to keep buying more and more mortgages regardless of their quality. The securitization process (derivatives) would eliminate the "quality problem."
Strongly recommend watching the Frontline piece footnoted below. The following are also very good for background:
•
60 Minutes: The Bet that Blew Up Wall Street, Wall Street's Shadow Market•
60 Minutes: Credit Default Swaps (A follow-up to the previous show 3 weeks earlier).
•
Credit and Credibility (The ratings agencies contribution to the obliteration of risk through derivatives)
• A recent
article on Credit Default Swaps.Mark
[1]
said by "Wash. Post" :In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders. --»
www.washingtonpost.com/w ··· 626.html said by "NY Times" :In 1999, under pressure from the Clinton administration, Fannie Mae, the nation's largest home mortgage underwriter, relaxed credit requirements on the loans it would purchase from other banks and lenders, hoping that easing these restrictions would result in increased loan availability for minority and low-income buyers. Putting pressure on the GSE's (Government Sponsored Enterprise) Fannie Mae and Freddie Mac, the Clinton administration looked to increase their sub-prime portfolios, including the Department of Housing and Urban Development expressing its interest in the GSE's maintaining a 50% portion of their portfolios in loans to low and moderate-income borrowers. --»
en.wikipedia.org/wiki/Su ··· oponents [2]
Photo of Greenspan, McCain and Gramm uncontrollably giddy over the '99 CRA reform.
[3]
PBS Frontline: The Warning. An outstanding one-hour documentary of attempts to regulate the derivatives market, just months before the '97 crash (which was largely a result of derivative speculation on Russian bonds by LTCM.).
There is a link on the upper-right corner of the page to watch the program.
Our economy has evolved into a state where the government allows wireless companies to play the old shell game, with the larger companies getting away with more abuses. Big wireless is to big to sanction. Our corrupt government has allowed big wireless to abuse customers by: