Come on… that’s just silly, right?  Did someone put something in the water?

And what about the banks?  Was it just coincidental that every major
bank in this country also became insolvent just as the foreclosure
crisis began?  And if it was bad loans that caused the banks to fail,
shouldn’t they be worse off now, as the foreclosures have increased? 
But they’re not, are they?  No, I guess they’re not.

You see, it wasn’t irresponsible borrowers that caused the crisis, in
fact truth be told, irresponsible borrowers hardly mattered at all, as
far as our financial crisis is concerned.

What happened, in simple terms, is that beginning in 2003, Wall
Street discovered that it could buy something called a Credit Default
Swap (a credit derivative, in banker parlance), not just on a triple-A
rated corporate bond, but also on a triple-A rated mortgage-backed security. 
And that meant that certain investors on The Street could now bet
against the mortgage-backed bonds that were starting to sell like
hotcakes.  The Credit Default Swap swapped the risk of the bond
defaulting… in other words, it paid off if the bond it was essentially
insuring, went bad.

The cost of a Credit Default Swap
that would insure a $100 million bond was about $2 million a year for
10 years, according to Michael Lewis in his book, “The Big Short.” 
That’s 50 to 1, which is even better than the roulette wheel in Las
Vegas.  But it’s even better when you know the bond you’re betting
against is going to default, right?  I’ll say it is.

So, as Wall Street continued to pump air into the housing bubble,
they didn’t just want regular old sub-prime loans, they wanted really
bad sub-prime loans… they had gotten really good at the securitization
game and by 2005 anything could be turned into a triple-A rated
mortgage-backed security, which could then be bet against by someone who
bought the other side of that bond, or the credit default swap (CDS).

As more and more Americans are coming to understand every day, things
got fairly out of control from there and banks even loaded up their own
balance sheets with the complex derivatives, called CDOs and CDOs
squared… along with synthetic CDOs and those squared too.  And since
American real estate was simply never going down, in the eyes of many
Wall Street bankers, they borrowed against their holdings, just like a
homeowner in the late 1990s might have taken out a second mortgage to
invest the money in the stock market, only bankers call it “leverage.” 
And for the ones that knew that thinking was goofy-tunes, they could go
short, betting on the housing market’s demise, as counter-parties
holding CDSs.

Everything was going according to plan until in July 10, 2007,
Standard & Poors and Moody’s held a press conference in London at
which they announced that they would be downgrading the ratings on 1,032
bond offerings backed by sub-prime mortgages… less than 1% of the bonds
backed by sub-prime loans that had been issued at that time.  But
investors panicked.  If these bonds were now being downgraded, what
about all the others that they had feasted on the last few years?

Investors dumped bonds overnight and at fire sale prices, as everyone
started wondering whether the insurers that had issued the CDSs would
be able to pay their bills.  Banks stopped trusting each other, because
no one knew who had what on their balance sheet.  New accounting rules,
FAS 157 and 159, adopted in the fall of 2006 and often called the
“mark-to-market” rules were forcing banks to write down their assets to
market price each quarter.

And as the market for the CDOs et al, dried up, their value went
straight off a cliff, like at the end of the movie, “Thelma and Louise.”

The credit markets, within just a few weeks, were frozen solid like
an Alaskan lake in the dead of winter, and Fed Chair Ben Bernanke turned
on the sirens and ran for the fire hoses and started pumping liquidity
into the system to avert a total collapse.  (It’s interesting that just
two weeks before this happened, the Fed’s meeting had seen none of this
coming.)

On August 10, 2011, PBS News Hour’s,
Jeffrey Brown interviewed two “experts” in global finance, Laurence
Meyer, a former Federal Reserve Board Governor, and Glenn Hubbard, who
was at the time, Chairman of the President’s Council of Economic
Advisers.  It had been two days since the Federal Reserve and EU Central
Banks had pumped $326 billion into the global financial system, and PBS
was asking why.

JEFFREY BROWN: All
together, central banks have pumped some $326 billion into the global
financial system in the past 48 hours.  Why don’t you explain what the
Fed, other central bankers are doing? What does it even mean to pump
extra cash into the financial system? Where does that money come from,
and where does it go?

LAURENCE MEYER: Well, it creates deposits at the Federal Reserve by lending, by lending to these primary dealers, for example.

JEFFREY BROWN: Primary dealers meaning…

LAURENCE MEYER: Large banks and broker-dealers.

Doesn’t that exchange make you wonder why Lawrence Meyer didn’t just
say that the $326 billion was being pumped into large banks and Wall
Street broker-dealers, instead of saying “it creates deposits at the
Federal Reserve by lending to primary dealers?”

JEFFREY BROWN: So that, what, so they can lend to each other? What is the problem that they’re trying to fix?

LAURENCE MEYER: So
they can lend to each other, and so that they can, more generally, so
that the lending can take place between banks and other institutions who
lend to each other in the money market. And what happened was that that
got disrupted because of a very abrupt re-pricing of risk in the
economy. They became less willing to lend to each other.

You see… banks wouldn’t lend to each other because no one knew who
was solvent and who had leveraged themselves across a bridge too far. 
And “disrupted because of a very abrupt re-pricing of risk in the economy.” Abrupt re-pricing of risk is just another way of saying that bond ratings were lowered overnight.

JEFFREY BROWN: Mr.
Hubbard, explain more about this idea risk and re-pricing of risk. I
think it sounds simple, but it’s at the heart of what we keep talking
about in all of this. Explain it a little more for us.

GLENN HUBBARD: Well,
exactly. I think many economists believe that risks had not been
accurately priced in recent times, that risk premium — that is, the
spread you would get for bearing risk — were very, very low by
historical standards.
What we’ve seen is a
pricing where the risky assets would now require much higher rates of
return. We saw this in this market for so-called subprime mortgages, but
it’s really filtered throughout markets for risky debt into
higher-grade mortgages and into the leveraged loan market.

Did you read that last sentence carefully?  We saw it in so-called
sub-prime mortgages, but it has really filtered throughout markets into
high-grade mortgages and leveraged loans?  Hmmm… I guess “irresponsible
sub-prime borrowers buying homes they couldn’t afford” didn’t cause the
crisis after all… what do you know about that?”

That’s right… back then as the crisis began, no one was talking about
irresponsible sub-prime borrowers, they were talking about the bond
markets… or, the credit markets… you see money had stopped a-flowin’.

Banks started hoarding cash, the secondary mortgage market closed its
doors, and the chances of getting a mortgage of any kind went from 100%
to essentially zero.  Predictably, as homes sat on the market longer
and longer… home prices started to fall fast.  The bubble had actually
popped a year before during the summer of 2006, by which time Greenspan
had raised interest rates 17 times in a row.  But now, with credit
tighter than Rush Limbaugh’s cycling shorts, there would be some that
simply wouldn’t get out alive.

The foreclosure crisis had begun in earnest.

It was the fall of 2007 when Bernanke started talking about sub-prime
loans being the cause of the foreclosure crisis, and had he been even
close to right, we’d have been through with it by now.  And perhaps, had
2008 not been an election year, with an unpopular Republican president
and two Democratic party candidates fighting it out to the bitter end…
perhaps under different circumstances we might have handled things
differently… better, maybe.

(NOTE: JUST BELOW IS A
LINK TO A PAPER BY PHILIP SWAGEL…Chief Economist at Treasury during the
last two years of the Bush Administration.  He wrote it for Brookings
about six months after his job had ended.  It’s fascinating… to me,
anyway.  So, I thought I’d share.)

Spring 2009 Philip Swagel Paper

But the 2008 presidential race was on, and the Dems were not of a
mind to do anything that might help ole’ Dubya look good.  So, when Bear
Stearns went down in the Spring of that year, and Paulson contacted
Speaker Pelosi, he was told not to sow his face on Capitol Hill unless
he could guarantee there was a crisis at the door.  And so… that’s what
he did… waited until there was a crisis at the door… remember?

Paulson and Bernanke jumping in a car and putting the siren on all
the way to Congress where they proceeded to tell everyone that the sky
was falling and it was falling fast?  You remember that day, right?  I
think just about everyone does… it was a few days before TARP’s $700
billion was approved after failing to pass the first time out.  We were
in bailout mode.

But it wasn’t homeowners we were bailing out… it wasn’t Main Street
either.  No, it was the banks that we were going to rescue, or so we
thought.  We didn’t have the political grit to stop foreclosures, which
had already fueled a free fall in home prices, because that would have
meant bailing out “irresponsible borrowers.”

We were going to bail out the “irresponsible bankers” instead.

And many in the American middle class turned their backs on those who
were now at risk of foreclosure, saying that they deserved their fates,
as unemployment rose into double digits and home prices sank by the
same.  We can’t reward their bad decisions, was the way most of this
country talked about homeowners in financial distress, as we proceeded
to do precisely that for our inconceivably irresponsible bankers.

And now here we sit.  In homes we may never be able to sell, watching
each quarter as their value declines, many still saying that we can’t
bail out irresponsible homeowners, but nowhere near as loudly as we once
said those same words.  Soon, that cry will have become a whisper, as
trillions more are drained from our collective middle class wealth.

Here we are a full three years later, and our government is the only
lender to speak of, and with a nationalized… yes, they’ve been
nationalized… Fannie and Freddie set to lower their lending limits and
FHA just flat out broke.  The average credit score for a Fannie loan for
the last two years topping 763, and we might care if we weren’t so far
underwater it just doesn’t matter.  Besides, even if we weren’t, who
would buy now, with prices falling and picking up speed and plenty more
foreclosures ahead?

Today, the foreclosure crisis has spread from coast-t-coast.  What
was once a sunbelt state problem is now something seen in almost every
state in the union.  I recently watched Mr. Case, of Case Schiller fame
be asked a question on television:

“Foreclosures in Minneapolis are up 26% year over year… what’s causing that?”  The show’s host wanted to know.

Mr. Case replied, “I’m not sure, I’d have to study that.”

I walked calmly to my bathroom to throw up.  “Study this, moron,” I said under my breath.

So, a lot of people wonder where we’ll go from here. We’re
back to a presidential election year, during which we’ll debate
Barack’s birth certificate, Obama-Care, immigration, and the funding of
Planned Parenthood and NPR.  And Obama will campaign among us once
again, telling us with a smile that prosperity is right around the
corner If we just stay the course.

The foreclosure crisis will hardly be mentioned, and those affected
by it will remain at home, silent, ashamed and afraid to come outside
except perhaps to vote, or pretend that everything’s going to be just
fine.

Parents will pace the floors of homes they can’t stand the thought of
losing.  Mothers-to-be will cry gripped by the fear of not knowing for
sure where they’ll live if the bank doesn’t approve their loan
modification.  And children will go through another year afraid, unsure
of what’s happening around them, unable to fully understand why it
doesn’t feel safe like it used to feel, and wanting to spend more time
with parents who have no choice but to work 60 hour weeks and longer as
they try everything to save their family home.

And fathers will sit at dining room tables wondering if their life
insurance policies will pay off after suicide… and some will take their
own lives… as the campaign rages on, with the rallies and the cheering…
the confetti and the promises soon to be broken against the realities of
American politics.  And nothing will happen, nothing will change… and
it will be 2013 when we once again start wondering when the free fall in
home prices will stop.

By then… by the
winter months of 2013, millions more homes will have received
foreclosure notices, millions more homeowners will have mysteriously
emerged from nowhere to become part of the “irresponsible borrower
class.”

And millions more homes will have been taken back by the bank, only
to sit as REOs in the shadow inventory, like old movie props,
deteriorating for no reason except that we simply can’t bail out those
irresponsible homeowners who we see as being so different from the rest
of us… until it becomes us in financial trouble… and then we tell no
one, choosing to suffer in silence in order to hold onto our dignity.

They made bad decisions, but we didn’t.  They bought too much house,
not us.  They probably have a jet ski and a flat screen… quick take a
peek in their garage.  They made their bed, now they must lie in it. 
Hah!

We, on the other hand, just need a little help to get through this. 
We’ve never missed a payment before… we had perfect credit… you see,
what happened was…

And sometime in the next couple of years, we’ll all come to realize
that “it” isn’t coming back, and if “it” ever does, it’ll be thirty
years before it does… too late for most of us to care.  And we’ll settle
into to whatever the fallen economy has left for us.  And we’ll try to
blame someone else for what’s happened.  But we will have seen the
enemy… and it was us.

And all because of the “irresponsible borrowers” that never were.

Mandelman out.

~~~

Go ahead… SUBSCRIBE to Mandelman Matters…

… and stay up to date with what matters.

Come on… that’s just silly, right?  Did someone put something in the water?

And what about the banks?  Was it just coincidental that every major
bank in this country also became insolvent just as the foreclosure
crisis began?  And if it was bad loans that caused the banks to fail,
shouldn’t they be worse off now, as the foreclosures have increased? 
But they’re not, are they?  No, I guess they’re not.

You see, it wasn’t irresponsible borrowers that caused the crisis, in
fact truth be told, irresponsible borrowers hardly mattered at all, as
far as our financial crisis is concerned.

What happened, in simple terms, is that beginning in 2003, Wall
Street discovered that it could buy something called a Credit Default
Swap (a credit derivative, in banker parlance), not just on a triple-A
rated corporate bond, but also on a triple-A rated mortgage-backed security. 
And that meant that certain investors on The Street could now bet
against the mortgage-backed bonds that were starting to sell like
hotcakes.  The Credit Default Swap swapped the risk of the bond
defaulting… in other words, it paid off if the bond it was essentially
insuring, went bad.

The cost of a Credit Default Swap
that would insure a $100 million bond was about $2 million a year for
10 years, according to Michael Lewis in his book, “The Big Short.” 
That’s 50 to 1, which is even better than the roulette wheel in Las
Vegas.  But it’s even better when you know the bond you’re betting
against is going to default, right?  I’ll say it is.

So, as Wall Street continued to pump air into the housing bubble,
they didn’t just want regular old sub-prime loans, they wanted really
bad sub-prime loans… they had gotten really good at the securitization
game and by 2005 anything could be turned into a triple-A rated
mortgage-backed security, which could then be bet against by someone who
bought the other side of that bond, or the credit default swap (CDS).

As more and more Americans are coming to understand every day, things
got fairly out of control from there and banks even loaded up their own
balance sheets with the complex derivatives, called CDOs and CDOs
squared… along with synthetic CDOs and those squared too.  And since
American real estate was simply never going down, in the eyes of many
Wall Street bankers, they borrowed against their holdings, just like a
homeowner in the late 1990s might have taken out a second mortgage to
invest the money in the stock market, only bankers call it “leverage.” 
And for the ones that knew that thinking was goofy-tunes, they could go
short, betting on the housing market’s demise, as counter-parties
holding CDSs.

Everything was going according to plan until in July 10, 2007,
Standard & Poors and Moody’s held a press conference in London at
which they announced that they would be downgrading the ratings on 1,032
bond offerings backed by sub-prime mortgages… less than 1% of the bonds
backed by sub-prime loans that had been issued at that time.  But
investors panicked.  If these bonds were now being downgraded, what
about all the others that they had feasted on the last few years?

Investors dumped bonds overnight and at fire sale prices, as everyone
started wondering whether the insurers that had issued the CDSs would
be able to pay their bills.  Banks stopped trusting each other, because
no one knew who had what on their balance sheet.  New accounting rules,
FAS 157 and 159, adopted in the fall of 2006 and often called the
“mark-to-market” rules were forcing banks to write down their assets to
market price each quarter.

And as the market for the CDOs et al, dried up, their value went
straight off a cliff, like at the end of the movie, “Thelma and Louise.”

The credit markets, within just a few weeks, were frozen solid like
an Alaskan lake in the dead of winter, and Fed Chair Ben Bernanke turned
on the sirens and ran for the fire hoses and started pumping liquidity
into the system to avert a total collapse.  (It’s interesting that just
two weeks before this happened, the Fed’s meeting had seen none of this
coming.)

On August 10, 2011, PBS News Hour’s,
Jeffrey Brown interviewed two “experts” in global finance, Laurence
Meyer, a former Federal Reserve Board Governor, and Glenn Hubbard, who
was at the time, Chairman of the President’s Council of Economic
Advisers.  It had been two days since the Federal Reserve and EU Central
Banks had pumped $326 billion into the global financial system, and PBS
was asking why.

JEFFREY BROWN: All
together, central banks have pumped some $326 billion into the global
financial system in the past 48 hours.  Why don’t you explain what the
Fed, other central bankers are doing? What does it even mean to pump
extra cash into the financial system? Where does that money come from,
and where does it go?

LAURENCE MEYER: Well, it creates deposits at the Federal Reserve by lending, by lending to these primary dealers, for example.

JEFFREY BROWN: Primary dealers meaning…

LAURENCE MEYER: Large banks and broker-dealers.

Doesn’t that exchange make you wonder why Lawrence Meyer didn’t just
say that the $326 billion was being pumped into large banks and Wall
Street broker-dealers, instead of saying “it creates deposits at the
Federal Reserve by lending to primary dealers?”

JEFFREY BROWN: So that, what, so they can lend to each other? What is the problem that they’re trying to fix?

LAURENCE MEYER: So
they can lend to each other, and so that they can, more generally, so
that the lending can take place between banks and other institutions who
lend to each other in the money market. And what happened was that that
got disrupted because of a very abrupt re-pricing of risk in the
economy. They became less willing to lend to each other.

You see… banks wouldn’t lend to each other because no one knew who
was solvent and who had leveraged themselves across a bridge too far. 
And “disrupted because of a very abrupt re-pricing of risk in the economy.” Abrupt re-pricing of risk is just another way of saying that bond ratings were lowered overnight.

JEFFREY BROWN: Mr.
Hubbard, explain more about this idea risk and re-pricing of risk. I
think it sounds simple, but it’s at the heart of what we keep talking
about in all of this. Explain it a little more for us.

GLENN HUBBARD: Well,
exactly. I think many economists believe that risks had not been
accurately priced in recent times, that risk premium — that is, the
spread you would get for bearing risk — were very, very low by
historical standards.
What we’ve seen is a
pricing where the risky assets would now require much higher rates of
return. We saw this in this market for so-called subprime mortgages, but
it’s really filtered throughout markets for risky debt into
higher-grade mortgages and into the leveraged loan market.

Did you read that last sentence carefully?  We saw it in so-called
sub-prime mortgages, but it has really filtered throughout markets into
high-grade mortgages and leveraged loans?  Hmmm… I guess “irresponsible
sub-prime borrowers buying homes they couldn’t afford” didn’t cause the
crisis after all… what do you know about that?”

That’s right… back then as the crisis began, no one was talking about
irresponsible sub-prime borrowers, they were talking about the bond
markets… or, the credit markets… you see money had stopped a-flowin’.

Banks started hoarding cash, the secondary mortgage market closed its
doors, and the chances of getting a mortgage of any kind went from 100%
to essentially zero.  Predictably, as homes sat on the market longer
and longer… home prices started to fall fast.  The bubble had actually
popped a year before during the summer of 2006, by which time Greenspan
had raised interest rates 17 times in a row.  But now, with credit
tighter than Rush Limbaugh’s cycling shorts, there would be some that
simply wouldn’t get out alive.

The foreclosure crisis had begun in earnest.

It was the fall of 2007 when Bernanke started talking about sub-prime
loans being the cause of the foreclosure crisis, and had he been even
close to right, we’d have been through with it by now.  And perhaps, had
2008 not been an election year, with an unpopular Republican president
and two Democratic party candidates fighting it out to the bitter end…
perhaps under different circumstances we might have handled things
differently… better, maybe.

(NOTE: JUST BELOW IS A
LINK TO A PAPER BY PHILIP SWAGEL…Chief Economist at Treasury during the
last two years of the Bush Administration.  He wrote it for Brookings
about six months after his job had ended.  It’s fascinating… to me,
anyway.  So, I thought I’d share.)

Spring 2009 Philip Swagel Paper

But the 2008 presidential race was on, and the Dems were not of a
mind to do anything that might help ole’ Dubya look good.  So, when Bear
Stearns went down in the Spring of that year, and Paulson contacted
Speaker Pelosi, he was told not to sow his face on Capitol Hill unless
he could guarantee there was a crisis at the door.  And so… that’s what
he did… waited until there was a crisis at the door… remember?

Paulson and Bernanke jumping in a car and putting the siren on all
the way to Congress where they proceeded to tell everyone that the sky
was falling and it was falling fast?  You remember that day, right?  I
think just about everyone does… it was a few days before TARP’s $700
billion was approved after failing to pass the first time out.  We were
in bailout mode.

But it wasn’t homeowners we were bailing out… it wasn’t Main Street
either.  No, it was the banks that we were going to rescue, or so we
thought.  We didn’t have the political grit to stop foreclosures, which
had already fueled a free fall in home prices, because that would have
meant bailing out “irresponsible borrowers.”

We were going to bail out the “irresponsible bankers” instead.

And many in the American middle class turned their backs on those who
were now at risk of foreclosure, saying that they deserved their fates,
as unemployment rose into double digits and home prices sank by the
same.  We can’t reward their bad decisions, was the way most of this
country talked about homeowners in financial distress, as we proceeded
to do precisely that for our inconceivably irresponsible bankers.

And now here we sit.  In homes we may never be able to sell, watching
each quarter as their value declines, many still saying that we can’t
bail out irresponsible homeowners, but nowhere near as loudly as we once
said those same words.  Soon, that cry will have become a whisper, as
trillions more are drained from our collective middle class wealth.

Here we are a full three years later, and our government is the only
lender to speak of, and with a nationalized… yes, they’ve been
nationalized… Fannie and Freddie set to lower their lending limits and
FHA just flat out broke.  The average credit score for a Fannie loan for
the last two years topping 763, and we might care if we weren’t so far
underwater it just doesn’t matter.  Besides, even if we weren’t, who
would buy now, with prices falling and picking up speed and plenty more
foreclosures ahead?

Today, the foreclosure crisis has spread from coast-t-coast.  What
was once a sunbelt state problem is now something seen in almost every
state in the union.  I recently watched Mr. Case, of Case Schiller fame
be asked a question on television:

“Foreclosures in Minneapolis are up 26% year over year… what’s causing that?”  The show’s host wanted to know.

Mr. Case replied, “I’m not sure, I’d have to study that.”

I walked calmly to my bathroom to throw up.  “Study this, moron,” I said under my breath.

So, a lot of people wonder where we’ll go from here. We’re
back to a presidential election year, during which we’ll debate
Barack’s birth certificate, Obama-Care, immigration, and the funding of
Planned Parenthood and NPR.  And Obama will campaign among us once
again, telling us with a smile that prosperity is right around the
corner If we just stay the course.

The foreclosure crisis will hardly be mentioned, and those affected
by it will remain at home, silent, ashamed and afraid to come outside
except perhaps to vote, or pretend that everything’s going to be just
fine.

Parents will pace the floors of homes they can’t stand the thought of
losing.  Mothers-to-be will cry gripped by the fear of not knowing for
sure where they’ll live if the bank doesn’t approve their loan
modification.  And children will go through another year afraid, unsure
of what’s happening around them, unable to fully understand why it
doesn’t feel safe like it used to feel, and wanting to spend more time
with parents who have no choice but to work 60 hour weeks and longer as
they try everything to save their family home.

And fathers will sit at dining room tables wondering if their life
insurance policies will pay off after suicide… and some will take their
own lives… as the campaign rages on, with the rallies and the cheering…
the confetti and the promises soon to be broken against the realities of
American politics.  And nothing will happen, nothing will change… and
it will be 2013 when we once again start wondering when the free fall in
home prices will stop.

By then… by the
winter months of 2013, millions more homes will have received
foreclosure notices, millions more homeowners will have mysteriously
emerged from nowhere to become part of the “irresponsible borrower
class.”

And millions more homes will have been taken back by the bank, only
to sit as REOs in the shadow inventory, like old movie props,
deteriorating for no reason except that we simply can’t bail out those
irresponsible homeowners who we see as being so different from the rest
of us… until it becomes us in financial trouble… and then we tell no
one, choosing to suffer in silence in order to hold onto our dignity.

They made bad decisions, but we didn’t.  They bought too much house,
not us.  They probably have a jet ski and a flat screen… quick take a
peek in their garage.  They made their bed, now they must lie in it. 
Hah!

We, on the other hand, just need a little help to get through this. 
We’ve never missed a payment before… we had perfect credit… you see,
what happened was…

And sometime in the next couple of years, we’ll all come to realize
that “it” isn’t coming back, and if “it” ever does, it’ll be thirty
years before it does… too late for most of us to care.  And we’ll settle
into to whatever the fallen economy has left for us.  And we’ll try to
blame someone else for what’s happened.  But we will have seen the
enemy… and it was us.

And all because of the “irresponsible borrowers” that never were.

Mandelman out.

~~~

Go ahead… SUBSCRIBE to Mandelman Matters…

… and stay up to date with what matters.

Sincerely,
Chicago, IL