Gateway Pundit has put up this synopsis written by a international auditor in the insurance industry on a huge mistake made by our government when they took over Washington Mutual. It’s pretty good at giving a rundown of the how, what and when all this happened….and what could happen if the government doesn’t do something to correct its mistake quickly:
The financial crisis is real. Most people don’t realize it yet, but banks, investment managers and corporate treasurers around the world all know what is going on. It started with the Freddie – Fannie collapse. They wrote loans to individuals who they shouldn’t have. Government policies encouraged loans to minorities and the underwriting function of banks was no longer approving loans upon an individual’s creditworthiness but their race was now a factor in the loan decision. When individuals are given loans based on race and not their ability to pay, it is inevitable that bad loans would be written and foreclosures would come. That’s what happened and in a big way.
This caused ripple effects throughout the financial services industry. Firms who consolidated loan packages or guaranteed their creditworthiness were caught in the middle. Bear Sterns, Lehman Brothers and others went under. The largest insurance company in the US by some measurements was one of the casualties (AIG). With insurance companies around the globe, AIG is hoping to have some business left when all is over. The government stepped in to rescue this giant by providing capital for the firm while it liquidates portions of its business to pay off the investment derivatives which caused it trouble and then pay off the government loan. The investments became bad when the mortgages went south.
The ripple affect continues. Putnam funds, the largest money market fund in the US and rated AAA, had to close its doors since money managers began to realize that Putnam’s assets were not guaranteed by the Federal Government (unlike cash in banks and savings and loans) and began to ask for their money. Putnam had to sell securities in order to meet the demand. Although they have begun to pay their account holders, their reputation and money market accounts in general have been severely damaged.
Corporations and institutions are scared of losing their money or having it locked up so there is a rush for money. This is global as long lines were reported outside AIG offices in various Asian offices. The Taiwan government came in to help AIG in Taiwan. There are other cases like this worldwide. Rumors are that some banks in Europe may be at risk.
The largest bank to ever be taken over by the government was next. And this is the scary part. Washington Mutual was taken over by the government on Thursday. They were not able to handle the surge for cash requests and became insolvent. The government however has made a big – HUGE – mistake.
In taking over Wash Mu, the government told Wash Mu bondholders that they would not be paid. This precedent when recognized by the investors around the world will cause massive pandemonium if the government doesn’t do something quick. You see the bondholders are people and institutions who buy bonds for stable and guaranteed returns with a payoff based on the bond type. Banks and many corporations raise capital or get money by issuing bonds. If bondholders realize that their bonds with banks will not be paid off if the bank goes under, then the bond will become very risky especially during these times, if not worthless. This will cause banks the inability to raise capital to pay off the depositors they have on the books. Depositors will become scared and more ‘runs on the bank’ will occur in all financial service industries.
The President has made a proposal for the government to step in. They must do so quickly. There is no time to waste. Fear is a great motive and causes people to do crazy things. Already treasurers of companies are divesting their assets from risky investments and moving it to more safe places. This is causing illiquidity in the market and will continue if not addressed. Congress cannot continue to filibuster and lollygag. The world economy is at stake. The root problems of a government policy encouraging bad loans, corporate and government greed (some Fannie Mae executives made off with millions), and a Congress that wishes to put pork on this bill to save our economy must be addressed and now.
The stock market is jittery and could dive quickly while the Democrats are calling Republicans un-patriotic because they didn’t attend a meeting which they were not invited to attend.
Typical partisan crap during a crisis.
Both parties need to can it and fix this thing, its way too important to be monkeying around with politics.
See author page
Bonds are risk investments also. Should stocks be guaranteed? I’ll grant you I’m totally lost when it comes to economics/finance, but you start backing one instrument/industry they will all be lining up with their hands out. One has the right of pursuit of happiness, not in getting it.
Tom
Tighten your seat belts and hold on to your hats.
The ride is gonna get rough.
Like the post below in another thread, if it was all doom and gloom why are investors jumping in? They see a bargain and know this isn’t that bad. It will get bad if we allow the Feds to get involved, again!.
Tom
PS: Way to be on top of things Curt re: bs whatever!!
“I call B.S”- typical example of “don’t let the facts get in the way of my beliefs”. (earlier post was deleted by moderator)
The fact that you can’t state your position without profane and puerile name calling says a lot about you. I think it is too much to ask you to do some homework regarding the origin of this mess.
Anyone who does some research will find that Bush and McCain, several times, tried to get some regulation of Fannie Mae in Congress, and every time it was the Democrats, led by Barney Frank, who refused to act on any reforms. See which politicians have received the most money from Fannie Mae, led by Barack Obama. Barack’s economic adviser is a disgraced ex-CEO from Fannie Mae, who left with millions. This whole mess was caused by politicians, and in this case, mostly Democrats have to shoulder the blame. But I doubt any one will be called to task, only the taxpayers will be forced to carry the brunt. It is time to throw out ALL the rotten politicians from
Washington. Both parties have robbed Social Security over the years, and now, they want the taxpayers to pay for their greed.
What’s “Social Security”????
There’s nothing social about and it doesn’t make me feel very secure.
I expect to get NONE of it, work till I’m 85, then drop dead during my lunch break 43 years from now. When my supervisor asks why I’m late from my lunch break, they’ll search for me in the men’s room only to find me slumper over in a toilet (heart attack…just like Elvis but without the fried PB/Banana sandwich cluched in one hand and a shot of whiskey in the other).
While in Navy Intelligence, (1958-1967), in 1963 I read the file on the investigation on Frank Marshal Davis (Obama’s Mentor in Hawaii). Davis, a known communist with ties to Moscow had written a plan to take over America. I can’t remember the exact wording nor all the steps, and have exausted all my resources trying to find a copy of the original plan.
Basically the plan outlined taking over the media to promote socialist propaganda. Recruit and train educators and take over all levels of education. Recruit and train people to run for public office. Create distrust of corporations. Promote distrust of all elected officials not in THEIR party.
Promote distrust of the military. Create shortages of food. Create shortages of energy. Appoint judges who support the socialist view. Pass laws to ban the ownership of firearms of any kind.
Encourage riots by the minorities. Attack religious beliefs. Creat a dependent population that looks to the Government for all their needs. When energy shortages, and food shortages cause such wide spread riots impose military rule.
That is what i remember reading of Davis’s plan. Maybe that is why Obama wants a National Civilian Security Force as strong as, as well funded, and well trained as our military.
Obama was groomed, tutored and scripted for his ascension since he was 12 years old.
May God help us all.
I think this is how it works with all risk investments, stocks and bonds — No guarantee of worth.
Unless you know what caused the financial meltdown, isn’t it a little specious to say you can fix it?
Expose Barney Frank … and the other Democrats who pushed giving home loans to people who could not afford to repay them.
Marion Valentine, sounds similar to the information in the American Thinker article I posted on another thread. The Cloward-Piven Strategy. It’s beginning to look like they were all connected and probably knew each other well. Obama arrived in time to take up the baton.
The thing that worries me is a panic. Whether the financial fundamentals are really shaky or not, if a panic occurs……look out!
Why is that clown pulling his punches and covering for the Democrats? No “analysis” is complete, let alone honest, if it does not include information on where the blame lies.
…like this one does…
http://wolfhowling.blogspot.com/2008/09/doddering-fool-charlatan.html
(extensive compilation of links to additional material) – H/T DrSanity
HERE’S A SOLUTION I CAN GET EXCITED ABOUT…
Tancredo Tells United Nations to Get Out
Missy
I know…The communist party is more active in America than most people realize. I gathered intelligence on Communist countries for 9 years. The indocrination of working people, getting them to believe they are “victims” and the methodical tanking of a country’s economy is a slower way to take over a country, but less expensive than armed conflict.
This has nothing to do with sub-prime mortgage holders (who are defaulting at 5%) and everything to do with the super human greed exhibited by Wall St brokers. If this isn’t classic fraud, somehow telling investors in those repackaged ‘securities’ they were getting were investment grade AAA sh**, i don’t know what is.
That the banks are now not lending to each other shows us how much lying has been going on with this system, banks know this, they’re all in on and have profited handsomely from this b.s.
The piles of almost worthless bond and other paper that Paulson wants to re-inflate using our tax money needs to be nuked instead of trying to nurse this crap back to health. It was funny money when it was issued and it’s beyond a joke now.
The same people who told us last year, and earlier this year, that this was all small potatoes, are now predicting the end of the universe. We shouldn’t have believed them then, and to believe them now?!
Fool me once…
FOCUS, LEE MAJELLA, FOCUS
“This has nothing to do with sub-prime mortgage holders (who are defaulting at 5%) and everything to do with the super human greed exhibited by Wall St brokers.”
It’s primarily the “super-human greed exhibited by” Democrat congress people. Stop trying to shift focus away from the real culprits, Carter and Clinton and their cronies.
More than greed it’s the ultimate fruition of the “Nanny State” mentality.
These low enders who should have been red lined when they applied for their mortgages instead ended up benefiting once again from the gov’t teat.
The Dims accomplished their goal of power retention by a “Give ya, give ya” approach to politics.
This is the perfect example of what happens when you apply political correctness to capitalism and the free market.
Aye Chihuahua focuses in and ups the magnification.
Actually, Yon, I understand what Lee was trying to say.
He was talking about the homeowner/borrowher here, not the secondary mortgage market holders (investors, Fannie/Freddie, Wall Street etc) Yes, absolutely many of those took out mortgages, buying more house than they could afford. Then again, there was that mandate of proving X amount of easy money mortgages. And the prices escalated so astromically since 1997.
Here’s were I might disagree with Lee somewhat. If you had the CRA compliance banks making hand over fist on subprimes, where is it fair to say the private institutions shouldn’t get on the same bandwagon? Fact is, the easy money was wrong for both CRA and private institutions. Then again, there were those mandates.
Which brings us full circle to this being a Congressional mishap of unforgivable magnitude.
Then Lee said:
Can’t agree more.
What is the default rate on the sub-prime mortgage species?
I found an article from April 2008 which shows a nationwide rate of 8.5% with individual states such as FL, WI, and OH showing rates near 13%.
Then you have to have to factor in adjustable rate defaults that as well since those rates have adjusted upward multiple times now so as to become unmanageable for the borrower.
I’m not sure how these packages were marketed to the final investor, but obviously the sub-prime, or otherwise risky, mixture was too rich and threw the overall balance out of whack.
There was an article I read recently about people who were able to go in and get a mortgage without any proof of income, without a SSN, and even without any ID.
I cannot even write a check without ID.
How in the hell can someone buy a HOUSE without an ID?
I will try and find it.
Aye Chi, the last stats I saw was back in Feb of this year, where it was about 11.2% of the 2007 subprime (only, not conventional) mortgages. That was double the amount of 2006 loans that went south. This, of course, doesn’t include student loans as well. Just mortgage.
About 40% of the subprime loans made in 2006-07 were made on what they called low doc/no doc or stated income loans. The low doc/no docs required either no proof of income or tax returns, or just the minimum. They went primarily on credit scores, and the appraisal value of the property.
It was an era of many exotic loan packaging by lenders. To avoid mortgage insurance, they would package 1st and 2nd loans… the first being an 80% LTV of the home, and a 2nd with the 20% value. Or sometimes they do what they call an 80/15/5 (80% 1st, 15% 2nd, and 5% downpayment) The mortgage insurance adds a lot to a monthly payment. Conventional loan MI rates are considerably higher than FHA MI. VA has no mortgage insurance.
These loan packages are part of the response to the CRA compliance mandates. When risky borrowers could not meet standard lending requirements, they created new loan packages that would ask for only minimal criteria.
Interest only loans were also another option… where you never paid down on the principle, but only paid the interest on the loan balance. This means you had to have home price appreciation in order to not be upside down in a mortgage, since you’d be responsible for the full loan price if you resold.
Some of these loans had appropriate value for short term ownership. Interest only for house flippers who purchased, fixed up, and then resold on the market. The 80/20 or 80/15/5 packages were good for those that wanted to buy into a new home, and were selling another home in a good resale market. They took their proceeds from the original sale, and paid of the 2nd, leaving them with an 80% mortgage and no MI.
It’s not a blanket “bad thing” depending on each buyers’ circumstances. However the subprime, combined with the astronomical rise in housing prices was the death knell.
Just to add, Aye Chi, not all mortgages are subprimes. So you can’t look at the 11.2% as the percentage of *all* mortgage loans.
However I did find a site with some dated info (April of this year), but will give you an idea of the rise of subprime mortgage activity, and it’s packaging into the MBS (mortgage backed securities) resale market. Remember that it was Jan 1, 1995, that the CRA compliance regulations were rewritten to demand numberical proof of compliance for minority/low-income lending.
There’s some more interesting generalizations there as well. But it was a perfect storm of a mess, coming together. i.e. below…
Also below… note that the conventional mortgages only had a 2% default rate, while the subprimes had an average of 13.7%
So the sub-prime piece is the tumor which is killing the patient.
That’s what I thought I understood. I just wanted to make sure.
Then, when you add on all of the other exotics, adjustable rates, etc. you get a big steaming plate of bailout.
I’m not sure how these packages were marketed to the final investor, but obviously the sub-prime, or otherwise risky, mixture was too rich
Basically, there is a huge trade in credit default swaps, which is more or less insurance against a debt (bond, mortgage, what have you) not being paid. A lot of people sold this insurance; in 2006, for example, it cost $14,000 dollars to insure a $10 million debt portfolio. However, most of these sellers didn’t really have deep enough pockets to pay if conditions turned bad. AIG was a major seller of this type of insurance, which is why they went under.
Here is one article describing the problem. The Wikipedia entry on credit default swaps is also very good, although quite technical.