Modern Finance
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Hat tip Paul
Source:
Chain of fools
Matt Miller
The Deal.com, October 3, 2008 at 4:52 PM
http://www.thedeal.com/newsweekly/features/chain-of-fools.php
Tuesday, October 07, 2008 | 11:45 AM | Permalink
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Interesting comments the last couple of days. Especially the threads about what people are investing in, and the gyrations the FED and treasury are going through to try to prevent meltdown.
Mastercard announced this morning large declines in EVERY spending category for the month of September.
September Consumer Sales Drop Sharply.
http://www.reuters.com/article/businessNews/idUSTRE4960YR20081007?feedType=RSS&feedName=businessNews&pageNumber=2&virtualBrandChannel=0
Consumers are still, uh, 70-80% of the economy......
Leftback...initial claims on the 9th will win for me this week...The fed can say they will buy my old shoes, and the market is STILL going down.
Posted by: Bruce in Tennessee | Oct 7, 2008 11:53:05 AM
http://video.msn.com/video.aspx?mkt=en-us&vid=6f562e3d-040e-44fe-860f-dca9ca8a4b6a&fg=rss
this is Cramer on the today show defending being the contrary indicator.... poor bastard.
I'd rather be the contrary indicator, than one of the litany of knot heads gay for the contrary indicator.
Posted by: Eric Davis | Oct 7, 2008 11:54:23 AM
We’ll get through this mess sooner or later.
But give it 20 years (maybe less); an even more lethal and pervasive virus will evolve and infect the financial system.
Posted by: DL | Oct 7, 2008 11:56:09 AM
The problem is not that we are having a lack-of-credit crisis - the problem is we are having an I-can't-pay-for-the-credit-I-got-now crisis.
Posted by: Winston Munn | Oct 7, 2008 12:01:12 PM
Unfortunately this diagram-Chain of Fools is missing the biggest Fool of them all
the TAXPAYER........
of course the taxpayer is just finding out
that he is on the hook for this
"Modern Finance".
Posted by: MarkTX | Oct 7, 2008 12:28:01 PM
When I look at this chart it is so obvious that a small child could tell that our current predicament is all the fault of the CRA, Jimmy Carter, Bill Clinton, and Barney Frank.
/wingnut
Posted by: Whammer | Oct 7, 2008 12:35:50 PM
And in each little box they were taking a little taste.
Posted by: catman | Oct 7, 2008 12:36:34 PM
Novice question,
How do the CDO's get squared and cubed?
Posted by: Jim | Oct 7, 2008 12:37:35 PM
I find myself channeling Charlton Heston in Planet of the Apes: "It's a madhouse!....A madhouse!..."
Oh, and to answer a question from yesterday, I, too, dipped a toe in: bot GE, GS, PFE, BP. These aren't short termers. All but Goldman have fat dividends (until they cut 'em, of course). BP and PFE were well above 7%, and GE nearing 6 when bot. Given the sell off at this moment, I'm about flat at the moment.
I remain long GLD, plus physicals, and SDS.
Posted by: Scott in Chicago | Oct 7, 2008 12:38:02 PM
That chart has at least twice as many boxes as it really ought to have in a sane-lending world.
Notably missing (in addition to the taxpayers) are the regulatory authorities and the banks' auditors. Also missing are the true end investors (depositors into the banks) who actually control the wealth being invested. It's a myth that the banks control the wealth of the nation. People control the wealth and they lend it to the bankers whenever they make a deposit.
P.S. I have heard rumors that certain properties were actually included as collateral for multiple RMBS... can anyone confirm that? (A "One loan, many payoffs" business model would, in the absence of due diligence or regulation, certainly have been more profitable than anything else, and the fraudsters might even get away with it if no one goes back to check...)
Posted by: Wisdom Seeker | Oct 7, 2008 12:43:10 PM
And the top half of that chart is entirely fictional nonsense, which explains why we are where we are.
Idiots.
Posted by: donna | Oct 7, 2008 12:44:20 PM
Somebody today wrote somewhere that Wall Street is only a compensation scheme for those who work there.
Stupidity and incompetence was probably not a factor, but will be the excuse used to get away with it. It's an excellent negotiation tactic when used properly. "Nobody's responsible ... we were just too stupid to understand what those sharpies over there somewhere did to us. I'm just as mad as you are."
I remember, back in the day, when I negotiated with various souls about this and that. My favorite stalling technique was the long silence. I didn't use it, I just knew how to deal with it. The first person who spoke, lost. Always.
The stupidity ploy is just a variation on that. If you accept it, you lose. To accept it, all you have to do is discuss it with those who are using it. You have already lost if you even accept it as a possible explanation.
Posted by: dead hobo | Oct 7, 2008 12:44:37 PM
Is there still any doubt in your mind that this was engineered to fail?
Somebody, somewhere wants to consolidate the world banking system into a smaller, more tightly controlled unit.
Catastrophe breeds rapid change, as 9-11 taught us. See a theme here?
Posted by: I Can Smell A Turd Even In A Dark Room | Oct 7, 2008 12:48:49 PM
Good Graphic but don't we all know that it was caused by poor people. Who doesn't know that with all the trillion dollar corporations and powerful rich families we all suffer at the mercy of poor people who took out loans they can't afford?
Thomas Swift would be proud at this modest blame.
Posted by: tbapple | Oct 7, 2008 12:49:21 PM
AKA: "THE BIG PONZI SCHEME". USA!! USA!! USA!!
Posted by: Jeff M. | Oct 7, 2008 12:51:20 PM
@dead hobo-
nice post. anytime human nature gets thrust back into the discussion we all benefit.
Your handle, dead hobo, reminds me of an amusing occurrence. I was a member of the CME for 16 years. I had to walk across the bridge over the Chicago River to get to the CME as I was coming from the west (this is the old CME on Monroe, though I also did time at the old-old CME on Jackson). There were always panhandlers. One morning as I was slipping one of them a five, another broker came running up behind me and pushed me away from the panhandler. The guy that shoved me had been on a great winning streak and, as many of us in this biz, was superstitious. As he shoved me he yelled," Get away! That's MY bum!" No shit, I ain't making it up.
Posted by: Scott in Chicago | Oct 7, 2008 12:59:28 PM
As Dick Fuld told us yesterday, he will have to live with the “pain” of what happened “for the rest of his life”.
I’d say that just about wipes the slate clean.
Posted by: DL | Oct 7, 2008 1:05:18 PM
"Good Graphic but don't we all know that it was caused by poor people."
Straw man. Nobody says it was "caused by poor people." The very accurate contention is that it couldn't have happened if activists and elected officials claiming to speak for the poor hadn't managed to get the government to coerce lending institutions lending standards so that loans were given to people who couldn't or wouldn't pay them back.
That is in indelible part of the record.
Posted by: Richard | Oct 7, 2008 1:07:54 PM
Scott,
Thank you for your generosity. I used the cash for some Ripple and some smokes. Didn't even share the bottle. Good times.
Posted by: dead hobo | Oct 7, 2008 1:13:15 PM
@dead hobo-
Nice
Posted by: Scott in Chicago | Oct 7, 2008 1:18:03 PM
Planting Seeds of Disaster
ACORN, Barack Obama, and the Democratic party.
By Stanley Kurtz
‘You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.” So began an April 1995 article in the Chicago Sun-Times that went on to direct prospective home-buyers fitting this profile to a group of far-left “community organizers” called ACORN, for assistance. In retrospect, of course, encouraging customers like this to buy homes seems little short of madness.
Militant ACORN
At the time, however, that 1995 Chicago newspaper article represented something of a triumph for Barack Obama. That same year, as a director at Chicago’s Woods Fund, Obama was successfully pushing for a major expansion of assistance to ACORN, and sending still more money ACORN’s way from his post as board chair of the Chicago Annenberg Challenge. Through both funding and personal-leadership training, Obama supported ACORN. And ACORN, far more than we’ve recognized up to now, had a major role in precipitating the subprime crisis.
I’ve already told the story of Obama’s close ties to ACORN leader Madeline Talbott, who personally led Chicago ACORN’s campaign to intimidate banks into making high-risk loans to low-credit customers. Using provisions of a 1977 law called the Community Reinvestment Act (CRA), Chicago ACORN was able to delay and halt the efforts of banks to merge or expand until they had agreed to lower their credit standards — and to fill ACORN’s coffers to finance “counseling” operations like the one touted in that Sun-Times article. This much we’ve known. Yet these local, CRA-based pressure-campaigns fit into a broader, more disturbing, and still under-appreciated national picture. Far more than we’ve recognized, ACORN’s local, CRA-enabled pressure tactics served to entangle the financial system as a whole in the subprime mess. ACORN was no side-show. On the contrary, using CRA and ties to sympathetic congressional Democrats, ACORN succeeded in drawing Fannie Mae and Freddie Mac into the very policies that led to the current disaster.
In one of the first book-length scholarly studies of ACORN, Organizing Urban America, Rutgers University political scientist Heidi Swarts describes this group, so dear to Barack Obama, as “oppositional outlaws.” Swarts, a strong supporter of ACORN, has no qualms about stating that its members think of themselves as “militants unafraid to confront the powers that be.” “This identity as a uniquely militant organization,” says Swarts, “is reinforced by contentious action.” ACORN protesters will break into private offices, show up at a banker’s home to intimidate his family, or pour protesters into bank lobbies to scare away customers, all in an effort to force a lowering of credit standards for poor and minority customers. According to Swarts, long-term ACORN organizers “tend to see the organization as a solitary vanguard of principled leftists...the only truly radical community organization.”
ACORN’s Inside Strategy
Yet ACORN’s entirely deserved reputation for militance is balanced by its less-well-known “inside strategy.” ACORN has long employed Washington-based lobbyists who understand very well how the legislative game is played. ACORN’s national lobbyists may encourage and benefit from the militant tactics of their base, but in the halls of congress they play the game with smooth sophistication. The untold story of ACORN’s central role in the financial meltdown is about the one-two punch to the banking system administered by this outside/inside strategy.
Critics of the notion that CRA had a major impact on the subprime crisis ask how a law passed in 1977 could have caused a crisis in 2008? The answer has a lot to do with ACORN — and the critical years of 1990-1995. While the 1977 Community Reinvestment Act did call on banks to increase lending in poor and minority neighborhoods, its exact requirements were vague, and therefore open to a good deal of regulatory interpretation. Banks merger or expansion plans were rarely held up under CRA until the late 1980s, when ACORN perfected its technique of filing CRA complaints in tandem with the sort of intimidation tactics perfected by that original “community organizer” (and Obama idol), Saul Alinsky.
At first, ACORN’s anti-bank actions were relatively few in number. However, under a provision of the 1989 savings and loan bailout pushed by liberal Democratic legislators, like Massachusetts Congressman Joseph P. Kennedy, lenders were required to compile public records of mortgage applicants by race, gender, and income. Although the statistics produced by these studies were presented in highly misleading ways, groups like ACORN were able to use them to embarrass banks into lowering credit standards. At the same time, a wave of banking mergers in the early 1990's provided an opening for ACORN to use CRA to force lending changes. Any merger could be blocked under CRA, and once ACORN began systematically filing protests over minority lending, a formerly toothless set of regulations began to bite.
ACORN’s efforts to undermine credit standards in the late 1980s taught it a valuable lesson. However much pressure ACORN put on banks to lower credit standards, tough requirements in the “secondary market” run by Fannie Mae and Freddie Mac served as a barrier to change. Fannie Mae and Freddie Mac buy up mortgages en masse, bundle them, and sell them to investors on the world market. Back then, Fannie and Freddie refused to buy loans that failed to meet high credit standards. If, for example, a local bank buckled to ACORN pressure and agreed to offer poor or minority applicants a 5-percent down-payment rate, instead of the normal 10-20 percent, Fannie and Freddie would refuse to buy up those mortgages. That would leave all the risk of these shaky loans with the local bank. So again and again, local banks would tell ACORN that, because of standards imposed by Fannie and Freddie, they could lower their credit standards by only a little.
So the eighties taught ACORN that a high-pressure, Alinskyite outside strategy wouldn’t be enough. Their Washington lobbyists would have to bring inside pressure on the government to undercut credit standards at Fannie Mae and Freddie Mac. Only then would local banks consider making loans available to customers with bad credit histories, low wages, virtually nothing in the bank, and even bankruptcies on record.
Democrats and ACORN
As early as 1987, ACORN began pressuring Fannie and Freddie to review their standards, with modest results. By 1989, ACORN had lured Fannie Mae into the first of many “pilot projects” designed to help local banks lower credit standards. But it was all small potatoes until the serious pressure began in early 1991. At that point, Democratic Senator Allan Dixon convened a Senate subcommittee hearing at which an ACORN representative gave key testimony. It’s probably not a coincidence that Dixon, like Obama, was an Illinois Democrat, since Chicago has long been a stronghold of ACORN influence.
Dixon gave credibility to ACORN’s accusations of loan bias, although these claims of racism were disputed by Missouri Republican, Christopher Bond. ACORN’s spokesman strenuously complained that his organization’s efforts to relax local credit standards were being blocked by requirements set by the secondary market. Dixon responded by pressing Fannie and Freddie to do more to relax those standards — and by promising to introduce legislation that would ensure it. At this early stage, Fannie and Freddie walked a fine line between promising to do more, while protesting any wholesale reduction of credit requirements.
By July of 1991, ACORN’s legislative campaign began to bear fruit. As the Chicago Tribune put it, “Housing activists have been pushing hard to improve housing for the poor by extracting greater financial support from the country’s two highly profitable secondary mortgage-market companies. Thanks to the help of sympathetic lawmakers, it appeared...that they may succeed.” The Tribune went on to explain that House Democrat Henry Gonzales had announced that Fannie and Freddie had agreed to commit $3.5 billion to low-income housing in 1992 and 1993, in addition to a just-announced $10 billion “affordable housing loan program” by Fannie Mae. The article emphasizes ACORN pressure and notes that Fannie and Freddie had been fighting against the plan as recently as a week before agreement was reached. Fannie and Freddie gave in only to stave off even more restrictive legislation floated by congressional Democrats.
A mere month later, ACORN Housing Corporation president, George Butts made news by complaining to a House Banking subcommittee that ACORN’s efforts to pressure banks using CRA were still being hamstrung by Fannie and Freddie. Butts also demanded still more data on the race, gender, and income of loan applicants. Many news reports over the ensuing months point to ACORN as the key source of pressure on congress for a further reduction of credit standards at Fannie Mae and Freddie Mac. As a result of this pressure, ACORN was eventually permitted to redraft many of Fannie Mae and Freddie Mac’s loan guideline.
Clinton and ACORN
ACORN’s progress through 1992 depended on its Democratic allies. Whatever ACORN managed to squeeze out of the George H. W. Bush administration came under congressional pressure. With the advent of the Clinton administration, however, ACORN’s fortunes took a positive turn. Clinton Housing Secretary Henry Cisnersos pledged to meet monthly with ACORN representatives. For ACORN, those meetings bore fruit.
Another factor working in ACORN’s favor was that its increasing success with local banks turned those banks into allies in the battle with Fannie and Freddie. Precisely because ACORN’s local pressure tactics were working, banks themselves now wanted Fannie and Freddie to loosen their standards still further, so as to buy up still more of the high-risk loans they’d made at ACORN’s insistence. So by the 1993, a grand alliance of ACORN, national Democrats, and local bankers looking for someone to lessen the risks imposed on them by CRA and ACORN were uniting to pressure Fannie and Freddie to loosen credit standards still further.
At this point, both ACORN and the Clinton administration were working together to impose large numerical targets or “set asides” (really a sort of poor and minority loan quota system) on Fannie and Freddie. ACORN called for at least half of Fannie and Freddie loans to go to low-income customers. At first the Clinton administration offered a set-aside of 30 percent. But eventually ACORN got what it wanted. In early 1994, the Clinton administration floated plans for committing $1 trillion in loans to low- and moderate-income home-buyers, which would amount to about half of Fannie Mae’s business by the end of the decade. Wall Street Analysts attributed Fannie Mae’s willingness to go along with the change to the need to protect itself against still more severe “congressional attack.” News reports also highlighted praise for the change from ACORN’s head lobbyist, Deepak Bhargava.
This sweeping debasement of credit standards was touted by Fannie Mae’s chairman, chief executive officer, and now prominent Obama adviser James A. Johnson. This is also the period when Fannie Mae ramped up its pilot programs and local partnerships with ACORN, all of which became precedents and models for the pattern of risky subprime mortgages at the root of today’s crisis. During these years, Obama’s Chicago ACORN ally, Madeline Talbott, was at the forefront of participation in those pilot programs, and her activities were consistently supported by Obama through both foundation funding and personal leadership training for her top organizers.
Finally, in June of 1995, President Clinton, Vice President Gore, and Secretary Cisneros announced the administration’s comprehensive new strategy for raising home-ownership in America to an all-time high. Representatives from ACORN were guests of honor at the ceremony. In his remarks, Clinton emphasized that: “Out homeownership strategy will not cost the taxpayers one extra cent. It will not require legislation.” Clinton meant that informal partnerships between Fannie and Freddie and groups like ACORN would make mortgages available to customers “who have historically been excluded from homeownership.”
Disaster
In the end of course, Clinton’s plan cost taxpayers an almost unimaginable amount of money. And it was just around the time of his 1995 announcement that the Chicago papers started encouraging bad-credit customers with “dog-food” wages, little money in the bank, and even histories of bankruptcy to apply for home loans with the help of ACORN. At both the local and national levels, then, ACORN served as the critical catalyst, levering pressure created by the Community Reinvestment Act and pull with Democratic politicians to force Fannie Mae and Freddie Mac into a pattern of high-risk loans.
Up to now, conventional wisdom on the financial meltdown has relegated ACORN and the CRA to bit parts. The real problem, we’ve been told, lay with Fannie Mae and Freddie Mac. In fact, however, ACORN is at the base of the whole mess. ACORN used CRA and Democratic sympathizers to entangle Fannie and Freddie and the entire financial system in a disastrous disregard of the most basic financial standards. And Barack Obama cut his teeth as an organizer and politician backing up ACORN’s economic madness every step of the way.
— Stanley Kurtz is a senior fellow at the Ethics and Public Policy Institute.
Posted by: Van Castle | Oct 7, 2008 1:21:26 PM
Anyone watching the market reaction as Bernanke speaks? It's like a 4-year-old asking, "Are we there yet? Is it ZIRP yet?"
Did anyone do a count on how many times "Have we reached a bottom?" on CNBC today? Does anyone have a year-to-date count?
You got some spare absinthe, leftback?
Posted by: CNBC Sucks | Oct 7, 2008 1:23:26 PM
Jim wrote: Novice question, How do the CDO's get squared and cubed?
You apply the same process that turned pools of mortgages (or other debt instruments) into CDOs, to the CDOs themselves. Twice.
Thus, round 1 takes somewhat risky mortgages (or other debt) and produces some very safe AAA CDO securities, along with some risky CDO securities. Round 2 takes the risky CDO securities from round 1, and produces some very safe AAA CDO-squared securities, along with some risky CDO-squared securities. Round 3 takes the risky CDO-squared securities from round 2, and produces some very safe AAA CDO-cubed securities, along with some risky CDO-cubed securities.
I'm sure that if this innovative process were allowed to continue indefinitely, you would end up turning that original pile of dubious mortgages entirely into AAA securities, except for a vanishingly-small fraction. This is called financial innovation, and is a good thing.
Wisdom Seeker wrote: Notably missing are the regulatory authorities and the banks' auditors.
Don't forget the ratings agencies. Without their skill at looking at the slicing-and-dicing process and saying "yep, that makes sense," none of this would be possible.
Posted by: Ken | Oct 7, 2008 1:46:32 PM
Stanley Kurtz is a Republican stooge, sucking at the teat of wingnut welfare.
Note how there are no numbers in that article that relate to what actually happened in 2004-2006?
This is going to be yet another zombie wingnut myth that is going to persist and be impervious to facts.
Pitchforks may be the only cure.
Posted by: Whammer | Oct 7, 2008 1:55:05 PM
Hey Scott in Chicago:
I wondered how long it would take for the wingnuts to blame the poor for this mess. God forbid we blame the right.
Of course the rest of the story is that the default rate for that small group of people was below the national average and had absolutely nothing to do with the extreme leverage the "smart money" marked everything up with.
Oh no! Its the poor and those evil immigrants that are to blame.
Sorry Scott in Chicago, the bullshit isn't going to work this time. But nice try though.
Eric in Austin
Posted by: ericl | Oct 7, 2008 2:03:28 PM
