Subprime Mortgages: America's Latest Boom and Bust

Thursday, May 08, 2008 | 07:00 PM


Last year, Edward Gramlich published an economic takedown of the mortgage industry, titled Subprime Mortgages: America's Latest Boom and Bust.

Be sure to note the rooflines on the book cover -- they are not so subtle arrows, referencing the "boom and bust" of the book's subtitle. 

In addition to his substantial knowledge of subprime and predatory lending, Gramlich was the sort of academic who was able to see through much of the nonsense within the lending industry.

That Greenspan ignored his warnings of predatory lending and the coming subprime mess says as much about Easy Al's tenure as FOMC chair as it does about Gramlich 's prescience.

The NYT recently noted: "For more than a decade, even before he was named a governor of the Federal Reserve Board in 1997, Mr. Gramlich was warning of dangers in the housing market, a stance that has made him a sought-after expert in the current crisis.

As chairman of the Neighborhood Reinvestment Corporation, he urged legislators to better protect consumers against predatory lenders, and toughen regulation of mortgage lenders and banks. Nonetheless, his efforts met resistance within the Fed and on Capitol Hill, and even he admits he could have pushed earlier for reform."


Last year, despite his advancing illness,  Gramlich spoke at length about potential solutions during a televised panel sponsored by the Urban Institute, where he was a senior fellow.

You can listen to his lecture here.



Fed Governor Edward M. Gramlich
Patricia Sullivan
Washington Post, September 6, 2007; Page B07

Being Right Is Bittersweet for a Critic of Lenders
NYT, August 18, 2007

Thursday, May 08, 2008 | 07:00 PM | Permalink | Comments (14) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Poole: Save Fannie/Freddie, Then Dismantle Them from The Big Picture
Its actually kind of ironic: Two Fed Governors warn Federal Reserve Chief Alan Greenspan about major problems -- and are promptly ignored by the maestro. Ed Gramlich on subprime and predatory lending, and Bill Poole on Fannie and Freddie. In the Sunday... [Read More]

Tracked on Jul 27, 2008 10:03:25 AM


(Surprise, surprise, suprise: Look who is in the top ten. Hint #7,9, and 10)


Who Has More Level 3 Assets Than Capital?
Bennet Sedacca May 07, 2008 4:48 pm

New accounting rules allow for trading assets to be divided into three levels. Level One assets are the most liquid assets and therefore the easiest to price. They make up less than a quarter of most firms' assets.

Level Two assets make up the majority of firms' assets but rely heavily on the firms' assumptions about things such as interest rates because they are far less liquid than Level One assets; according to regulatory filings by the five largest U.S. brokers and largest money center banks, there are more than $4 trillion in Level Two assets on their balance sheets.

Finally, Level Three assets are the least liquid of the firms' trading assets and therefore are valued using what are called "unobservable inputs."

Level Three assets include real estate, mortgage-backed securities, private equity investments and possibly even "undertakings of great advantage, but nobody to know what they are" (cf. South Sea Bubble).

The three magic words that make an asset a Level 3 asset are "no observable inputs." What this means is that not only are they hard to price, but nearly impossible to sell.

Recently there's been such deterioration in all types of mortgages that more and more assets are finding their way into this category. Also, this is the first time insurance companies have made the list. I think the list will continue to grow.

Ten companies now have more Level 3 assets than capital. In order they are (as a % of total shareholder equity:

1) Bear Stearns (BSC): 313.97%
2) Morgan Stanley (MS): 234.88%
3) Merrill Lynch (MER): 225.4%
4) Goldman Sachs (GS): 191.56%
5) Lehman (LEH): 171.18%
6) Fannie Mae (FNM): 161.48%
7) Northwest Air (NWA): 142.02%
8) Citigroup (C): 125.06%
9) Prudential (PRU): 119.36%
10) Hartford (HIG): 108.52%

So now we have insurance companies joining the party. Yes, the contagion is spreading and no, it's not over.

Not even close.

C just had to pay 8.5% for $2 billion in preferreds. One of these days, there will be no takers.

Cue the theme song......

Posted by: spcwby | May 8, 2008 8:54:27 PM

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