Washington Post: Boom, Bust & Aftermath Part II

Monday, June 16, 2008 | 08:30 AM



Part II of the WaPo Real Estate & Credit series we mentioned yesterday is out today. A few excerpts after the jump will give you a flavor of the article.


The Bubble
Zachary A. Goldfarb and Alec Klein
Washington Post,  Monday, June 16, 2008; Page A01   html


"The housing boom had powered the U.S. economy for five years. Now, in early 2006, signs of weakness within the subprime industry were harder to ignore. People with less-than-stellar credit who had bought homes with adjustable-rate mortgages saw sharp spikes in their monthly payments as their low initial teaser rates expired. As a result, more lost their homes; data showed that 70 percent more people faced foreclosure in 2005 than the year before. Housing developers who had raced to build with subprime borrowers in mind now had fewer takers, leaving tens of thousands of homes unsold."


"As his team analyzed the individual loan files, Zimmer said he was struck by evidence of fraud, such as doctored bank statements. "Fraudulent loans were a big part of the subprime mess," he said. Mortgage brokers forged borrowers' signatures and pumped up their income, he said. People seeking to buy and sell a home for a quick profit lied that they were going to live in the home -- qualifying for a lower interest rate. But People's Choice calculated that it would have been too complicated and expensive to go after fraud, Zimmer said."

The Fed:

"Bernanke and others at the Fed still did not see how severely the troubles would cascade through the economy. The chairman did warn Congress of "significant financial losses" in the subprime industry, saying there were "implications of this for financial markets." He was right. Within days, Countrywide Financial, the nation's largest mortgage lender, announced that its profit had fallen by a third as more homeowners defaulted. The Bear Stearns hedge funds that had invested heavily in the subprime market went under. The largest bank in France, BNP Paribas, suspended three funds that held mortgage-backed securities."

Financial Institutions:

"Then the credit raters -- Moody's, Standard & Poor's and Fitch, which over time had become high priestesses of the global capital markets -- astonished investors by abruptly downgrading many subprime-backed securities that they had previously blessed. The rating companies, which assign letter grades to all kinds of debt issued by companies, municipalities and countries, came under criticism from investors who questioned whether they had issued rosy assessments because they had been paid by the banks whose securities they rated. The credit raters responded that they have procedures in place to prevent conflicts of interest.

Banks and investors also questioned whether there were hidden weaknesses in the broader market for mortgage-backed securities and other complex investments, such as collateralized debt obligations, or CDOs, which combined various kinds of debt.

As a result, banks, anticipating their own losses, began to hoard cash and refused to lend. The fallout: A major part of the machinery of U.S. capitalism -- the $28 trillion credit market that ensures big companies can pay their employees and buy equipment by taking out loans -- nearly shut down. In August, the credit crunch sent the stock market into its most volatile period since the Enron days."

Monday, June 16, 2008 | 08:30 AM | Permalink | Comments (8) | TrackBack (0)
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Just think. In a couple of years, the Washington Post or another fine publication will provide an analysis of the oil bubble and the ignorance and denial about it at the peak. The only unknown at this time is potential wreckage to investors. High, low, or none? To consumers, it is massive. How much involves crooks and how much is due to incompetent regulation of the markets, or lack of regulation to be more precise?

I'm still asking, can anyone explain why oil is apparently in a supply shortage while products made from oil are not? If someone claims they are, then please identify the allocation issues. Unrefined oil is completely useless. Or is this type of analysis complicated enough to make the average person fade out because it contradicts what everybody already knows?

Posted by: cinefoz | Jun 16, 2008 9:13:06 AM

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