Reply #21: Investors aren't the biggest problem [View All]

[Idealism]

The government and the Fed is. Heres cause and effect:

-Greenspan lowered interest rates to 45-year lows (1%) after 9/11 and kept them there for a year to spur lending in the face of recession.
-Lower prices for lending made it profitable for banks and bank affiliates to loan money, even to risky borrowers, because the overal default rate is still highly positive
-Bush promoted universal ownership by telling the fed to keep rates low, supply couldn't meet the demand: home prices skyrocketed to unrealistic values. This led to overproduction in new home construction
-Allowances by banks were made that should not have been in some lending, cases being: lack of income verification, allowing you to buy a home with no downpayment (HELOC as principal- taking a 2nd mortgage out on a house essentially before you have a 1st), utter lack of regulation and oversight from the banking sector.
-50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations.
-There was a shift in loan to value from 80% to 120%, partially due to home values soaring, another part because banks saw profits rise and wanted more of that gravy train.
-Several laws passed over the past decade stripped the banking industry of guidelines for instruments and allowed the creation of sophisticated vehicles that many did not understand well (ex. collateralized debt obligation, collateralized mortgage obligations, credit default swaps)
-These became quickly abused, as you had banks underwritting high risk mortgages because they wouldn't have to hold to debt on their balance sheets. Thanks to securitization they can ship off their bad loans to another entity, then purchase 'insurance' on that bond (CDS') so that if they failed the company who wrote them incurred no penalties.
-Moody's, S&Ps and Fitch keep rating this junk paper as AAA grade, the highest, even though it was obvious these were the high-risk, low-income borrowers. Federal regulators neglected their oversight on rating agencies
-You had entire companies (Countywide, AmeriQuest) pushing ARM's and no-interest mortgages as ways of pushing the envelope. Anything with a pulse could get a home loan.
-When the ARMs' rates got adjusted, many couldn't afford the payments and defaulted, house goes into foreclosure and the CMO bond that holds hundreds of mortgages turned 'bad'...one bad apple ruins the barrel.
-These obligations dropped in value because no one knew how much they were worth, bankrupting Fannie and Freddie literally overnight.
-These toxic mortgages almost took down Citigroup yesterday; the system was as close to meltdown as it could've been.


This was more from a housing standpoint because its failure has infected the global markets, but also leveraging was a problem aswell. Some companies, like Goldman Sachs, were leveraged 33:1 and should never have been allowed to get to that point. Again, regulators failures, but that also falls on the CEOs. A huge problem is CEO compensation being directly linked to stock values. Executives manipulate short-term stock value growth to boost their own net worth before they can cash out, but this usually errodes long-term solvency, which is why we are seeing so many institutions fail or almost fail.