Collapse of 2008

The recent Fannie & Freddie discusion which tries to apportion blame for the mortgage meltdown lays the blame on the government and F & F itself. Yes, they both deserve part of the blame -- the government for it's lax regulation and hands off policy (see Greenspan's statements on self regulation), and F & F for trying to compete by lowering it's standards. What I find missing from today's discussion is the role of Wall Street money (the elephant in the room) in fueling the housing bubble. This made me search out my notes from 2008. Here's what I wrote at that time. (Please note it's not sourced as I was writing for myself, in my own shorthand, pre blog. BF emphasis was done today)


<<<<  In 2001 economy was already in recession after the collapse of the dot com boom. After 9/11/01 Greenspan feared collapse and started lowering interest rates. Mortgage rates declined, housing boom started.

As housing prices increased, affordability decreased. “Creative financing” was needed. The “opportunity” came with accounting scandals in Fannie & Freddie.  F & F traditionally bought mortgages from mortgage originators (usually banks). They then packaged the mortgages & sold them as Mortgage Backed Securities - MBS, primarily to pension funds & institutions, who only bought investment grade securities (AAA to BBB). F & F were dominant in the market so they dictated terms and those terms were very strict. A documented mortgage could take up to 90 days. Wall Street had always salivated over this business and for years had been pressuring Congress to do away with F & F.

After the scandal, F & F lost market dominance, so mortgage originators needed another source of cash. That is what Wall Street was waiting for. In 2001 & 2002 Wall Street was awash with cash from petro dollars and emerging economies. It poured the money into mortgages. Unlike F & F it did not care about standards, as it immediately packaged them into Collateral Debt Obligations - CDOs, and sold them all over the world collecting huge fees. With home prices rising & affordability declining a solution was found via Orange County and creative financing – no doc loans. (Countywide)  Wall Street was able to do this with the collusion of credit rating agencies & the financial engineering of CDOs.

CDOs were engineered by several geeks at Bear Stearns. (Basically, another level of derivative of MBS)  MBS are sliced and repackaged into a new product – CDO, which holds slices of numerous MBS. (Greenspan admitted he’d read several prospectuses of CDOs and could not understand them). CDOs were created not only with mortgages but with corporate & municipal bonds. (Staples Center, Films, etc)  Anything that could show a future income stream could potentially be securitized, sold, and fees collected. Rating agencies (only 3) were paid by the banks that issued the securities. If a bank did not like the rating they could always go to another agency. So, the agencies were incentivized to provide the highest rating possible. Their formulas assumed house prices would rise 6% - 8% per year forever. After all, there had not been a single down year in house prices since the Great Depression. Additionally they designed mathematical models, which gave a AAA rating to CDOs that contained 80% AAA and 20% junk.

In 2004 Bush made his push for the ownership society and Greenspan responded – in a speech he encouraged the mortgage industry to devise “product alternatives” to increase home ownership. The result – negative amortization loans.

At this time F & F reentered the market and started doing sub-prime loans. Prior to 2004 loan volume had been running at 50 billion/year. After 2004 it was 300 billion per year. By 2005 sub-prime made up 20% of the mortgage market.

The SEC never even questioned the banks about these structured products. They believed the banks would regulate themselves. The mortgage origination business was totally unregulated and the finance companies got their AAA rating from the agencies and Wall Street sold the products all over the world.

By the first quarter of 2006 mortgage delinquencies started rising and Wall Street cut off credit to the mortgage originators.  With no new mortgages, and no new buyers, housing prices started declining. This killed the refi market and adjustable rate buyers could not refi when the teaser rate ended nor could they sell in a declining real estate market. Investors around the world realized AAA was junk and credit stopped.

This describes what came to be called the “shadow” banking system. At one time, traditional banks wrote mortgages and kept them on their books. This system was regulated. The shadow system is totally unregulated because banks don’t issue mortgages they only buy them, package them as CDOs and sell them. And CDOs and “originators” are unregulated.

And then there are SWAPs -  insurance on CDOs, another level of derivative. Again unregulated. The shadow banking system is huge and it is part of the traditional banks. There is no end in sight if they securitize every income stream they can identify.  >>>>

Finance Capital, rightly, is in search of the a return and will always flow towards the highest return. But, given todays wealth concentration and the structure of the markets, (exponentially increasing derivatives products) a limited number of individuals, commanding huge sums can sway markets. (hedge funds)  Thus we get bubbles and crashes, with greater and greater frequency. (emerging markets, dot com, oil spikes and then crashes - 1987, 1998, 2000, 2008) 

Neoclassical Free Market ideology set the table for the mortgage debacle -- repeal of Glass-Steagall, the constant drone of anti-regulation rhetoric, regulatory and government capture, and finally Chairman Greenspan declaring that the financial industry was capable of self-regulating. In 2001 Wall Street needed a new "investable" market for it's billions. It saw the opportunity and supplied mortgage originators with cash in return for mortgages. Financial engineering created products based on those mortgages to be sold and traded. Wall Street profited by collecting fees and by trading those products, at times even taking positions counter to the product they were pushing to their customers. The profits rolled in. It was so profitable that Wall Street firms (Bear Sterns, Morgan Stanley, Goldman Sacks and major banks)  kept pushing out the money and demanding more product for its  financial packaging industry.

And that is the way the game was played until the music stopped in 2008. 

The Street

I wrote this poem/song lyrics in September 2009, eight years after the attacks of 9-11. The Crisis of Finance Capital was still in the headlines. Stock Markets had started to crash in October 2008, with no bottom in sight. Credit and commerce froze, although war funding continued, unaffected.  The government & the Federal Reserve responded with TARP, interest rates near zero, and various guarantee programs available only to the big financial institutions.  The S&P 500 index hit bottom in March 2009. Money continues to flood Wall Street while no effective programs reach the devastation in the rest of the country.


On nine-eleven Wall Street fell

People burned, people jumped

Bodies rained -- on the Street

Men and women went to War

Support our Troops

Free Markets cannot die they said

Traders traded, brokers brokered

Finance Capital revived, Shadow Bankers thrived

CDOs SIVs ABSs flowed throughout the globe

Bonuses rained -- on the Street

Men and women fight in War

Support our Troops

Overleveraged credit froze

Global gears seized up

The lubricant of money flowed no more

Brother -- lend me a dime

Uncle Sam -- lend me a billion

Men and women fight in War

Support our Troops

The death of Finance we must forestall

Not the time for strings or regulations

Taxpayer funds flood the Street

The gears unlock, credit flows, and yes, of course

Bonuses rain again -- on the Street

Brother lend me a dime

I paid my taxes, my mortgage I cannot pay

Men and women die in War

Support our Troops

Support the Street

Violent Eviction of OWS NY 11/15/11

Below is an eyewitness report of what happened in Liberty Square (Zuccotti Park) last night, excepted from http://truth-out.org

 <<<< Last night, I watched lower Manhattan turn into a militarized lockdown. The park known as Liberty Square was apparently cleared by force, though I arrived 20 minutes after the police barricades encircled a two-block radius, kicked out all media and prevented all foot traffic on public sidewalks surrounding the park.


This was expected. The emergency text message went out at 1:00 AM and read, "URGENT: Hundreds of police mobilizing around Zuccotti. Eviction in progress!" prompting a mass mobilization of people like me, part-time protesters who signed up to converge on the park for the looming police raid on the physical heart of the Occupy movement.


The police were prepared for this flood of bodies. Many subway stops were shut down, as was the Brooklyn Bridge. My go bag had been packed for weeks, waiting for just this moment. I laced up my boots, and spent an agonizing 20 minutes on the subway from Brooklyn.


Upon arrival in lower Manhattan, I struggled for about two hours to get to a position where I could see into the park, to no avail. From a block away, I saw massive piles of what used to be supplies dumped into waiting trucks. People's major concerns were two-fold: first, the health and safety of the occupiers locked in the camp; and second, the 5,000 books of the Occupy Wall Street library. What a picture it would be (maybe it exists) of police in riot gear gathering boxes of donated books and loading them into garbage trucks. A perfect metaphor for what appears to be the intention of last night's raid: destroying the body of knowledge that had been collected by a movement just two months old, which was built by collective effort, literally from the ground up.>>>>

Me again -- The occupiers had created a microcosm of a civilized democratic society in the park w/ everyone having a voice in the general assemblies. They had a library of over 5,000 books, a communal kitchen, medical center, legal aid center, & various committees like security details, cleanup etc. In the past few days the NY police policy has been to encourage drunks & street people (many of who have psychological problems) to go down to Z park. This created problems which the internal OWS security had difficulty handling & provided one of the excuses used to eliminate & "sterilize" the park.  Democracy Now was the only news organization on site recording the eviction -- see their video report.

It was heartbreaking for me to see the structures and especially the 5,000 book library bulldozed and loaded onto dump trucks. The mayor of Oakland admitted that these actions were coordinated with 16 other cities across the US, where police destroyed the OWS locations and arrested numerous protestors.

How terrified the 1% must be to use such force against peaceful protests guaranteed by the first amendment. Was Homeland Security involved in these actions? This of course was the least effective tactic the 1% could have used to achieve their goal of shutting down the OWS movement. In their violence they  achieved the opposite -- this will increase the movement's momentum.

The lives of the 99% will not improve with current policies so the OWS message will increasingly become more relevant to more & more people.

Bank of America Losses Socialized Again?

On September 21, 2011, Moody's dropped Bank of America’s long-term senior debt two notches to Baa1, placing it three notches above junk status.

The NY Post reported that BAC shifted trillions of dollars of derivatives into their FDIC insured unit. The SF Business Times reports the amount transferred was $55 trillion of risky derivatives. They call this move by BAC unsurprising, since ratings downgrades often trigger calls for more collateral from derivatives holders who want to ensure their counterparties are good for the money if they have to pay up.

The important point here is that the collateral BAC is putting up to back those derivatives is FDIC insured deposits, which again puts taxpayers on the hook. The Post reports that "the derivatives transfer has irked officials at the FDIC". Supposedly the FDIC is reviewing the transfer. If the decision is to let the transfer stand then taxpayers may have to cover the losses incurred by insured depositors (now the collateral) when the derivatives tank. If the decision is reversed in taxpayer favor (I don't hold my breath for that) Bank of America and/or the derivatives counterparties are at risk for huge losses.

Some additional perspective - Bank of America acquired Countrywide in July 2008 and Merrill Lynch in September 2008. BAC now has Countrywide's failing subprime mortgages on its books. With Merrill it acquired trillions of dollars of derivatives.

And to give all this some context here are some astounding figures:

$ 75 Trillion     BAC derivatives
$ 63    "            Global GDP
$ 14.5  "          US GDP
$ 16.2   "         EU GDP
$  5.9    "         China GDP

Source ICC/IMF via Capital Account at RT.com

Is it Greed or is it The System?

In an article in The Guardian, Slavoj Žižek states: "The problem is not corruption or greed, the problem is the system that pushes you to be corrupt."

Žižek is absolutely correct. The OWS calls for ending greed & corruption are off the mark. It's the system (the current form of capitalism) that sets up the environment for greed & corruption to flourish. Actually the system demands it as the rate of profit falls. The globalization of the labor market has produced a downward spiral in wages and the financialization of the US economy - money making money, in other words - speculation: CDOs, ABSs, SWAPS, astronomical leverage and so on.  This is the formula for financial crises, each more drastic than the prior one. Is the disintegration of the Eurozone our next crisis?