Friday, December 12, 2008

I Believe …

- Many powerful liberal politicians believed that everyone in America should own a home regardless of their means or morals. (Some now believe that they were wrong ... how quaint.)
- They coerced, with regulatory and oversight threats, banks and other institutions into offering such “sub-prime” mortgages.
- Banks and these other institutions discovered that they could package these mortgages (collateralized debt obligations -- CDOs) and sell them to, among others, Fannie Mae and Freddie Mac.
- Since the origination fees from this pass-through sub-prime mortgage process was very profitable to these banks and other institutions, they became willing co-conspirators.
- Because of the implicit government guarantees of these packaged mortgages, credit rating agencies placed unrealistic high ratings on them and on the institutions that held them.
- Fannie and Freddie were overly-populated with liberal ex-pols who were more than willing to participate in this fraud since their annual compensation was based on the volume of said transactions. The growth in the portfolios of sub-prime mortgage packages at Freddie and Fannie was exponential.
- All efforts to monitor and/or regulate this sub-prime process at Fannie and Freddie were squelched by accusations of racism from liberals in Congress
- At the start, the ease with which these sub-prime mortgages were off-loaded caused banks and others (such as Countrywide) to drop any semblance of checking the credit-worthiness of their mortgage borrowers. The writing of mortgages without suitable documentation became rife. Home-buyers couldn’t believe their luck and many went hog wild.
- The volume of these sub-prime mortgages grew to such an extent that many remained at their originators because, for no other reason, the origination fees were so profitable.
- Concurrent with this, because of accounting frauds at Enron and others, accounting rules were changed by the SEC to force companies to “mark to market” all balance sheet assets
- Also concurrent with this, a financial instrument appeared called a Credit Default Swap (CDS) which allowed institutions to insure most any financial asset against credit default
- Banks and other institutions sold CDS’s to protect themselves against losses that would occur if the collateralized mortgages on their books went into default. But they went much further; they (including many insurance companies and foreign institutions) bought and sold CDS’s far beyond the face value of the underlying assets (as much as ten times their value). CDS’s became, effectively, a gigantic, unregulated casino.
- When sub-prime mortgages began to default in droves, asset packages including these mortgages became difficult to value (or mark to market). Many of these asset packages (even though producing a steady, albeit somewhat reduced, income flow) were forced to be drastically devalued on balance sheets.
- Because of the sheer size of the CDS market ($60 trillion?) and its lack of regulation, many of the insurance policies on these defaulting sub-prime mortgage packages could not be honored which put the buyers and sellers of these CDS’s in great financial jeopardy (eg. AIG). This then began the world-wide freezing up of capital markets.
- Because of the capital-ratio requirements at banks, many of such institutions were forced to raise more capital in a capital market that was rapidly freezing up. It was then either insolvency or a government bailout.
- Enter Henry Paulson and the U.S. taxpayer.

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