The Perfect Storm

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From Deal Journal … one of the simplest yet clear explanations of what’s going on. (I added links to assist with definitions):

It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.
Those loans were packaged into CDOs rated AAA, which led the
investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.
When they started defaulting, out of bad luck or bad judgment, we implemented fair value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial banking and investment-banking system.
In the face of those losses…you needed to raise new equity which came from sovereign-wealth funds in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system….It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. We had a series of bankruptcies, whether Bear Stearns or Lehman, or forced sales like Merrill. Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.
So that’s the story of how we got there.


Seems clear to me … socialism married to capitalism … with the normal dose of human greed on the part of all concerned, from those too poor to make their payments yet making promises they couldn’t keep, to social engineers like Clinton, Bush, and Congress, who would boast that “never before have so many Americans owned a home,” to Wall Street and international firms who lent money like drunks fresh from a lottery win. In the end, there is a lot to be said for Canada’s stodgy banking system and restrictive lending practices … too bad though that so much of this spills over the border.
For lots of op-ed … click.
crossposted @ Cjunk
Update: Coulter dishes it out … something about minorities?

40 Replies to “The Perfect Storm”

  1. Cjunk:
    Do not get too cheery about our system. If we had an identifiable race problem that saw the majority party politically interested in currying the favour of the racial group that feels wronged we would probably be in a similar or worse mess.

  2. I have to agree – government agencies set up for the purpose of putting a large slice of the population into debt beyond their means is a recipe for disaster.

  3. please let us remain focussed on the res diaboli which precipitated this ‘accounting’ disaster…..that evil thing being airy fairy dreamy impractical expectations about our fellow man….all the following rather awkward difficulties stem from this fundamentally socialist irrational belief in man’s(read debtor’s)noble nature…..
    add opportunism of both the political and banking stripe and what do you eventually have ?
    …..the beating of a trillion wings coming home to roost.

  4. Derivatives, CDOs, swaps, junk bonds, leveraging – same sh**, different pile. Like trying to make something out of nothing. Camouflage. Pig in a poke. Bill of goods.
    But wouldn’t it be ironic if the American taxpayer made a killing out of a bailout plan !!
    Just like Warren Buffet will.
    The losers ? The very ones Bill Clinton and Janet Reno we’re trying to help.
    [In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson’s Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs.
    But these are small-time deals. My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion — yes, with a “t” — for the United States Treasury.] Wall Street Journal

  7. [Within hours of revealing his dramatic, confidence-boosting investment in Goldman Sachs yesterday, Warren Buffett had made a $783 million (£424 million) notional profit.
    The Wall Street investment bank astounded its rivals by raising $10 billion in fresh capital — $5 billion from Berkshire Hathaway, Mr Buffett’s main listed company, and $5 billion through a public share offering. Shares in Goldman rose 6 per cent to $133.00, giving Berkshire an instant theoretical profit on a side deal, under which it has warrants to buy up to $5 billion of new Goldman shares at $115 a share at any time in the next five years.
    Analysts said that the decision by Mr Buffett, widely regarded as one of the world’s most astute long-term investors, to take the plunge in financial stocks — having passed on previous capital-raisings by banks — might come to be seen as the turning point in the financial crisis.] TimesOnLine

  8. I’ll quibble…
    Instead of socialism married to capitalism, I’d call it social engineering married to capitalism.
    I agree with Ron that the ones who will be most hurt by this will be the little guys… who thought they could ride the bandwagon, but couldn’t really afford the fare.
    Just my $.02
    DaveK

  9. A trillion here, a trillion there and the next thing you know you are talking about real economic (and social) collapse.
    This the parent spoiling the child on a grand scale. It’s is what is wrong with Canada’s judge and lawyer system. It is what is wrong with our welfare system, it is what is wrong with our health care system.
    If no one ever has to pay for the mistakes, you will get a lot more of them.
    We all know that the Baby Boomer generation never grew up. They are running everything now. The US and Canada are nations of children governing children. Children are irresponsible and nothing is ever their fault. That is we are all f**ked in the long term. Even Obama can’t save America from itself.
    I do believe Harper will do better in Canada though.

  10. my suitability for a mortgage consists in that i have “a good jump shot and a missing child named Caylee”….
    gotta love the woman…

  11. Derivatives, CDOs, swaps, junk bonds, leveraging – same sh**, different pile. . .
    Posted by: ron in kelowna at September 25, 2008 11:44 AM
    ——————————-
    Speaking of derivatives and Canada, I believe that’s what did in Confederation Life back in the early 90’s, although it was the other life insurers who covered policyholder losses.

  12. so the problem in the USA is real estate is in trouble.
    Our Euro brothers have it waorse.
    “Ireland has become the first country in the eurozone to slide into recession as the torrid housing boom of recent years turns into a deep slump.
    The economy shrank by 0.5pc in second quarter following a 0.3pc contraction in the first quarter, according to the statistics office, marking an emphatic end to the stellar years of the Celtic Tiger.
    A long list of eurozone states are expected to follow in short order as the oil shock, surging credit costs, and the global downturn all combine to choke growth across the region. Denmark is already in recession, but is not a member of European Monetary Union (EMU).
    “Italy will definitely be next, and probably Germany,” said Julian Callow, Europe economist at Barclays Capital.
    “Ireland is suffering from a massive reliance on real estate. Construction was 21pc of GDP at the peak last year, which is even worse than Spain (18pc) and far worse than America (11pc) at the height of the bubble,” he said.”
    http://tinyurl.com/5yw5hd

  13. A very similar situation to that of the UK where the socialist Prime Minister boasted (until recently) of an end to boom and bust. The clowns also removed house price inflation from the retail price index. This allowed the banks interest rate to remain artificially low. Which encouraged a generation of half wits to re-mortgage so they could enjoy holidays in the sun and a new car. Now we are all paying for their stupidity.

  14. “there is a lot to be said for Canada’s stodgy banking system and restrictive lending practices ”
    Indeed! Doubtless a remnant from our Scot’s heritage in the banking industry. 😉
    The US crisis is a good example of the folly of growth-driven economies and currency speculating. To keep over expanded currency systems valuated you have to show it creates growth…so when there is no growth due to the middle class shrinking and falling into a non consumptive have not class due to out sourcing their jobs off shore, you have to keep them buying stuff…even if it’s with high risk credit and stuff they can’t afford…growth is everything, it supports the dollar, the means is inconsequetial….until the credit system collapses.

  15. I really doubt that the U.S. Treasury will make money on this bailout. If the “analysis” some commentators have mentioned is so sound, then why aren’t private investors jumping at the opportunity to bail out these same firms?
    From what I’ve heard about Paulson’s proposals, there seems to be a real dearth of analysis.
    All Paulson has done is hand the bond trading community a golden opportunity to turn his social engineering into a shambles.
    Paulson reminds me of Herbert Hoover.

  16. Redux got it right but forgot to mention that the rightoids had 8 years to recognize this problem was coming but chose to wash each others smelly feet rather than actually do something productive.

  17. Dennis …. the little investors are by and large doing this through their funds.
    Independent small investors are doing it a few shares at a time.
    Those that are not are probably in the category of perpetual victim and should most likely not be making their own investment decisions…

  20. I agree with DaveK,
    “Instead of socialism married to capitalism, I’d call it social engineering married to capitalism.”
    That came to mind when I read Anne Coulter’s article.
    We have to keep in mind thought even if this “crisis” is being compared to the ’29 crash, a lot of money was made by those who had the means to capitalize on the fallen stock prices.
    Sometimes I wonder if the best thing to do, is to put money in the coffee can buried in the backyard. (If you do, Rev Can can’t trace it).

  23. Lib Ron, President Bush warned this would happen a few years ago and the Dems in Congress and the Senate laughed at him. Now they are pointing fingers at everyone but themselves. I could point to times during every administration since Carter that the buck was passed and things were painted rosy for political ideals so don’t give me that 8 years to do it BS.

  25. Tex:
    Once the FBI finishes their investigation, the true culprits will be found.
    Obama is the No. 3 recipient of Fannie Mae’s political generosity. I assume that includes employees.
    No. 1 on the list? The Clintons.
    Surprise, surprise.

  26. Coulter reminds me of a larger breasted Paris Hilton…all packaging but no substance!
    Liberal Ron, perhaps you need to take a closer look at Coulter again. You’ve made one of the stupidest gaffes so far on this board. Coulter has a law degree, best selling books, and no boobs. Your comparison, Paris Hilton, has what, big silicon boobies and an IQ of six guinea pig power?
    Try harder, Ron. I know you meant to be clever, but, that was pure stupid which forces me to shave a few inches off of your, hum, brain maybe?

  27. just read the following written in The New York Times ( of all places! )
    on September 30, 1999
    … … … … … …
    Fannie Mae Eases Credit To Aid Mortgage Lending
    By STEVEN A. HOLMES
    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
    In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.
    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.
    … … … … … …
    Keep in mind this was written in 1999 – before Bush was in power – and in the New York Times.
    Ain’t it something that some knew this Clinton/Democrat move was an accident waiting to happen…
    and ain’t it something that today the “colluding” main stream media is helping the Democrats use this to bash Bush/ Republicans when they know it is a Democrat mess that Bush/ Republicans actually tried to prevent over the years?

  28. Cue the screams of “Crazy Ann Coulter” — but she’s right about this.
    Read the last couple of editorials at the Not Insane/Fringe/or RightWing Newspaper, “Investors Business Daily.”
    They explain that banks have recently been obliged to grant mortgages on racial grounds, as a kind of affirmative action.
    (Historically, blacks have been more likely to default on loans, leading to a vicious cycle of mistrust, resentment and discrimination.)
    Alas, the well intended legislation meant to fix this in the 1970s led to wear we are today.
    ibdeditorials.com/IBDArticles.aspx?id=307149667289804
    ibdeditorials.com/IBDArticles.aspx?id=307061229501695
    And of course, Steve Sailer was onto this all year, but nobody listened to him, since he’s a ‘crazy fringe right wing racist’ and all…
    Thank God they don’t have Section 13 and HRCs in the States; certainly all this writing, from Coulter to IBD, qualifies as “racist”, no?

  30. Ooops! you forgot to mention the important fact that banks started lending money to lower-income people because that would give them another investment product to sell to greedy middle-income investors.

  32. Yet another financial genius (deBeauxOs) who cannot distinguish between commercial banks and investments banks surfaces.
    It’s just the big, bad bankers.
    No mention of Clinton and his famous decree that it’s racist to ask certain loan applicants how much money they make.
    Friend of USA, I agree with you.
    It was Washington who created this mess and boasted about the highest percentage of home ownership in the history of the USA.
    If I were a US taxpayer, I would be totally peed off at Washington right now and punish any candidate who believes in the phrase: ‘I’m from the government and I’m here to help you.’

  33. set you free,
    Thanks for agreeing but it is not really Washington as much as Democrats who created the mess.
    I have collected articles from various sources that explain how this began with the Clinton administration.
    I actually have a 53 pages document with such articles. ( yes I know 53 pages sounds a bit obsessive but I like collecting evidence that exposes the left )
    I even have one in which Clinton himself blames the Democrats and says the Republicans tried many times to prevent this accident waiting to happen.
    I’m not saying there were not a few Republicans involved here and there but this is not a Washington mess as much as a Democrat mess.
    Democrats have opposed every effort from Republicans since 2001.
    In 2008 alone Republicans tried 17 times to bring some reform to this.
    I even have one article from 1999 – before Bush was in power – written in the New York Times ( of all places ! ) which says the Democrats are possibly creating a very dangerous situation that could eventually explode in their face.
    It is prety much impossible to deny it now, this was a Democrat created mess.
    Yes of course not one main stream media source will ever mention this, but those are the facts, it is an almost 100% Democrat created mess.
    Even Bill Clinton said it on ABC.
    I could provide links or excerpts if anyone is interested. ( probably not this evening as it is about 10 pm here in Montreal and with my health problems it is almost bed time for me… )

  34. Penny,
    Don’t you use the Internet? Paris Hilton’s set are 1) pretty small, and 2) real.
    And Ann Coulter is hilarious, but she’s about as credible as Jon Stewart or Stephen Colbert. Fun to listen to, not serious enough to pay attention to.
    FWIW, I agree with Ron about this; Ms. Coulter appears to be better endowed (physically) than Ms. Hilton. And, let’s not let law degrees get in the way – Barack Obama has a law degree from a better school than Ms. Coulter, and there aren’t many people here who think he’s all that smart.

  35. To Liberal Ron and Kevin B:
    Ann Coulter is a salve. She draws out the toxic left for all to see (and judge) whilst discarding the pusillanimous kabuki theater the left loves to hide behind. Match wits with her and you better be equipped with considerably more than limp slogans shielded by campus consensus. Pie posturing doesn’t cut it in the real world.

  36. Friend of USA:
    I’d be interested in that list.
    Wondering if we can start sending that list out to all the major news networks.

  39. Barack Obama has a law degree from a better school than Ms. Coulter
    Yeah. So what. In your snobbish naivete that really means something to you?
    If you want to use college ratings as a criteria for intelligence how about sharing your alma mater with us. Then we can use your rating system to determine if you are worthy of ignoring or not. Duh.

  40. Well, that dickhead Lance is censoring/blocking my posts again, so I doubt this will get through – and Kate, if he keeps doing it, I’m going to leave forever, your choice.
    Penny, you missed my friggin’ point by a mile. First off, your comment that Paris Hilton has “big silicon boobies” is just plain wrong. She has small real ones. Not that that’s important in any way, just you’re completely wrong.
    Second, my comment about law degrees was in response to YOUR comment:
    “Coulter has a law degree, best selling books, and no boobs.” Yes, she has a law degree; good for her. So does Obama. And just as I’ve castigated people here and elsewhere who’ve called GWB “stupid” even though he has an undergrad degree from Yale and MBA from Harvard (like they give those away like jellybeans..), I’ll castigate those who say “law degree, best selling books” as if that’s proof that the person should be listened to. Stephen Colbert has four Emmys, three Peabodys, and a best seller, a resume that equals Coulter’s (and he gets better ratings). Does that mean I believe anything Colbert says? No, he’s a sideshow, just like Coulter is. As I’ve said, she’s funny as hell, but if you take her seriously, you’re an idiot.

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