Yesterday's New York Times reported that the funnel of investor money into United States consumer loans and related products is very sticky, if not entirely stuck.
In "Mechanism for Credit is Still Stuck," Vikas Bajaj reports that:
"A year after financial tremors first shook Wall Street, a crucial artery of modern money management remains broken. And until that conduit is fixed or replaced, analysts say borrowers will see interest rates continue to rise even as availability worsens for home mortgages, student loans, auto loans and commercial mortgages."
What Mr. Bajaj is talking about is the process of securitization -- where bonds promising yield to investors are created with the backing of specific assets. So, for example, a mortgage security is created which generates yield to investors and which is presumably very safe because, well, "U.S. homeowners rarely default on their mortgages." These products are so safe, in fact, that up until a year or so ago, the three major ratings agencies were rating some of the mortgage securities AA and AAA -- comparable to U.S. government debt.
The problem, of course, is that U.S. homeowners have defaulted on their mortgages -- in fact, in record numbers. As I have written in other places and media, I believe the causes of these defaults are many but primarily due to a rigged system that put people into an environment and mindset to take on much too much debt. But, the reasons are not what is relevant for purposes of this present posting.
What is relevant is that the United States financial system -- particularly the lenders and investment banks -- sold the world's investors mortgage securities which were founded on faulty assumptions -- that a) U.S. homeowners will never default, and b) that U.S. housing prices always go up. In addition, the financial geniuses in the investment banks created products that were so complex -- e.g. derivatives which depended on yield from other securities -- that few really understood what they were selling or what they were buying. All this in the name of profit, of course, for when the housing market was humming, those securitizing mortgages made billions.
But now the chickens have come home to roost. Lots of investors who thought they were buying safe products are stuck with empty promises and poor returns. And, in some cases, these are the same potential candidates to buy securities backed by other U.S. loan products -- credit cards, student loans, auto loans. Is it any surprise that these investors are now wary of the system?
Here is how Edward E. Yardeni describes the situation:
"This time the (investors) are refusing to go into the saloon and start drinking what Wall Street's financial engineers are mixing."
If the world loses confidence in the U.S. financial system, we all have a headache. As is happening today, loans will be both more difficult and more expensive to obtain.
Author Kevin Phillips in his book, Bad Money (Perseus, 2008), refers to the potential trillion dollar loss which banks and investment banks may incur as a result of the housing meltdown. That is bad of course but Phillips makes a more important point:
"If the world loses confidence in the American markets, the long-term costs will be greater than a one-time trillion dollar balance sheet write down."
Follow Jim Randel on Twitter: www.twitter.com/jimrandel
The rating agencies in many cases worked on a contingency agreement that they would not be paid unless all the securities were sold under a Triple A rating. This enabled the banks to take the risk off their own books, take large up front commissions and fees, plausibly deny fraud, and to sweep the dirt under the rug. Monoline insurance completed the transaction even though the leveraging was 30 to-one or more.
Greedy foreign banks saw that they could make more money in interest on these tranches than on Treasuries. The foreign banks needed to buy large amounts of U.S. securities to fend off attacks on their currencies. It's a wonderful life!
I wonder if any of these super-greedy purchasers scrutinized a statistically representative sample of the crap they were buying before plunking down the hard-earned money of their depositors (what? you thought they used their own money?).
For example, drill down to a Joe Sixpack loan for a $600,000 house based on unverified income, etc. - and apply standards proven for the last 70 years to give a reasonable indication that Joe might somehow be able to afford the house. Now, do a few more. If there were more than a handful, do not buy the CDO, MBS, Alt-A, NINJA, whatever, crap Wall St. was selling.
I would have.
Some may be able to drill down and see what the loans are, but it is impossible in 401ks, I would think. But the managers coulda and shoulda.
That was a good trick and Paulson pulled it.
both parties win right?
is there something i am missing.
Any major economic upheaval in this country is supposed to leave more, not fewer, struggling people in its wake. Says so in the secret rewrite of the Constitution during the First Guilded Age...
In most parts of the country, the prices of housing is too high by roughly 50%.
Adjustment should come over the next 2 years.
seen the truth much earlier.
http://www.amazon.com/Das-Kapital-Gateway-Karl-Marx/dp/089526711X
There is still enough resources to go around. But the current method, is a particularly silly way. And the price tag reflects it.
In some cases, treating the "deabeats" as renters and deferring foreclosure for a later date might be a viable option. Housing values still fall, some people get to stay in their homes, financial institutions get most of the expected income. Probably doesn't work for everyone, but if just 40% of people got dovetailed into becoming "temporary renters," we might head for a softer landing than a full fledged crash into a brick wall.
And to claim that "They" believed that housing could not fall is not credible, even if it had not happened logic dictates that it COULD happen. Any reasonable analysis of risk would incorporate that possibility.
You failed to mention "GREED" and "Excessive risk taking" which I believe are at the bottom of this issue. Why would people spend such vast portions on tech companies back in the tech bubble on companies with no product, no income, and that ultimately folded? Greed and excessive risk taking because certainly "they" had to understand that startup tech companies can go broke.
I don't see why it's such a disaster if loans are more expensive. Loans have been more expensive in the past and they will be again. It used to cost double digit interest rates to borrow money for a home and no doubt one day it will be again. These swings are natural. They will wring excess out of the market. We will wind up with more regulation, with much more careful banks, with loan officers who seek to protect the banks against lending money to those who should NOT BE GIVEN the loans, and balance will be restored and we will no doubt OVER BALANCE before it swings back the other way again.
Investing in tech were newbies who had just started with their 401ks and followed the crowd. The managers are the ones who messed up, by not giving better guidance.
achieve the income level required to pay for a house at current market levels. When the means of
production is as transferable as capital then you don't have fair or free trade. What you have is a
transfer of wealth to place like China and India. On top of that you allow wholesale illegal immigration and at least 12 million workers are here pulling wages down further.
Where is the new American family going to get the money to buy a house? The union factory jobs
paid well with retirement and now they are laid off and told to work bagging groceries, flipping
burgers with high school kids, staying home, collecting welfare, drinking and smoking their
stress into the grinder. We need a new President that puts AMerica back to work again, that puts
America first before the WTO, a program like FDR's Public Works Projects to rebuild our infrastructure, our green power plants, and a cheaper one payer healthcare system.
Not until then will we see housing beging to rebound and grow.
So what to do with those citizens who are essentially a drag on the economy if we force them to "work?" We had a partial answer to that when we came up with Social Security and to some degree AFDC (Aid to Families with Dependent Children). But we got caught up in the "non-productivity" of certain of those individuals, forgetting that "idleness" (or perhaps more a more palatable description would be "time and space to reflect") is the root of innovation.
Sir Issac Newton wasn't busy performing "productive work" when he saw that apple fall.