The President's Working Group on Financial Markets released its analysis on the subprime mortgage meltdown. A lot of the analysis falls under the "Well duh..." category, but it's an interesting overview of the entire mess.

The comments, like most Internet political cesspools, is full of the usual far left, far right dribble pinning blame on their enemies and favorite targets while calling for the election of what they view as their own flawless candidates. However, it does raise an interesting question of just how responsible the current administration is for the whole mess. I'm not a financial markets expert, so I'm kind of curious as to whether or not these sorts of shady lending practices are something that a typical executive branch agency should have caught and reigned in early on or if this is merely another case of the "irrational exuberance" we find in bubbles. Is this a case of a slack administration who let capitalism go wild or of markets caught up in the quick and easy profits of the real estate boom and blew things up before anyone could have found out? For every sad case of a poor family being booted out of their home is one of a speculator who got burned and simply dumped the property. Thoughts?

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031301887.html

Quote :

"A "dramatic weakening" of standards used by the U.S. mortgage industry to evaluate and make home loans touched off the global credit crisis that continues to undermine markets, a presidential panel said today in a report that called for nationwide licensing of mortgage brokers and new consumer protections for home buyers. Treasury Secretary Henry M. Paulson Jr. said at a news conference that the report would be used to overhaul a system that had put the global economy at risk by bundling mortgages into a dizzying array of larger investments that had become too complex to be accurately analyzed. "We will see changes at every step of the securitization process," Paulson said at a news conference this morning, as regulators tighten standards for the people who appraise houses, originate and fund mortgages, and package them into more complex financial products. In a broad criticism that touched virtually all levels of the mortgage business, the President's Working Group on Financial Markets said that the underwriting process used by finance companies to analyze home mortgages suffered a "breakdown" in late 2004, which led to a proliferation of questionable deals as those involved chased the profits of a boom in real estate. Meanwhile, the organizations responsible for packaging mortgages into larger investments -- from the rating agencies responsible for independently assessing the investments to the banks and financial companies that sold or bought them -- failed to properly analyze the risk involved and had insufficient knowledge about the underlying mortgage assets. The result by mid-2007 was "turmoil," the group said, as global financial institutions lost faith in one another largely for lack of knowledge about their exposure to a U.S. real estate market where property was losing value and the default rate on home mortgages was soaring. Although the problem began in the market for riskier "subprime" loans made to less creditworthy borrowers, "the loosening of credit standards . . . was symptomatic of a much broader erosion of market discipline on the standards and terms of loans to households and businesses," the panel concluded. "Following many years of benign economic conditions and plentiful market liquidity, global investors had become quite complacent about risks, even in the case of new and increasingly complex financial instruments." The panel included representatives from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. It called for a broad set of actions to avoid similar problems in the future, including national standards to replace the current patchwork of state laws that regulate the mortgage industry and stronger consumer laws to make clear what a mortgage will cost and how that might change over the life of the loan. Investors and the agencies that regulate them, Paulson said, need to also evaluate more closely an increasingly complex set of financial products that, at their base, rely on the ability of homeowners to make their monthly mortgage payments. "Excessive complexity is the enemy of transparency and market efficiency," Paulson said in prepared remarks delivered this morning. The report is the result of a seven-month effort by the Working Group and signals a need for greater transparency and other reforms to prevent the kind of sudden downturn that has struck credit markets in recent months. Abrupt dislocations in those markets have triggered a wider slowdown in the U.S. economy and mounting predictions of a recession. Specific recommendations from Treasury are expected at a later date. These could have a sweeping impact on major segments of Wall Street, from the way mortgages are securitized to the role of credit-rating firms, which evaluate and give a score to such securities. The Working Group's report is especially significant because it is a collaboration of the government's top economic policymakers, Paulson, Federal Reserve Chairman Ben S. Bernanke and Securities and Exchange Commission Chairman Christopher Cox. President Bush tasked the group with reexamining the reasons behind the subprime mortgage collapse and, in particular, the role played by credit-ratings agencies, such as Standard & Poor's and Moody's. Because Treasury does not oversee rating firms, any regulatory recommendations for such companies would have to be approved by Congress or the SEC first. Treasury officials have said in past interviews they expect the practice of rating securities and firms to change. "There will probably be a lot more scrutiny, in a sense, a lot more analysis being done of the underlying credit. And that's probably a good thing," said Phillip Swagel, Treasury's assistant secretary for economic policy in an interview on C-SPAN in early September. The President's Working Group on Financial Markets was created after the 1987 stock market crash to coordinate responses to financial crises. But before Paulson took office, the group had rarely met. Paulson has used the group to hold regular meetings among the heads of four key agencies: Treasury, the Fed, the SEC and the Commodity Futures Trading Commission. He also pushed the group to conduct exercises that would prepare it for financial crises. One of the primary reasons why credit markets froze up was because ratings agencies gave securities linked to subprime home loans higher scores than they ultimately deserved. When times were good, subprime mortgages produced a lot of money for investors and lenders because they asked borrowers with risky credit histories to make high-interest payments. These homeowners were willing to make those payments as long as housing prices were rising. When prices started to fall in late 2006 and 2007, many borrowers started to default on their monthly payments. Millions are expected to face foreclosure over the next two years. Investors who made big bets on mortgage-backed securities watched helplessly as their portfolios plummeted in value. The rating agencies quickly downgraded many of the securities. By the summer, confidence in all kinds of debt securities had been shaken. For some financial firms and investment funds, it became hard to know what the securities in their portfolios were worth and what they should consider losses in earnings statements. The resulting credit crunch has since affected other kinds of loans that are securities, such as auto and student loans and buyout debt, and is threatening to cause a recession. "

[Edited on March 13, 2008 at 3:54 PM. Reason : Grammar is our friend]

3/13/2008 3:48:31 PM

can you bold any parts you think are interesting?

3/13/2008 4:32:21 PM

Quote :

"can you bold any parts you think are interesting?"

3/13/2008 5:01:33 PM

If more people read unbolded articles, we probably wouldn't have such a problem with the economy right now...

3/14/2008 12:28:45 AM

Quote :

"The panel included representatives from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. It called for a broad set of actions to avoid similar problems in the future, including national standards to replace the current patchwork of state laws that regulate the mortgage industry"

Wait, a bunch of people from the federal gov't recommended national standards? Wonder why... Oh yeah, it will secure their jobs even more... Shocking!

I like how the solution to this problem is to let the federal gov't start regulating even more things over which it has no Constitutional authority to do so. BRILLIANT!

Here's a crazy idea... Let the companies that fucked up DIE. Yes, let them die. That we don't have a bunch of poorly run companies deciding the economic future of our country. If that means Wall Street disappears, then good riddance.

OOOH, or how about this... How about we actually make corporate owners responsible for their company's downfalls? You know, since they more than likely profited off of the mismanagement. Nah, responsibility is for sissies.

3/14/2008 12:59:13 AM

Quote :

"Although the problem began in the market for riskier "subprime" loans made to less creditworthy borrowers, "the loosening of credit standards . . . was symptomatic of a much broader erosion of market discipline on the standards and terms of loans to households and businesses," the panel concluded. "Following many years of benign economic conditions and plentiful market liquidity, global investors had become quite complacent about risks, even in the case of new and increasingly complex financial instruments.""

You know what a good way to restore market discipline? Don't bail out reckless lenders. It's called "moral hazard" for a reason.

3/14/2008 1:37:05 AM

Its ironic that the Fed is bailing out institutions that gave away loans to bad candidates and yet we're perfectly willing to let people who are defaulting on those very loans to take the brunt of the damage (and blame).

3/14/2008 2:46:30 AM

Quote :

"If more people read unbolded articles, we probably wouldn't have such a problem with the economy right now... "

3/14/2008 9:18:43 AM

Quote :

"Here's a crazy idea... Let the companies that fucked up DIE. Yes, let them die. That we don't have a bunch of poorly run companies deciding the economic future of our country. If that means Wall Street disappears, then good riddance. OOOH, or how about this... How about we actually make corporate owners responsible for their company's downfalls? You know, since they more than likely profited off of the mismanagement. Nah, responsibility is for sissies."

totally agree. I also have very little sympathy for the people who took the crazy loans and are now fucked. that is their problem. I bought my house when everybody was using these crazy loans and I refused to use one because I could see past my nose.

3/14/2008 9:24:56 AM

[Words - But you need to read all of them, otherwise you're wasting your time on this]

http://www.nytimes.com/2008/03/19/business/19leonhardt.html?_r=1&hp=&pagewanted=print&oref=slogin

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"Can’t Grasp Credit Crisis? Join the Club By DAVID LEONHARDT Raise your hand if you don’t quite understand this whole financial crisis. It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages. But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression? I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis. “We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup. I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?” I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust. So let’s go back to the beginning of the boom. It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend. The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she’s going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage? As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages. Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors. Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years. All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy. And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit. Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week. “If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.” This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns. The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well. Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers — as opposed to, say, laid-off factory workers — is deeply distasteful. At this point, though, the alternative may be worse. Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence. “You say, my goodness, how could subprime mortgage loans take out the whole global financial system?” Mr. Zandi said. “That’s how.”"

3/19/2008 8:44:45 PM

Quote :

"The comments, like most Internet political cesspools, is full of the usual far left, far right dribble pinning blame on their enemies and favorite targets while calling for the election of what they view as their own flawless candidates."

Here are some guidelines on how people operate in this country:

-The left blames the right for everything
-The right blames the left for everything
-The rest of us just wish the left and right would get on with it and start killing each other so we don't have to listen to them anymore

3/19/2008 9:11:49 PM

^^ I like the article. Wall Street really dug itself into a hole with this one, getting greedy as it did. While I'm not a big fan of bailouts, preferring to let weak and stupid companies collapse, I do understand the reasoning behind the Bear Stearns "bailout". As distasteful as it may have been, the alternative would probably have been much more horrific.

3/22/2008 12:35:11 AM

^^^ I didn't read any of that, but I'm going to assume that it says a soft landing is better than Japanese-style deflation.

3/22/2008 12:58:19 AM

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"totally agree. I also have very little sympathy for the people who took the crazy loans and are now fucked. that is their problem. I bought my house when everybody was using these crazy loans and I refused to use one because I could see past my nose."

It would be your problem if there were fifteen houses in your neighborhood in foreclosure and you were trying to sell yours so you could move......

The people who took out 100% loans with crappy terms are not going to be the ones suffering, they can walk away from the problem and the only collateral damage is their credit. They never had money invested in the deal to begin with.

When you are the guy living down the street from them and have a bunch of money invested in your house then of the sudden you are getting fucked because your house is not worth what you paid for it, and wont be until all this settles out.

3/22/2008 11:42:55 PM