A Mortgage in Stockton Flaps Its Wings and Global Finance Collapses
This credit crisis didn't just "go global." It's been global.
The current global credit typhoon has its own butterflies. Among them: a modest 2002 home purchase in, say, Stockton, California—financed with a nonprime, or otherwise faulty, mortgage loan.
By the time that home in Stockton was supporting two or three ill-advised loans in 2005, those loans had disappeared into packages called asset-backed securities (ABS), then were to global banks, insurance companies, and pension funds—particularly in Europe. Like their US counterparts, the European financiers bought boatloads with borrowed money. Then they, too, shoved them off books into Structured Investment Vehicles that required no capital charge and little reporting.
With US investment banks making huge profits from packaging churning loans, volume in mortgage securities exploded. US investment banks then added another link to the chain, repackaging ABS securities into CDOs, or collateralized debt obligations. In that way, the Belgian-Dutch bank Fortis (and others) came to own a piece of Stockton. If one Stockton home defaults, the global effect is miniscule. But if lots of home loans go under, the damage reverberates globally—just as it is now.
The current global fallout might have been manageable, if banks hadn't entered a massively interconnected circle of $55 trillion worth of privately negotiated credit default swaps.
But that wasn't the case.
While European institutions are getting hit mostly by exposure to toxic US assets, mortgage markets in the UK and Spain also are coming under increasing pressure. The bigger problem is the global borrowing still going on. With an average leverage of 10 times, we could be looking at an eventual $14 trillion systemwide loss. That's a dark scenario, which is why it's imperative that the US government help homeowners in Stockton keep their homes by backing renegotiated lower mortgages with lenders.
John McCain explicitly mentioned this in the last presidential debate. Barack Obama noted that Treasury Secretary Hank Paulson's $700 billion purchase plan, vague as it was, contained the ability to do this.
Meanwhile, as the leaders of central banks throughout the world realize they are all in this together, they will be forced to keep injecting capital into the banking system. And, hopefully, to do some thinking.
Three weeks ago, the Federal Reserve decided that saving Merrill Lynch could be accomplished by giving it to Bank of America. Since everyone calling the shots in Washington has been spectacularly ineffective in preventing the downward spiral of the financial system so far, one wonders why other bank mergers are now going through without examination. Moreover, why are European banks heading in the same direction? Merging murky books with deteriorating ones is not a recipe for strength and stability.
In the absence of a controllable framework, central banks around the world are paying for the excess of an unregulated financial system. What we need is a Glass-Steagall Act for our times. Can we regulate the $55 trillion credit derivatives industry unleashed by the US Commodity Futures Modernization Act of 2000? Can we have higher global capital requirements going forward, or put a structure in place that will both contain the current fallout and avoid future credit typhoons? It's time to find out.
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Why is it you let a lot of cheap construction labor into
the country and the price of houses go up? Shouldn’t
the cost be base on what it cost to build plus a profit?
Why is gas in a pump not price by what it cost to get
it there plus a profit.
Because some people like to gamble and there's not too many places that will let you put $100 million on the Steelers game.
"Because some people like to gamble and there's not too many places that will let you put $100 million on the Steelers game."
Especially when you don't actually have the money to back up your bet.
The best idea I've heard post-bailout is to put a freeze on foreclosures for a period, say, 6 months or more while this mess is being addressed presumably for the benefit of banks and, hopefully, ultimately for the benefit of those consumers who were suckered into these horrible (illegal) loan deals. Do this NOW! It is seared into my mind; a Boston family, the Escavels, a honest and hard working family, who were separated from their home a week ago. It took 6 Boston policemen and the constable to do it. How disgraceful and despicable!
"those consumers who were suckered into these horrible (illegal) loan deals."
Suckered? Really? Does that family have no accountability for getting into their loan? Did they think if they resisted the eviction long enough that the bank would say, "well, they put up a good fight, and they're honest and hard working, they can stay." Isn't it common sense to work the numbers before you sign for your loan or refi or whatever happened to them? If they didn't, shame on them. If they did, realized it was a gamble and signed anyway, then they lost the bet. Correct me if I'm wrong, but seems to me if I was borrowing 200+ thousand I would try and understand the terms.
Why not just make derivatives and all other such phony financial transactions illegal? Require banks to be fully capitalized, stop the insane practice of counting uncollected debts (loans) as assets to be borrowed against, and either nationalize the central bank (the Fed) or abandon it altogether; since it is a tool of the global banking cartel and their pet multinationals to facilitate the transfer of wealth to a small group of self-proclaimed 'elites', and compel the remainder of the world's population to lives of third-world poverty or first-world industrialized serfdom. This so-called crisis is the result of the collapse of a global Ponzi scheme, staggering in it's scope, and brazenly audacious in it's demand that the taxpayers, here and abroad, buy up the mountain of bad paper that these bankers have been trading back and forth between each other trying to 'kite' the price up as high as possible before dumping it on unsuspecting pension funds and foreign sovereign (national) banks. It's bad enough that the inflation due to the Fed printing billions in unbacked currency hurts those at the bottom of the economic hierarchy the most,but adding insult to injury by forcing us to buy the worthless paper from the so-called 'investment' banks by borrowing from the future through the Fed, which collects a healthy sum in the form of interest on these debts. All to keep the blame,and possible repercussions from the shareholders of these insolvent banks off the shoulders of the guilty parties(don't forget the politicians who are charged with oversight of the banking industry,and who have been "slopping-down" at the lobbyists' trough for many years). Consider the 10 Trillion already paid out to keep these people from feeling any pain as just the initial down-payment, as the final costs will not be seen for 3 or 4 more years when additional junk-paper backed securities mature,and the additional 150 or so expected bank closings in the upcoming year materialize.
Banks and lenders wpould feel much less fear about dealing in risky debt if we didnt have the largest corporation on the planet removing the risk. Fanny and Freddy removed risk and allowed the lenders to pursue folks further down the economic spectrum and lend them money. This risky end of the spectrum began defaulting and sucking the reserve and money out of the asset backed securities. Creditors however, continued to lend. This is econ 101, and life lessons from Mom that everyone has heard: dont borrow money you can't pay back. Dont lend money unless you can stand to lose it. Man, Moms are simply was a geniuses.
After a lot of web searching I find someone who knows the system. Although complicated your explanations make it all to clear. Finally the cable financial shows have started to suggest we start bringing people in for some questionning. I could have won the so-called debate last evening. Just say "look your 401K's are down 30-40%, mostly because there is not a free market and some people were jacking with the system. I will go to Washington, hold hearings and people will pay." With the number of angry people in the U.S. I think they would skip the voting process and put swear me in on Monday.
Why don't we spend $750 billion on building schools and improving the infrastructure? That would create jobs and solve a lot of other problems. At the same time it would build the economy from the bottom up. Rich people are tight fisted, we know they aren't going to spend money for no reason. The poor and the middle class have to spend every dime they have, just to stay alive, so making money available to them is the best thing we can do to ease the economic disaster that the fools in Washington and on Wall Street have created.I invite you to my website: www.FreetheGods.com. There you will find a political discussion forum where political ranting is highly encouraged, especially opposing viewpoints!
Although, I personally am so far to the left, that even the even the democrats appear to me to be "right-wing," I certainly hope that they win this election. If they don't, I fear that this country, indeed the entire planet is in serious trouble. The war that the conservatives have rekindled against the Muslim nations is already likely to last for years, if not centuries. Hopefully, Obama can do something to ease the tension.
This war is really a continuation of the holy wars that began so many thousands of years ago. And unfortunately, it appears that religion has shown itself to be the biggest catalyst of hatred that the human race will ever see.
I represent private lenders in California. We are dropping the rates to 1% per annum, for the next 12 months. With LTV greater than 95% we are at great risk. We need to help these
people stay in their homes and to continue making payments to the
underlying debt. This property is severely underwater.
My idea is to reduce the interest rate to 1% for the next 12 months and
to have the balance of the payment used to reduce the principal. If the
payment is $800 per month, the interest would be about $90 per month and
the balance would be used to reduce the principal balance.
This is a radical idea for any one in the lending business but, if we
get this property back there is a huge loss in today's market. I would
rather get a little principal back every month on an investment that is
a sure loss than get nothing and a property back at the end of 6 months.
Perhaps the major Lending institutions could make that same sort of global rate reduction to allow people to take a deep breath and get back on their financial feet.
Sorry Pam,
It's more like common people, guys and gals, that get suckered in by smooth talking good looking males and females for their relationships, like on reality TV and then get irritated and blown away when Brad and Cinderella dreamboats dont work out. Sorry Pam, this is what people do in a screwed up society responding to an invisible hand and an amerikan way of life in Sodom and Gomorrha, and like a bunch of religious freaks screwing each other over for the Amerikan daydream of money, profit, gain, the big house for two and all the cars one can stuff in one's driveway, etc, etc... Some people would call it testing the Abyss which is like your daily mysterious traffic jams that nobody understands and keep sitting in them like slaves rather than talking an alternate route or public transport. Sorry again Pam, this is what the Amerikan puppeteer wants the people to do and all offended virgins are not welcome in Amerika. Will Durant had a name for such a mindless mouvement of people being guided by some mysterious force against their will or maybe that's the way human nature functions whether we like it or not.
