mongon Posted October 6, 2008 Report Share Posted October 6, 2008 Back to reality. First, Phil Gramm's 2000 Commodity Futures Modernization Act (supported, unfortunately, by the Clinton administration) was specifically designed to "protect financial institutions from overregulation" â?? primarily by leaving the market for credit default swaps (CDS) completely unregulated. There may be several underlying causes for the credit crisis, but this is surely the very biggest. Second, after the LTCM debacle of 1998, Alan Greenspan (and Robert Rubin) produced a report suggesting that we should "encourage," "promote," and "consider" guidelines that might prod financial institutions into reducing their drunken sailor approach to leverage. But they declined to produce actual regulations to that effect. In fact, in 2004 the SEC issued a rule allowing big investment banks to increase their allowable leverage ratios. That turned out not to be such a good idea. The leverage ratios for investment banks resulted in their demise. The credit default swap problem you mentioned (and Tarantario's post mentioned them) might be the demise of Europe and the West. Probably take down Asia as well. No one really knows what is out there but everyone says at least $50 trillion worth. I don't understand why when FF were placed into conservatordhip that the CDSs on FF securities were not triggered. Will have to go check on that. Link to comment Share on other sites More sharing options...
chuckwoww Posted October 7, 2008 Report Share Posted October 7, 2008 For those who don't follow the financial markets too closely a CDS is a cute way of insuring funny paper invented by quantum physicists to get round insurance regulations. Link to comment Share on other sites More sharing options...
Steve Posted October 7, 2008 Report Share Posted October 7, 2008 Here is a quote from that Wiki site regarding the CRA: [color:blue]Howard Husock, vice-president of the market-oriented conservative Manhattan Institute and author of a book on American housing policy, writes that once in effect, the new rules substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans. The Senate Banking Committee estimated that as of 2000, as a result of CRA, such groups had received $9.5 billion in services and salaries. As of that time such groups also had received tens of billions of dollars in multi-year commitments from banks to loan to local communities, including the Association of Community Organizations for Reform Now (ACORN) housing advocacy organization $760 million; Boston-based Neighborhood Assistance Corporation of America $3 billion; a New Jersey Citizen Action-led coalition $13 billion; the Massachusetts Affordable Housing Alliance $220 million..[23][/color] Sounds like trouble to me. Jimmy Carter enacted the CRA to service low income neighborhoods. Interference with the markets, such as trying to provide homeownership to everyone, leads to the banks getting clogged up with these mortgages, or MBSs derived from them. The groups named above are very political and use the money they receive to get a death grip on a block of Congressmen and the existence of both the Congressmen and the groups becomes perpetual. Even in this crisis environment, you will hear them talking about the need to build more affordable housing which is nuts considering the bloated housing inventory. A government on a social mission can be a big factor in precipitating problems in the market. Can be isn't the same as 'was' the big problem. Most of us will agree that many government programs either don't work or were ill conceived. I'm still trying to connect the dots that made you infer the CRA was a major player in this fiasco. It could be but I haven't seen anything but suppositions from right wingers. Link to comment Share on other sites More sharing options...
Steve Posted October 7, 2008 Report Share Posted October 7, 2008 Back to reality. First, Phil Gramm's 2000 Commodity Futures Modernization Act (supported, unfortunately, by the Clinton administration) was specifically designed to "protect financial institutions from overregulation" â?? primarily by leaving the market for credit default swaps (CDS) completely unregulated. There may be several underlying causes for the credit crisis, but this is surely the very biggest. Second, after the LTCM debacle of 1998, Alan Greenspan (and Robert Rubin) produced a report suggesting that we should "encourage," "promote," and "consider" guidelines that might prod financial institutions into reducing their drunken sailor approach to leverage. But they declined to produce actual regulations to that effect. In fact, in 2004 the SEC issued a rule allowing big investment banks to increase their allowable leverage ratios. That turned out not to be such a good idea. The leverage ratios for investment banks resulted in their demise. The credit default swap problem you mentioned (and Tarantario's post mentioned them) might be the demise of Europe and the West. Probably take down Asia as well. No one really knows what is out there but everyone says at least $50 trillion worth. I don't understand why when FF were placed into conservatordhip that the CDSs on FF securities were not triggered. Will have to go check on that. I read 'Asia', 'CFMA', CDSs but I don't see any CRA's in there as Rogueyam is claiming that was a major player in this. Link to comment Share on other sites More sharing options...
mongon Posted October 7, 2008 Report Share Posted October 7, 2008 Yep its insurance. But everybody is insuring stuff multiple times. So a $billion in real losses might result in 14 companies having to each pay a $billion. Since most companies can't pay a $billion, they go under. Triggering even more multiple defaults, since those companies are covered by CDSs. I'm no expert on these things but it really sounds to me like a doomsday scenario. And no one knows who is liable for what on these CDSs so no bank wants to loan money to another bank. Hence we are dead in the water. Link to comment Share on other sites More sharing options...
Steve Posted October 7, 2008 Report Share Posted October 7, 2008 60 minutes spoke on this last night. The monied firms created their own downfall essentially is what they concluded. Link to comment Share on other sites More sharing options...
chuckwoww Posted October 7, 2008 Report Share Posted October 7, 2008 It's not proper insurance because the people doing the insuring don't have any capital. Game over. Link to comment Share on other sites More sharing options...
mongon Posted October 7, 2008 Report Share Posted October 7, 2008 CS: The CDSs cover default on MBSs. And MBSs are derived from mortgages, a percentage of which are very weak mortgages because they are either subprime, FF or mortgages written pursuant to the CRA. I don't know how much of the crap out there was written by banks trying to comply with CRA, but there is probably a good amount. The problem is government trying to social engineer the markets. The gov should just be engaged in smart regulation and leave the markets to themselves. Then again, I see the role of the fed gov as being extremely limited. The fact that it is not, means that it poses a threat to us all, the mortgage crisis just being the one noticeable at the moment. Link to comment Share on other sites More sharing options...
mongon Posted October 7, 2008 Report Share Posted October 7, 2008 Its insurance. Without capital reserves. Yes the game is/will be over but what is the extent of what is over? Link to comment Share on other sites More sharing options...
chuckwoww Posted October 7, 2008 Report Share Posted October 7, 2008 I can't decide. I don't think a bail....er sorry...stimulus package will work more than once. The government just keeps printing money and T Bills I guess which will cause rates to rise and the dollar to fall. We are all doomed. Link to comment Share on other sites More sharing options...
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