John Edwards gets an early start...

[texaspackerbacker]

OK, what's your point?

Bringing money in from Japan and elsewhere at very low interest, making a profit, but for the most part, passing that very low interest along to American home buyers, what part of that do you see as a problem?

Clumping mortgages in these "CDOs", which basically spreads the risk--minimizing the effect of the small percentage of individual foreclosures--I'd call that smart risk management. Wouldn't you?

As for these mortgages/CDOs having no value, we all know that isn't true. Even with the downturn in real estate values, the huge majority of mortgages are NOT in default. It is, rather, the PERCEPTION of problems that dries up supply. That is why the bailout of Fannie Mae and Freddie Mac was a good move. That is also why bailing out Lehman, etc. is NOT so vital. It's assets apparently consisted of a lot of these lesser providers of money--hedge funds, etc.

Maybe somebody is doing like your article says--manipulating/speculating/selling sort, etc. on these--profiting at the expense of companies like Lehman Brothers, but who would that be? Small-timers out-smarting the big boys? Or even bigger fish swallowing up companies like Bear Stearns, Lehman, and Merrill? They don't come much bigger than that. Bank of America, however, does seem to be cleaning up pretty well, though.

The bottom line of all this, it seems to me, is that it will all resolve itself just fine--as it always has in the past--without having any significant effect on small-time regular people.

[HowardRoark]

As for these mortgages/CDOs having no value, we all know that isn't true.

This and a nickel will get you.....well, nothing. The market determines what they are worth......that's the ESSENCE of the problem today.

but who would that be? Small-timers out-smarting the big boys?

They aren't very small time anymore.


You are aware that Lehman no longer exists, right?

And all of their assets will be flooding onto the market over the next few weeks. What do you think that will do to asset prices?

[texaspackerbacker]

As for these mortgages/CDOs having no value, we all know that isn't true.

This and a nickel will get you.....well, nothing. The market determines what they are worth......that's the ESSENCE of the problem today.

but who would that be? Small-timers out-smarting the big boys?

They aren't very small time anymore.


You are aware that Lehman no longer exists, right?

And all of their assets will be flooding onto the market over the next few weeks. What do you think that will do to asset prices?

On the first point, you are setting yourself up as knowing something about something, so I assume you are acquainted with the "present value" of money--money that arrives in the futre--the payments on all those mortgages in good standing--has clear value in an objective sense.

On the second point, who exactly would "they" be in your statement? That is not a rhetorical question. It really is unclear who might have so outmaneuvered Lehman Brothers, Merrill Lynch, and Bear Stearns as to basically terminate them. The "assets" you refer to would be mostly $639 billion (face value) of mortgages in one form or another that Lehman has/had. I assume that will be liquidated and go to creditors. That's what's supposed to happen in a bankruptcy. As for market values, it will certain make for a bargain basement situation for the buyers. However, for anybody NOT forced to sell, it will have no effect at all, since the intrinsic value (based on present value--above) still exists, and the market certainly will snap back. (or are you gonna argue that the market won't snap back?)

[HowardRoark]

On the first point, you are setting yourself up as knowing something about something, so I assume you are acquainted with the "present value" of money--money that arrives in the futre--the payments on all those mortgages in good standing--has clear value in an objective sense.

You are correct, but right now, there is way too much flooding the market. When there is way too much of anything for sale, what happens to the price? You need to recognize that the securitization of these mortgages was the root of the problem. If a bank keeps a mortgage on their balance sheet tehy will probably be a little more careful on underwriting.

On the second point, who exactly would "they" be in your statement?

Google John Paulson and Company, Harbinger Capital...for starters. There are many others. It was a simple matter of looking at the books.

I assume that will be liquidated and go to creditors. That's what's supposed to happen in a bankruptcy. As for market values, it will certain make for a bargain basement situation for the buyers.

The reason we are in this mess is there ARE NO BUYERS!!! Why will buyers buy it now. More on the market will force the prices lower, balance sheets will be marked even worse.

and the market certainly will snap back. (or are you gonna argue that the market won't snap back?)

Snap might be overstating it.

[texaspackerbacker]

On the first point, you are setting yourself up as knowing something about something, so I assume you are acquainted with the "present value" of money--money that arrives in the futre--the payments on all those mortgages in good standing--has clear value in an objective sense.

You are correct, but right now, there is way too much flooding the market. When there is way too much of anything for sale, what happens to the price? You need to recognize that the securitization of these mortgages was the root of the problem. If a bank keeps a mortgage on their balance sheet tehy will probably be a little more careful on underwriting.

On the second point, who exactly would "they" be in your statement?

Google John Paulson and Company, Harbinger Capital...for starters. There are many others. It was a simple matter of looking at the books.

I assume that will be liquidated and go to creditors. That's what's supposed to happen in a bankruptcy. As for market values, it will certain make for a bargain basement situation for the buyers.

The reason we are in this mess is there ARE NO BUYERS!!! Why will buyers buy it now. More on the market will force the prices lower, balance sheets will be marked even worse.

and the market certainly will snap back. (or are you gonna argue that the market won't snap back?)

Snap might be overstating it.

First Quote: Too much WHAT flooding the market, real estate, secondary reselling of mortgages, or what? I would say there is LESS real estate on the market--anybody whose circumstances don't make it necessary to sell is intelligently waiting out the downturn. There's always a bunch of trading of established mortgage note. Other than cases like the Lehman portfolio due to the bankruptcy, there's nothing exceptional there either.

Second Quote: So certain formerly small time "theys" actually have taken down the giants of the industry? Here again, I say, what's the big deal--newer/better strategies outcompeting older/less effective ones--do you see a problem there? Or are you somehow implying something sinister?

Third Quote: There are ALWAYS buyers in a free market economy--sometimes, however, there just aren't many beyond the bargain hunters. Here again, do you have a problem with that? And exactly HOW does ANY of this affect ordinary regular people?

Fourth Quote: This is America. We've survived and thrived things extremely much worse. We might even be able to survive an Obama presidency--although thrive, I doubt. The only threat to good normal people in this trumped up credit "crisis" was averted last week when the Fannie Mae and Freddie Mac situation was dealt with.

[HowardRoark]

Tex, this is not a debate, there is nothing to debate.

First Quote: Too much WHAT flooding the market, real estate, secondary reselling of mortgages, or what? I would say there is LESS real estate on the market--anybody whose circumstances don't make it necessary to sell is intelligently waiting out the downturn. There's always a bunch of trading of established mortgage note. Other than cases like the Lehman portfolio due to the bankruptcy, there's nothing exceptional there either.

Both homes and the securitized debt. In particular Tier III Debt. Until a floor is put in on home prices, the bleeding can't stop.

Second Quote: So certain formerly small time "theys" actually have taken down the giants of the industry? Here again, I say, what's the big deal--newer/better strategies outcompeting older/less effective ones--do you see a problem there? Or are you somehow implying something sinister?

You asked, I told. I have no problem.

Third Quote: There are ALWAYS buyers in a free market economy--sometimes, however, there just aren't many beyond the bargain hunters. Here again, do you have a problem with that? And exactly HOW does ANY of this affect ordinary regular people?

This is where you don't get it. The billions of dollars of sucuritized loans have no "bid". The "mark to market" prices are practically nothing. Firms need to reflect these low prices on their balance sheets. rating agencies come in and downgrade them. They can't raise new money because investors don't want to throw good money after bad. The vultures circle, they are done. Real, ordinary people with real ordinay kids with real ordinary stomachs to feed lose their jobs. Did you see the people leaving Lehman last night? Real people don't have Government pensions, they have 401ks. They are worried.

Fourth Quote: This is America. We've survived and thrived things extremely much worse. We might even be able to survive an Obama presidency--although thrive, I doubt. The only threat to good normal people in this trumped up credit "crisis" was averted last week when the Fannie Mae and Freddie Mac situation was dealt with.

We have a credit crisis. This is not a debate.

http://money.cnn.com/2008/08/04/news/newsmakers/whitney_oppenheimer.fortune/index.htm

BTW, this AIG thing is going to get real ugly.

[Tyrone Bigguns]

Ty nor Tex believe anything from liberal media sources like CNN.

[texaspackerbacker]

Howard, you're sure acting like it's a debate!

Don't you realize that even though real estate prices are in an overall downturn--not even very many places on that, the HUGE majority of mortgages around the country are NOT in default. They are, therefore, good assets on the books of the current mortgage holder--like that is even of significant consequence to the huge majority of people in the country anyway.

If, as you say, there are few or even no bidders for some mortgages or groups of mortgages, those items simply will NOT change hands. Why is there even a need for them to change hands--other than the rare exceptional case of the portfolio of a company in Bankruptcy being sold off--and trust me, the bankruptcy judge WILL sell those assets, even if it is for pennies on the dollar. Is that a problem? Certainly not on a macro-economic level.

And yes, I suppose I have to grant you, those poor unfortunate Lehman employees that were cleaning out their desks on the news today WERE harmed. But they are a miniscule minority in the whole labor market. Nobody else is really affected, and even these people will likely land on their feet, depending on their skill and willingness to be flexible.

And AIG? the Treasury Secretary was asked about them today, and he just shrugged it off. Do you have some inside info that he doesn't about how it's gonna be a mess? A big insurance company, that undoubtedly has a bunch of mortgage notes as assets, might go belly up. I really don't see that it affects many regular people. Their portfolio possibly gets on the already bad market. What happens? Somebody snaps them up for peanuts, and eventually makes a killing when the market gets back to normal. There are always gonna be winners and losers in a capitalist economy, especially among the major players. Why is that something we should even be concerned about?

[HowardRoark]

Howard, you're sure acting like it's a debate!

Don't you realize that even though real estate prices are in an overall downturn--not even very many places on that, the HUGE majority of mortgages around the country are NOT in default. They are, therefore, good assets on the books of the current mortgage holder--like that is even of significant consequence to the huge majority of people in the country anyway.

If, as you say, there are few or even no bidders for some mortgages or groups of mortgages, those items simply will NOT change hands. Why is there even a need for them to change hands--other than the rare exceptional case of the portfolio of a company in Bankruptcy being sold off--and trust me, the bankruptcy judge WILL sell those assets, even if it is for pennies on the dollar. Is that a problem? Certainly not on a macro-economic level.

And yes, I suppose I have to grant you, those poor unfortunate Lehman employees that were cleaning out their desks on the news today WERE harmed. But they are a miniscule minority in the whole labor market. Nobody else is really affected, and even these people will likely land on their feet, depending on their skill and willingness to be flexible.

And AIG? the Treasury Secretary was asked about them today, and he just shrugged it off. Do you have some inside info that he doesn't about how it's gonna be a mess? A big insurance company, that undoubtedly has a bunch of mortgage notes as assets, might go belly up. I really don't see that it affects many regular people. Their portfolio possibly gets on the already bad market. What happens? Somebody snaps them up for peanuts, and eventually makes a killing when the market gets back to normal. There are always gonna be winners and losers in a capitalist economy, especially among the major players. Why is that something we should even be concerned about?

I am not debating....I'm lecturing.

You are correct that the vast majority of mortgages are fine. But it doesn't matter. Because everthing has been securitized, what matters is the price of those mortgages on the open market.

Listen real close on this point......even though they DON'T change hands, there is market price for the mortgage. This is known as "marked to market". Accounting rules make companies reflect this "mark to market" prices on the balance sheet. This is the problem!!!!!!!!!! If they did not have to mark to market none of this would have happened. Read Einhorn's speech above.,,,,he is a shorter. His main goal was to have Lehaman properly reflect the prices of loans on the balance sheet.

As far as AIG, they have a trillion dollar balance sheet. Much of this is what is know as "counter party." Credit swaps, etc.

I won't even try to explain. I barely understand that stuff myself.

[bobblehead]

The problem is that she actually IS unnecessarily cruel. And in being so, she becomes a sort of self-fulfilling prophesy in reverse - HER arguments are ignored because HER vitriol becomes the story.

I agree..........

I read her articles every week, and she often times crystalizes an issue better than any other Conservative writer has. But, she has to throw in her over the top "Ann Coulter thing." I think she has her disciples that she has to feed. It keeps her very wealthy.

It's too bad though, she is very bright.

Ya think skin is related?

[bobblehead]

The problem is that she actually IS unnecessarily cruel. And in being so, she becomes a sort of self-fulfilling prophesy in reverse - HER arguments are ignored because HER vitriol becomes the story.

I agree..........

I read her articles every week, and she often times crystalizes an issue better than any other Conservative writer has. But, she has to throw in her over the top "Ann Coulter thing." I think she has her disciples that she has to feed. It keeps her very wealthy.

It's too bad though, she is very bright.

Besides her sparkling intellect and ability to articulate extremely effectively her spunk is what distinguishes her from the conservative crowd. From my vantage point it's what makes Ann, Ann.

I can't agree with anyone 100% of the time, Ann included, but I wouldn't ask her to change her approach either. She's a wordsmith and like an artist she has her own distinctive style.

I agree though that she can be her own worst enemy. The "faggot" reference she was playing off of in the Edwards comment was just too obscure for the average Joe to catch. Pop culturally-aware folks got it, but most people were left bewildered by what she meant.

That's what happens when you are a public media figure playing verbal chess when most people are playing checkers.

I think you guys miss one point: she is railing against the PC crowd when she "crosses the line". Her entire style is an affront to the thought police and its intentional. She is willing to martyr herself to speak what she sees as the truth.

[bobblehead]

I didn't realize the hedge funds caused the mortgage meltdown. Please explain.

First, it may be nuanced, but you are nothing if not a master of nuance……I never alluded to whether or not hedge funds caused anything; merely that the duplicitous John Edwards profited off what happened.

But, now that you ask.

Back in the day, your bank would do the underwriting on your mortgage, and then keep it on their balance sheet. They had a vested interest in your ability to pay the money back.

In the past few years, mortgages have been securitized and sold off in bundles known as CDOs. These CDOs have different traunches, depending on the risk of repayment. Because of fees, etc. there was a very large appetite for putting together these securitized loans. And offloading them.

Hedge funds were able to put together extremely highly leveraged funds of these securitized loans. Sometime 16:1. And, to add fuel to the fire, they were borrowing money in Japan at practically 0% interest and taking that cash over here to put the funds together. So, they not only had U.S. credit risk, but also foreign currency risk as well. It was an extremely highly torqued spring.

Certain firms, which I will not name, had a HUGE chunk of this stuff on their balance sheets. It was easy money, but they were not taking care of the risk management.

These securities aren't heavily traded or priced for that matter, and a flood of supply into the open market could drive prices down, forcing other holders of these securities to mark down the value of their holdings. When these loans are marked down, they start to really erode balance sheets. As balance sheets continue to erode, rating agencies such as Moodys and Standard and Poors lower the rating on these companies. As that happens, institutional investors, such as endowments and pensions, by their bylaws are forbidden from holding them anymore. The pensions, etc have to liquidate…..and so the flood of this stuff continues on the market.

As any Capitalist knows, when there is too much of something offered for sale real quick, there can come a time when there is no “bid” at all. That is where we are today. No “bid” for these securitized loans, so theoretically……they are worthless. Companies have to put this stuff on their balance sheets as worthless. Killing the companies.

Now, for the “short” side. Some smart guys/gals out there in the past couple of years have put huge bets on that this would all happen. Either through shorting, puts or buying credit swaps. When something is shorted, it is sold high, with the intention of buying back later cheaper. So, the shorting actually added a whole lot of fuel to this fire. Read Einhorn’s speech:

http://www.foolingsomepeople.com/main/TCF%202008%20Speech.pdf

What we need now is a “bid” on this debt.

Bump for Tex.

good news...the US gov't (that means us the taxpayers), just bid face value on 5 TRILLION dollars of bad debt. (ok, only about 1.5 trillion is bad).

The short story that you elaborated well is that lenders and borrowers got fully disconnected, therefore repaying a loan wasn't a concern to the loan writer....only the commission s/he could collect.

[bobblehead]

Howard do you, or have you worked in financials? (or do you read way to fricking much).

I know I am coming across as an arrogant ass by this statement, but you are trying to explain a movie to people who didn't see the first part. You can no more explain the workings of the financial market on a blog than someone could explain biochemistry to me in a blog. I don't have the background.

Tex is right about one thing, this will only be a hiccup to most people, its not a national emergency. They won't even notice the hiccup....higher interest rates on home/auto loans, stagnant wages, stagnant growth, investments not growing as well as they should. These are things we call 'recession' without really understanding the meaning of the word. If you work a secure job and you are staying in that job for another 10 years and living in your house another 10 years and only look at your retirment funds once a year this will barely affect you.

edit: It will affect me because I have a large amount of equity locked into 2 pieces of land that are worth much more than I paid, but my selling horizon was supposed to be 2007-2010. With the economy stagnant I can't get a buyer at nearly ANY price, as no one is able to get credit to build on it atm.

[HowardRoark]

Howard do you, or have you worked in financials? (or do you read way to fricking much).

I know I am coming across as an arrogant ass by this statement, but you are trying to explain a movie to people who didn't see the first part. You can no more explain the workings of the financial market on a blog than someone could explain biochemistry to me in a blog. I don't have the background.

Tex is right about one thing, this will only be a hiccup to most people, its not a national emergency. They won't even notice the hiccup....higher interest rates on home/auto loans, stagnant wages, stagnant growth, investments not growing as well as they should. These are things we call 'recession' without really understanding the meaning of the word. If you work a secure job and you are staying in that job for another 10 years and living in your house another 10 years and only look at your retirment funds once a year this will barely affect you.

edit: It will affect me because I have a large amount of equity locked into 2 pieces of land that are worth much more than I paid, but my selling horizon was supposed to be 2007-2010. With the economy stagnant I can't get a buyer at nearly ANY price, as no one is able to get credit to build on it atm.

I guess I read too much.....

FASB Rule 157

http://www.fasb.org/st/summary/stsum157.shtml