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The Greed Superhighway Explained by Bill Siedman
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The Greed Superhighway Explained by Bill Siedman |
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Local Rebel Member Ascendant
since 1999-12-21
Posts 5767Southern Abstentia 
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William Siedman was the chairman of the RTC (Resolution Trust Corporation) which was the organization established to clean up the S&L crisis in the 80's. Out of that came 'tranched credit rated securitization' -- the instruments responsible for the rise and collapse of the economy -- and fun little things like 'credit default swaps' (an instrument designed like a craps table where an investor could buy an insurance policy from AIG on a bundle of bad mortgages that would pay off if the bundle defaulted -- or any other contract for that matter -- in other words -- they were making bad loans with other peoples money and then buying insurance policies that paid off if people defaulted). He also explains how Greenspan and the ideology politc du jour -- (aka Reagan/Bush) vehemently resisted regulating the monster that Siedman created; A must watch in two parts; http://www.youtube.com/watch?v=GKBuVU5b6eM&feature=related http://www.youtube.com/watch?v=2SDaubyh8yU&feature=related And here is a great primer on what's wrong with the banks as a result -- but it is an hour-long radio program; http://thislife.org/Radio_Episode.aspx?episode=375 or there is a PDF transcript; http://thislife.org/extras/radio/375_transcript.pdf [This message has been edited by Local Rebel (03-17-2009 12:12 AM).] |
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Huan Yi Member Ascendant
since 2004-10-12
Posts 6688Waukegan |
. The link I listened to ignored the pressure to make otherwise stupid loans that was bought on by the Government. Think C.R.A. I know from speaking to bankers for example that that pressure was constant and subject to audit for compliance. I further don't care for the assumption that mortgage instruments are purchased as short term, (rather than long term revenue generating), investments which then should suffer fluctuations in valuations and their consequent effect on balance sheet ratios through mark to market. . |
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Local Rebel Member Ascendant
since 1999-12-21
Posts 5767Southern Abstentia |
quote: What specifically are you referring to here John? FHA wasn't offering no-doc sub-primes -- that was private sector. Still -- one clip here didn't tell Bill's story - you'd have to watch both -- which is why I posted them both. By the way -- Bill is a Republican and worked for Gerry Ford. quote: Perhaps you're not getting the point then. Mortgages were bundled up together into packages -- then sliced up -- or shared out -- and sold to anyone who wanted to buy them.(securitization) Some people -- particularly institutional investors -- may have held them for long-term investments. Others day-traded them. But -- more importantly -- many times the very people who were making the no-doc loans were turning around and buying credit default swaps against them(from AIG) -- which in essense were insurance policies that paid off if the loans went bad. Anyone could buy these -- so obviously there would be many times more owed (by the insurer) against a bad loan than what the origial loan was worth -- if the loan went bad. When the value of the assets (loans made by banks) go bad -- the banks are legally required to mark them to market -- or in other words -- if a house that was worth 500k is now worth 250k -- they have to show it that way on the books. Anything else is fraud. |
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Huan Yi Member Ascendant
since 2004-10-12
Posts 6688Waukegan |
"The problem with MTM accounting is that it relies on the notion that the market is an asset's best arbiter of value. Most of the time, that's a fair assumption, but it breaks down in a market crisis. When investors are gripped by fear, panic-selling can produce prices way out of whack with underlying asset values. Worse, a market may stop trading altogether. Even the Financial Accounting Standards Board and the SEC issued a clarification of the accounting rule known as FAS 157 on Tuesday, saying that the price of "disorderly" trades (distressed selling or forced liquidations) isn't "determinative" when measuring fair value. And since it's difficult to imagine a market more disorderly than the one we're in right now, when it comes time to do the books, accountants are basically taking a guess and hoping for the best. The resulting uncertainty creates a very real problem. The Bank for International Settlements (basically, "the central bankers' central bank") has suggested that applying mark-to-market accounting to triple-A-rated subprime mortgage securities, using the ABX index -- which tracks the current market value of such securities -- as an input, could overstate expected total losses by as much as 60%." http://www.fool.com/investing/dividends-income/2008/10/02/mark-to -market-accounting-what-you-should-know.aspx " So what conclusions do we draw? Some possibilities: • Agitate to have “mark-to-market accounting” outlawed by the Financial Accounting Standards Board. It makes business cycles more extreme, and allows management to play too many games and pay itself too many bonuses. The old system could be gamed too, but not as badly - if you wanted a bonus for an asset’s increase in value, you had to sell it. • Don’t buy shares of financial service companies with “Level 3″ assets of more than their capital - that’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too. • Expect more unexpected crashes and taxpayer bailouts. The mark-to-market system is highly unstable, and the value of illiquid assets can vanish in a downturn. • Treat “mark-to-market” accounts with deep suspicion unless all the assets so valued are publicly traded on a recognized exchange. " http://www.moneymorning.com/2008/06/04/why-mark-to-market-is-bad-news-for-shareholders/ . |
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Local Rebel Member Ascendant
since 1999-12-21
Posts 5767Southern Abstentia |
This is the conundrum John. The trouble with the toxic assets is that no one can tell who is going to default or not -- which means no one wants to buy them. If we're to adhere to the free market model that Greenspan (I may start calling him Randspan) advocated regarding this very unstable investment system -- then they are worth zero -- since no one is willing to buy them. End of story. Banks close. We pick up the pieces through the FDIC. But in reality -- they can't be worth zero -- because some people are still paying their mortgage, using the home, and taking care of the property. So is the free market fair? It's been interesting how all the free marketers have been asking the government to fix their dwindling assets. Capitalists in boom -- socialists in bust? Do we sequester all the toxic assets into one bad bank and then guarantee investors a floor? We'd have to print a lot of money to do that. |
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Huan Yi Member Ascendant
since 2004-10-12
Posts 6688Waukegan |
. Accounting is a closed world and idiom relying on rules and generally accepted principles. To the extent it, beyond measuring arms length transactions, reflects reality it is fortunate but by no means certain. Looking forward it can also distort views and decisions doing harm in the process. I think mark to market is, (like purchase accounting), an example of this. . |
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Local Rebel Member Ascendant
since 1999-12-21
Posts 5767Southern Abstentia |
Mark to market was the very accounting method that fueled the rise in productivity in the market for the last ten years though John. You'll get no argument from me that it is more than a little immoral for some to perform hard work for every penny and other's wealth increases with the stroke of a pen because of speculation. It seems to me that when you have capitalization 30 times over the value of the mortgage backed security that's being insured with a CDS that is as much an instability in the market as the current situation -- but the banks weren't complaining any then. Still -- if they aren't going to mark to market -- then what? A government board determines what each asset is worth? |
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