|
From ColoradoHomeLoans.com Real Estate
You Won’t Believe It Well, you won’t believe what I learned since last month. I keep digging and trying to educate myself, as the bailouts are now well over $1 trillion. Is it just me, or are you as appalled as I am that there has not been any public input, given these huge sums of money going out? I mean, it isn’t like we don’t have something like five of the last six Nobel Prize-winning economists here in the country to draw from. Anyway, here is what I have pieced together so far. The entire derivatives market worldwide is now estimated to be $600 trillion. Yes, you are reading that right. To put that into perspective, the entire Gross Domestic Product for the U.S. (everything we produce as a country) was $13.81 trillion in 2007. So these numbers are simply mind boggling. However, the good news is that most derivatives are apparently fine and are not of the type currently causing this melee. The credit derivatives portion of that market is estimated to be $60 trillion. Here again, most of this is not the highly leveraged type of “credit swap” derivatives involved in this meltdown. The bad news is that upwards of $20 trillion of it is. So what are these highly leveraged “credit swap” derivatives anyway, and how did we get to this point, you may be asking? Well, to start, you might want to check out http://www.cbsnews.com/video/watch/?id=4484039n to see the 60 Minutes interview of Henry Paulson, our Treasury Secretary and author of all of these bailouts. (Oh and did I mention that he made his $500 million net worth working at Goldman Sachs, who just happens to be the largest derivatives player in the world?) It turns out that these toxic credit swaps were a fraudulent way to circumvent insurance rules and regulation. I say “fraudulent” because regardless of whether you call it “insurance” or not, whenever you accept a fee for a guaranty, which you know you do not have the ability to make good on from day one, that is fraud pure and simple. Any first-year law student could tell you that. But let’s get back to our story … The first error was that we, as an industry, were told we had to make loans to people that weren’t really qualified. That stems from a 1994 revision to the Community Reinvestment Act of 1977, which created stiff financial penalties for banks not doing so, because otherwise we were discriminating (or so the story went). So that was the birth of “sub-prime lending” in the U.S. Next thing you know, we have pools of these stupid loans that needed to be securitized (like all loans) and resold into the secondary market as “collateralized debt obligations” (CDOs). Now here is where the first fraud was committed by the bond rating agencies. They (Moodys, Fitch, and Standard & Poors) received huge fees and somehow managed to rubber stamp all these CDOs with AAA ratings. This told unsuspecting investors worldwide that these pools of bonds were the safest grade of investments you could find in the market. But, the financial institutions like Lehman and Merrill who made these stupid loans and managed to resell them for top dollar (based on these fraudulent ratings) still weren’t happy. No, they decided to sell insurance against the defaults that everyone knew would be happening on a regular basis. But, they lacked the capital reserves to provide this insurance, so they cooked up a scheme to circumvent this problem by creating “credit swaps.” And if this wasn’t bad enough, they decided they couldn’t earn enough in fees for this new insurance, which they never intended to pay out on anyway. So (and this is confirmed in the video link above), they hired physicists to create the math underlying these credit swaps in such a way that the leverage was exponential in nature. So these same players like Merrill went back to the Norwegian Pension Fund they sold a batch of these stupid loans to, and sold them this new insurance promising to pay out these astronomical amounts if the pools of loans they had went bad. This, of course, was in exchange for astronomical fees that would make a normal insurance company blush with envy. Wait, you ask, how did they ever hope to get away with this? Well, these same financial geniuses decided that property values would never go down again in this country. So when a sub-prime borrower got into trouble, they just refinanced him into a new sub-prime loan. They earned still more record fees by churning these loans over, sometimes two or three times in a year. Since there was always more equity to tap, the deadbeat borrower didn’t care either, because he didn’t have to pay the fees out of pocket. Our friend the Norwegian Pension Fund was none the wiser. But, eventually, there was no more equity to borrow against at this pace of perpetual refinancing. Mr. Deadbeat went back to his old trailer park after dropping off the keys, and suddenly the geniuses realized the jig was up. But how did Fannie Mae and Freddie Mac end up involved? They never really did any sub-prime lending after all. Well, Frank Raines who was the CEO of Fannie Mae during this time, saw all his buddies at Lehman making extra fees selling these phony swaps. He decided Fannie could play the same game. As we all know now, that is where the first $700 billion bailout is going—to pay 50 cents on the dollar for worthless Fannie and Freddie swaps totaling $1.4 trillion. You may remember Frank Raines got caught cooking the books this way back in 2004 and 2005, but only after he paid himself a $100 million bonus in a single year. He ultimately paid a fine of $31 million in a civil proceeding, never having to admit any guilt. Gee, it must be nice having friends like Senator Barney Frank, huh? Has all this changed my mind about the bailout working? You bet. This is ridiculous in its very premise. How does paying 50 cents on the dollar for something that is worthless, make it magically worth something later at some make believe auction? The entire amount of actual losses due to mortgage foreclosures nationwide is not the problem at all. They are a mere $150 to $300 billion by almost all estimates I have read. Those losses would likely have been behind us by the middle of next year. But, as I have now just learned that $1.4 trillion was just the tip of the iceberg hitting the U.S. economy. It appears the other $20 trillion (in actual sub-prime swaps) has now also come due, and that would surely explain why every nation in the world is now jumping in to try to catch what is an overwhelming amount. But no one seems to be asking the obvious question—why? These contracts or swaps are two-party agreements. Why are we jumping in to pay off these bad bets? I think years from now, we will find out we have all been duped by these very same financial geniuses into lining the pocket of their friends in the derivatives market. After all, who is it that keeps telling us the sky will fall if we let these bad banks fail? Well, Mr. Paulson for one, and he surely signed the checks for the physicists after all, didn’t he? Instead, I now believe we are recapitalizing liars and thieves because (we are told) they are just too big to let fail. Well, I can tell you I for one at least am prepared to test that theory, rather than have our dollar pillaged by these fools any longer. How about you? Next month, my ideas for fixing this mess … |