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Thread: Here we go again - Sowing seeds for another Financial Crisis

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    Banned Eric Stoner's Avatar
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    Default Here we go again - Sowing seeds for another Financial Crisis

    Two recent news items are causing jitters to put it mildly :

    From the April 2, 2013 Washington Post : The Obama Administration is engaged in a broad push to make more home loans available to people with weaker credit.
    Obama's economic advisors say the housing rebound is leaving too many people behind. Pressure is being put on Fannie Mae and Freddie Mac to guarantee more mortgages without regard to credit ratings. Banks are being told to be more "subjective" in deciding whether or not to make mortgage loans.

    Here's a related item from today's N.Y. Times : Banks have been busy fobbing off credit risk by reviving the same garbage instruments they created that led to the last Financial Crisis. They have been renamed as "structured financial products" but are still the same CDO's that got everybody into trouble just a few years ago. This year alone, banks have issued $33.5 billion in bonds backed by commercial mortgages. More than they issued back in 2005. Initially issued with various "protections" many are now being issued "naked" as demand has increased. The "safest" are paying twice the interest being paid on Federal debt.

    Dodd- Fwank was SUPPOSED to create more and better safeguards for this type of thing. In reality the banks are making loans and issuing bonds based on loan bundles as though nothing happened back in 2007 and 2008. While lower than before the Crisis, the percentage of loans that are "interest only" has crept back up to 34% from a low of 11 % two years ago. Demand for these loan pools is so high that LENDING STANDARDS HAVE BEEN RELAXED. Somebody please pinch me and tell me this is NOT happening.

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    Banned Melonie's Avatar
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    Default Re: Here we go again - Sowing seeds for another Financial Crisis

    ^^^ the very same situation has effectively taken place via 75% US Taxpayer owned Ally Bank ... which via such alter egos as ResCap, DiTech etc. held a ton of subprime mortgages , that are now being sold via mortgage backed junk bonds at 'bargain basement' prices ( with the losses in 'principal' being shoveled on said US Taxpayer owners ).

    The move out of mortgages has now allowed 75% US Taxpayer owned Ally Bank ... via such alter egos as the former GMAC , to start writing huge numbers of low interest rate 'surprime' auto loans and leases for GM and Chrysler vehicles.

    The credit quality pundits will undoubtedly comment that this is a better arrangement than with other banks' shaky credit auto loans, since the already 75% US taxpayer owned Ally Bank subprime auto loan portfolio losses can be channeled directly to US taxpayers without the need for the intermediate step of a separate US Taxpayer financed bailout of a separate big bank !

    But hey the increased auto 'sales' ( is it a sale if the car is never actually paid for ? ) make the total retail sales statistic look better, in the same way that increased real estate 'sales' ( same question ) make the total home sales statistic look better.

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    Banned Eric Stoner's Avatar
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    Default Re: Here we go again - Sowing seeds for another Financial Crisis

    Oh how nice. A "recovery" using smoke and mirrors. Great, just great !

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    Banned Melonie's Avatar
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    Default Re: Here we go again - Sowing seeds for another Financial Crisis

    ^^^ arguably, it's not only that !!! From


    (snip)"Two months ago, Fed governor Jeremy Stein caused a major stir among the very serious excel-using economists and other wannabe "scientists"-cum-voodoo witchdoctors, when he hinted that it was the Fed's actions that were leading to "overheating" in the markets. It took quite a bit of rhetoric by other very serious people to talk down his comments and give the impression that the S&P is not about 50% overvalued. Today, Stein has managed to stick his foot in his mouth for the second time in a row, and do what virtually nobody in the status quo is capable of: tell the truth.

    In a speech titled "Regulating Large Financial Institutions" Stein made something very clear: if and when a TBTF fails, and since this time is not different, and a failure is only a matter of time, depositors will lose everything (courtesy of some $300 trillion in gross unnetted liabilities which once there is a counterparty chain failure, suddenly become very much net and immediately marginable - a drain of cash), which now that Cyprus is the template, is to be expected. Not only that but Stein makes it all too clear that part of the Dodd-Frank resolution authority guidelines, a bailout is no longer an option.

    Perhaps more to the point for TBTF, if a SIFI does fail I have little doubt that private investors will in fact bear the losses--even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. And as a member of the Board, I am committed to following both the letter and the spirit of the law.

    At least he can't say Americans weren't warned when the Cypressing(sic) hammer finally falls."(snip)


    ... the arguable takeaway is that it's now preferable to avoid inserting 'individual financial institutions' between deadbeat borrowers and US Taxpayers, for then US Taxpayers can be called on for a bailout without the 'inconvenience' of Dodd-Frank and other legal limitations, without the 'complication' of prior congressional approval being necessary etc. Thus the US gov't / US taxpayer now directly guarantees virtually all student loans, the vast majority of shaky mortgages, a large and growing number of 'subprime' auto loans etc.


    On the flip side, your 'hero' Paul Krugman and other Keynesians are of the opinion that this mechanism of the FED / US treasury printing money out of nowhere, 'loaning' it to Americans whose credit rating / ability to repay is so poor that 'individual financial institutions' refuse to lend them money at reasonable interest rates, and in turn having that money spent by said subprime borrowers on everything from new Chevy's to I-Pads to mini-McMansions, is 'good' for the US economy since it stimulates 'demand'. Of course the Austrians would point out that there never was, and never will be, a real shortage of 'demand'. The shortage exists in the increasingly limited ability of said subprime borrowers to produce additional real 'value' which might be used to actually repay the borrowed money they have already spent !
    Last edited by Melonie; 04-19-2013 at 08:45 PM.

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    Featured Member Vamp's Avatar
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    Default Re: Here we go again - Sowing seeds for another Financial Crisis

    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Banned Eric Stoner's Avatar
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    Default Re: Here we go again - Sowing seeds for another Financial Crisis

    Melonie - Krugie ? If he didn't exist I'd have to invent him lol.

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    Banned Eric Stoner's Avatar
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    Default Re: Here we go again - Sowing seeds for another Financial Crisis

    Quote Originally Posted by Vamp View Post
    Yep. You were ahead of the curve on this one.

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