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Thread: US close to NATIONAL bankruptcy

  1. #166
    Elite Member Little Wombat's Avatar
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    Quote Originally Posted by witchcurlgirl View Post
    Sorry, but these things would not have been allowed under Glass-Steagall....which Clinton signed into law in 1999. Yes, it was sponsered by Phil Graham, but there was no majority and clinton didn't veto. So the blame is shared.

    This repeal allowed commercial lenders to underwrite and trade instruments such as mortgage-backed securities........

    Without this, these companies would not be involved in the mortgage mess

    There were many warnings that this would happen back in 1999 when the repeal was done. If you Google, you'll see article after article from 10 years ago saying this is exactly what would happen, and that it would even affect the Insurance industry- AIG for example.
    I agree. The repeal of the prohibition of mixing commercial and investment banking is probably at the core of this to some extent. When it was repealed, it was like people forgot why it was created in the first place.

    Hmmm...., in the late 1920s, the mixture of bank funds in the stock market eventually led to banks not being able to cover their obligations, which led to panic and huge run on banks and their inevitable closures.

    Now - the reverse! The securitization of risky home loan packaging has led to investment firms not being able to cover their losses, leading to the failures of some of the largest investment firms in the world...

    Gee, it's like they thought of the banks and their potential closures, but didn't think about the risks of the reverse!

  2. #167
    Elite Member Little Wombat's Avatar
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    Quote Originally Posted by louiswinthorpe111 View Post
    I did not mention Fannie and Freddie in my analysis. Here's what's happening with the mortgage end of Fannie and Freddie.

    Right now, the majority of mortgages being done are FHA loan. Because those loans are not necessarily credit score driven, have nice low interest rates, and allow for higher loan to values. My business is exclusively FHA right now. Fannie and Freddie are the only ones that purchase FHA loans. FHA loans are government backed loans.

    The main problem with Fannie and Freddie is that Lyndon Johnson privatized the companies back in the late 60's. This made the companies a combo of a private and government enterprise. They have a weird set of rules where they don't have to disclose financial difficulty.
    Haven't Freddie and Fannie's business models changed a lot in the past 10 years? Correct me if I'm wrong, but I believe previously they were only involved in FHA or similar government-backed loans. Sometime in the past 10 years they were allowed to expand their scope or something like that.

  3. #168
    Elite Member Fluffy's Avatar
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    Greenspan still deserves some blame. He may not be the sole cause of this but his actions did nothing to mitigate the housing bubble in the early 2000s.
    First, as has been argued by John Taylor, the Fed kept the interest rate at very low levels for too long after the recession of 2001. The Fed waited until the middle of 2004 to start raising the interest rate from its historically low level of 1%. The point is not that in 2001 the Fed reduced the interest rate too much when it cut it from more than 6% to less than 2% in less than a year. This was probably the right thing to do in a recession. The problem is that it kept the rate there for too long, when the economy showed signs of recovery. This laid the groundwork for a massive credit and liquidity expansion which in turn created an asset bubble in the housing market.

    Second, the Fed failed to take up its mandated responsibility to supervise and to regulate the financial institutions. Why did this happen? The root cause is the religious belief of Greenspan in the benevolence of markets and perniciousness of government interventions. At the moment financiers were increasing their exposure to liquidity risk and made fantastic profits doing so, in the knowledge that the Fed was insuring them freely against such a risk, Greenspan stood by and marveled at the creativity of markets. In his wonderful book “The Age of Turbulence” he discusses the new financial instruments and he concludes with a beautiful metaphor: “Why do we wish to inhibit the pollinating bees of Wall Street” (p 372). The problem is that the financiers of Wall Street were mostly pollinating themselves.

    FT.com | The Economists’ Forum | We will never have a perfect model of risk

  4. #169
    Elite Member louiswinthorpe111's Avatar
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    Quote Originally Posted by Little Wombat View Post
    Haven't Freddie and Fannie's business models changed a lot in the past 10 years? Correct me if I'm wrong, but I believe previously they were only involved in FHA or similar government-backed loans. Sometime in the past 10 years they were allowed to expand their scope or something like that.
    Correct. I believe in the past 10 years they've purchased loans OTHER than FHA. However, they are the ones that purchase all of the FHA loans now. So, seeing as how 70% of all lonas currently being done are FHA loans, if Fannie and Freddie were not there to buy them, the lending industry would be toast.

  5. #170
    Elite Member MohandasKGanja's Avatar
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    Why would the FHA need Fannie Mae or Freddie MAC to purchase FHA-backed loans? The FHA backs the loan made by the conventional lender who provides the loan. I could see how not being able to re-sell the loan to another institution could be a problem, but I don't see why it would be a "big" problem.

  6. #171
    Elite Member louiswinthorpe111's Avatar
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    The lenders that originally write these loans do not ultimately hold them. They maintain the servicing rights for which they get compensated, but they sell off the loan behind the scenes. Even your hometown banks sell the loans but maintain the servicing rights, so it "appears" they hold the note, but they don't. All lenders have to maintain a certain percentage of liquidity, or their lender rating is downgraded. So if they don't move the mortgages off their books, they are unable to do any more loans. So all the FHA loans have to meet Fannie and Freddie requirements so F & F will purchase the loan. Otherwise, it says on the books of the lender, sucking up the liquidity.

    I hope this isn't confusing anyone and I am explaining it properly.

  7. #172
    Elite Member MohandasKGanja's Avatar
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    No, that makes sense. But why would an FHA-backed loan appear to be less attractive than any other? Is it the interest rate? And when Fannie Mae or another institution purchases the loan, does it remove the obligation of the FHA from backing it if it goes into default?

  8. #173
    Elite Member RevellingInSane's Avatar
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    Quote Originally Posted by lurkur View Post

    DE - REG - YOO - LAY - SHUN
    CORR - UP - SHUN

    Deregulation + corruption
    ^^Simple equation explaining the complex economic conundrum.



  9. #174
    Elite Member Fluffy's Avatar
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    Default Herbert Hoover & John McCain think alike

    Mediocre minds think alike.
    Responding to the collapse of several major investment banks this week, John McCain reassured us, "I think still -- the fundamentals of our economy are strong." That move comes from an old playbook: On Oct. 25, 1929, Herbert Hoover declared, "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis."McCain's Dangerous Do-Nothing Economics | The American Prospect

  10. #175
    Elite Member MrsMarsters's Avatar
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    So, can you agree that the Bush administration was also a player in screwing up the US economy? Obviously...it wasn't just this, there were many other issues, but can't even republicans agree there was a huge screw up..somewhere on that end?

  11. #176
    Elite Member MohandasKGanja's Avatar
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    Quote Originally Posted by MrsMarsters View Post
    So, can you agree that the Bush administration was also a player in screwing up the US economy? Obviously...it wasn't just this, there were many other issues, but can't even republicans agree there was a huge screw up..somewhere on that end?
    Nobody will admit to that with barely a month away from a general election. It's going to be all about blaming the other side.

  12. #177
    Elite Member Little Wombat's Avatar
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    Quote Originally Posted by louiswinthorpe111 View Post
    Correct. I believe in the past 10 years they've purchased loans OTHER than FHA.
    Thanks. I new it was something along those lines.

    I guess my point in bringing up Freddie & Fannie's changes in investment activity was to highlight that it exposed them to greater risk than they otherwise would've been subjected to during this whole subprime lending fiasco.

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