Bailing Out Mortgages on Real Estate vs Bailing Out Derivatives?

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[Engine Nighthawk Palin]

I want to switch gears  for second, and add another bullet in the debunking of the the GOP's theory that the sub prime crisis was the fault of the Community Reinvestment Act.

The campaign to racialize a global financial meltdown operates in a fact-free zone. A national study of the performance of banks covered by the Community Reinvestment Act (CRA) shows that these government-backed banks were much less likely than other lenders to make the kinds of risky, high-cost home purchase loans that helped fuel the foreclosure crisis. The average interest rate for CRA loans was much lower than other lenders. CRA banks were more than twice as likely as other lenders to keep the loans they write instead of selling them off to the highest bidder.

By and large, the problem with subprime lending was that independent, unregulated brokers pushed inappropriate loans to poor borrowers and to many American middle-class and wealthy consumers who could not qualify for their second or third vacation home and who took a "liar's loan" from brokers, not covered by CRA. These loans were then sliced and diced into mortgage-backed securities by Wall Street investment houses that then sold them to the financial institutions of the world.

Wall Street in Black and White
By Emma Coleman Jordan | TheRoot.com  LINK HERE
Oct. 6, 2008

There are other places I have come across that show the statistics on the default rate of the CRA mortgages, and how much lower it was in the minority segment than in the caucasian segment.  If I find them again I will link them into this post.

[HamletsMill]

I want to switch gears  for second, and add another bullet in the debunking of the the GOP's theory that the sub prime crisis was the fault of the Community Reinvestment Act.

The campaign to racialize a global financial meltdown operates in a fact-free zone. A national study of the performance of banks covered by the Community Reinvestment Act (CRA) shows that these government-backed banks were much less likely than other lenders to make the kinds of risky, high-cost home purchase loans that helped fuel the foreclosure crisis. The average interest rate for CRA loans was much lower than other lenders. CRA banks were more than twice as likely as other lenders to keep the loans they write instead of selling them off to the highest bidder.

By and large, the problem with subprime lending was that independent, unregulated brokers pushed inappropriate loans to poor borrowers and to many American middle-class and wealthy consumers who could not qualify for their second or third vacation home and who took a "liar's loan" from brokers, not covered by CRA. These loans were then sliced and diced into mortgage-backed securities by Wall Street investment houses that then sold them to the financial institutions of the world.

Wall Street in Black and White
By Emma Coleman Jordan | TheRoot.com  LINK HERE
Oct. 6, 2008

There are other places I have come across that show the statistics on the default rate of the CRA mortgages, and how much lower it was in the minority segment than in the caucasian segment.  If I find them again I will link them into this post.

This is an important point to clarify, because the conservatives are trying to blame this whole thing on the Dems and THEIR CRA program. I saw a very dodgy video about this on YouTube that was a kind of Rethug financial talking point "Clockwork Orange" hypnotic device! I'll try to find the link. It was a nice try. But I am glad you are researching this too!

A nation of LIARS on both sides is NOT going to solve anything. Let's search out the truth and get the facts. Good post, Engine.

[Rubo]

I guess I'm mentally challenged in understanding the tap dancing around the financial crisis.  Congress signs a $700B bailout bill and a few days later this makes the news:

Fed, in emergency move, will lend to companies
Tuesday October 7, 10:14 pm ET

By Jeannine Aversa, AP Economics Writer
 
Fed makes emergency move to lend directly to companies; Bernanke hints at rate cuts soon


WASHINGTON (AP) -- Frantically trying to stop the bleeding on Wall Street, the Federal Reserve took a first-time step Tuesday to get cash directly to businesses and hinted that interest rates could come down soon. Stocks continued their free fall anyway and hit new five-year lows.
 
The central bank invoked emergency powers to lend money to companies outside the financial sector and buy up mounds of commercial paper, the short-term debt that firms use to pay for everyday expenses like salaries and supplies.

The Fed, which has only loaned money to banks before, made the move as the gravest financial crisis in decades wore on and concern spread around the world.

In a speech to the National Association for Business Economics, Fed Chairman Ben Bernanke delivered a strong signal interest rates may need to be cut. And he warned the country could be stuck in the economic doldrums for some time.


http://biz.yahoo.com/ap/081007/financial_meltdown.html?.&.pf=banking-budgeting


So this money is on top of the $700B, correct?  And the feds have lowered the interest rate.

John McCain doesn't think this is enough.

McCain changes homeowner plan

Mike Allen Thu Oct 9, 12:29 AM ET

Sen. John McCain (R-Ariz.) made an overnight change in the homeowner bailout he proposed at Tuesday’s presidential debate, making it more generous to financial institutions and more costly for taxpayers.

McCain's staff says it was always meant that way.

When McCain sprang his surprise idea at the start of the debate in Nashville, his campaign posted details online of his American Homeownership Resurgence Plan, which would direct the government to buy up bad home mortgages, allowing strapped people to keep their property.

The document posted and e-mailed by the McCain campaign on Tuesday night says at the end of its first full paragraph: “Lenders in these cases must recognize the loss that they’ve already suffered.”

So the government would buy the mortgages at a discounted rate, reflecting the declining value of the mortgage paper.

But when McCain reissued the document on Wednesday, that sentence was missing, to the dismay of many conservatives.

That would mean the U.S. would pay face value for the troubled documents, which was the main reason Sen. Barack Obama (D-Ill.) gave for opposing the plan.

http://news.yahoo.com/s/politico/20081009/pl_politico/14414

Is there a better mind than mine out there that can wrap around this?  I just don't get it.

[HamletsMill]

OK everyone, with the IMF saying we are on the brink of Global Financial Melt Down for the coming week as the Masters of the Universe that got us into this mess and government economic "D" student incompetents scramble like rats on a sinking ship - I have been researching this weekend.

http://www.reuters.com/article/topNews/idUSTRE49A36O20081011

Here are the links for some background info for this post from our preceding discussion for anyone just coming in to get up to speed on the basic situation:

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

http://en.wikipedia.org/wiki/Credit_derivative

http://en.wikipedia.org/wiki/Collateralized_debt_obligation

http://en.wikipedia.org/wiki/Credit_default_swap

From everything I have read, I still say the "Bailout" is for saving the hides of the now terrified investors in bundled mortgages (the CDO "SECURITIES INSTRUMENT" component - Collateralized Debt Obligations "derivatives" component of this lame brained gamed fiasco) by buying $700 billion worth of support "confidence" in them. So far THIS INITIAL SCHEME ISN'T WORKING TO FREE UP CREDIT MARKETS and now we move into WEEK THREE of the impasse of the spreading financial bubonic plague crisis of confidence in the worldwide banking system.

It appears that as long as there is MASSIVE FEAR in the now global financial banking system that the CDO's tied to the Credit Default Swap plutonium (the CDS "INSURANCE INSTRUMENT" component) can lead to a chain reaction of 1929 "Margin Call" bank failures, there is no Interbank lending going on and the credit markets are FROZEN. If the interbank credit market is frozen, validly operating completely financially solvent companies - like the one you and I are working for - can't get a short term loan to finance raw materials, or capital expenditures, or this weeks payroll - and things start to implode, people get laid off, and it all  leads to 1932 and this all over again:

http://www.youtube.com/watch?v=umoYaS49Dnw

So here we now are ready to start this potentially very fateful week down at the Jungian World Crossroads. Things may or may not get "Old Timey". We can only hope the people calling the shots have a sudden rise in conceptual IQ that we have not yet seen so far.

http://www.youtube.com/watch?v=krwywj_gIjk

So all you Mudflatters have to get a quick big picture understanding.

In a quite appropriate Wall Street financial analogy it is like everyone has been doing an Eliot Spitzer booking-a-thon with the same Fredericks of Hollywood catalog clad "V.I.P. Models" agency in downtown Manhattan. This booking-a-thon f****** frenzy started in 1998 forward until now in October 2008 when the 1933 Glass-Stiegel Act that put the 1933 Great Depression LESSON ONE Government Regulation FIREWALL between Commercial Banks, Investment Banks, Securities Dealers, and Insurance Companies WAS FORMALLY ENDED. Phil Graham and the Wall Street Lobby acted as the Association of Wall Street-Senate-Congress Financial Madams in getting this, well, lubricated with a railroad car of KY jelly. (Sorry for the analogy but it works and we all have to understand what has gone on very, very fast now.)

Slowly in 2007 and now at tabloid speed in 2008 word now gets out that ALL the models at the agency might have AIDS! Suddenly no one is in the mood. Maybe only one bank really has tested positive for AIDS. But no one is taking any chances because no one knows for sure about the rest. Financial AIDS is the CDO-CDS Virus Complex tied to the collapse in the real estate market and the default in mortgage payments thanks to shady interest rate booby trapped candy loans that were almost criminal. All the global banks are afraid that another bank they might loan money to in the global credit system is now tired in some way into the toxic Financial AIDS CDO-CDS Virus Complex and WILL DIE and NEVER repay the money! The world economic ministers are now trying to come up with a condom cure that will get people back into bed and amorously going at it again regardless of who may or may not actually be sick.

So Mud people. You are all smart. You are all early responders. You are people who take action when you become aware of the facts. But you may have been quite busy in life over the last 10 years doing your job competently while you figured people on Wall Street and in the U.S. Government were doing their jobs competently. THEY WEREN'T We were led by savagely mindless greedy functionaries that simply did not care about the future consequences of this, or ideological "D" students in economics in the Congress and Senate of the United States who simply did not understand the danger because it was completely over their bottom of the class heads, or (sigh) a third rate profoundly intellectually lazy legacy "D" student POS for a human being from Yale as President of the United States.

But you, quite differently, are all like the lady on the Titanic that slept in her clothes the whole Atlantic crossing and made it out alive because she had a premonition. You all ended up here on the electronic Mudflats in your deepest premonitions from the appearance of the lunacy of the choice of Scara on this now very strange cosmic voyage of the Pequod that is our nation. So listen up so you can maybe understand the dynamics of the situation now for the coming week and make your own informed assessment of what they are doing and how close to the mark they are.

This is what all the up until now clueless Masters of the Universe at their world summits don't seem to understand. Here is the analogy:

Imagine a big bath tub filled with warm water ready for bath time. The stopper has been suddenly pulled and water is draining out in a vortex at the drain hole.

All the money in the world financial system of whatever currency is the warm water in that bathtub. The world financial ministers are concentrating on the mass of water. They want to keep the bath temperature up. They want to add nice smelling bath crystals. They want to fill buckets of water by other means and pour water into the tub to keep the level up suitable for a bath. They do not want the tub to empty and go dry because if they do it is TOTAL COLLAPSE. No water - no money - nothing invested worth anything anywhere.

But here is where we must tell our leaders to act: they must stop the water draining out at the drain hole vortex. The drain vortex is the implosion of real estate values and mortgage defaults.

This guy, Dan Gilbert,  as far as I can tell from research has come up with the BEST PLAN SO FAR to stop the drain hole vortex in the simplest manner, in the quickest time, with the LEAST COST TO THE TAXPAYERS IN BOTH THE SHORT RUN AND THE LONG RUN.

Go to this site and read his argument for his solution:

http://choosethinking.com/2008/10/a-solution-that-works/

This is who this guy is. He has the credentials to get a Presidential hearing with a new President and Vice President who will listen to a wide range of ideas and arguments, and we all know who we hope that will be:

http://choosethinking.com/about-dan/ 

I would temper his very good argument with the issues brought up by these two commenters:

Comment by Dean Malone on October 12, 2008 @ 4:59 am

This is not going to work. As long as housing prices keep falling, people will tip over to bail when they hit their personal negative equity threshold of pain. We need to get at the ROOT cause of all this. The banks won’t lend money to businesses because they’re concerned that opague derivatrives held by counter-parties will cause them to default if we get a major corporate failure. That is the “sawdust” that is grinding ALL the gears to the fault. Any solution must address this FIRST. So what’s the answer? Government has the right to issue money so why not declare all derivatives null and void? Follow it up with a law that says only derivatives listed on CME and/or some other exchange and backed up with real collateral will be lawful. The risks will instantly evaporate and nobody will get hurt - including the taxpayer. Credit will magically free up, business will skyroicket, inflation will kick in with a vengeance and it will be party times all over again. I am amazed that there is not enough common sense ANYWHERE to see this obvious cause and effect.

Comment by M.FRED MINTER on October 11, 2008 @ 3:29 pm

Dan, you have taken the words our of my mouth. I have been preaching the mantra that we can only bail out of this crisis by stabilizing the housing market. I submitted a similar solution to Barak Obama. I suggested a national Section-8 program for home owners. It works very similar to your plan, the most important part of which there is no reduction in the principle mortgage. That’s important because the owners of these mortgages are investors and retirement plans that pay their members as a return on the principle. And the lower the principle, the lower return to these owners. It could be disastrous for retirees who depend on these 401k payments.
---------------------------------------------------------------------------------

Everyone become familiar with the bathtub analogy and  Dan Gilbert's plan. We will need this foundation to analyze the crisis as this fateful week unfolds. If these guys at the top don't start to get this right, it is all going to get far more drastic than just everyone's 401K going down.

As Mudpuppies in Steerage on the Titanic we must now try to discern how much time we have before we have to storm up to the lifeboats while the elite diners and people getting their news from the MSM are yet still throwing snowballs at each other up on A Deck with the shiny novelty residue from the ice berg.

Anyone else with any observations this week, keep posting your observations and insights here on this thread and any insightful links here as we try to discern how the water tight doors are being sealed off and if the gash is indeed too long and the ship is going under.

I felt very much the need to write this out for all of you from my research for your consideration, thoughts, and further individual analysis. This is the best damn site for thinking people on the whole entire Internet right now!

Please send this Mudflats link of my essay

http://www.themudflats.net/forum/index.php/topic,1439.msg18099.html#msg18099

or in copy and paste text email form to any family and friends that may be puzzled this coming week in trying to understand this situation and will be trying to figure out what to make of what they are going to see in the MSM reporting this week. Tell them to become thoroughly familiar with Mr. Gilbert's proposal and the web link to it

http://choosethinking.com/2008/10/a-solution-that-works/

and then start contacting their Congressmen,

https://forms.house.gov/wyr/welcome.shtml

Senators,

http://www.senate.gov/general/contact_information/senators_cfm.cfm

and the Obama ideas web site

http://www.ohboyobama.com/

for consideration of Mr. Gilbert's analysis and proposal if they think it is perhaps the best idea so far on what to do to take the most effective immediate action.   

Best regards to all!

HamletsMill  

[HamletsMill]

Here is an excellent link on thoughtful economists that gave fair warning:

http://www.huffingtonpost.com/2008/10/12/economic-honor-roll_n_133928.html

Where was the Bush Administration? I say with their heads up their ideological group think Rethuglican asses. Blind Neocon ideology= Iraq War of ideological choice. Wall Street collapse=lobbyist blind Republican hand-me-down economic ideology= now collapse = now Chairman Mao Paulson People's Republic of Wall Street.

F**king unbelievable!

Never. Never. Never Give power to Free Market Stepford Republican blind ideology rabid hacks! Never. Remember this coming week and what it will feel like both good and bad. Remember the handiwork of Free Market hack Bot ideological fascists.

If I was a woman married to any of these Masters of the Universe on Wall Street that brought this to pass, I'd be in divorce court just to preserve human gender dignity.

 

 

[Proud2bUSA Krinkle Bear]

If I was a woman married to any of these Masters of the Universe on Wall Street that brought this to pass, I'd be in divorce court just to preserve human gender dignity.

LOL.  You're way too smart and thoughtful to have gone down this path.

[HamletsMill]

I mean it to preserve the woman's dignity! NOT the other way around! I am dead serious. I was in a frivolous lawsuit once which I won. The prosecuting attorney was so inept if I had been his wife I would have cut off all marital relations that this man dared call himself a lawyer. The law that governed the case was COMPLETELY OFF THE BOOKS through a mistake by the PA State legislature during that year! The guy had not even researched this! Of course, my lawyer hadn't either! I just sat there playing dumb, amazed at these people. But my lawyer was an elderly man and a quite good lawyer. The other guy was a kid just out of law school.

If a husband is not good at his so called advertised profession, that is grounds for being tossed out of the procreation gene pool by the wife in divorce court! And I am dead serious about this!

These Wall Street guys have now potentially completely vaporized the economy of the United States! Would you want to be involved with a person so criminally incompetent who may eventually cause the financial misery of tens of millions of people? Not me, dear Proud2bUSA! And you know i have tremendous respect for you!


 

[LJP aka Revolver Trooper]

Ouch.  My head hurts.  I keep thinking that if they had just been satisfied to make a few million here and there, everything would have gone along OK.  But no. They needed HUNDREDS OF MILLIONS in their bonuses and golden parachutes and stock options. They needed 7 or 8 houses and a jet or two. Nothing was ever enough, and they needed to privatize peeling potatoes for the army and patrolling New Orleans after a flood so that they could make money on services that government did more or less at cost.

Now I know there is government "waste," but holy moly, Batman! Could the government waste more than Halliburton?

Hamlet'sMill, I can pretty much follow your argument.  It all boils down for me to this:  another f***up on George Bush's watch.  If I have a hard time following the bunny trail in this crisis, I would guess that I am in the company of most Americans.  But, God bless them, most have already figured out: it's the Republicans. That's why the Democrats are so far ahead in the polls.

[Proud2bUSA Krinkle Bear]

If a husband is not good at his so called advertised profession, that is grounds for being tossed out of the procreation gene pool by the wife in divorce court! And I am dead serious about this!

My HamletsMill - First, thanks for the compliment!

I have to agree with you, although I believe as a woman if I misrepresent myself to my husband the same rules should apply.   What I was saying to you is that you would never get yourself into that situation.  You think too much.  You're too deep.  The people on this Board have a deep interest in helping each other and those less fortunate.  It just doesn't fit the profile.

We have known just a few of these, er, "couples."  They are interesting arrangements dealing with huge ego's, insatiable consumption, and a complete disinterest in current events and anything that doesn't directly involve them.  We had a couple of these women who wanted to throw a big ball for the Battered Women's Shelter, but to get them to take their turn volunteering on the phone lines and actually talking with a battered woman so they would understand the importance of supporting these women?  Horrors!  That would be going against their class. 

You know, the hard thing for me is that these guys have already earned their $100MM+ USD.  They may have to get rid of a home or two, a yacht, etc, but they won't hurt like the Average Joe.  I know that's what makes you grrrr. . . what makes me grrr is that their "ex-wives" will get to keep a wonderful standard of living even during these hard times that many can only dream about.   You and I are on the same page!

[HamletsMill]

Proud2bUSA Krinkle Bear,

If I had $10 million to put into a start up business, I would come a calling to get you as a top level officer! You are a business head and I say bless every NYU brain cell in you! You have street smarts and that is sadly lacking in the people at the top of many of these companies. And as you said in a post, I also fully believe they should completely abolish Business Administration as an undergraduate degree. I also think no one should EVER be allowed to study for a MBA degree unless they FIRST have 5 years of real world experience of some kind doing ANYTHING! Even having a newspaper route would count!

I have met some of the kinds of people you mention and their wives too. How these people ever got into these positions really makes you wonder? You can generally size someone up pretty quickly if they are formidable. And some of them ARE formidable and deserve their positions. Someone that is formidable is always three to six chess moves ahead. You can usually tell if they have that level of mind by just asking them their favorite recent movie and why they liked it. Just a general conversation can reveal a lot. But many people are not formidable even though they are in these top positions.

People ALWAYS reveal themselves by their ASSUMPTIONS in life. That is where you can see someone's potentially fatal weaknesses in their thinking.

My woman passed away in 2000. It involved Huntington's disease and was very tragic. But she was strong all her life and she faced it. She was a stunningly beautiful woman who was smart as a tack and spoke seven languages. If we had not been moral people from our own study of the Universe, we would have loved to be con artists! We often talked of it. Total Grifters! Running around the French Rivera relieving clueless overly rich people of their life savings!

She was so good at using her female vehicle to get info out of CEO and CFO types. She was a great actress. I wasn't, but I could act the distant mysterious guy in our shtick. We would have been great and very formidable criminals. But we put more of our imagination into movie scripts rather than outright overt criminal temptation thank goodness! I am so lucky and honored to have known her even through we got the fate we both feared when the disease manifested in her.

I have met people from the tops of companies that were easily read as to what was driving them. People like you mentioned. You just wonder how they ever got there.

But by far the most formidable people I have ever met as a group are the people in the creative aspect of the movie business out in Hollywood. These are people who are six steps ahead in every chess move, have incredible street smarts, have the ability to read people's intelligence from across a room, and also have absorbed acting chops to completely throw you off! I absolutely love these kinds of people! Very talented and very smart people pitching ideas to get someone to ante up $130 million dollars to back their amazing currently conjured up idea are a joy to encounter! Grifters one and all! I believe being an actually working screenwriter out there is the greatest fun profession anyone in our current level of civilization can have! I wish I would have understood the full implications of that profession in my wayward youth after I got out of my military service. I would have gone right to Hollywood to try my hand. But better late than never to be aware of it.

Study the "Firm Temptation Scene" on the Manhattan rooftop in "The Devil's Advocate".  Jonathan Lemkin and Tony Gilroy lifted it all right from St. Matthew and then just must have gone out early for Chinese that day! Brilliant stuff! I just loved that movie. It doesn't get any better than that for a job.

Anyway, now I know what you meant! I just didn't want you to think I was ripping on these women.  Quite to the contrary! Now I realize you meant I just would never have chosen that life to begin with in the first place. You are right. I was educated for Wall Street but just read too much Herman Hesse in the 60's. I saw the complete delusion right away.

From my analysis this weekend, however, I do think some of the measures they have created in this crisis just might work. If it does stabilize things, how do we then get these self styled "Masters of the Universe" into a 12 step program to not abuse their new powers? How do we get these people to stay on their knees weeping and sober up with lots of intravenous spiritual coffee now if they dodge this bullet? Who is going to be the new watchdog? I now think in 2008 that it is going to have to be the Blogosphere and citizen economists - hell citizen Everythings! I think that is the wave of the future on this entire planet now.

Make no mistake, this event in October 2008 is a 100% collapse of the blind ideology of American capitalism as we know it just like the collapse of the Soviet Union in 1989 was the collapse of the blind ideology of communism.

But we have been here before:

"Yeah, Ma. Where there is some Wall Street CEO beat'in up a guy, I'll be there."

 http://www.youtube.com/watch?v=8wke1RBvcNQ     

[HamletsMill]

Now back to financial analysis.

This looming situation was ALLl clearly known in April (7 months ago). The Bush Administration did nothing up front because it would bring up very, very ugly realities in an election year. Again, the MSM failed to sound the alarm because it would effect their corporate situation too. We are all on our own now people. If you love your family and want to protect them, you have to do the research yourself. When you have a system that does not hold greedy idiots accountable, this is where you ALWAYS end up! When will the American people ever get up off their knees in life and learn something? When?

http://banking.about.com/od/cds/a/cdars.htm

http://money.cnn.com/2008/03/31/news/economy/gelman_taleb.fortune/index.htm

[Alex]

Now back to financial analysis.

This looming situation was ALLl clearly known in April (7 months ago).

 
This is very reminiscent of the march up to the Iraq war.  It was very clear to me as an interested (but not expert or heavily involved) observer that something was very wrong with the "facts" we were getting (and which the corporate media was endlessly repeating).

Later, when it all went south, the administration went around saying things like "No one could have known there would be looting" and "No one could have known we wouldn't find WMDs."

Excuse me?!  I knew!  And plenty of other people knew. 

Now we're hearing the same thing from the corporate media.  "No one could have known this would have happened."

And again: I knew.  Lots of other people knew.  And I wasn't even paying much attention to it.

When the real histories of the Bush administration are written, a huge part of the story will be devoted to the fact that the corporate media abandoned their duty to question propaganda and uncover the truth.

[Proud2bUSA Krinkle Bear]

I have a v-e-r-y  l-o-n-g post over on the ACORN thread around some of this topic.   

This is so much more complex than both the media and the administration want people to believe.  There is no one culprit.  We have known about the potential credit crisis for years, not months.  We have chosen to cut rates versus experiencing the pain for years, not months.  What we have to remember are the actions we take now (with the $700B USD rescue plan, the continual infusion of dollars, the actions taken last week between Japan and Iceland, the European Community's actions, etc) will impact

six billion people for years to come.

To be fair to banks, they have been talking about this issue for years.  The Basel Accord, first designed in 1999, with modifications in 2004, is just one example. (The link is a straightforward description of the Basel Accord).  In designing Basel II, the Basel Committee on Banking Supervision (BCBS) specified a target prudential standard of a 99.9 percent solvency rate of over a one-year horizon. Under the June 2004 Basel II agreements, national supervisory authorities chose from among three alternative frameworks to set minimum regulatory capital for their institutions. All had some form of modification to the 1988 Basel Capital Accord that links capital requirements to external credit ratings. 

The U.S. Banking Organizations decided only the largest banks would be required to implement Basel II (the so-called core banks), while the remaining banks (so-called general banks) will continue using the capital requirements specified in the 1988 Basel Capital Accord. Core banks are defined as institutions with total banking (and thrift) assets of $250 billion or more or total on-balance-sheet foreign exposure of $10 billion or more.

More than you ever want to know, I'm sure.    So, what's happened?  Well, some banks estimated the risk for unconvential mortgages much lower than anticipated . . . after all, the "fundamentals of the economy" were strong  and housing continued to appreciate.  Some banks chose to be more conservative than others.  Some banks chose to diversify into other products and/or markets than others.  Some banks chose a lower risk rating for unconventional mortgages (and I'm greatly over-simplifying here). Please note that personal mortgages are just one issue of the credit crisis. 

Required Reading for those who want to know more: There is an excellent paper by Martin Weiss Research that highlights the following regarding the bail-out.  It is posed as an open letter to the U.S. Congress:

"In it, we detail why the U.S. debt crisis alone was far larger than previously believed. As of the first quarter, it encompassed or affected (PROUD note: ...and I have killed the table here, so please excuse my very poor attempt at formatting):

1. 1,479 banks and 158 thrifts at risk of failure with $3.2 trillion in assets, or 41 times the bank assets estimated at risk by the FDIC.
2. $14.8 trillion in residential and commercial mortgages, $20.4 trillion in consumer and corporate debt, plus $2.7 trillion in municipal debts outstanding.
3. $180.3 trillion in notional value derivatives, of which one single institution — JPMorgan Chase — held $90 trillion, or 49.9% of the total U.S. market share.
4. $465 billion in credit exposure to derivatives, up 159% from one year earlier.[/li][/list][/li][/list]

Today, less than three weeks later, it appears that many of these debts and bets are falling like a house of cards. Moreover, in retrospect, it appears that many of the efforts to support or sustain them may have been futile, wasteful, or both."

Greenspan was notorious for cutting rates if bad news was coming and many folks were trained up underneath him, so that's what they know.  Remember, the media revered Greenspan, and he has served admirably under several administrations.  This had worked in the past although we were killing the dollar.  Serious, yet quiet, conversations started around 2003 that this was not going to work forever.  After awhile, cutting rates just doesn't work.  Large investors do not get the return they need to incent them to invest in and carry the US dollar, so they move on to greener pastures - to currencies that will provide a reasonable return. 

In my simple mind, this is what we need to be demanding of our government:

1) Why is it that continual monetary injections are needed to stabilize an ecomony or prevent recessions?  Why is that no longer working?
2) We should demand that Bush and Chaney resign as soon as the votes are counted on November 4th.  Then Nancy Pelosi, as Speaker of the House, would become acting President and would be expected to work closely with the President-elect on the plan to restore trust to the world' s financial system.  I don't necessarily trust Pelosi on financial matters, but it would be a dramatic move for the US to show the global economy that we are serious about turning this around.
3) The bail-out is promoting the exact oppositie of what sound economic policies would suggest.  The bail-out should help investors make the rational decision to move money to stronger hands.  Quit infusing those companies who do not share the sound financial principles required to survive.

This is not the time for a lot of pointing fingers and emotion by our leaders.  This is a time for strong intellect and a calm, collaboration of minds.  It is not the time for knee jerk reactions and the continual exploitation of the American people and our pocket book.

Who is the most qualified to help us get out of this mess?  Let me share a quote from Kenneth Galbraith, and then you decide: 
“All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership.”

[HamletsMill]

Krinkle Bear,

Excellent post! Thank you.

[HamletsMill]

This is an excellent link on the immensity of what has happened in the revelations and consequent massive actions of the last six weeks:

http://www.huffingtonpost.com/frank-schirrmacher/what-will-be-tomorrow_b_134962.html

I predict the $850 Billion Congressional Bill and now the PARTIAL NATIONALIZING of 9 core banks in the system STILL WON'T FREE UP CREDIT MARKETS.

As long as there is MASSIVE FEAR in the global banking system that the CDO's tied to the CDS  plutonium "debt default insurance" mechanism can lead to a financial chain reaction like a 1929 style CASCADING PAY UP NOW "margin call",  there will be no GLOBAL OR INTERBANK LENDING going on and the credit markets will stay FROZEN.

But once something works to get the credit markets to start flowing ANY FUTURE MASSIVE DEBT DEFAULT EVENT that pulls the CDS debt default insurance plutonium chain reaction mechanism potentially into play will STOP everything ALL OVER AGAIN at EVERY JUNCTURE.

I say this Government "bank stock purchase" cash infusion is for trying to cover the potentially catastrophic turbulence of the Credit Default Swaps (CDS) by putting extra liquidity into the system UP FRONT NOW FOR THE BANKERS THEMSELVES TO SURVIVE and NOT to free up credit for Main Street businesses to survive  AS ADVERTISED.

Just watch where that money goes in this slight of hand which the dumbed down MSM will NOT fully explain to the America people because the truth of the situation will not evoke confidence.

The NEXT coming move will be for them to get the U.S. Government taxpayers (you!) into the CDS insurance business too! That the U.S. Government itself will insure all Interbank loans directly! When you see that come into play, know that we are at the end of the road. After that, there is nothing else to try.

If this last measure does not work in a sustained turn around in credit availability worldwide, I would start doing the following:

(1) Get a passport.

(2) Take at least half your money out of the banks.

(3) Get out of ALL stocks, bonds, and mutual funds.

(4) Stockpile food, gasoline, and heating oil if you can.

(5) Get a weapon and ammo.

Because we are going to be in something worse than the Great Depression.

I sincerely hope it does not come to this. I really do. But this country has been gang raped beyond recognition now by very evil people. The American people have lived for so long on their knees that they do not know anything else in life.

If elected, Barack and Joe are going to have to marshal the greatest thinkers and most competent and able people in our nation to try to save us. I, myself, will do everything I can.

But the CDS/CDO Financial AIDS Virus Complex out there is beyond any destructive danger this nation has EVER faced in it's 232 year history. We are in very big trouble. And the people now trying to take the necessary steps know it.

[HamletsMill]

Finally, someone talking about the bath tub drain!

http://www.huffingtonpost.com/propublica/fdic-chief-criticizes-gov_b_135274.html

Again, I maintain the CASH INFUSION by the $850 Billion House and Senate Bill and the PARTIAL NATIONALIZATION of 9 core banks by the U.S. Government buying stock in them are in reality to help the core banks handle the CDO/CDS plutonium that could cause a world wide nuclear financial chain reaction at ANY TIME if there is a major corporate bond default "insured" by a CDS contract in somebody's filing cabinet somewhere. We shall see how the Lehman Brothers situation goes as a litmus test.

The credit markets are STILL FROZEN. There is NOTHING in the sacred "core banks" taking this money that REQUIRES them to lend it to "Joe Plumber" AT ALL! Kind of strange ain't it? Keep watching that little piece of fine print as to how this all plays out.

Next step will be for the U.S. Government (you) to in a sense start issuing "Credit Default Swaps" insurance on these guy's corporate debt by "insuring" Interbank lending to instill confidence! That is then unprotected financial sex for you too whether you have given you permission or not! You are the guarantee for the Big Boys on Wall Street! Ain't it grand!

Watch for next weeks pitch to be focused on the "Fredericks of Hollywood" component in the equation from my model on this thread. That used to be newer and better Executive Trophy Wives for these Wall Street guys, ever bigger estates in Connecticut, and faster personal private jets from the multi-million dollar investment bank bonuses on Wall Street year after year to them as the Masters of the Universe.

Now the engine being top down pitched for all these stunning frenetic actions in the crisis is going to be "jobs" on Main Street. The whole "Joe Plumber" meme IS the new more toned down catalog. From nice FoH gear with nice areas of nylon cut out to more Victoria's Secret proper fare to now more L.L. Bean "hunting garb" trajectory. The transformation of the economic engine is now presented to maintain a more Puritan appearance. But in reality, we are still paying for the former excess and more twisted fare since 2001 because it's ticking Financial AIDS nuclear car bomb effect is STILL out there. Was there a "Joe Plumber" among the Village People? That is now where we are as far as appearances go.

Stay tuned...
 

[HamletsMill]

The same old, same old.

http://www.cnn.com/2008/US/10/17/siu.wall.street/index.html

http://money.cnn.com/2008/10/17/news/economy/whirlpool_layoffs/index.htm?cnn=yes

Where is John Steinbeck when you need him?

http://www.youtube.com/watch?v=l1kTh7cXylM

When will the American people get some insight into the manipulation of markets by Wall Street barracudas? When? Hopefully, with the Internet now the citizen economists will be emailing their Congresspersons and Senators 24/7/365 going forward.

So far the price tag is $2 Trillion in lost 401K savings and counting.

"Yeah Ma. Where some Wall street CEO is beat'in up a guy, I'll be there."

http://www.youtube.com/watch?v=PWNmJb-EUtk

Should I head for Californie yet?

Ooops. According to Arnold, they're broke now too!

Looks like we're all just part of the Big Soul now like Tommy Joad! At least on the Mudflats. At least we got that! As long as I can keep paying my cable bill I can be part of the Big Soul! Then I guess I can use an Internet Cafe for a few minutes at a time each day to check in if I hit bottom. Even if I have to go without a meal.

Things ain't that bad yet. Just say'in.

[HamletsMill]

Hey! And I won an Award  today here on the Mudflats!

http://www.themudflats.net/forum/index.php/topic,2371.new.html#new

I knew that my Bathtub and Bathtub Stopper analogy would work in getting folks to understand this situation! And the Fredericks of Hollywood and Condom analogy is always a good choice to enhance further understanding. 

[HamletsMill]

OK. Everyone try to see how today (October 21st) went in the Lehman Brothers CDS settlement today.

http://www.bloomberg.com/apps/news?pid=20601068&sid=agqE4vehdcJQ&refer=home

http://www.istockanalyst.com/article/viewarticle+articleid_2725618.html

http://www.thedeal.com/dealscape/2008/10/massive_fallout_from_lehman_cr.php

Everyone keep their eye on it and what the spin is. To use my analogy on this thread this is the financial equivalent of getting an Aids Test Report back on your last year's very expensive mistress with some appendixes on all her other lovers too over the last four years. Who is telling the truth? How widespread is the risk? Who is at risk and how far has any disease advanced?

Watch this closely over the next few days. Because once credit markets and stocks stabilize, it could all EXPLODE INTO FREE FALL PANIC OVERNIGHT if another CDS financial weapon is discovered in a financial institution that is going to be suddenly wiped out.

It really is like the Joker in TDK. No one really knows the true extent and location of the financial suitcase bomb nuclear weapons out there.

Keep an eye on Lehman Brothers CDS settlement which was held today as to developments tomorrow and to the weekend.     

[HamletsMill]

http://www.msnbc.msn.com/id/3683270/

“There’s nothing new going on,” said Scott Bleier, president of market advisory service CreateCapital.com. “This is all about the unwinding of massive leverage.”

Bleier attributed the decline to margin calls and investors in hedge funds and mutual funds cashing out. A margin call occurs when a broker tells an investor to deposit more money into his account because the securities he bought with borrowed money fell to a certain point. When that happens, the investor usually has to sell something else, like stock, to get cash.

"...unwinding of massive leverage.” The word "leverage" means BORROWED MONEY for rich people".

As Ravi Batra has been saying for at least 15 years now, the greatest danger to any economy is " concentration of wealth." This is EXACTLY what has happened in the United States in the overheated deregulated casino economy of the last 10 years with the 401K scam running at full out throttle in combination with complete deregulation. The same old, same old.

The last 10 years developed the greatest disparity between rich and poor in our society since 1929. Remove the 1933 Glass-Stiegel Act in 1998 because of Wall Street lobby money in our current political system where no one in EITHER PARTY is held accountable for ANYTHING by either ideological Republican hack fanatics or "D" student voters of BOTH political parties, and BINGO, here we are! Catastrophic melt down collapse. October 1929 all over again.

The only thing really new and somewhat original in all this from 1929 is the Credit Default Swaps where these guy's turned one guy's DEBT into another guy's ASSET on HIS air guitar paper balance sheet. That is even better than Jesus turning water into wine! Turning debt into an asset to even further borrow against! Just incredible! So now everyone's 401K money is down 40% on fevered trading in a phantom economy with Confederate paper money!

If we can survive as a nation, please pass these TWO IRON ECONOMIC LAWS down to your children and grandchildren so they will use these two economic laws to gauge ALL political economic decisions by BOTH Republicans and Democrats elected to high public office in the Congress and Senate of the United States now and forever:

(1) NEVER, NEVER, NEVER let a commercial bank ALSO BE be an investment bank ALSO BE a securities dealer ALSO BE an insurance company. There must be a WELL REGULATED government FIREWALL kept between these different kinds of businesses.This is what the Great Lesson of the Great Depression was all about once implemented in the 1933 Glass-Stiegel Act that was ended in 1998 by Phil Graham and all who voted on BOTH sides of the aisle to change the law.

(2) NEVER, NEVER, NEVER let a huge accumulation of wealth develop by one class of investors in your society. They will then turn your capital markets into a gambling casino of speculators and it will ALL EVENTUALLY COLLAPSE taking EVERYONE with it.

I recommend all of Ravi Batra's books if you have any extra money left now in your budget to buy a book.

http://www.ravibatra.com/

He has been right about everything in his predictions for the last 15 years!

He is the Deepak Chopra of financial markets. A very intelligent man very much worth reading for long term financial advice.