March 25, 2009

The kind of people the smart money boys at AIG bet on

From the Washington Post:

Woman Pleads Guilty in Mortgage Fraud Scam

By Henri E. Cauvin

A former stripper accused of orchestrating a massive mortgage fraud scheme pleaded guilty yesterday in federal court in Greenbelt, admitting that she played a central role in swindling desperate homeowners out of millions of dollars.

Joy Jackson, who lived lavishly while the real estate market boomed, wore a green jail jumpsuit with the word "PRISONER" across her back. She was a world away from her $800,000 wedding at the Mayflower Hotel in 2006, where she was feted by more than 300 guests and serenaded at the reception by Patti LaBelle.

Jackson, 41, who was the president of the Metropolitan Money Store in Lanham, faces a decade or more in prison.

Instead of helping people hold onto their homes, as they promised, Jackson and her co-conspirators took titles to properties, drained them of equity and charged exorbitant transaction fees, according to prosecutors.

Jackson, her husband and several others were indicted in July by a federal grand jury. Six of the defendants, including Jackson's key accomplice, Jennifer McCall, have pleaded guilty.

Appearing yesterday before U.S. District Judge Roger W. Titus, Jackson pleaded guilty to conspiracy to commit mail and wire fraud, which carries a maximum prison term of 30 years. With no known criminal record, she is likely to face a sentence of 10 to 12 years.

Three defendants, including her husband, Kurt Fordham, are scheduled to go on trial in July.

The conspiracy spanned from September 2004 to June 2007. Already, 115 victims have been identified in Maryland, and that number is expected to grow, a prosecutor said. Jackson's sentencing is Nov. 16.

In a statement, U.S. Attorney Rod J. Rosenstein said: "Joy Jackson presided over a 'money store' that was in the business of ripping off homeowners and mortgage lenders by submitting fraudulent paperwork to support over $16 million of loans that were never intended to be repaid."

Mighty AIG got taken to the cleaners, in effect, by thousands of small-time grifters like Joy Jackson. As the last participant in the food chain that led from broke nobodies through Joy Jackson through various financial institutions, they were the most clueless about the quality of the mortgages they were insuring against default.

Here's from an earlier WaPo article on Jackson:
With her long hair and shapely figure, Jackson was one of his most popular dancers, earning well over $1,500 a week in tips, said Schwapp, who owns the Legend Nightclub. He said Jackson danced under the name "Night Rider" from 1997 to 2003. One of her most memorable stunts involved riding in on a white stallion, a la Lady Godiva.

"She was very popular, very creative," he said. "She stood out."

It wasn't just the patrons who noticed Jackson's act. Kurt Fordham, a popular disc jockey in Prince George's clubs, liked her, too, and the two started dating.

Jackson eventually stopped dancing to focus on her career as a loan officer, moving from one mortgage firm to another. In September 2004, she teamed with McCall, 46, to open Metropolitan. They advertised on gospel and R&B radio stations and other African American media outlets, promising to help homeowners with cash-flow and credit problems.

Veronica Savoy was two months behind in mortgage payments on her Waldorf home when she contacted Metropolitan in summer 2006.

She said the firm promised to keep her home from going into foreclosure and to get her a mortgage with a lower interest rate. She signed on. Now the deed is no longer in her name, and $100,000 in equity is gone, she said.

"I guess that's where the equity in my home went," Savoy said after hearing about Jackson's big day. "It went to her wedding."

* * *

Investigators say Jackson and McCall ran a sophisticated foreclosure rescue operation that included family and friends, many of whom Jackson taught the ins and outs of the real estate industry.

Essentially, the company would enlist investors with strong credit as "straw buyers" who would take ownership of the houses. The original homeowners could live rent-free for a year and then buy back their homes at the end of the year.

But when the homes passed to the straw buyer, Metropolitan would borrow as much as possible against the value, effectively siphoning out the equity and increasing the cost of the house, according to the suit. The original owners were often unable to repurchase their property; some said they were unaware they were signing over their deeds. ...

Neighbors knew little about the couple but said signs of conspicuous consumption were everywhere. Eight cars were regularly parked outside their home, including a Jaguar, a Porsche, a Corvette and a Cadillac Escalade, several neighbors said. Fordham was seen each day outside wiping down his vehicles and moving them from space to space, neighbors said. A limousine arrived daily to take Jackson's 15-year-old son to a nearby private school.

"We knew when they came on the street they had a lot of drama. They weren't friendly at all," neighbor Roger Liggins said. "It was always about them."

Explain to me again why credit default swaps (i.e., insurance against defaults by mortgage backed securities) don't create moral hazard? If you are Goldman Sachs, you can buy up mortgage backed securities made up of fraudulent refis done by ex-strippers and get AIG to insure them against default. Heads you win, tails AIG loses. What's not to love? Except for the possibility that AIG is so clueless that they'll insure everybody's stripper fraud mortgages so when AIG goes broke you have to go through the inconvenience of calling the latest Goldman Sach's alum heading the Treasury Department to get the federal government to give billions in the taxpayers' money to AIG to pass on to you for the MBS's you own full of stripper assets.

My published articles are archived at iSteve.com -- Steve Sailer

45 comments:

RKU said...

Yes, indeed! My own guess is that this sort of speculation/fraud/swindling was a much bigger part of the Housing Bubble Meltdown than illegal grape-pickers buying $500,000 homes to live in.

There was another big NYT story a couple of weeks about about real-estate brokers going door-to-door in lower-middle-class black neighborhoods in Cleveland, trying to persuade the elderly homeowners (who'd long since paid off their original home mortgages) to take out NEW sub-prime mortgages, and use the money for "home enhancements" (or maybe "life-style" enhancements). Now all those loans have gone into default, and both the MBS holders and the home-owners are in a mess, but the original brokers have no connection to the problem.

If this isn't "predatory lending", I don't know what is...

SFG said...

I wonder if this is really a matter of the big boys at AIG being stupid so much as them not caring about the company. They make big paychecks year after year, and if the company crashes near the end, who cares? They've got millions in the bank...

Anonymous said...

AIG's collapse was not about the housing collapse. You guys STILL don't get that the crash was about the fragility of the entire financial system. The amount of mortgage value that went south was pretty small compared to the total loss in asset value we've seen.

Steve Sailer said...

Yeah, sure, hundreds of motorists on the Kennedy Expressway saw the engine fall off the jetliner just after take off from O'Hare, followed by the DC-10 nosing over and wiping out a house in Park Ridge and killing 260 people, but you are missing the Big Picture.

Stop worrying about little details like the engine falling off. What are you, some kind of enginist? Think about the big picture: Gravity, man!

anonymous_coward said...

"If you are Goldman Sachs, you can buy up mortgage backed securities made up of fraudulent refis done by ex-strippers and get AIG to insure them against default. Heads you win, tails AIG loses."

Yes, and if you don't take a loss then AIG takes the fee. This is just the same argument as "you can buy a rickety shack and buy fire insurance against it. Heads you get the shack, tails the fire insurer pays" - total nonsense. The problem with CDSs is when the company recklessly writes lots of insurance without the money to pay if something goes bad, as it happened this time. The reason they're called swaps and not insurance is to get around a regulatory loophole, and that is something that will definitely change soon. But there's no reason to abandon the practice altogether.

Anonymous said...

The WSJ was fellating AIG, ENRON, Wcom, etc, in there time. The emporer has no clothes. S&P, the WSJ parent was one of the worst offenders. Bond ratings of AAA for zombie corporations. That one senator had it right. If they have any shame they should kill themselves.

We live in a 'capitalist' society. We need to let all these investment banks die.

There is no other intellecually honest way to approach.

(BTW, kudos to all the people who ripped these guys off! You did us a favor big time.)

Steve Sailer said...

Fire insurance _does_ create moral hazard: much of the South Bronx burned down in the 1970s due to arson due to the existence of fire insurance. But at least fire insurance companies understand moral hazard. Asset-insurance companies like AIG didn't seem to get it.

greenrivervalleyman said...

Regarding credit default swaps: the worst part of it wasn't the moral hazard, but the fact that banks and investment firms were using them not as a hedge, but in fact to double (or triple, or quintiple down on already suspect mortgages). From
Michael Lewis
:


That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

Mr. Anon said...

I do hope that your new coinage - "Stripper Fraud Mortgage" - enters the financial lexicon, Steve. It'd be fun to hear some suspendered, pin-striped charlatan talk about them on one of those Wall Street shows.

eh said...

She's a 'woman of color'. Fat too. Perfect.

...they were the most clueless about the quality of the mortgages they were insuring against default.

How carefully did they actually investigate that themselves? Or did they more rely on rating agencies? Most mortgages were securitized/sold as part of much larger and more complicated CDOs. In any case, with that much outright fraud and lying going on in the paperwork, when there was the usual paperwork at all, how useful was due diligence?

In any case it was a 'new paradigm', like the ever-rising stock market back in the days of 'irrational exuberance'. Real estate is the way to get rich. It never goes down. I learned that from Saturday morning infomercials. Those AIG geniuses just got caught up in the euphoria. More right brain than left brain.

rightsaidfred said...

Part of this seems to be the "liberalization" of finance: everybody gets a house loan, everybody gets a AAA rating, everybody gets insurance on their mortgage backed security. The conservatives have been chased out of the market. We could have used more actual diversity.

AllanF said...

Exactly! Steve is spot on. People fail to appreciate the way *every aspect* of housing market got to be utterly depraved. There was at least a trillion dollars grafted in one way or another. Recognize, a trillion dollars is an unfathomable amount. It shows up in countless ways everywhere you look:
* spinner hub caps on every Cadillac in the ghetto
* "pergraniteel" kitchens in million dollar tract houses from one end of Orange County to the other
* multi-million dollar bonuses for nearly every I-Banker in Manhattan
* at the absolute pinnacle James Simons and John Paulson personally making $5,000 million each over the last two years.

Again, it was everywhere you look and in everything you can touch. Japan's exports to the US were off 58% for Feb. Autos were off 70%! Think about that for a moment. No business could ever plan for something like that, it is completely unfathomable and the repercussions are going to be with us for a long time.

AllanF said...

One other thing to keep in mind, no one at Goldman Sachs actually owned those MBS, at least after Aug 07 they didn't. If you're an I-banker, MBS are made to sell. But you better believe they held the CDS. That's the beauty of CDS, me and all my friends can buy insurance against Steve missing his mortgage, and we don't even have to bother owning Steve's mortgage.

One mortgage, a dozen pay-outs. It could only happen in an unregulated "free" market. Of course a market fully backstopped by the US Treasury is hardly "free". A truly free market would have no backstop and everyone would be aware of counter-party risk. No sense buying CDS if the company selling it is going to fold up like a gypsy carnival the very moment you are ready to collect your $12,000 million. Notice there are no Russian I-banks.

testing99 said...

Steve -- you must be dreaming. CDS are the least of the problems with AIG. Much of the losses were in highly regulated, and "solid" securities and bonds. Which given the oil shocks and decline of consumer wages and spending, went into the tank rapidly.

GE's bonds a year ago looked solid. In an expending economy. Now they look like garbage because the world-wide economy is collapsing over US consumers running out of money to spend (caused at least in part by the oil shocks).

It wasn't just the diversity recession, as usual oil shocks create fractures in the global economy and pitch it into recession. All the scams made things worse, but that was the proximate cause.

It doesn't fit your pet theory Steve, but it's still reality: the losses in mortgages and CDS and other exotica are far outstripped by equities and loan losses.

THAT (the ugly secret Obama and Dems and most Reps want to hide) is what killed the economy.

They want to hide it because expensive energy shocks basically took enterprises that were profitable to marginally profitable and by raising the cost of EVERYTHING quite higher, suddenly, most of the enterprises lost money. Some in major amounts.

We've had real estate bubbles all the time. By your own accounts, it was confined mostly to four states. Let's be realistic:

Can defaults on mortgages in four states cause a worldwide economic collapse?

Or sudden oil-price shocks making consumers unable to pay for cheap sneakers from China, which suddenly require a lot more money to make and ship?

Steve's problem stems from mental blindness in an unwillingness to acknowledge that the world economy, and the US in particular is built on cheap energy.

Much of the rise in oil prices was greeted with hoorays by Dems and Green morons, hoping for more Cap and Trade, credit nonsense and idiot schemes for alternative power. Obama famously wanted gas prices at more than $4 a gallon. Even higher. And offered inflated tires as a way out of consumers being hammered by high gas prices.

Yeah no wonder auto exports from Japan are way down, or Williams-Sonoma lost 90% of revenues year over year, or other huge losses.

THAT is the predictable result of energy shocks.

Again let's review: EVEN with CDS's, bad mortgages affect only a small portion of the economy. HIGH energy prices affect EVERY part of the economy and choke off nearly all activity. Only the most profitable survive.

FWIW, Obama plans to put in Cap and Trade, through the budget reconciliation process without any up or down votes, and let the EPA regulate everything as a carbon emitter, choking off economic revenue.

Obama is both profoundly stupid (his IQ is probably below 90 at least) and filled with a racist rage to "punish" "racist White America" -- he's certain to go down in the books as the worst President ever. Obama has done it -- turned a manageable 1981-83 recession into a deep, deep recession. And make "Blood for oil" pretty damn popular, when it comes down to it.

John Seiler said...

What the stripper -- and even AIG -- did was but a small-scale version of the vast expansion of the money supply under Greenspan and Bernanke, debasing the currency by 2/3 (so far) against gold, the only real money. Will they go to prison, along with their enabler, Bush? Never. When private persons and companies do this, it's a crime. When government does it, it's policy.

Soul Searcher said...

Sigh...

It's disappointing that your story is so badly wrong on this front, Steve.

Look to this site where an experienced trader highlights the overall story of AIG's crash:

"The broad outlines of the story are the following. As part of an effort to expand its insurance underwriting business, AIG (more precisely, London-based AIG Financial Products) began writing protection on supersenior (senior to AAA) ABS CDOs. By the time lax underwriting standards led AIG to get out of this business in 2005, it had sold some $560bn of protection.

By 2007 spreads had widened enough that counterparties started to demand that AIG post collateral on the trades, which by mid 2008 totaled over $16bn. Following its first and second quarterly losses of $5.3bn and $7.8bn, AIG, under pressure, adjusted the valuation methodology for its CDO portfolio (word at the time was the company was not mark-to-marking the trades) - leading to a further $8bn writedown. On September 15th - the Monday following the Lehman default, AIG’s rating was cut, effectively guaranteeing a bankruptcy of the company. Concerned about the effect on world markets, the government stepped in with a bailout."

AIG recognized the signs of weakening underwriting standards using standard metrics like rapidly increasing LTV ratios of subprime loans. However they thought the risk of a nationwide housing decline was basically zero; which is why the did not try to hedge any of the protection they wrote, as the perceived historical default risk of super-senior debt (rated higher than AAA) defaulting all at once was deemed close to infinitesimal.

The nature of CDS allowed AIG to continue on its dangerous path since it did not have post collateral, leading it to bankruptcy as a result of massive collateral calls. But this was a feature of CDS as originally designed, as allowing participants make directional bets without having to move the underlying assets, which can have significant transaction costs, and allow other participants to take positions you.

Banning naked CDS isn't the complete answer either. After all, after issuance of some MBS, the primary market of broker-dealers is long the bond, and want to hedge this exposure before selling off the pieces. Who's going to hedge this exposure without naked CDS? The volume of corporate financing in the US would plummet. The fundamental nature of hedging is one party exchanging the part or all of the risk of an asset to the other; for every prudent entity, you need a "speculating" counterparty.

Steve Sailer said...

What's so "badly wrong" that you're sighing about? AIG insured $560bn worth of assets, some of them no doubt consisting of fraudulent refis arranged by ex-strippers. After awhile they noticed the quality of the assets was going to help in a hand basket, so they stopped insuring more of them, but didn't do much over the next year and a half to get out from under the $560 bn they'd insured, or hedged it, because they figured the odds of home prices declining overall were "infinitesimal." Presumably, they didn't get an invitation to Joy Jackson's 2006 wedding.

Anonymous said...

What do you have against strippers, Steve?

Anonymous said...

Will Joy Jackson have her assets seized?

Anonymous said...

As the late, great Irish comedian Dave Allen once remarked during a whisky induced rant against British chancellor Denis Healey's swineing tax increases in the mid 1970s (they reached over 50% of GDP, imposed byan IMF austerity program):
"Everything is taxed in England, if they could put a meter on your face they'd tax the air you breath, even those silly little rubber things, condoms are taxed in England, where will it all end - will flashers be taxed for revealing their assets?"

Ben Franklin said...

Nobody in his right mind writes $560 billion of insurance without spreading that risk, typically by so-called Reinsurance. Reinsurance means passing typically part and sometimes all of the risk off to another party or typically to multiple other parties who all take a share of the gross risk. The fact that AIG didn’t do that with its CDS portfolio tells us that they didn’t consider the possibility of default or decline. It also might have been that there wasn’t a “market” for sharing the risk on its CDS portfolio.

It is important to keep in mind that the CDS business that AIG got in was very much a sideline and wasn’t a form of real insurance, otherwise it would have been regulated and AIG’s lack of reserves and lack of reinsurance would have prevented it from running up such a huge position.

Note that the motivation for piling on so much CDS exposure was that it was the easy way for executives to get big paydays. In the business world you aren’t rewarded, at least not frequently, based on the quality of your work but rather on the raw numbers that you pile up, usually without regard for quality. By the time a portfolio like AIG’s CDS book of business blew up, those that made money off it were gone or could afford to leave, having already pocketed bonus and salary based on the $560 billion number.

bjdouble said...

There was some kind of fraud here that the homeowner thought they were getting in on. I think the "live in your home rent free for a year" part is the key. This is the key line:

"The homeowners were told they could live rent-free for a year and buy back their houses at the end of the year."

"Buy back their houses" suggests they knew they were signing over the deed. Sell the house, don't pay mortgage or rent for a year, and then buy the house back . . . all suggests this was a scam to screw the bank, with the straw buyer as the fall guy. Nobody easier to scam than a scammer . . . Oh wait sorry, the poor homeowners reaching for the American dream, cruelly snatched away by predatory lenders.

Anonymous said...

t99 -

So now that oil prices are half what they were when Jorge was one irritable, hung-over morning from starting WWIII in the Middle East, everything should just be dreamy, right?

The reason mortgages in the Sand States were able to cause a recession is due to the financial practice called leveraging. In short, there was a huge inverted pyramid of obligations piled on top of these securitized mortgages. The model was premised on ever-rising US home values. When everyone realized that trees don't grow to the sky, the bubble burst. Very simple.

Now I know this doesn't jibe with PNAC's grand scheme to invade the Middle East so 6 million Jews don't have to worry about the 900 million Muslim Arabs to the north, west and south of them and the subsidized oil can flow back like gold from the conquistadors, but let's stick with reality.

--Senor Doug

Anonymous said...

I think that, in certain cirumstances, programs developed to allow qualified applicants with less than stellar credit-but with a down payment, could work.

In this instance, however, fraud and deceit were a part of the game.

ironrailsironweights said...

A dominatrix has been charged with materminding a fraudulent mortgage scam on Long Island. Many of the "straw buyers" used to take out fraudulent mortgages were her, ahem, customers.

Peter

Peter said...

Mighty AIG got taken to the cleaners, in effect, by thousands of small-time grifters like Joy Jackson.

Just how did AIG get taken to the cleaners? Seems like the employees made a pretty penny off loans to grifters like Joy Jackson, and then got bailed out. And as Ben Fraklin points out, the executives primarily responsible for this mess have taken the money and split, to live happy lives somewhere else. No, the taxpayer got taken to the cleaners. You also seem far too willing to defend AIG, Steve, words like "clueless" really don't apply here. Try "greedy","arrogant", "overconfident."

Tino said...

Look:

The financial system did multiply the losses from subprime. Financial institutes tend to be highly leveraged, so for 1 trillion in equity they have 20 trillion worth of assets. There was also a secondary shock:
Chain of events:

• Banks took unexpected losses from subprime, whipping out most of equity in the American Banking system.

• Banks cut lending, and frantically gather capital (Americans banks took 500 billion in private capital injections in 2008). Some banks fail or are near failure. In order to rebalance their books, they de-leverage. Panic and uncertainty ensues.

• The shock from the subprime crisis goes ripples the economy, leading to reduced consumer confidence, investments by normal companies being postponed, layoff’s. Imports go down. The crisis spreads to Europe and Asia. Each contraction has a feedback loop that worsens the crisis in the US even more.

• The financial institutions take even more losses, and cut back even more.

That’s how 1 trillion in losses led to 30 trillion in value being wiped out. But Steve is completely right in looking at stage 1 and the subprime trillion as the central event.

A lit cigarette can start a fire, but you need flammable material in the house for the fire to spread. Once the house has burned down, the amount of heat from the cigarette itself is a small part of the aggregate. But it is the central part. We will never understand what happened if we just aggregate all the problems, you need a story with casual mechanism traced out. We know that our economy is “flammable”, which is to say from standard textbook economies that a shock to demand or supply has multiplicative effects on GDP.

But you want to know where the shock came from, the economy is what the economy is.

ben tillman said...

AIG's collapse was not about the housing collapse. You guys STILL don't get that the crash was about the fragility of the entire financial system.

I'm open-minded, but what does that mean exactly?

ben tillman said...

As the late, great Irish comedian Dave Allen once remarked during a whisky induced rant against British chancellor Denis Healey's swineing tax increases in the mid 1970s....

The Beatles said it much better: "Declare the pennies on your eyes." That's the ultimate.

ben tillman said...

By the time a portfolio like AIG’s CDS book of business blew up, those that made money off it were gone or could afford to leave, having already pocketed bonus and salary based on the $560 billion number.

Exactly. This calls to mind the evolution of virulence through horizontal transmission. See Paul Ewald: Infectious Disease and the Evolution of Virulence.

It also calls to mind Hans-Hermann Hoppe's perspective on the government of a social democracy. See Democracy: The God That Failed. Our rulers are also temporary "owners" for whom looting is a profitable strategy.

David said...

I got to live in a two-story historical home on Amelia Island, Florida and attend tea parties (no lie) with my old money neighbors. Beach: 2 miles away. St. John's River: 1 mile away. It was paradise.

It lasted almost 2 years. Then I sold at a profit and beat a retreat to an apartment.

Fun!

stari_momak said...

Eight cars were regularly parked outside their home, including a Jaguar, a Porsche, a Corvette and a Cadillac Escalade, several neighbors said. Fordham was seen each day outside wiping down his vehicles and moving them from space to space, neighbors said. A limousine arrived daily to take Jackson's 15-year-old son to a nearby private school.


Brings to mind a great exchange from 'The Morning After', with Jeff Bridges and Jane Fonda.

Turner Kendall (Bridges): You'll notice that your sp*d*s spend disproportionately on transportation and clothing their young.

Alex Sternbergen(Fonda): What are you, some kind of Klan anthropologist?

coldequation said...

Essentially, the company would enlist investors with strong credit as "straw buyers" who would take ownership of the houses. The original homeowners could live rent-free for a year and then buy back their homes at the end of the year.

What kind of dumbass would sign their home over to these people, and why haven't they been eliminated by natural selection already?

Polistra said...

A mortgage broker in Seattle used the lax rules for another type of scam: "Selling" houses to people with fake identities, who then used the houses as pot-growing factories.

http://www.nwcn.com/statenews/washington/stories/NW_042308WAB_pot_growing_bust_SW.913a1544.html

not an economist said...

I hate to agree with something Testing 99 writes, but he is on to something here. Overleverage and fraud had turned the American economy into a house of cards. But what caused the house of cards to collapse was the oil price shock of the summer of 2008, which had followed three years of heavily rising oil prices.

This doesn't mean we could have prevented this by invading another Middle Eastern country and seizing its oil, if we had done that (or dumped social security onto the stockmarket) that would have kept things going for another year or two, but then there would have been something else.

What caused the Titanic to sink? The iceberg, of course. But ths ship was also going too fast, too far north, and there wouldn't have nearly been the same loss of life if there had been enough lifeboats.

Maximilian said...

To me it looks like both sides are right.

Massive leveraging led to the creation of an enormous multi-trillion dollar house of cards built on a foundation of laughably below par loans.

On the other hand, skyrocketing oil prices sent a shock through the economy like someone shaking the table on which the house of cards is built.

One commenter here mentioned that the pyramid scheme being run by the banks selling MBS -- like all Ponzi schemes -- would have continued to prosper fine just as long as trees are able to grow up to the sky.

But at some point they stop growing and start dying, and that point for this particular scam was the moment when oil prices tripled, the economy went into contraction, and no new credit could be created to maintain payments on the existing credit.

Ben Franklin said...

It isn’t so much that the financial system is “fragile” but that those at the top of the financial food chain, like those at AIG, are clueless about the reality at the bottom, the strippers doing mortgage fraud and the liar loans by illegal immigrants. In other words, the system can’t work unless the lower orders are fairly decent. A good working class is essential for a first world country. Our elites obviously feel differently about that, as the overclass has been eager to spread their corrupt “lifestyles” among the decent elements in the lower classes and merge them with the underclass.

There is another problem with the “overclass” way of looking at the world; at least from the perspective of the financial number crunchers and that is that they view the world (and the people in it) from an excessively ABSTRACT perspective. They don’t see any qualitative differences between populations and thus can’t understand how importing poor and poorly educated folks from the third world means a reduced standard of living. They looked at numbers from the past and assumed that the low rate of homeowner defaults would continue into the future regardless of changes in who the homeowners were.

Ben Franklin said...

Why did oil prices spike? Did that have anything to do with a decline in the dollar related to the attempts by the Fed to reinflate the real estate bubble thus putting downward pressure on the dollar thus driving the price of oil up?

Certainly the Fed Reserve engineered decline of the dollar explains a lot about the rise in the price of oil. But why is the Fed destroying the dollar? Is it due to the debt and real estate crisis or is it also in part to slow down the trade deficit?

So, was the oil price spike in part the result of the real estate crisis in the USA? How much of the oil price spike is due to the growth of China and India, whose economies have gone up in part due to massive outsourcing of the American economy to those countries? How much of the oil price spike was due to speculation by hedge funds? Did hedge funds just exaggerate the trend that was already under way?

Steve Sailer said...

The oil price spike of 2008 was largely due to the Fed trying to inflate our way out of the mortgage crisis that became highly evident in the summer of 2007.

I also suspect that Chinese stockpiling of supplies before the Olympics to prevent humiliating shortages may have given oil prices the final push upward.

David Davenport said...

There is another problem with the “overclass” way of looking at the world; ... from an excessively ABSTRACT perspective. They don’t see any qualitative differences between populations and thus can’t understand how importing poor and poorly educated folks from the third world means a reduced standard of living.

I somewhat disagree with your premise. I think that many members of the contemporary American overclass quite knowingly want to swamp and sink old stock, white America under a Third World tidal wave.

For many of our masters in the big coastal cities, it's not an abstraction. It's very emotional. They hate hate hate old stock American white people.

OlaAmigos said...

It wasn't just the CDO's the swaps based on them were huge. Much of which was simply gambling.

T99 is crazy if he thinks swap hedging wasn't a huge part of AIG's collapse. And Lehmans, etc.

Derivatives were set up to be extremely complicated. The sellers of this toxic waste counted on the arrogance and laziness of the buyers. Long Term Capital Management was the canary in the coal mine for a lot of this.

There's a sucker born every minute. It's the US taxpayer now.(You'd figure the WSJ would at least apologize).

AllanF said...

Geez, this stuff is still "memory", as opposed to "history", and people are already getting it effed up. The housing bubble had completely popped by the time of oil price spike last summer.

Also, note the order of events. It is not coincidence, it is causality.

1. House prices in CA peaked in '05-'06.
2. The sub-prime lenders imploded winter '06. (Due to early payment defaults, ie. not one mortgage payment was made, the I-bank was able to return the note to the lender for a full return of principle. The notes EPD'd, instead of simply flipping the underlying house, because of 1.)
3. News of Bear Stearns enhanced equity fund collapse hits in Feb '07.
4. The Alt-A, liar-loan lenders collapse in Summer '07 due to their funding from Wall Street drying up. (It dried up because of 3. A rush for the exits was imminent.)
5. There was a huge stock market swoon in Aug '07 as credit markets seized up, and highly-leveraged (and crowded) quant trades stopped working.
6. By Sept. the Fed clearly indicated they were going to keep liquidity flowing by any means necessary. Investors cheered thinking it's 1998 again and the Greenspan-Put has been superceded by the Bernake-Put. The market hits an all-time high in Oct '07.
7. No sooner does the market peak in Oct then it becomes obvious the credit problem is much bigger than all of us, it's not 1998 anymore, and it's not going to be rolled up and quietly sent to bed.
8. Come Spring '08 all the fast/smart money taken out of the markets over Summer and Fall is looking a home and to spot the next bubble to blow. Decoupling is the rage, China appears to have insatiable growth, and so the commodity trade is on. (Again, no mere coincidence choosing commodities, it logically follows from points 6 & 7.)
9. Summer '08, more and more news is leaking out that oil demand is largely one-time stockpiling by China. With the Olympics the ultimate "sell-the-news" event, fast money again starts booking their profits and soon a rush for the exits is on.
10. By Sept '08 commodity demand is non-existent and it appears the last 6-12 months of gains were entirely driven by speculation. The decoupling thesis is DOA, the sub-prime problem has metastasized through all of Wall Street and beyond, and everyone remembers it's OK to panic as long as you panic first.
11. Finally, where we are today is that everyone's been brainwashed or scared into thinking if we save the banks and the economy will follow. It's trickle-down economics writ-large. "Geithner's" plan is to restore bank's balance sheets by letting "private" investors buy up dodgy assets using the US Treasury's checkbook.

Hindsight is supposed to be 20/20, but reading some of the commenters on this thread leaves me dumbfounded. Didn't we just live through it and already people are screwing up the order of events.

Speculation: How 11 restores/enhances consumer's ability service debt and return to spending is anyone's guess. But by the time it is obvious that good times are not here again, at least the bankers and old money will have been made whole. Taxpayers and dollar holders, not so much. Last comes the long-slow slog as we pay down debt, restore our balance sheets, and slowly pend demand. I reckon it took 15 years to do this following the Roaring Twenties, and Japan's "Lost Decade" is now two, so we might be here a while. Good luck.

Mike said...

T99 wants to shift the blame for the economic crisis to the AYrabs. His hysterical anti-Obama rants are no longer funny. Wall street gangsters ought to be arrested and prosecuted for crimes against America.

ben tillman said...

AllanF, good stuff.

Sideways said...

Good post, AllanF

Hindsight is supposed to be 20/20, but reading some of the commenters on this thread leaves me dumbfounded. Didn't we just live through it and already people are screwing up the order of events.

The problem here is that A) it's new history and B) few people noticed anything beyond some sort of recession was going on until it was really, really obvious (mid-2008).