Numerian - You've done an excellent job connecting the dots. What if the pessimists (e.g. Tanta at Calculated Risk) are correct in their estimates that 10-20 million American Homeowners will be "underwater" in the next few years? Will they persevere and hold on, or, will they mimic our corrupt elites and mail in (i.e., "jingle mail") the keys?

I'd love to hear your opinion Numerian (and Ian & Sean Paul).

And even more hysterical is that the harsher bankruptsy law gives homeborrowers added incentive to just leave the keys in the door and walk, thus totally screwing the bank.

Why should a borrower behave any differently than the lender? In a 'rational' market why should a borrower pay back a mortgage that is greater than the asset that backs the mortgage. That it is a bank and not an individual getting screwed should make no difference in a rational market that is simply seeking balance with no ethical underpinning.

You invest and lose money every day in stocks, in pension funds, in 401ks. Corporations routinely write off pensions from their books when they file bankruptcy, or underpay into the funds based upon false projections of performance. Companies routinely lay off the oldest workers to avoid the health insurance liability of these workers, they routinely write off any number of obligations based upon changes in their internal policy, changing healthcare benefits, etc. Insurance companies routinely cancel an insurance policy with no stated reason, routinely deny care when it is needed by refusing to pay.

Someone needs to explain to me why a homeowner owes any ethical consideration to a bank, or hedge fund, or company? I would walk in a minute and, hell, I'd take the copper pipes with me.

Thanks for the clear and concise rundown of the history of this great debacle. It is always refreshing to read an article that cuts to the chase and casts off the rose-colored lenses.

Apocalypse Khan

work Numerian, I've pushed it out to various folks.

What goes around, comes around.

The financial crisis took another giant leap this past week. Credit insurer ("financial guarantor") Ambac lost its AAA rating (from Fitch), in what will mark the onset of a devastating run of downgrades for the likes of Ambac, MBIA and the entire industry.

The "monoline" insurance business, as we've known it, is done and the value of the insurance they're written is evaporating by the day. The market is now desperate to determine which financial institutions (and there are many) have purchased large amounts of (now suspect) insurance for hedging purposes, as well as other financial companies that have in one way or another participated in the credit reinsurance market.

Virtually all the major financial players are embroiled in this systemic credit fiasco. Importantly, the mind-blowing demise of the financial guarantors is fomenting a crisis of confidence in credit insurance in all its various forms (certainly including the credit default swap - CDS- and mortgage-backed securities - MBS- guarantee markets). According to Bloomberg news, $2.4 trillion of securities are at risk to the financial guarantor industry downgrades.

I'm assuming that our policymakers will attempt to throw together some type of industry recapitalization strategy, although the complexity of the issue leaves one perplexed as to how any bailout plan would be structured. I suspect that our federal government will eventually be forced to enter the financial guarantee business, at least to the point of assuming the obligations of municipal bond (from the monolines) and mortgage-backed security (from the government-sponsored enterprises such as mortgage lenders Fannie Mae and Freddie Mac) insurance.

The credit system is today an incredible mess. Literally trillions of securities, previously valued in the marketplace based upon confidence in the underlying financial guarantees, are now suspect. This has severely impacted marketplace liquidity. And perhaps tens of trillions of credit and other derivative contracts are now subject to very serious counterparty issues. Many players throughout the credit market are now severely impaired and have lost the capacity to hedge against/mitigate further losses.

To be sure, discontinuous and illiquid markets have wreaked bloody havoc on "dynamic" trading strategies used commonly to hedge various risks. I don't believe it is hyperbole to suggest that dynamic hedging (in particular shorting credit instruments to provide the necessary cashflows to pay on Credit derivative contracts written) became the critical linchpin of contemporary Wall Street risk intermediation. Yet today the models behind so many strategies that have come to permeate "contemporary finance" have completely broken down; the strategies of thousands of financial institutions - big and small - have turned infeasible.

Doug Noland -- more

here goes. I have owned several homes and always thought that I signed a contract to pay off the home. So there is no penalty for giving the keys back to the bank?

Before you elect me President, at least let me explain how I would deal with this crises:

1. Close the banks
2. All billionaires can take their assets back from the banks and secure them in privately owned institutions.
3. All people worth 100 million or more can take whatever is left for themselves.
4. The rich and super rich secure themselves in heavily fortified, nuclear-protected "Geen Zones" throughout the nation. They live, work, eat, and sleep totally separated from the now starving masses that was once the American Middle Class. They fly across the polluted poverty zones back and forth to their enclaves.
5. A huge gulag system is et up to detain, torture, and execute (publicly) rebels, protesters, or insurgents against the super-wealthy.
6. Some of the starving masses gain access to the enclaves as carefully monitored "guest workers" who have no civil rights, strict wage ceilings, and cannot socialize or associate at all with the wealthy. The most lucky among them become domestic servants, meaning they are quartered in the Green Zones permanently.
7. The masses are allowed televisions on which only FOX,NBC,ABC,CBS,and CNN are allowed to broadcast. The programming constantly tells them how free and great they are as Americans, and how well the country is doing in all ways. They also get to watch sports and be distracted by glamorous movie and music stars.

"I have a dream...." and YOU are not part of it....

OK now you can vote for me.

Is that although they have the legal means to go after debtors (whether the debt originates in mortgages, home equity loans, personal lines of credit, or credit cards), especially with the 2005 bankruptcy bill, if enough people default at the same time, the banks will be left holding the bag. If people are willing to walk away from their mortgages because they got ill, lost a job, or got burned playing the stock market, the next shoe to drop will be that they just stop paying their credit card bills. If they've missed a payment or two, they'll also be saving themselves the usurious 30% interest. If unemployment goes from 4.7% to 5%, then 5.3% there will be just too many people for the banks to chase down, and if you draw those massive defaults over two or three quarters, the banks will either have to fudge their quarterly reports (whether or not today's SEC would call that fraud), or take the hit and get crucified on the stock market more than they already have. It would be difficult to roll those losses into the level-3 writeoffs they're already trying to bleed out bit by bit. I can't see a scenario where a slowing economy/rising unemployment/falling stock market/rise in defaults and bankruptcies/real estate bubble deflation phenomenon doesn't create a feedback loop that aggravates and magnifies each symptom in turn. A cut in interest rates? That doesn't matter--if you've lost your job and probably won't help get your job back for six months. It doesn't matter--if your credit card company cites universal default and charges 30% interest regardless of prevailing interest rates. And it still hasn't convinced the banks to take risks and make more loans to businesses and individuals.

Namely that to evict someone or to get a title to a house you need to prove ownership. As well as if you say in court that someone owes you a mortgage payment, you must be able to prove you own that contract.

With all the slicing and dicing done in CDOs, who really can prove ownership of many of these loans? Think of it this way: if I write my name on a banana and then puree it in a blender with 20 other bananas, how can I prove that mine was in there? Or how much of the mix belongs to my original named banana?

The banks would have one hell of a time even proving these people owe them money, much less forcing them to pay it. This is what they are scared s*tless of IMHO, they've gotten so clever with their repackaged loans and spreading risk that they can't even prove they own them anymore.

Get ready for a bumpy ride. Maybe I should open an account with my loacal Bank of Mattress? There will be bank runs by 2009.

How your home became a brand item, aka "a banking crisis in the making - banker pleads ignorance." He is forgetting that men like this can be ignorant. There are people who are the face, that's how shit works at higher levels. Rest assured, people have seen this coming, but people who make such decisions don't always accurately predict what people will do -- it's part of the contempt.

Believe me, if people in media can get jobs helping to create Hollywood-style pitches for the Pentagon hardware, it can work the other way around, too. People can fail upwards for no other reason than looking good or throwing the right parties. The problem, I suspect as it's always been, is where banking and industry collide with government. That includes business now, too, because the styles became one and the same with influx of young bukcs into the practice during the 1980s. This created the banking monsters seen then and today; v2.0, you will.

Sub-prime crisis happens when you apply "free market fundamentalism" to money -- loosening up the rules, as they did. They took sknanky business practices to the masses in the form of their money, and yes, as they say, people are now treating their homes as a bad investment. As they fucking should. They're the ones that sold the masses on the idea that they were just like the wealthy in their ability to work the system. It has, of course, never been set up that way.

That can't be good for neighbourhoods or the American psyche. People need gardens and trees of their very own, but I digress.

Now, the good (or bad, depending on ho it plays out) news is that money is sort of a game anyhow. We all decide it's worth stuff and fourtunes are won and lost every day by people who invent rules. It's rather like inventing the rules for how to be a vampire or some other ficticious vehicle for storytelling. Anyhow, incremental changes are usually allowed, but the natives get restless if you do too much at once -- some kids start calling, "unfair," and then everything is called into question.

Whee! Apparently the US has put its faith in Bernake - are you feeling lucky? What's the right thing to do? Cut rates? Raise rates? Radically alter the way business is done, once again, to respect the lives of human beings as the prime goal of any sane species? Civilizations have a tendency to act like addicts, so one has to wonder what would have to happen to let such a radical shift to take place. I'm quite sure I wouldn't like the answer, in fact.

Could a man running a bank be so clueless? In the business or entertainment world, yes. Though you'd think anyone in an entry-level economics class might put those points together -- or is that only the domain of the conspiratorialy-minded? That's the problem with the seemingly endless possiblilities that are created when dealing with people who are loyal only to themselves and apparently capable of doing anything to get ahead. The problem becomes to complex to solve for normal people on the conscious level. What that leaves, I don't know, perhaps Charles Fort collected something useful in his travels.

Thing is, one is pelted by so many outrageous lies on a daily basis from people such as this fellow from banking or someone at a White House Press Conference(tm). It's hard to know what to be outraged at next. This article is a very good start and true as I know it.

-sillydog

sillydogmeida.com

can be bailed out as currently being prayer for planned? The stakes are pretty high.

One way in which underwriters entice investors to buy lower rated bonds is by having them ‘wrapped’ by financial insurers like Ambac and MBIA. Insurers take on the first chunk of potential losses a bond may take, effectively increasing its credit rating. Underwriters pay the insurer a fee to protect the risky bonds, but this credit enhancement allows them to more easily market and sell the riskiest pieces of a security to investors.

Underwriters can no longer wrap low-rated securities because investors no longer trust the insurers whose protection boost the credit ratings, nor do they trust the ratings themselves. While much of the dislocation in the mortgage securities market is due to concerns over increased delinquencies and falling home prices, some of the fundamental dynamics in the market for securitizing assets of all kinds no longer function.

In the coming months, it is likely that we will find out more about how the arcane market for structured debt works, as a $500 trillion market for financial derivatives may in fact be “too big to fail.”