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WOW! Me too! Thank you!
rt
By Francesco Guerrera in New York
Published: 13/4/2007 | Last Updated: 13/4/2007 17:25 London Time
The US subprime mortgage crisis hit General Electric on Friday, wiping $373m from the industrial conglomerate's first quarter profits and prompting its executives to warn of an incipient "bubble" in global credit markets.
GE said it had replaced the senior management team at its mortgage unit, and would reduce its workforce by around 1,000 people, or 40 per cent.
GE will also cut by half the loans it makes to less than $15bn this year - a sign of its belief that the subprime market has yet to hit the bottom.
"We have got to get our house in order," Keith Sherin, GE's chief financial officer, told the Financial Times.
Mr Sherin said the problems in the subprime sector, which targets borrowers with weak credit histories, were being replicated in the market for "Alt-A" loans for borrowers with slightly better credit scores.
Mr Sherin sounded a broader warning on the health of the global credit markets.
He said he was concerned at the rise in the level of high-yield debt, which has fuelled the boom in leveraged buyouts by private equity groups, and the growing use of "no covenant" deals, which strip lenders of the right to force borrowers to repay the debt.
"The levels of debt assumed in LBO activities and the lack of covenants . . . to me those are sign of a bubble," he said.
GE is in talks with a number of buyout groups over the $8bn-$10bn sale of its troubled plastics business, which it expects to clinch by June.
TLDR
GE said it had replaced the senior management team at its mortgage unit
Twenty bucks says they end up with a new job on Wall Street.
The bond market has always considered GSE securities to be implicitly government-backed, so GSE MBS trade a lot like Ginnie Maes, although there is some actual discount for the lack of the explicit full faith and credit backing.
Tanta - Can you tell me what the discount range between the GSE "implicit guarantee" and the GM "full faith" guarantee is?
TStockmann, GSE MBS carry an implied AAA rating. Ginnie Maes are the equivalent of treasury bills.
So really the difference comes in, where it does, in what a given investor (particularly a depository or institutional investor) is allowed to hold, or what a CDO or some other structured security that holds these MBSs as underlying collateral, needs to have in its overall rating. In this sense there is additional value to holding the Ginnie if you need the incremental credit boost.
Practically, it's rarely a "pure" issue of the implicit or explicit guarantee, as Ginnies have different prepayment characteristics than either treasuries or GSE MBS, so that is in the price as well.
Tanta - Just one question.
Where the heck did you learn all this?
My IQ drops every time I read one of your posts... guess I'm one of those who better scroll on down... I can't keep my GSEs straight from the MBS, or for the life of me figure out what a Uber Nerd is, but now I at least know what an REO is!
About the only thing I can relate to in this article is Lake Wobegon...
So seriously, I know you worked in the industry for a long (?) time, but were you born knowing this stuff?
For those readers who are shorting homebuilders here is an article which implies that some may face bankruptcy in 08:
Bloomberg.com:
News
Did anyone else think that Cherry Vanilla must be a cool mom to be allowing a 5 year old to watch a show like Trailer Park Boys? Cool moms are kinda hot (even if it seems thermodynamically implausible).
Also, it was never clear from that old J. Giels video who actually was the "angel in the centerfold". I don't look at centerfolds but if I did and since I'm still young I would like to nominate this chick:
YouTube - Scarlett Johansson' Boob-Squeeze
Just so that you all know that I ghost write Alan Abelson's columns:
The foreign-exchange markets also were less than impressed by the trade numbers: The weak dollar weakened further, to a two-year low. As we've noted more than once, the descent of the dollar, so avidly being encouraged by Congress and the administration as a spur to exports, may easily prove the validity of the admonition to be careful what you wish for; it may come true.
For a weak currency could be more than a little hurtful for the world's leading debtor; it could act as a stimulant for inflation (by hiking import prices) and a depressant for the economy (by forcing the Fed to raise interest rates to prevent an outright run on the dollar sparked by panicky foreign holders of our paper).
The failure to envision the evil that might issue from a plunging dollar could be the single biggest flaw in the market's persistently rosy view.
Tanta, I am going to read it extremely carefully and ask questions. But I must sleep now.
Mr. Abelson did not add that the dollar was up against the yen.
The carry trade is doing just fine...for those who profit from it.
That's you and me, right?
Here are the YEN LOANS!!! 1.5-2%
http://whypaydouble.com/Home_Page.html
Man, I feel like Johhny Mnenonic after the download. Barely enough synapses left unfried to ask a question.
If the GSEs are insured and all that why do they have stockholders? They have no need for capitalization right? Where do the stockholders come in?
It's not fiction it's not lore,
our own Tanta es la mejor!
Thanks Tanta!
Thanks, I now have enough info to make me dangerous.
Thanks Tanta - looking forward to Section II.
Great post Tanta. I was with you all the way to this point:
"Insofar as people who would be required to cough up 20% down payments were trying to save those up in bond funds, it could produce a certain conundrum."
My train of thought: So potential buyers are saving money for down payments (using some sort of bond), which would represent an increase in demand for bonds, which should decrease the interest rates paid out on these bonds. Which should (leap of faith here) decrease the interest rate that they (the buyers) will eventually pay when they take out their mortgage.
Seems like a win-win situation to me. Where am I missing the conundrum?
Also - thanks ron... I had been wondering about GE & others backing these huge highly leveraged PE plays. I have thought this was the sub-prime of the commercial & industrial world... with GE Capital the poster child. Meanwhile back at the ranch...
He said he was concerned at the rise in the level of high-yield debt, which has fuelled the boom in leveraged buyouts by private equity groups, and the growing use of "no covenant" deals, which strip lenders of the right to force borrowers to repay the debt.
"The levels of debt assumed in LBO activities and the lack of covenants . . . to me those are sign of a bubble," he said.
GE is in talks with a number of buyout groups over the $8bn-$10bn sale of its troubled plastics business, which it expects to clinch by June.
The GE plastics group is an outstanding operation from a technical perspective - produces wonderful products.
But it isn't 'growing' & is just a stable and reliable 'old' cash cow.
GE has always had a 'talent' for borrowing a ton of money to 'buy growth' then sell stable assets once the growth has appeared to have stalled.
I wouldn't complain if they bought the 'growth' in its infancy at a discount... Then sold those same assets at maturity for a premium... meanwhile having paid off the debt used to acquire & built up tangible net worth. But it doesn't appear to me they do that...
Instead it appears they 'buy the growth' at a premium well after the market has already recognized the value & priced in 'future growth'... Then GE waits until it is past maturity & sells at a discount when the market has already decided that sector is mature.
All the while GE debt seems to grow & grow. Think of it as Stockholder Equity Withdrawal.
Maybe I'm being too harsh - but that sure seems like their model to me. Neutron Jack was the smartest dude in town to step down when he did.
Tanta,
Excellent!
Thanks,
All the while GE debt seems to grow & grow. Think of it as Stockholder Equity Withdrawal.
With all the corporate buybacks and insider selling, who in their right mind is buying stocks right now? Must just be a bunch of 401ks and government pension plans on autopilot...
who in their right mind is buying stocks right now?
Not just 401Ks - private equity too. I think they really are to corporate finance what sub-prime is to real estate.
I have seen just a little behind the curtain of one PE play and it blows me away. Outside investor money joined up with a whole lot of leverage provided by folks like GE Capital... Combined they pooled a bunch a cash and took a company I work with private... They have made no secret they plan to dress the company up & sell it in a few years for a 'big gain'. Same as flip this house only with way more zeros.
What happens if by that time there isn't all this 'excess liquidity' to make good on the flip? No one is asking that question... its a bit too scary to contemplate.
Despite fearing what the GSE's have become -- the very essence of systemic risk -- I curiously find myself admiring a lot of what they've brought to the overall mortgage market. Damn you, Tanta!
Slightly off-topic, but if I don't post this now I'll forget.
British comedian Robert Newman did a BBC special in which he portrayed what would happen if the rest of the world stopped accepting US dollars. Well done and funny:
Google Videos Error
The relevant portion begins around minute 18.
Whoah ! Such a long post about MBS' and yet.
"You've only just begun"
haven't you ? Now that I've planted that song in your head, I'll go duck and cover and hold back my question on CDOs till you get there.
-K
Max
"With all the corporate buybacks and insider selling, who in their right mind is buying stocks right now?"
Daily Speculations
These guy's are I belive. I'm a sell in May and go away type guy mysef but I decided to leave in April this year and beat the rush.
CR: The page cannot be found
Market Observation - Tim W. Wood 12.04.2009
Tanta
Can you give this blog back to CR now.
Many thanks.
http://www.msnbc.msn.com/id/18097347/
Quick question: why isn't there rampant inflation in Japan?
I don't know the answer.
(Looks like I have to change my tag on this blog, now there is another ajh out there.)
Arbogast,
One reason for the lack of inflation in Japan is the high net savings rate of the household sector which deflates overall consumer demand. Ironically, this comes about at least in part from the low interest rates.
Japan does not have much in the way of Social Security for the aged, and has a high life expectancy, higher than the US in fact. Mr and Mrs Watanabe have to save enough money to handle what might be a very long retirement, without much help from interest income either while accumulating or while living off their funds.
To make matters worse there has been a long period of RE stagnation, so the Watanabe's do not expect a bonanza from the home ATM. They therefore save, and save, and save some more.
If you are a hedge fund manager, why not buy all the risks you can? People are giving you a blank check to outperform the market.. So if a recession stops by and wipes out the fund- you will have collected enough 2/20% fees to retire wealthy.
Buy (with leverage) junk, risky CDOs, companies to gut and load with debt (to pay yourself special dividends), then turn the hulks back to the public markets who pay historically high P/Es for everything.
Seems like a good deal for hedge fund managers- the logical thing to do if you have no real downside risk for the funds implosion.
At least treasuries pay the historic 2-3% real yield, so I dont think its a savings glut.. Just unflinching risk taking by people who have no "skin" in the game.
The Casey Serins of Wall Street?
Median down by 5.7%
The market has slowed in San Joaquin County. Some 780 homes changed hands in March, down from 1,302 in March 2006. The median sales price in March was $415,000, down from $440,000 a year ago.
Anthony Fleming,
Here are the YEN LOANS!!!
Did you note the conditions? 75% LTV and only for rental properties.
I think there might be a specuvestor or two that might struggle with that 25% deposit requirement when they look to refi.
Stevenyork: You are right on.
Hedgie can retire after 3 years with millions in the bank. I am sure their own money is invested in a conservative way.
For a dose of reality, read William Poole, St Louis Fed Pres. on GSE systemic risk:
St. Louis Fed | Page Not Found
Mortgage Crisis Threat to System Dawning on Congressmen?
AZ_Cowboy, my idea was that the coupon on the bonds held by the waiting-to-get-a-mortgage crowd could be low enough that it hardly helps build up the down payment. That is, the 20% will have to come more or less entirely from after-tax after-inflation employment income dollars. Sure, our homeowner wannabees could invest in something a little more risky, but the whole idea was we were going to limit homeownership (and hence mortgaging) to the congenitally risk-averse. If we won't give a loan to someone making a leveraged RE investment, why are we giving loans to people buying high-yield and stocks and hedge funds and so on? If everybody has to be a coupon-clipper in order to fit our risk profile, well, then, someone is going to have to get a raise.
If the GSEs are insured and all that why do they have stockholders? They have no need for capitalization right? Where do the stockholders come in?
Rob, you are forgetting that We the People are not, actually, allowed to own anything. We don't get to buy mortgages for our portfolio. Hell, we apparently don't even get to buy treasuries for our Social Security Trust Fund: every time that subject comes up someone tells me that those are "worthless IOUs." So the taxpayers are just the perpetual holder of the zero-coupon junk residual, the subordinated of the subordinate. We pay out for losses, but we don't get to earn interest on equity investments. The only program we have, at the moment, that is a "negative subsidy" to us--FHA's MMIF--is under assault as we speak.
If the GSEs didn't have shareholders, how could private profit be extracted from this process? How could you motivate Fannie and Freddie to creatively destroy the capital markets if you didn't have a private board of directors authorizing obscene bonuses for executives that provide moral hazard incentive for cooking the income numbers?
"We've only just begun." You keep that up, sk, and there will be a Captain and Tenielle vid next week. Call it "Muskrat Risk": the risk that a given discourse will fall in value relative to the participants' access to out-of-the-money YouTube hedges.
Outsider, like everyone else I was born unable to locate my buttocks with both hands and a flashlight.
There are people who are paid to do nice concrete tasks like process a loan or deliver one to an investor or make an accounting entry. Periodically, one of these people will sit back and wonder why this needs to be done, where it goes when I'm done with it, and in what parallel universe it actually makes sense. There was a time in our country when such people were promotion material. These days we just sell expensive toys to children that teach them how to consume their way to wealth.
Like everyone else, I very often have been asked to do something that is counter-intuitive. It has been my contention for a long time that intuition only gets you so far; sometimes it makes more sense when you shift the point of view. I will only note that my poor disgusting beloved mortgage industry has become full of people who are either willing to continue to do things that "don't make sense" all day, which makes them dangerous, or who think--from their counter-intuitive position--that it does, actually, make sense. Which makes them dangerous, too.
Turn them into voters, and you got yourself a war on.
from Yal's link
But Frank said, with an FDR echo, "It is not part of my concern whether investment banks make money. The purpose of housing finance is to get people in housing, not to finance the U.S. financial markets."
This somewhat answered my question:
from Lorne's link:
the 30-year mortgage rate fluctuates in tandem with the rate on 10-year Treasury bonds, and the spread over the Treasury rate is not affected by portfolio purchases by Fannie and Freddie...Because fixed-rate mortgages are subject to prepayment risk, whereas the 10-year Treasury bond is not, there is a degree of variability of the mortgage spread. But if the cessation of the GSEs portfolio growth had made a difference, it surely would have shown up in the data. The annual average of the spread in 2003, before the OFHEO orders that restricted Fannie and Freddies portfolio growth, was 180 basis points; the spread was 157 basis points in both 2004 and 2005.
Of course this the the raw mortgage rate rather than the resulting MBS.
"Outsider, like everyone else I was born unable to locate my buttocks with both hands and a flashlight."
That may be true, but I'd wager big bucks that you found it before 99.9% of the rest of us...
From the same reference:
Since the GSE accounting scandals emerged in mid-2003, one thing has remained rock-solid: The GSEs have continued to borrow at yields only slightly higher than those of the U.S. government, and noticeably lower than those available to any other AAA-rated private company or entity.
Tanta,
Can I make a request?
How about a swim through the Freddie and Fannie non-agency retained portfolio pools?
jb
jb, I'll try to get there--it's certainly a subject I'm interested in. It's just that I find it more profitable for all of us if we first understand what a "non-agency" "retained" "portfolio" "pool" is/are/was/were. Which implies that we need to know what an "agency" "securitized" "MBS" "pool" is/are/was/were.
I am not, as it happens, an expert on how the GSEs finance themselves. Anyone who is, or has good source material on that, is more than welcome to pop it up in the comments. I find that a lot of what I read on that subject doesn't strike me as particularly trustworthy, because of the assumptions it seems to make about the part of this I do, actually, understand, which is mortgages.
So maybe we can do some participatory teamwork groupthink here, wherein I supply what I know about mortgages and someone else supplies what he or she knows about hedge accounting and duration gaps and GSE debt issues.
To follow up on oz's answer to arbo on why so little inflation in Japan...
One reason for the lack of inflation in Japan is the high net savings rate of the household sector which deflates overall consumer demand. Ironically, this comes about at least in part from the low interest rates.
Japan does not have much in the way of Social Security for the aged, and has a high life expectancy, higher than the US in fact. Mr and Mrs Watanabe have to save enough money to handle what might be a very long retirement, without much help from interest income either while accumulating or while living off their funds.
To make matters worse there has been a long period of RE stagnation, so the Watanabe's do not expect a bonanza from the home ATM. They therefore save, and save, and save some more.
The BOJ then practices ZIRP or near-ZIRP in an effort to stimulate consumption... pump money into the system... but instead of people using it THERE for consumption... private & institutional investors 'carry trade' it away to places like So Cali to inflate real estate... passing it through GSE MBS on the way to closing.
And of course we have no qualms about turning that extra BoJ money into consumption (via MEW)... some of which finds its way back to Japan via Toyota sticker prices.
That is why this whole thing is so crazy. It sort of almost works... if you can just ignore the US debt growth that is.
Hell, we apparently don't even get to buy treasuries for our Social Security Trust Fund: every time that subject comes up someone tells me that those are "worthless IOUs."
They're worthless because the money to repay the treasuries held by the SSA has to come from the same future income stream that will be supporting future SS levies.
It's exactly as though Mom & Pop commit to setting aside money for Jr's college fund each month, but every month they take the cash out of the piggy bank and buy pizza with it, replacing the money with personal IOUs.
When Junior's ready to go to college, the nominal value the college fund might be tens of thousands, but as a practical matter the fund's only as valuable as Mom & Pop's ability to repay the IOUs out of their future discretionary income - just as if they had never set up a college fund at all.
Hey ozajh,
I'm not sure which of us came first, but your posts are good, so I'm okay with a shared identity.
But for the sake of clarity, I'll also change my handle to "anotherajh"
Best,
formerly AJH
It's exactly as though Mom & Pop commit to setting aside money for Jr's college fund each month, but every month they take the cash out of the piggy bank and buy pizza with it, replacing the money with personal IOUs.
Huh?
My understanding was that income-earners paid into SSA, which ended up (thanks, Mr. Greenspan!) with a surplus of assets over liabilities. That surplus was invested in treasuries. That means that the treasury borrowed money from my pension, which I am still too young to be drawing down, in order to fund the treasury's (not SSA's) other activities, at the same time, I notice, that it lowered taxes on non-payroll tax income like high incomes and cap gains. Anyway, my idea, or perhaps Mr. Greenspan's idea, was that my pension could redeem those bonds, with interest, just like any other bloody bondholder can, and use the proceeds to pay out retirement benefits, which is what they're for, because they're just invested payroll taxes. But noooo, now someone wants to tell me I bought pizza with that money, the pizza is gone, and so the IOUs are "worthless."
The hell they're worthless. If Goldman Sachs can redeem its t-bills for cash, by God the SSA can. If the treasury can't afford to pay its debts, it will have to do something about its revenues. It does not get to just reneg on its debts to SSA, not as far as I'm concerned.
Well, Tanta, we'll just have to see how it works out, but my guess is that the Boomers aren't going to get 100% of everything that they've been promised.
In fact Mr. Greenspan said as much to Congress, when he commented that the nominal benefits would be paid as promised, but that the value of those payments couldn't be guaranteed.
Yahoo! Message Boards -
[All emphasis added] February 16, 2005 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan [testified] yesterday before the Senate Banking Committee. [...]
As he has in the past, the Fed chairman acknowledged that the long-term, gradual decline in the share of the U.S. population of working age already under way creates a huge problem. That's the basic reason some projections show Social Security's financial sustainability to be questionable. Greenspan believes the difficulty is more fundamental.
``Unless productivity growth increases significantly, the per capita GDP must very significantly slow, and that means either the retirees or active workers, say in the year 2030, must have a significant slowdown in their standard of living,'' he said. [...]
At another point, in response to a question from Democratic Senator Jack Reed of Rhode Island, Greenspan said, ``We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power." [...]
The chairman explained that he likes the concept of private accounts because they contain real assets, whereas a largely pay-as-you-go Social Security system doesn't involve the accumulation of assets. [...]
On the larger issue of future federal budget deficits, Greenspan was asked about Bush's proposal to make permanent some temporary tax cuts, such as those that lowered income tax rates on dividends and capital gains to 15 percent.
The Fed chairman said he would make permanent those cuts ``which I view as enhancing economic growth and therefore enhancing the revenue base,'' including that on dividends.
Full article
How lovely. The economy will not grow nearly enough to provide a decent future standard of living.
It will, however, grow plenty if we don't tax non-employment income.
We can't buy bonds and expect to have enough to retire on, because there won't be enough taxpayers in the future to pay those bonds off.
On the other hand, we could buy stocks, and that would be enough to retire on, because stocks are some kind of magic counter-hedge to a contracting economy. The future not-enough-workers will be receiving not-enough-income from the Fortune 500 that they can buy enough not-enough-stuff to keep the economy growing so that shares can pay more-than-enough dividends to pay some old decrepit duffer like me to sit on the porch and yell at the kiddies. Since we don't put payroll taxes on dividends, the math works.
Did I get that right?
I am dead serious. I have no idea what the Great Greenspan thinks he's talking about.
Tanta,
Your timing, much like your information, is impecable. I spent three hours last night digging through SEC filings and wake up to find an MBS UberNerds tutorial. By the time I'm done with my "adventure" I'm going to end up owing you a vineyard (or at least a year's supply of Swiss chocolate) and you're not even going to realize it.
At some point in your travels through installment II or beyond could you possibly work in at least a cursory definition of "cut off" and "closing" dates and what they mean to a REMIC? My case just got bumped to Federal Court and I'm trying to set up for
discovery.
The economy will not grow nearly enough to provide a decent future standard of living.
Not necessarily "will not", just "might not".
Greenspan apparently believes that low taxs on dividends and capital gains will lead to greater capital expenditures, which will lead to productivity growth increasing significantly, which would nullify the worst-case scenario that he outlined for Congress.
Tanta
"I have no idea what the Great Greenspan thinks he's talking about."
Probably the same thing as always: We gonna have to print mo money.
arbo,
Demographics plays a major part in the answer to your question about Japan. An aging population buys less stuff. The US is moving there now; except for immigration swelling the number of consumers we would (and possibly will) arrive at a deflation economy in time.
While you can look at the situation in housing from a credit/debt standpoint, you can also say that low interest rates caused that market to 'borrow ahead' - kill off a few years of future demand by making all the sales today. The same thing with consumption of other items: the big purchasing years are the child-raising years and those immediately after. You do not repeat those purchases in old age.
"Greenspan apparently believes that low taxs on dividends and capital gains will lead to greater capital expenditures, which will lead to productivity growth increasing significantly"
Which means shifting the tax burden onto those who don't make much in dividends and capital gains. Alternatively it means bigger deficits, which most likely get paid through inflation (fed buys t-bills), thus shifting the tax burder onto savers, thus encouraging us to spend, spend, spend! Sounds like a great plan for a secure future...or at least to get reelected.
Oops, should be tax "burden"
Which means shifting the tax burden onto those who don't make much in dividends and capital gains.
Hey, no problem. We'll just encourage the brokers to lower their margin requirements to the point (like zero) that stocks become affordable to all. This would take the "ownership society" to new heights!
So let me see. Here's Bubba, who works for WalMart, which exists to satisfy our demand for merchandise which is cheap because WalMart is good at screwing its employees, its tax-collecting municipalities, and its suppliers. Out of Bubba's crappy check--every dollar of which he pays FICA on--he manages to scrape up a couple of bucks to put in his savings account, which is invested in the money market and earns him some big honkin' yield. Eventually he finds an old starter home and we give him an FHA loan. He's not saving any more--whatever will the money market do without Bubba's investment?--but he's handing over a substantial part of his check to some investment bank who built the CDO that owns the Ginnie I in which Bubba's loan is parked. Since taxing the investment bank would mean Bubba losing his job, it seems, we will just take Bubba's payroll tax payments and donate them to the general fund to make up for the taxes that Walmart and the investment banks don't pay. Or, as an alternative, we will take Bubba's payroll tax and give it to the investment bank, which will either buy shares of WalMart or more Ginnie Maes, or possibly both. This will fund Bubba's retirement, since WalMart will make so much money--by keeping Bubba's wages down and not paying any of its own tax burden--that he will earn dividends, and those Ginnies will throw off a bunch of interest by making it too expensive for Bubba to be able to make mortgage payments. Nonetheless, Bubba's cool new "private account" will help grow the economy, which will be good for Bubba because if the economy didn't grow, his future standard of living would suck. His current standard of living doesn't suck, because he's one of those "lucky duckies" who doesn't pay much income tax, has a government-insured loan, relies on medicaid for healthcare because WalMart doesn't offer bennies, and probably eats a lot of pizza. Should Bubba ever run into any trouble with the house payment, of course, he's screwed, because he shoulda thought of that before he ran up all that debt. In any case, our bigger concern is not Bubba, but the taxpayers--of which Bubba ain't one because payroll taxes are not taxes, you see--who might have to bail out FHA. We can't do that because that would reward the investment bank who lent the money to the lender who made the FHA loan, and if it is impossible--which it clearly is, because we said so--to bail out Bubba without bailing out Wall Street, we need to let them both crash and burn, so that neither will be so irresponsible in the future. Bummer about Bubba's private retirement account, there, but someone had to be made example of.
Tanta, thanks for the trip down memory lane. I'm not as financially savvy as most around here, but I did time with an early vendor of MBS portfolio management and accounting software back in the '80s. So I had to learn this stuff to write the users manuals.
Back then, Ginnie, Freddie, and Fannie were about the only games in town, and the pass-through was the security of choice, or at least the only one I'd heard of. So I look forward to reading more about how mortgage-backed securities have mutated since then.
Funny, just before the company went belly-up we were looking into developing modules that would managed bonds based on automobile loans and other sorts of securitized debt. Seemed screwy to me, but now that sort of financing seems to be all that keeps our limping along. For now.
First of all Greenspan is a tool. Believing Greenspan on SS is about as sound as believing & trusting Bush on Iraq...
BTW to conservatives just because I don't believe/trust Bush om Iraq DOESN'T mean I believe/trust Dems on Iraq either... it is not a binary choice.
Same applies to SS. I don't see much light glowing from the Dem candle on this topic either.
I have serious doubts whether SS will live up to its promises (in inflation adjusted dollars anyway).
Having said that, going 'private' is as bad or worse for all the same reasons. Only difference is the privatization schemes are all likely to be a 'lottery of success/failure'... some doing well some terrible & a lot in between... with Wall Street skimming off a sizable share via fees just like sub-prime... a share that might or might not be larger than the cut the gubbermint bureaucracy takes.
The real issue comes down to productivity.
Any scenario that is likely to provide an environment where privatized SS works out is sufficiently robust to provide revenues & growth sufficient to allow the current SS model to work out as well.
Likewise any scenario that creates an environment where the current SS model fails will also create an environment where privatized returns will also fall short of expectations IN AGGREGATE.
It all comes down to providing a growth environment where we produce more than we consume & we aren't doing that. Whether SS stays public or private doesn't affect this fundamental issue one way or another.
Yes, Social Security is the world's greatest Ponzi scheme -- take money from new "investors" to pay those that came before more than they put in. Meanwhile, most of the money is squandered by the managers. Such a deal!
Those IOUs are a "special issue" of Treasury notes, too -- totally non-negotiable in the open market. GWB made a trip over to show off the "paper in the filing cabinet" when pushing his privatization plans.
Can't find a link but I heard that the administration recently objected to including entitlement obligations in government debt calculations, arguing that those programs could be altered and/or terminated at any time.
Tanta
Could you help the regulators out with and insiders view of the following question?
Do you think that there are reasonable circumstances under which investors could force FDIC-insured banks to buy back sub-prime issues given the warranties that banks make on them?
Looking through the prospectus to some of these private-label MBS, it looks like banks make warranties as to the characteristics of borrowers in the pool. For example, one of these is the distribution of DTI.
However, when income is stated, couldn't an investor who has lost his shirt because of fraud say that the bank misrepresented the true DTI and has to buy back the loans? Is it enough for the bank to disclose the fraction of stated income loans? And what if the bank was actively involved in the process of "stating" income, helping borrowers figure out how much income they would need to "state" in order to get the loan, or shifting borrowers to a stated program when the bank has the real income in the application file? Aren't they participating in the de-frauding of investors?
Sincere thanks for any thoughts.
Can't find a link but I heard that the administration recently objected to including entitlement obligations in government debt calculations, arguing that those programs could be altered and/or terminated at any time.
Any debt can be terminated - you just don't pay. Ask Argentina. Bush was an ass as usual.
Fact is the money doesn't matter - you don't eat the money. Until folks get that through their head they are going to be stuck on the metal vs paper argument and you can't eat either of them.
We have to produce the wealth in the future we consume in the future... then figure a way to distribute it at that time (private or public). If we don't do that (don't produce enough) neither private or public strategies will work. If we DO produce enough then it is just an argument over who gets more... nothing new about that.
In either case everything is a pay as you go Ponzi so get used to it...
anotherajh,
I don't know which of us was posting on this blog first, but I've been using ajh (my initials, magnificently unoriginal hey?) for a couple of years at Ben & Patrick's housing blogs. I will continue to do so, and use ozajh here.
I don't mind being credited with your comments either, but it might get a bit confusing for intending respondents.
Oh, and the 'oz' is shorthand for Australia, where I live, rather than any reference to the film. I'm certainly no financial wizard.
G'day ozajh,
AJH are also my initials, and another coincidence I was born in Australia, though now I live in the USA (eerie music wells up).
The Handbook of Mortgage Back Securities by Tanta? Fabozzi vs Tanta war!!!
BTW, I know a guy who used to trade subprime at Freddie. His daily trading limit was $1B, and senior management didn't know his name. That's messed up, and it's also why he left.
Tanta, bravo, bravo, bravo for your superb replies to Reepicheep and the others who have fallen for the scam that the SS Trust Fund's US Treasury holdings are "worthless IOUs".
Social Security: The Phony Crisis
CEPR Papers on Social Security
Hi Tanta,
Thanks for the article. I have tried and tried to read about GSEs but have been mystified (to the extent of having paid $250 for some books).
Your article was clear and concise and expect to see many more visitors to your site.