U.S. Debt discussion

[Slava]

Originally Posted by Yasa

If there are 3 agencies that determine credit ratings, which ones do investers listen to? S&P seem to make the loudest noise, but do they have more influence than Moody's or Fitch? Are investors still going to panic monday despite 2/3 agencies keeping their ratings at AAA, and public knowledge of S&P's error?

S&P is generally the most respected. Its good that Moodys and Fitch kept them at AAA, but things don't look rosy for tomorrow. In the middle east the markets all pointed at sell.

[afc wimbledon]

Originally Posted by Flames Fan, Ph.D.

Well, Fannie and Freddie do not secure all mortgage debts. Far from.

I had a post lined up for Calgaryborn's "Fannie and Freddie caused everything" canard, but I just shook my head and decided not to. Why bother?

Bottom line is that F&F's contribution to the housing crisis was minor. The numbers behind F&F's holdings, and the default rate of their "risky" sub-prime / Alt-A mortgages was actually low. If anyone is interested, they need to look at the type of loans that Countrywide was financing... those are the ones that were problematic and securitized privately. Their loans were largely nonconforming and therefore ineligible for F&F's securitization and had to go to the secondary market. They did misrepresent loans to make them conforming for F&F's securitization.

I seem to recall F&F were only involved in around 10% of the sub prime mortgages.
I suspect the bundling of mortgages probably allowed brokers to make it look like all their crap mortgages were backed by the goverment when most weren't.

[afc wimbledon]

Originally Posted by Slava

S&P is generally the most respected. Its good that Moodys and Fitch kept them at AAA, but things don't look rosy for tomorrow. In the middle east the markets all pointed at sell.

I am a bit of a fatalist when it comes to recessions, I suspect we have earnt this one and are going to get it whatever the goverment does, mostly they have just stretched it out some, with QE 1,2,3 being little more than the Keynesian equivelent of taking the band aid off slowly instead of ripping it.

[Slava]

Originally Posted by afc wimbledon

I am a bit of a fatalist when it comes to recessions, I suspect we have earnt this one and are going to get it whatever the goverment does, mostly they have just stretched it out some, with QE 1,2,3 being little more than the Keynesian equivelent of taking the band aid off slowly instead of ripping it.

There are some huge differences between where we are today and 2008 though. One being that corporations are flush with cash. This should mean much less job loss, or the worry of job loss...which is huge.

[afc wimbledon]

Originally Posted by Slava

There are some huge differences between where we are today and 2008 though. One being that corporations are flush with cash. This should mean much less job loss, or the worry of job loss...which is huge.

Should being the operative word, unlike our tea party friends I have little faith in corporations acting in the best interest of the rest of us so I suspect they will cling to their reserves or use them to open factories in mexico and china

[Flames Fan, Ph.D.]

Originally Posted by afc wimbledon

I seem to recall F&F were only involved in around 10% of the sub prime mortgages.
I suspect the bundling of mortgages probably allowed brokers to make it look like all their crap mortgages were backed by the goverment when most weren't.

This is the most thorough treatise that I've read.

Bottom line is that F&F's portfolio had default rates well below that of subprime loans, which is probably the bigger factor. Also, just in magnitude, what F&F held could not create that large a meltdown. The highly leveraged, private securitization CDO / CMO market that companies like AIG were mired in was large enough in magnitude, and based on a shaky enough loan portfolio, that it clearly spurred the whole mess.

If anybody is interested in the securitization and the leveraged bets from private companies that was responsible for the melt down, I would recommend Yves Smith's Econned or even go as far back as Liar's Poker to see how this all started. Econned is heavy but it makes it clear how the CDOs created in the secondary market from crappy MBS tranches. Taibbi's last book spells out, in an easy to read format, the garbage that AIG was creating.

[J pold]

DOW futures down 292 points on market open

[macker]

Originally Posted by Flames Fan, Ph.D.

This is the most thorough treatise that I've read.

Bottom line is that F&F's portfolio had default rates well below that of subprime loans, which is probably the bigger factor. Also, just in magnitude, what F&F held could not create that large a meltdown. The highly leveraged, private securitization CDO / CMO market that companies like AIG were mired in was large enough in magnitude, and based on a shaky enough loan portfolio, that it clearly spurred the whole mess.

If anybody is interested in the securitization and the leveraged bets from private companies that was responsible for the melt down, I would recommend Yves Smith's Econned or even go as far back as Liar's Poker to see how this all started. Econned is heavy but it makes it clear how the CDOs created in the secondary market from crappy MBS tranches. Taibbi's last book spells out, in an easy to read format, the garbage that AIG was creating.

Or "The Big Short" where it is pointed out how AIG a tripple A rated Insurance company was not subject to bank regulation and large reserve assets and that it could have also been GE or Berkshire Hathway but that AIG just got there first. AIG became the worlds biggest owners of subprime mortgage bonds. For a few million dollars per year AIG took on the very real risk that 20 billion could just go poof. Those who shorted were basically buying fire insurance on a slum with a history of burning down. The rating agencies didn't have a CDO model. AIG was effectively long 50 billion in tripple B subprime mortgage bonds masquerading as tripple A as Moodys and S&P had both rated the stuff tipple A. How could subprime loans be rated AAA....bingo there is your big short. Another great book from Michael Lewis.

[pepper24]

Originally Posted by Tinordi

At least Calgaryborn demonstrates consistent epistemic closure to his belives. No amount of evidence will challenge his world view from economics to religion.

Is it wrong to say that people like him are extremely dangerous?

Some jobber on an internet board is harmless. The fact that there are people with similar thoughts in US Congress in the Tea Party is a huge issue and they are dangerous. They were a huge reason why the recent bill didn't include a revenue increase (ala increase in taxes). To get out of this mess, the US needs to increase revenues while also cutting spending. To do only one of these only continues the bleeding. This is from someone who welcomes low taxes but in normal periods. This period is far from normal.

[seattleflamer]

Originally Posted by Flames Fan, Ph.D.

Well, Fannie and Freddie do not secure all mortgage debts. Far from.

I had a post lined up for Calgaryborn's "Fannie and Freddie caused everything" canard, but I just shook my head and decided not to. Why bother?

Bottom line is that F&F's contribution to the housing crisis was minor. The numbers behind F&F's holdings, and the default rate of their "risky" sub-prime / Alt-A mortgages was actually low. If anyone is interested, they need to look at the type of loans that Countrywide was financing... those are the ones that were problematic and securitized privately. Their loans were largely nonconforming and therefore ineligible for F&F's securitization and had to go to the secondary market. They did misrepresent loans to make them conforming for F&F's securitization.

Yes , thank you for expanding. My main point was it was not the GSEs that created that mess.

Everyone who took out a loan from the naive/greedy homeowner to realtor to appraiser to the banks, unregulated products like CDOs and mortgage securitization and the repeal of Glass Steagall which created the "too big to fail" model all had a hand in this mess.

We're all guilty to some extent.

I also read in the NP that the S and P analyst who was mostly responsible for the downgrade is Canadian. I wonder if there was some good ol' fashion anti americanism in that downgrade?

Downgrade is a shock...really. We are far from being Greece.



.

[afc wimbledon]

Originally Posted by seattleflamer

Yes , thank you for expanding. My main point was it was not the GSEs that created that mess.

Everyone who took out a loan from the naive/greedy homeowner to realtor to appraiser to the banks, unregulated products like CDOs and mortgage securitization and the repeal of Glass Steagall which created the "too big to fail" model all had a hand in this mess.

We're all guilty to some extent.

I also read in the NP that the S and P analyst who was mostly responsible for the downgrade is Canadian. I wonder if there was some good ol' fashion anti americanism in that downgrade?

Downgrade is a shock...really. We are far from being Greece.



.

I fail to see why the homeowners were either niave or greedy, they were offered a chance to buy a house in a rising market, it is implicit in every mortgage contract that you can walk away from it if you can't pay, it isn't wrong or immoral it just screws your credit, which most of them didn't have anyway, they didn't lie or cheat, the homeowners lived up to their responsibilty, they paid for as long as they could and then gave the house back when they couldn't.

This was wholly the mortgage vendors fault.

And Greece is triple c credit so the S&P doesn't think you are Greece just a bit effed up.

[Daradon]

While the actual economic evidence and reasoning behind the downgrade is definitely debateable, I do think the bigger story is the politcal climate and that was referenced as a cause of the downgrade too. The politics and brinksmanship behind the decisions (or lack thereof) and the childish way in which the government negotiated and tried to fix this problem is very scary. And when taken as part of a larger picture of what has been going on in American politics, I think there are legitamite concerns about how the country may right the ship, if they can.

[seattleflamer]

Originally Posted by afc wimbledon

I fail to see why the homeowners were either niave or greedy, they were offered a chance to buy a house in a rising market, it is implicit in every mortgage contract that you can walk away from it if you can't pay, it isn't wrong or immoral it just screws your credit, which most of them didn't have anyway, they didn't lie or cheat, the homeowners lived up to their responsibilty, they paid for as long as they could and then gave the house back when they couldn't.

This was wholly the mortgage vendors fault.

And Greece is triple c credit so the S&P doesn't think you are Greece just a bit effed up.

When I hear or read stories of buyers who didn't know or understand that their say, $300/mo payment would go up 4x or whatever as much, I don't have much sympathy.

There is a gov't regulation in existence since the 30s called the HUD statement which explicity and in layman terms gives your monthly payments, interest rate, potential payment scenarios and total interest paid, etc whether it is a vanilla 30 year fixed to the more exotic ARMS(adjustable rate mortgages) or option ARMs.

There is a naivite or greed involved if a. you believe or depend on your realtor, mortgage broker or appraisal firm to tell you how much you'll be paying instead of reading the HUD before signing the contract and b. you purchase a home knowing full well you can't afford the payments when your ARM resets GAMBLING that you can sell or flip before the reset.

There were certainly many situations where there was predatory lending but not enough to cause the entire crisis. So in that sense, buyers were part of the problem when they were gambling or didn't really understand what they were doing.

[Azure]

Originally Posted by seattleflamer

When I hear or read stories of buyers who didn't know or understand that their say, $300/mo payment would go up 4x or whatever as much, I don't have much sympathy.

There is a gov't regulation in existence since the 30s called the HUD statement which explicity and in layman terms gives your monthly payments, interest rate, potential payment scenarios and total interest paid, etc whether it is a vanilla 30 year fixed to the more exotic ARMS(adjustable rate mortgages) or option ARMs.

There is a naivite or greed involved if a. you believe or depend on your realtor, mortgage broker or appraisal firm to tell you how much you'll be paying instead of reading the HUD before signing the contract and b. you purchase a home knowing full well you can't afford the payments when your ARM resets GAMBLING that you can sell or flip before the reset.

There were certainly many situations where there was predatory lending but not enough to cause the entire crisis. So in that sense, buyers were part of the problem when they were gambling or didn't really understand what they were doing.

When you're telling a family that has a combined income of $40,000/year that they can afford the $1.5million dollar home over on the rich side of town, how many of them actually bother to read the fine print?

[Slava]

Originally Posted by Daradon

While the actual economic evidence and reasoning behind the downgrade is definitely debateable, I do think the bigger story is the politcal climate and that was referenced as a cause of the downgrade too. The politics and brinksmanship behind the decisions (or lack thereof) and the childish way in which the government negotiated and tried to fix this problem is very scary. And when taken as part of a larger picture of what has been going on in American politics, I think there are legitamite concerns about how the country may right the ship, if they can.

Well that is all well and good except for a few things: (A) a credit rating is not really a comment on the political climate. Its supposed to be a rating on the likelihood that you can pay your debts. (B) and perhaps most importantly, the US can always print more money. In other words taking the hyper-inflation aspect out of the equation (which is not a concern in the least right now!) its virtually impossible for the US to actually default. They theoretically ought to be either "AAA" or "D" in theory because if they were that close to a default they could turn on the presses...

[seattleflamer]

Originally Posted by Daradon

While the actual economic evidence and reasoning behind the downgrade is definitely debateable, I do think the bigger story is the politcal climate and that was referenced as a cause of the downgrade too. The politics and brinksmanship behind the decisions (or lack thereof) and the childish way in which the government negotiated and tried to fix this problem is very scary. And when taken as part of a larger picture of what has been going on in American politics, I think there are legitamite concerns about how the country may right the ship, if they can.

So is S&P saying plague to both your political houses then? If so, why the political commentary? The fact is the ceiling was raised and an agreement reached to cut ~1trillion in spending. They should be satisfied that the US is on the path to get it's fiscal house in order.

Based on S&P's logic or concern of the political situation, on November 12, 2012 they will upgrade back to AAA since, either the Democrats will have the house again or you'll see all 3 branches controlled by Republicans or neoReps.

[seattleflamer]

Originally Posted by Azure

When you're telling a family that has a combined income of $40,000/year that they can afford the $1.5million dollar home over on the rich side of town, how many of them actually bother to read the fine print?

Hence, everyone has dirty hands on this one....

[MarchHare]

Originally Posted by Azure

When you're telling a family that has a combined income of $40,000/year that they can afford the $1.5million dollar home over on the rich side of town, how many of them actually bother to read the fine print?

Can you provide citations to show that this actually happened? Obviously many people (poor and middle class alike) were buying homes beyond their means during the housing bubble, but I think your example is more than slightly hyperbolic. Even the greediest, most short-sighted subprime lender is not going to give a $1.5M mortgage to a family with a $40k household income.

[Daradon]

Originally Posted by seattleflamer

So is S&P saying plague to both your political houses then? If so, why the political commentary? The fact is the ceiling was raised and an agreement reached to cut ~1trillion in spending. They should be satisfied that the US is on the path to get it's fiscal house in order.

Based on S&P's logic or concern of the political situation, on November 12, 2012 they will upgrade back to AAA since, either the Democrats will have the house again or you'll see all 3 branches controlled by Republicans or neoReps.

I don't think it's as simple as blaming it on a divided House. It's the underlying political climate in the US that has become 'win at all costs' even if it harms the country in the process.

Shouldn't investors be concerned with what they saw the US leaders do? I know I would be.

Secondly, about the cuts or deal in general, it has been widely looked at as not nearly enough. Many organizations wanted 4T in cuts. While I don't agree with that, they should have at least added some tax increases to offset the lack of cuts. I think the deal was looked at as too little, too late. Which makes the whole issue of it being such a problem to get to even more concerning.

[MarchHare]

Originally Posted by seattleflamer

So is S&P saying plague to both your political houses then? If so, why the political commentary? The fact is the ceiling was raised and an agreement reached to cut ~1trillion in spending. They should be satisfied that the US is on the path to get it's fiscal house in order.

Based on S&P's logic or concern of the political situation, on November 12, 2012 they will upgrade back to AAA since, either the Democrats will have the house again or you'll see all 3 branches controlled by Republicans or neoReps.

No, this isn't a plague on both your houses. S&P specifically blamed the Republicans for their inflexibility and unwillingness to compromise with respect to revenue increases (e.g. letting the Bush tax cuts expire):

http://www.ft.com/cms/af2c4fac-bfc2-...144feabdc0.pdf

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.