Crow here again after a nice trip to the park with my old friends Mavis and Mathilda.
Just as I was getting ready to continue the description of the background of this particular collapse of human nest eggs who should happen by but susan's friend, Seraphine, who summed things up quite nicely with the following:
" ohh gosh, you only got it half right.
those guys weren't happy earning only 5% on mortgages, so the investment houses divided those pools into tranches, then they divided the tranches into subtranches, and they borrowed money to leverage those investments even further.
then, because they were borrowing money to purchase pools of already borrowed money, they decided to "insure" the pools by using as collateral the very pools they were insuring (it was a great way to add "liquidity" and generous fee income to their bottom lines).
then, of course, they'd take the income from their derivative investments and use it as further collateral to borrow even more money to lend to people who were desperate to own a home (after all, most poor people know the differance between haves and have-nots in america is home ownership. they'd do anything to own a home, and who can blame them?)
how stupid was that? the international monetary fund thinks about one trillion dollars will be lost by the time everything sorts out.
thank god america's founding fathers built square caskets, or they'd be rolling in their proverbial graves over this."
Smart lady. The end result for our homeowner friend, Clarence, was that when his mortgage payment rose more than $2000 per month and he wanted to go to the bank to refinance, nobody could figure out who owned the loan.
It turns out there's a brand new part to this story that I learned just today. A report in The NY Sun tells us that in 1975 the net capital rule was created to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a discount, to account for the assets' market risk.
The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.
In 2004, the European Union passed a rule allowing the SEC's European counterpart to manage the risk both of broker dealers and their investment banking holding companies. In response, the SEC instituted a similar, voluntary program for broker dealers with capital of at least $5 billion.
All five broker-dealers that qualified — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley — joined. Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.
The new program required time-consuming oversight of the broker dealers by SEC officials and the use of subjective judgment calls. In many cases talented but low paid SEC employees left the federal government for much more lucrative jobs with the investment firms they had previously been paid to monitor.
Bear Stearns collapsed in March. Lehman Brothers and Goldman Sachs went broke earlier this week and word today is that Morgan Stanley is now in talks to merge with Wachovia.
It was only twenty years ago in 1989, and strangely enough, during the term of the other George Bush that the country suffered through the savings and loan disaster. A Senate Ethics Committee investigated the Keating Five including John McCain who wasn't convicted but never exonerated either. Now another President Bush was responsible for appointing the SEC chairman Christopher Cox who changed the net capital rule.
I think someone should tell Senator Obama about this.
Meanwhile, I've got to get in shape for a little branching out party Mavis and Mathilda have planned for the weekend.
They're expecting chicks.