Today, I want to talk a little about what's going on with these three things, and what are your thoughts on these subjects.
Background on the sub prime mortgage crisis: there's a lot that could be explained here but I'll give you the short version. Basically, rating agencies, such as Moody's, were giving AAA ratings on mortgages that banks then sold. However, the very people buying these ratings (investment banks) were paying the rating agencies which leads many people to believe the conflict of interest are party to blame of the crisis. I Anyways, the banks cut up and packaged these gold rated mortgage backed securities into complex, nonsensical packages that no one could understand, and eventually sold them to investors through various mediums including mutual funds. Well, home buyers bought these mortgages left and right, paying a small down payment, owing almost the entire value of the mortgage on the house. The worse part is these people had bad credit ratings hence "sub prime" mortgage. Eventually, the buyers defaulted on their loans and banks had to seize the property. As more and more of this happened, the value of these mortgages fell and these home buyers were left with a larger debt on their mortgage than the mortgage was worth. Then they stopped paying their mortgage, defaulted on the lean, and furthered the downward spiral. Banks were foreclosing and seizing these properties but each seize takes about 8 months to complete from start to finish and often the people had already left the houses, leaving it prone to vandalism. This causes the value of the properties to decrease significantly and banks to receive as little as 40 cents on the dollar at foreclosure actions. The rest took a life of its own. As people began to lose more and more money, fear and speculation drove the market into crisis.
FINRA: On May 20, 2010, the Senate passed the Financial Regulatory Reform Bill by a vote of 59-39. (http://banking.senate.gov/public/_files/FinancialReformSummary231510FINAL.pdf) The legislature has 3 main parts, regulators would receive more authority to monitor mortgages and securities, reduce debt they take on and increase capital reserves and finally, worst comes to worse, the government can seize failing banks and sell it back piece, by piece. Hello big brother, you're getting mighty large...
Another interesting topic regarding this is the Glass Steagall Act of 1933. I'd explain it but this post is getting long enough as it is. So google the Act before giving an opinion. My concern is that they enacted the act after the Great Depression but then the Graham-Leach-Billey Act of 1999 completely repealed it. So the smart people of 1933 found that it was important to separate the investment banks from the depository banks but then the smart people of 1999 found that among other things it promoted deflation and repealed it. Now the "smart" people of 2010 are thinking about reenacting it or some version of it? There are huge problems either way, why are we just switching back and forth. Destroying the U.S. economy isn't a fashion trend that comes back every into fashion every 20 years.
The bill now proceeds to House-Senate conference where the Senate version and the House version are reconciled. It could be ready for President Obama's signature as early as July 4, 2010! If passed this would be the most sweeping overhaul of the financial sector since the Great Depressio
What do you think about this new bill?
The next segment will be on BP. What the future of BP is and whether you should invest in it. BTW BP closed at a 52 week low today of 34.68 even though the DJIA and the S&P both went up.
The problem with what has happened is that regulation is completely necessary in a field full of crooks and thieves waiting for their loophole to start taking advantage of people, which is right where the Glass-Steagall Act being repealed came in.
ReplyDeleteIn short, the act prevented banks from also being investment banks and realty intermediates. Through its final repeal in 1999, the flood gates then opened for banks to begin offering non-FDIC backed instruments (securities, mutual funds, etc.) and hope too capitalize on then-current dot-com bubble trends. What seemed like a fair use of open market competition at the time, however, led to very shady business practices and new, unregulated mortgage-backed securities that almost nobody could understand and yet were buying up as the markets and underlying home prices were skyrocketing.
What has happened since is history, and still nobody knows exactly what happened, but when reports come out saying that our supposedly-unbiased credit rating agencies may have been paid off, it is of grave concern to the industry and the public. While you may decide to criticize the potential re-enactment of the Glass-Steagall Act, I certainly see it as necessary to keep checks and balances within the industry and retain a partnership-type atmosphere, rather than getting these "too big to fail" companies like BoA and JP Morgan Chase that essentially combine 3+ business models into 1 without the necessary regulation. This is when we get situations where the government has to bail these companies out in the public interest so that millions of innocent people aren't sent into a panic and have a repeat of the bank runs and collapses of the Depression Era.
-the nature of capitalism is to breed crooks and thieves: don't say it's just Wall St. As I see it, all of this still comes back to campaign finance reform. As long as banks are paying lobbyists who are paying (albeit indirectly) Congressmen, there is a debt that must be repaid. That's why you get Treasury Secretaries who worked at Goldman, then the Gov't, then Goldman again. You cannot have this crossover between private and public sectors; it is not sustainable and leads to corruption.
ReplyDelete-From what I know, I don't really think there was any paying off of ratings agencies. Please show me an article if I'm wrong. What I have heard, is that these agencies simply didn't understand what they were doing. They were rating assets on a relative scale rather than an absolute one. I.E. several solid mortgages and some sub-primes may be rolled together into a CDO...later, if that CDO was re-divided and re-combined, there is not an absolute rating that stays with the pieces. I'm not being clear, but basically a AAA CDO could have BBB components, and when those are re-combined later, they were reevalutated poorly. From my limited knowledge, it seems to be agreed upon that ratings were a very small input into the total shitshow. As it stands, investors use ratings for little more than affirmations that someone has performed due diligence. The situation really is an amalgam of 10+ problems, which I can look into but will pass on for now.
-Too big to fail. I thought anti-trust legislation was meant to prevent economy-controlling monopolies (in this case oligopolies). If a firm's bankruptcy causes a significant disruption to the market in which it operates, there should probably be some measures enacted to prevent it from reaching that size. Free markets don't work when externalities form as they did in our recent collapse.
-Overall, meh. haha it's messed up and has always been messed up. Has any country really achieved a perfect banking system? I can't imagine it has. As long as politics and money are joined at the hip, there can be no smart, impartial reform.
This CNBC documentary explains our discussion quite effectively. It addresses everything from Wall Street to CDOs to the rating agencies.
ReplyDeleteIf you have some free time, I'd suggest you watch it.
http://www.hulu.com/watch/59026/cnbc-originals-house-of-cards