[clue-talk] The stimulus bill

[Nate Duehr]

On Feb 6, 2009, at 9:11 PM, Collins Richey wrote:

> You missed Jed's point entirely. It's not a matter of the banks
> feeling that they could get away with it. They were actively
> encouraged (if not required) to ignore the ability to pay back loans
> by Freddie and Fannie and the Barney Frank types in Congress. The
> "proper" risk assessment was the desire to get a loan, not the ability
> to pay back the loan.

I agree with the above assessment, but the real world is a touch more  
complex than that.  The other major factor was a veritable flood of  
foreign investment money pouring into the U.S. economy looking for  
things to invest in.  Bankers were "greedy" in that they all wanted  
that investment money, and would lower standards on mortgage loans to  
get it.

The entire system is still quite plugged up with tronches of tronches  
of mortgages (little pieces of hundreds of mortgages, turned into an  
investment, and then little pieces of those turned into a completely  
different investment instrument) that no one can figure out what  
they're worth.  Warren Buffet denounced these loudly, numerous times,  
and said he wouldn't buy anything he couldn't put a real price on.

The above leads to the complex discussion of "mark to market" which  
just gets worse.

So there were some "greedy" bankers doing what bankers do -- take  
investors money and try to invest it in something low-risk, but the so- 
called "low-risk" on all of these investments came due in a firestorm  
of housing market declines, all at once.

The foreign investors have had it handed to them in the shorts for not  
paying attention to what they were buying, and the bankers also lost  
billions -- so this insanity did attempt to self-correct to some  
extent... but the inability to even figure out who holds a particular  
tronche of mortgages, and the disparity of loss in these tronches  
between small investors and large ones when someone defaults on a  
single real mortgage, means that no underwriter will let go of them  
and let some of the worst debt get resold at market value today.  They  
just sit on it and hope and wait.

The Chinese are ultra-pissed about the money they lost in the U.S.  
market.  Their reaction to the bailouts has been summarized pretty  
well as, "WTF?!"  They know we're devaluing their investments by  
basically printing money.

And then that leads us back to politics and politicians, and a lack of  
a well-defined foreign policy...

Nate