Humor only works when there is truth embedded within it. This works because while it is humorous, the truth is evident.
“You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.
We use words like credit default swaps, collateralized debt obligation, and securitization? We use these words as the backbone of a life spent investing in something. You use ‘em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!”
Was the great real estate bubble of 2000 – 2007 preventable?
Who won and who lost?
Why weren’t the inevitable crash and current historic recession preventable or predictable by the best the brightest among us?
The following video from CNBC’s “House of Cards” (ht – Alan Sun) contains interviews with people in all parts of the real estate food chain: from borrowers to loan officers to lenders to wall street bankers to hedge fund operators to bond ratings analysts.
Wall Street will create what they can sell until there are no more buyers. This generates seemingly safe fee income which boosts quarterly profits and of course also produces undeserved multi-million dollar bonuses.
It is hard to believe now, but the banker’s financial models predicted 6% to 8% annual housing price increases forever into the future. How was this sustainable when household income wasn’t rising and probably wouldn’t rise much with global wage arbitrage? Many of the people on the front lines of this historic boom were young home buyers, recent MBA grads at Wall Street firms, etc. They had never known a down real estate market. It couldn’t even occur to them from experience that real estate goes anywhere but up in price.
The boom couldn’t start without Wall Street securitizing loans and selling them off to investors (many of them overseas). What type of WS culture creates an environment where there is strong incentive to sell what the market will buy and book a trading profit or fee income? No one had any incentive to stop the lucrative money train.
- Home buyers bought more house than they could afford.
- Loan officers originated more loans and earned significant income for basically just helping borrowers fill out a form (loan app).
- Wall Street bankers generated massive bonuses for themselves and quarterly profits for their firms.
- Rating agencies earned more fees rating mortgage backed securities (MBS) as AAA.
Isn’t it startling that nowhere was a fundamental issue like a borrower’s ability to service a loan and pay on time for 30 years ever discussed or considered?
The economic boom was NOT about fundamental value creation but solely a product of easy credit. Housing prices historically rise about 1% a year in line with increases in household income. They will revert to the mean over time. Essentially, there is no new economy or new economics. When we hear that in the MSM (mainstream media), look for the unsustainable bubble and prepare for it to end.
Why couldn’t Alan Greenspan, our economic “maestro”, our foremost authority on finance, interest rates and a stable economy, have warned us about the unsustainable boom and subsequent global economic collapse? He didn’t see the bubble. To make matters worse, he says:
“there is no doubt that somewhere in the future, we’ll have this conversation again. It will not be for quite a period of time, but it will occur because the flaws in human nature are such that we cannot change that, it does not work.”
Will you remember that all booms go bust?
Will you remember that what cannot go on forever must end?
Will you remember what your parents taught you? Just because everyone is doing it, doesn’t mean you have to do it too.
If history is any guide, almost all of us will forget what we learned by the time the next boom starts. Scary thought, isn’t it?
Someone wrote a good summary of credit derivatives.
(Hat tip Eric Overfield for pointing this out)
At last, what we’ve all been waiting for, an understandable explanation of derivative markets.
Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Heidi’s drink now pay later marketing strategy and as a result, increasing numbers of customers flood into Heidi’s brand soon she has the largest sale volume for any bar in Detroit. By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.
A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank’s corporate headquarters, expert traders transform these customer loans into
DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then traded on security markets worldwide.
Naive investors don’t really understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the nation’s leading brokerage houses who collect enormous fees on their sales, pay extravagant bonuses to their sales force, and who in turn purchase exotic sports cars and multimillion dollar condominiums.
One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due his negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar.
Heidi demands payment from her alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy. DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans.
The suppliers of Heidi’s bar, having granted her generous payment extensions and having invested in the securities are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers.
The bank and brokerage houses are saved by the Government following dramatic round-the-clock negotiations by leaders from both political parties. The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.
The following is from Mike Morgan’s blog (12/09/2008). I agree with many of his points.
If you still believe we are at or near the bottom, please consider a few of my Key Points to support the coming Depression:
1 – Housing prices are still falling.
2 – We are nowhere close to resolving the mortgage crisis, and millions of foreclosures are coming. In turn, this means lower housing prices and, in turn, more foreclosures.
3 – Wall Street and the Banking System has still not accepted the consequences of the toxic assets they built, sold, profited from . . . and now they are stuck with. All they have done is covered them up with a thin layer of Magic Dust (taxpayer bailout money).
4 – The housing ATM is closed. And with the closing of the housing ATM, consumers have less money to spend . . . and less money to pay their mortgages with, so there will be more foreclosures.
5 -If you map out the consequences for 1, 2, 3 and 4 you quickly see that less FFM “free-funny money” means less to spend and this means more job losses throughout the system, and this means much more pain to come.
6 – Worldwide we are seeing government responses with nonsensical bailouts and “spending” programs. The sad thing is, the spending programs are not directed at making us better, but just at how we can buy more toys and treats. In fact, governments are repeating the very same mistakes made in the 1930′s. By the way, these are only the big picture issues. I could give you a hundred reasons we are headed to very dark times, but all of it stems from the housing bubble that created the toxic asset crisis, and until we detox, the pain will get worse. This is no different than a drug addict. All we are doing now is feeding the drug addict and making matters worse . . . just like we did in the 1930′s. And just like a drug addict must go through a horrible physical detox, so must the world.
It is a bit dense but contains a clear description of the problem of an economy that is based on debt, fractional reserve banking, and fiat currency.
Here are my observations:
The current financial crisis is NOT a liquidity crisis but a solvency crisis.
The crisis is built into the system; i.e. it was bound to happen at some point due to escalating debt relative to savings.
The current political leaders are NOT solving the root problems but bailing out their Wall Street friends and donors.
In summary, the system will collapse due to debt that cannot be repaid.
My hope is for serious monetary reform in the U.S. starting with an END to:
Debt-based money
The Federal Reserve
The bubble economy
“Financial engineering” (as opposed to real productivity) consuming the “best and brightest” minds
Unfortunately, we have just the opposite system. Until the system changes we are slaves to our monetary masters.
President Abraham Lincoln said it best over 200 years ago:
“The Government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers.”
“The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity.”
“By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”
