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  • The Recent Financial Meltdown Explained

    Posted by James R. Rummel on September 19th, 2008 (All posts by )

    You can find a very good FAQ on the subject here.

    TJIC wrote an even pithier explanation that is also worth your time.

     

    10 Responses to “The Recent Financial Meltdown Explained”

    1. toad Says:

      Let’s not forget Eliot Spitzer’s war on the former head of AIG. He kept AIG in safe waters for what, about 30 + years. Then Spitzer forces him out, new management takes over, and they go with the herd and end up with a load of NINJA loan derivetives and whatevers that nobody can figure out the value of so who want’s it.

    2. Tyouth Says:

      I have to return to really read Levitt’s column later today and try to get a handle on things and I’m not generally economically as well-informed as I’d like to be. With these caveats re. my insight, let me say that this hundreds of billions of dollars bailout strikes me as another example of a recurring theme in the modern public/governmental life of ours: The unseemly and unwise veneration of convenience which seems to be coupled, where monies are involved, with rewarding unproductive and/or unintelligent behavior.

      In this case, for example, I would be hurt if mutual fund money markets were forced to leave the $1/share and sink to $.50/share. Surely, though, I will be hurt from the coming inflation and so will everybody else. But (morally, I suppose) I should be hurt (to some extent at any rate) since to one degree or another I’ve placed too much trust in the untrustworthy, a failing on my part. The major problem, though, is that the bailout in no way focuses the hurt where it belongs – on the financial institutions and major players responsible. This, in turn doesn’t force reassessment of erroneous action by the particulars and by public at large.

      Instead, it spreads a general malaise across economic landscape without hope for reform based upon capitalistic tendencies. Top down policy caused the problem and top down fixes will not solve it but only shift and delay accountability. It leads to a slide into what into what, in other countries, in this last century or so, has been a socialistic grayness of life.

    3. Mike Says:

      Here is the proposal from Ben and Hank so far:

      LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
      TO PURCHASE MORTGAGE-RELATED ASSETS

      Section 1. Short Title.

      This Act may be cited as ____________________.

      Sec. 2. Purchases of Mortgage-Related Assets.

      (a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

      (b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

      (1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

      (2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

      (3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

      (4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

      (5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

      Sec. 3. Considerations.

      In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

      (1) providing stability or preventing disruption to the financial markets or banking system; and

      (2) protecting the taxpayer.

      Sec. 4. Reports to Congress.

      Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

      Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

      (a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

      (b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

      (c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

      (d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

      Sec. 6. Maximum Amount of Authorized Purchases.

      The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

      Sec. 7. Funding.

      For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

      Sec. 8. Review.

      Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

      Sec. 9. Termination of Authority.

      The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

      Sec. 10. Increase in Statutory Limit on the Public Debt.

      Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

      Sec. 11. Credit Reform.

      The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

      Sec. 12. Definitions.

      For purposes of this section, the following definitions shall apply:

      (1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

      (2) Secretary.–The term “Secretary” means the Secretary of the Treasury.

      (3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

    4. Mike Says:

      Which door would you choose:

      Door #1. Let capitalism work. Allow failure.
      Door #2. Empower those determined to socialize losses and privatize gain.
      Door #3. Nationalize parts of the banking system; liquidate, re-regulate, and then free it.

    5. Tyouth Says:

      In my comment above, “….. if mutual fund money markets were forced to leave the $1/share and sink to $.50/share…. The major problem, though, is that the bailout in no way focuses the hurt where it belongs – on the financial institutions and major players responsible. This, in turn doesn’t force reassessment of erroneous action by the particulars and by public at large.”

      Here is a quote from my mutual fund MM account: ” Our largest money market fund currently holds more than half of its assets in U.S. Treasury and federal agency securities. In addition, Prime Money Market Fund has no exposure to money market instruments issued by securities dealers, including Lehman Brothers. It also has no exposure to securities of AIG, the insurance concern that is being supported by loans from the federal government.”

      The prudence and conservative nature of this company will not be rewarded. Those companies who were not intelligent enough, or prudent enough, will be rewarded. The bailout encourages gaming the system and careless greed (if your organization has enough money involved). The bailout does not encourage rational change in financial institutions or new mutations of financial institutions.

    6. virgil xenophon Says:

      The proposed solutions to our current financial problems are reflective of a some 30-40 yr trend in mentally re-defining what we think of as “good deals.” Used to be, a good deal was an unalloyed good. Today the revised version goes something like this: “First we give ya a bad deal, then cancel it, and call THAT a good deal.”

    7. fred lapides Says:

      I don’t believe in govt interference. I believe in the Invisible Hand and the Free Market. DC messes up all things. Govt involvement is socialism. Let the meltdown take place!!!

      ps: I won’t play a blame game but the very people who allowed this to take place are now the group who will fix things…additionally, outspoken Dodd and a number of Dems and GOP folks, on the banking and insurance committee have received huge campaign contributions (not even here referring to the lobbyists), so now is their chance to pay back the firms that supported them and all to save our nation!!

    8. Marty Says:

      No one here or at Freakanomics seems willing to say what started this whole mess, which was the Clinton Administration’s decision to reinterpret the Community Renewal Act to force lenders to make mor eloans in minority areas, regardless of creditworthiness, and force their lapdogs at Fannie and Freddie to buy such mortgages that did not meet “normal” standards, based on political pressure and some very flawed studies that argued that mortgage redlining was (mid-1990s) a significant issue (which said studies claimed to demonstrate, but in fact did not).

      In order for banks and other lenders not to fall afoul of the Feds (NOT “the Fed”) they had to lower standards… no more 20% down or even 10% down, big mortgages available based on “stated income” without it being verified, adjustable rates that people could afford, maybe, as long as interest rates never went up, and so on.

      Then, Superior Bank (Chicago, went kablooey in 2001, Penny pritzker, Obama Finance Chair, on the Board) worked with Merrill and others to develop a system of CDO’s that sliced large buckets of mortgages into separate tranches, and soon no one knew what they were buying or what anything was worth, but Fannie and Freddie were there to buy up the shite and the government stood behind Fannie and Freddie, so who cared?

      Bush proposed regulatory reforms in 2003, and a bill actually passed the House in 2005 before a threatened filibuster (by Dems) killed it in the Senate in 2006 (McCain was a cosponsor, Obama was missing in action, of course). Fannie and Freddie’s huge spending on lobbying and political contributions, to both parties but esp. Dems, paid off in kiling any attempt at real regulation.

      Certainly there were lots of other mistakes made by lots of people, but let’s be clear on who it was who threw trillions of dollars on the table and started the stampede.

      And yes, there were people as early as the mid-1990s who looked at the new proposals and smelled trouble, but no one listened.

      All very predictable, and predicted, 10 years ago when this all started. Onky the exact timing wasn’t obvious, the outcome was all but inevitable.

    9. Vince P Says:

      I remember hearing all about Fannie Mae in the years 2003-2004 on NPR. I remember it clearly .. the slow discovery that Raines was cooking the books for years… that all the inside people were getting millions in bonuses. That the Congressional Hearings would be a joke because Fannie Mae buys almost all of Congress.

      So I just shake my head in disgust at how no one with a broadcast is talking about the truth. I had hear Barney Frank on NPR tonight … the All THings Consider idiots asking him for his great ideas. HE’S PARTLY RESPONSIBLE FOR IT

      And John McCain.. is the man senile? He co-sponsered the 2005 reform… why the hell wasn’t he out there the first day raising hell about the Democrats. Instead it’s all generalities about Wall Street greed. Wall Street did exactly what the Govt wanted them to .. and now they’re the bad guys?

      The people in this country are getting dumber by the day. Thesae people were involved in this stuff, as it was happening, and yet no one will speak the truth.

      So when I consider how lies are being defended now.. and how our govt is totally ignorant about Islamic Jihad still after 7 years of war.. it’s depressing , totally depressing.

    10. Tyouth Says:

      Listening to “experts” the last couple days; They don’t know what will happen, the sky is falling; we are not reassured or convinced.

      Why a bailout? If this is an Emergency, why don’t the feds create a general, very conservative (so that new institutions will be encouraged to form) temporary bank (or banks) and lend directly to public and business’ to the extent that liquidity is required and that there is a “clogged system”. Why the massive bailout and attendant massive waste? Let AIG, Freddie and Fannie die and/or be restructured with loss.

      The only reasons I can see for a huge bailout is corruption and abdication of responsibility. The problem Washington pols may have is that they don’t know anyone who is a “friend” that is capable and honest enough to head the thing.