OT: I'm confused about the financial crisis

I don't know if it's honesty or humility to realize that there are a lot of people who are smarter than me.  And, I didn't study business in college.   I just don't understand what's going on.

I'm trying really hard and watching financial shows.   I've come to the conclusion that the experts don't agree among themselves.  I've heard that day traders have different views on this from bankers. 

I give up and hope and pray that our elected reps wll get it right.  Maybe we should all pray for god's guidance during  this critical period in our nation's history.

P.S.  It's taken me forever  to write this since what I'm printng isn't appearing on the screen.  I've had to retype most words a couple times.  I don't know if the problem is with my hardware or with OH.

I don't understand all of the nuances, financial jargon, and/or details, but as I understand it the broad picture looks something like this: There was something called the Community Reinvestment Act passed during the Carter administration that was supposed to motivate banks to extend morgtages to those who would ordinarily not be credit worthy. Various tweaks to the law and 20+ years later those same banks were basically sued by advocacy groups in to extending morgtages to people for whom no rational actor would've lent money under any cir****tances. Freddie Mac and Fannie Mae are somehow connected to these loans, either as direct lenders or as guarantors to the original lenders somehow, I'm not sure. And then they sold all of this paper on the market to private investors with the assurance that it was all backed by the US govt. Which I guess was the truth kinda sorta. After the fact. Looks like us taxpayers will bail out these bad faith lenders and their unworthy lendees either through taxes or the eroding of our net worth due to the inflation that must accompany the massive printing of money, or both. My gut tells me that Freddie Mac and Fannie Mae are guilty of fraud all the way up to their neck, but won't be held accountable because they have to many high level politicians on their payroll. You'd be interested to know who some of them are I'm sure. You probably can't find that information out from reading the newspaper or watching the network news, but it's out there. Other than that, I can't help you.

 JFish,

Is there a list of the politicians on the payrolls ? 

Thanks,

Dave

Ask and you shall receive. I think it's somewhat more than interesting that the top 4 ran for president either in 2004 or 2008 or both. I think it's even more interesting that they routinely accuse their opponents of being greedy. And by interesting I mean hypocritical.

http://www.opensecrets.org/news/2008/07/top-senate-recipient s-of-fanni.html

 Like usual, big companies are being allowed to get away with committing fraud and **** and now the government has to bail them out. So essentially we'll be paying them twice. Once now, through the bailout plan, and then a second time whenever we send in our loan payments (mortgage payments, etc). The dirty *******s shouldn't have loaned out the money if they couldn't afford to do so. I swear the idiots we have in this world today, every one of them should be drawn and quartered in public view.

It's my understanding that extortion is not to strong a word when it comes to discussing why these "big companys" lent money that had no chance of being recovered. If you are sued in court for refusing to lend money, then you lend money. If you are mau-maued as a racist institution for not lending money, then you lend money. Google Community Reinvestment Act and ACORN and see what turns up. I haven't done it yet, but I'd be willing to bet you turn up some interesting articles.

It is a complicated matter.  I do hope that the rescue goes through.  If it works as it is intended, it will start out being a big burden on tax payers, but after a few years it is quite possible that the government will get all of that money back with a profit.  If it passes, bonds will be purchased for a fraction of their face value and held by the govt. or a surrugate.  Later, when things are settled again, they can be sold for closer to their real value.  Now it is impossible to value them properly.

As far as punishing those who got us all into this mess, it is not yet clear who "they" are.  We know some of them, but I'd like all of them to be punished or in some other manner absorb the cost and punishment for this situation.

From Business week I found the following when I did the Google.

Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie.

The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).

Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.

Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated, the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)


http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

 SjBob,

My understanding is that it was (and will remain) too difficult for the average politician even to understand. They left most of the deals to the fed, who is supposedly better versed in the problem. So don't feel bad. I'm betting no one REALLY understands the problem.

On here, JP is probably the one who comes closest. Is JP still around? (Hi JP!)

Best Wishes,

Dave

Investors Business Daily printed this article last week. 

http://www.investors.com/editorial/IBDArticles.asp?artsec=16 &artnum=1&issue=20080924