The true story behind the financial crisis.

[108]

Originally Posted by Matthanuf06

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.

you are throwing around generalities without being specific, what exactly did the government do in steps 1-100 to set the rules for rampant fraud?

[Minister_of_Information]

Excising context is propaganda 101.

[gator996]

Originally Posted by Matthanuf06

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.

Who made the argument that the govt isn't involved in the housing market?

The private market only got involved at Step 101?

Who originated those loans?


Was there someone holding a gun to Countrywide's head forcing them to make bad loans?

[Matthanuf06]

Originally Posted by gator996

Who made the argument that the govt isn't involved in the housing market?

The private market only got involved at Step 101?

Who originated those loans?

Was there someone holding a gun to Countrywide's head forcing them to make bad loans?

Everyone that isn't putting a good chunk of the blame on the government is by definition claiming they were not involved.

The private market can only play the game by the rules set by the government. That right there is a distortion. There is a laundry list of distortions here.

And you are right, Countrywide took a huge risk and lost. In business companies fail all the time.

Yet in this case the government stepped in, in various forms and degrees, across the board. This moral hazard was well known, and another distortion of the market.

I'm not claiming individuals and businesses did not make bad business deals. Many took a risk and lost. What I am saying is that it is incredibly naive to think that this same scenario would have occurred with a different set of government distortions, whether its more (even more heavily regulated) or free.

On a different hand there is nothing wrong with securitizing loans. That wasn't the cause of the collapse.

[gator996]

Originally Posted by Matthanuf06

Everyone that isn't putting a good chunk of the blame on the government is by definition claiming they were not involved.

The private market can only play the game by the rules set by the government. That right there is a distortion. There is a laundry list of distortions here.

And you are right, Countrywide took a huge risk and lost. In business companies fail all the time.

Yet in this case the government stepped in, in various forms and degrees, across the board. This moral hazard was well known, and another distortion of the market.

I'm not claiming individuals and businesses did not make bad business deals. Many took a risk and lost. What I am saying is that it is incredibly naive to think that this same scenario would have occurred with a different set of government distortions, whether its more (even more heavily regulated) or free.

On a different hand there is nothing wrong with securitizing loans. That wasn't the cause of the collapse.

Well, then you blame any disruption in any business sector as the fault of the government because there are almost no markets that aren't governed by laws.


Countrywide lost?
Really?


As noted by river elsewhere...if companies were forced by law to retain 10% of all of the deal collateral or origination purchased it would have dramatically slowed the fraud.

The whole reason why fraud & bad paper became rampant was because everyone decided who cares I'll just sell it to the next guy...

Your idea that no type of regulation would have changed things is pure fantasy.


Securitization wasn't a problem?

It is when companies are originating any type of crappy paper to sell to Wall St. who can magically turn it into AAA tranches...

[Row6]

Originally Posted by Matthanuf06

I'm in the business.

Look, you are ignoring steps 1-100 where the government set the rules and jumping to step 101 where the private market acted. If you don't see the government involvement then I don't know what to tell you. Ever hear of the Fed? Taxation and deduction? City/county incentives? I can go on and on.

I bought a house in June 2011, first time home buyer. It was a USDA loan with county/city incentives I ended up having to put $0 down and in fact with the incentives they knocked down my principal a few grand. Yeah, no involvement in the housing market.

I didn't say there was no government involvement in the housing market, I said that the sub-prime crash was driven by a lack of government regulations on private mortgage companies and the Wall Street gamblers who bundled and resold them. That's is a fact.

[Matthanuf06]

No, the problem was the increasing default rates due to crashing home prices. The risky borrowers were not technically the problem, the problem was the default rate assumption. The problem was not with the securitization itself. If the default rates stayed within normal bands they would have performed within expectations. The problem is they didn't because home prices crashed.

[Matthanuf06]

Originally Posted by gator996

Well, then you blame any disruption in any business sector as the fault of the government because there are almost no markets that aren't governed by laws.

Countrywide lost?
Really?

As noted by river elsewhere...if companies were forced by law to retain 10% of all of the deal collateral or origination purchased it would have dramatically slowed the fraud.

The whole reason why fraud & bad paper became rampant was because everyone decided who cares I'll just sell it to the next guy...

Your idea that no type of regulation would have changed things is pure fantasy.

Securitization wasn't a problem?

It is when companies are originating any type of crappy paper to sell to Wall St. who can magically turn it into AAA tranches...

It's insane that you don't think the government meddles in the housing market. The whole crisis was due to the bubble. If you don't think the GSOs, FED, laws and regs, tax policies, etc had anything to do with the run up you are living in your own fantasy world.

[Row6]

Originally Posted by Matthanuf06

No, the problem was the increasing default rates due to crashing home prices. The risky borrowers were not technically the problem, the problem was the default rate assumption. The problem was not with the securitization itself. If the default rates stayed within normal bands they would have performed within expectations. The problem is they didn't because home prices crashed.

Of course risky borrowers were the problem. When the bubble crashed - as was inevitable - most people who bought high are still paying their mortgages and hoping their home values regain at least some of what they lost - they will. Those who bought sub-primes with exploding interest rates after 2 years - and many of them were speculators, not poor people - are the ones who choked and caused the crash on Wall Street.

[Row6]

Originally Posted by Matthanuf06

It's insane that you don't think the government meddles in the housing market. The whole crisis was due to the bubble. If you don't think the GSOs, FED, laws and regs, tax policies, etc had anything to do with the run up you are living in your own fantasy world.

The bubble fueled speculators, many of whom got sub-primes, but it didn't cause poor people to buy - the easy money sub-primes did. Even with that problem however, tjis was still a manageable problem. the total value of all subprimes at the time was estimated to be about $1.5 trillion. In a $50 market, that's a problem but it is not the end of the world. The end of the world is when that $1.5 trillion gets mixed up and lost so no one knows where it is. That's the Wall Street end of this.

[Matthanuf06]

Originally Posted by Row6

Of course risky borrowers were the problem. When the bubble crashed - as was inevitable - most people who bought high are still paying their mortgages and hoping their home values regain at least some of what they lost - they will. Those who bought sub-primes with exploding interest rates after 2 years - and many of them were speculators, not poor people - are the ones who choked and caused the crash on Wall Street.

You have your causation wrong. In a normal market environment the risky borrowers would have defaulted as modeled and the loans would have performed as modeled.

The defaults soared BECAUSE the market crashed. Then some of it became self fulfilling, the market went down, caused defaults, which cause the market to go down further.

But the initial problem was the market collapsing, not the securitization. Securitized loans are great actually if you know what you are doing.

[gator996]

Originally Posted by Matthanuf06

It's insane that you don't think the government meddles in the housing market. The whole crisis was due to the bubble. If you don't think the GSOs, FED, laws and regs, tax policies, etc had anything to do with the run up you are living in your own fantasy world.

Where did I say that?????

[Matthanuf06]

And I understand and agree that securitization increased the demand for riskier loans. But why is that a bad thing? If the market behaved normally then there would have been no issue.

[Row6]

Originally Posted by Matthanuf06

You have your causation wrong. In a normal market environment the risky borrowers would have defaulted as modeled and the loans would have performed as modeled.

The defaults soared BECAUSE the market crashed. Then some of it became self fulfilling, the market went down, caused defaults, which cause the market to go down further.

But the initial problem was the market collapsing, not the securitization. Securitized loans are great actually if you know what you are doing.

Markets go up and down all the time and the explosion of sub-primes partly fueled the speculation, as well as increasing the number of mortgages that would fail when it did. Again, that remains a local problem if Wall Street didn't get into the act.

[Row6]

Originally Posted by Matthanuf06

And I understand and agree that securitization increased the demand for riskier loans. But why is that a bad thing? If the market behaved normally then there would have been no issue.

The market did behave normally. If have read anything about free markets, they "normally" cycle through boom and bust and have for centuries. Through regulation and government spending we have gotten better at minimizing the swings.

[G8trGr8t]

Originally Posted by gator996

Who made the argument that the govt isn't involved in the housing market?

The private market only got involved at Step 101?

Who originated those loans?

Was there someone holding a gun to Countrywide's head forcing them to make bad loans?

Was there somebody holding a gun to the borrower's head? Did Reno threaten banks?

[Matthanuf06]

Originally Posted by Row6

Markets go up and down all the time and the explosion of sub-primes partly fueled the speculation, as well as increasing the number of mortgages that would fail when it did. Again, that remains a local problem if Wall Street didn't get into the act.

Increased demand overall was a factor in the bubble. Subprime demand a major factor in that. Securitization though, was only a small part of the increased subprime demand.

And pardon me laughing, but do you really think we didn't realize markets go "up and down". Come on? This market decline and default increase was unprecedented.

When I say "normal" I mean in the statistical sense that is incorporating typical market swings. What we went through in the 00s was certainly not statistically normal within any standard confidence level.

Models have been updated, and the risk field has grown to focus more on the tail risk. But we weren't there in the 00s.

And I'm not one to resume pump but I'm not some newbie to the financial and risk space.

[dangolegators]

Originally Posted by Row6

The market did behave normally. If have read anything about free markets, they "normally" cycle through boom and bust and have for centuries. Through regulation and government spending we have gotten better at minimizing the swings.

No, markets are always perfect. Nothing bad ever happens as long as the government stays out of the way.

Here's some examples of perfect markets:

[Matthanuf06]

Originally Posted by G8trGr8t

Was there somebody holding a gun to the borrower's head? Did Reno threaten banks?

Individual borrowers should bear the least of the blame. First of all there is massive information asymmetry. Secondly and more importantly they've behaved "rationale" in the sense of what we'd expect.

Why wouldn't a subprime borrower accept a loan that is generally reserved for higher quality borrowers?

Why wouldn't a borrower step away from an upside down mortgage? Yes I know there are some moral considerations hence why the expectation isn't 100% (and of course it depends how underwater they are).

[Matthanuf06]

Originally Posted by dangolegators

No, markets are always perfect. Nothing bad ever happens as long as the government stays out of the way.

Here's some examples of perfect markets:

In the case of slavery that is definition the fault of the government. Free markets require protection of property rights. The most important property we all have is ourselves.