I would hardly call this a "Big Giant" thread. But then perhaps those are modifying "Bailout" and not "thread". Let's discuss that, shall we?

"Big" is modifying "thread" and "Giant" is modifying "Bailout".

Well it's certainly not a big thread, innit?

Nu, you could make it big.

So these are nested adjectives? I don't think that's allowed.

In my dream world the Democrats would pass their own bill and adjourn, telling Bush that if he's in such a big hurry to save the world, he should sign it.

And a pony.

(Big [Giant Bailout] thread).

Just seize the thread and stroke the thread gently but firmly along its length, and it enbiggens. The pie gets higher, so to speak.

OK, so, I wanted to report that I learned a lot from NPR's interview with seasoned nonpartisan analyst Newt Gingrich this afternoon. Apparently the big plutocrats and their #1 friend, Chris Dodd, are pushing through a plan to bail out the powerful at the expense of the powerless, and since doing such a thing is not only anti-American but anti-Republican, he can't figure out why the Bush Administration is going along with it.

Not that I think Dodd is a modern-day Terence Powderly, but I noticed that Gingrich's assessment of who was to blame for the problem and who was more likely to prioritize the needs of average people over the lusts of Wall Street differed from the assessments of most people I trust. Perhaps the fact that Gingrich's job is to lie to people through the media affects how he chooses to phrase things.

6: FWIW, the noises I'm hearing from actual Dem Congresspeople makes me think that suck a thing is far more possible than I ever would have guessed. When you've got genuine politicians using the word "bullshit" on the record, we're in Looking-Glass territory.

OTOH, when you've got NPR putting Newt Fucking Gingrich on the radio, you've got Business As Usual.

Your Liberal Media, folks.

9: But the cool thing about this is that the net result is to pressure on the Dems not to cave. I like how this has been shaping up today.

Ok, here's the thing that's bugging me:

Everyone's principled objections about the Treasury fund is that it would inevitably overpay for assets and end up as a sop to the industry with nothing but a pile of moldy ol' mortgages at the end. But to me, that hardly seems self-evident.

1) The deals that Hank Paulson has struck so far have been pretty damn good. If I could have put my own money in with the government's on those 10% (going to 12% at the first sign of distress) preferred shares in Fannie and Freddie, or gotten in on that AIG LIBOR + 8.5% loan along with equity at negligable cost, I certainly would have. He's not an idiot, though admittedly he came out of the i-banking side of Goldman Sachs instead of the trading side.

2) There's still an advantage to banks in exchanging their mortgage assets for t-bills at current distressed prices or even a discount. Right now their most pressing need is new capital, and a big part of the reason they can't bring any in is because they still have these volatile assets on their books. Investors are too afraid of putting their money in, seeing the volatile assets take another brief hit that triggers a recapitalization, and suddenly getting diluted. Getting rid of those assets is worth something to the banks.

3) No one else is buying these assets up because there are no particularly viable buyers, even if there are profits to be made. The other banks are already dealing with too much risk on their balance sheets. Non-financial corporations have neither the expertise nor the incentive to get into the market. The existing distressed debt funds are too small to make much of a dent in the bank assets. They can get into equity and the banks' debt instruments (and they probably are), but that only accounts for 5-10% of the asset size on these banks' balance sheets. A fund the size of the one being set up by the Treasury is probably pretty necessary to make a decent dent and get enough diversification for a fairly secure profit even at good prices.

4) Although the Dodd plan includes an oversight board, what the hell else is so special about it that I see Krugman, DeLong and Tyler Cowen damn near raving about it? It has the incredible idea of buying equity at reasonable prices in banks? Whoa! I really doubt the people who made 80% equity stakes a prerequisite to their rescues of three major institutions could think of that!

The oversight is absolutely crucial, to avoid giving Paulson's group a blank check. I really hope the final bill produces a board that can put on a spending freeze, too, since the oversight committee needs to have teeth. But it seems like people have been severely criticizing the way this fund will act without anything having been said about its modus operandi or prices it's willing to pay (both of which are admittedly also things that need to be fleshed out a bit before the money is handed over).

And in the details of Dodd's plan, which seems to be getting so readily endorsed, here's where I must be missing something:

The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn't publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

Does this seriously mean to imply that the Treasury needs to get an equity stake of $10 billion in a bank if it buys up $10 billion in assets from that bank? How is this even possible? A number of troubled banks are 20-30 times leveraged, which means that replacing a mere 5% of their assets with T-bills under this bill would grant the government the bank's entire equity stake. Or did they mean to say that replacing 5% of the bank's assets would entitle the Treasury fund to an equity stake for 5% of the post-dilution equity? The latter would be more reasonable, and potentially doable, but doesn't sound like what the bill is saying.

Second, there's something profoundly wrong when the substitute for common equity is senior debt. Profoundly wrong. Those are in fact the two most opposite payoffs one can get without including warrants (which is probably what they actually mean when they suggest the Treasury should recieve common equity). The point to recieving equity is that if the government accidentally buys out the assets under too generous of terms, it will still recieve a chunk of the bank's upside through the higher equity returns. Senior debt for these banks is pretty much going to trade at par once all these distressed assets are off their books, and will not benefit much if at all from any post-deal upside for the bank. That sentence is just straight up fucking stupid, and makes me really question the people lwho are suggesting this as a substantially better deal without point out these particular oversights (though Krugman should get somewhat of a pass, since he was apparently skimming the Dodd deal in his car and just had to type out his approval before he crashed).

12,13:Well damn. Po-mo said everything that needs or could be said. Thread over.

Is Terminator on yet? Guess not. I need to catch up on Mad Men anyway.

Until I get some sense of how they plan to value the toxic paper I don't know if this is a good idea or not. There is value to showing the political will to not let things get worse, and there is some value in the toxic paper, but as I see it there either has to be a massive loan modification or the government is going to be doing a lot of foreclosing, which seems to be the opposite of what they want. Obviously there will have to be some foreclosures, but I would think most could be avoided.

I do think that part of the process should be prosecution of all parties that participated in loan fraud, including the homeowners, mortgage brokers and appraisers.

I WANZ SUM EKITY!

13 - The Treasury department seems to have shot down Dodd's reasonable plan, in favor of Paulson's steaming pile, so to hell with it: wait two months and let the next President figure out a better approach. But, read the text of Dodd's proposal -- the contingency shares only vest in an amount equal to 125% off the realized taxpayer losses. It's to encourage realistic pricing on the crap that the banks hand over to the Treasury; Paulson's resistance to any such mechanism is a clear indication that the real point of this is not a sensible plan such as you or Paul Krugman might design but instead massive looting of the commonweal.

It has the incredible idea of buying equity at reasonable prices in banks? Whoa! I really doubt the people who made 80% equity stakes a prerequisite to their rescues of three major institutions could think of that!

I'm sure Treasury thought of it, but I still like the idea of making them do it.

(3) VESTING OF SHARES.--If, after the pur-
chase of troubled assets from a financial institution,
the amount the Secretary receives in disposing of
such assets is less than the amount that the Sec-
retary paid for such assets, the contingent shares re-
ceived by the Secretary under paragraph (1) shall
automatically vest to the Secretary on behalf of the
United States Treasury in an amount equal to--

(A) 125 percent of the dollar amount of
the difference between the amount that the Sec-
retary paid for the troubled assets and the dis-
position price of such assets; divided by

(B) the amount of the average share price
of the financial institution from which such as-
sets were purchased during the 14 business
days prior to the date of such purchase.

At Digby"

Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.........

Bond Vigilantes are Back ...numerian at Agonist

It's too big too fast too complicated I think I'm melting.

Here's the comment I left over at Delong's:

I've only read through half of the proposed Dodd bill, but I concur: Dodd looks like a plan I can get behind--a serious attempt to solve the problem, preserve accountability, and balance the equities. Too bad he isn't the VP nominee.

Well, I've read the Dodd plan and it mostly looks like hopes and wishes; there are enough holes in it to drive a tank division through the middle of it.

The fundamental issue, I think, is that Paulson is trying to do for the banks what would be done under nationalization, without nationalizing them. Dodd's scheme tries to fix the problem of letting off the banks without seeing the essential point that this is de facto nationalization, so it gets bogged down in unneccessary detail. (In such a way as to render it half-unenforceable.) The beaureaucratic structure cuts across lines of authority such as to render the whole thing unworkable.

So I say, if we're going to get 75% of the way to nationalizing the banks, we just go whole hog and take advantage of the situation full nationalization would give us.

That is, we set up a committee of five people to supervise the mess, with three of them appointed by Democrats and the other two being Benanke and Paulson. The committee has to report to Congress every week.

The committee issues T-bills at equivalent face value in a one to one trade for stock shares. (100$ of stock gets 100$ (face) of T-Bills.) They also get a ticket that allows the shareholder to swap the T-bills (at face value) for stock shares of the denationalized companies. The price would bet for last Friday's closing, which is an above market price, since that's the proice of the shares given the cost of the bailout. The Treasury doesn't have to raise cash to do it this way.

Once the banks are nationalized, we use the bank employees themselves to continue the day-to-day operations of the banks, while getting a through and accurate accounting. That is, we rectify the books. Bernanke can direct operations (like he doesn't do this in a sense anyways) and ensure short-term lending resumes.

USG takes possesssion of the bad mortgages, and the bad paper (and hopefully, much of it can simply be burned), and once those items are off the books, and the mortgages pooled and cleaned up, we inject cash into the banks and simply denationalize them, without getting all punitive. That should take maybe 120 days, because we are not trying to get accurate market valuations of bad mortgages, and so on, we're just cleaning out the cruft and making the bank books good so they can go on functioning as banks. (Since our interest here is not in individual bankers, it is entirely in saving the institutions, so that the financial system keeps working.)

After that's done, the messy work of dealing with the bad paper or renegotiating the mortgages can be dealt with. (And that also buys time for Congress to figure out HOW they want to handle the disposition of the mortgages.)

If we do it that way, we can do it in a hurry, with a bill that's maybe 10 pages long, without simply tossing money at the bankers.

max

['There is enough money in these bills to buy the banks outright, so why rent when you can BUY?']

Think Progress has something about Paulson and Goldman Sachs. Not clean hands.

Does this seriously mean to imply that the Treasury needs to get an equity stake of $10 billion in a bank if it buys up $10 billion in assets from that bank? How is this even possible? A number of troubled banks are 20-30 times leveraged, which means that replacing a mere 5% of their assets with T-bills under this bill would grant the government the bank's entire equity stake. Or did they mean to say that replacing 5% of the bank's assets would entitle the Treasury fund to an equity stake for 5% of the post-dilution equity? The latter would be more reasonable, and potentially doable, but doesn't sound like what the bill is saying.

That's exactly the way I read it; however, they haven't set a share price, so the market can bid up the shares to any price and they have to take that as the equity in exchange for the home. The valuing mechanism for the mortgages is confusing at best.

The person I want to read the bill is LB; not for the economics/finance aspects, but for the legal aspects. It looks utterly unenforcable to me, at least in the short term, and seems to amount to asking Paulson to 'do it the way we want'.

max
['Do what I mean, and not what I say!']

19 to 24

(B) the amount of the average share price of the financial institution from which such assets were purchased during the 14 business days prior to the date of such purchase.

That's any 14 days in the next two years!

That's begging for market manipulation.

max
['Ugh.']

Apparently the biggest thing that Congressional Republicans have chosen to take a hard line on is the attempt to put limits on executive compensation.

If the Democrats aren't capable of demagoguing that, what are they they capable of doing?

Perhaps the Republicans know that the Democrats are bought too.

That's any 14 days in the next two years!

Assuming the law passed, that's any 14 days in the next three and a half months, and then a Secretary of the Treasury whose main goal doesn't seem to be ripping off the taxpayer would be in place. I think you're overestimating how easy it would be to game the system with someone who isn't colluding with you standing at the other end of the table.

Nonetheless, Dodd returned serve -- this mitigates my concern that the Dems were just going to panic and pass any damn thing. If Paulson wants to take his ball and go home, fine: the Democrats have behaved responsibly, and now I expect them to demagogue the fuck out of this.

and then a Secretary of the Treasury whose main goal doesn't seem to be ripping off the taxpayer would be in place

That's fairly optimistic. There's still at least a 35% chance that these powers would be going to Phil fucking Gramm. Probably higher.

Then a Secretary of the Treasury whose main goal doesn't seem to be ripping off the taxpayer would be in place.

Phil Gramm?

I'd tell y'all what's goin on and what's gonna happen and what should happen, but people pay me big money to keep my ideas, opinions, and analysis to myself. It wouldn't be ethical(2) to violate that sacred trust. And my silence, lack of experience, and empty brain are the only real goods I have to sell in the marketplace.

Of all the things to get a hard on about executive compensation has got to be pretty low on the totem pole, as it were. Take the equity position and stack the board with your guys and handle it in house. At this point it is demagoguery.

29, 30 - Point taken, which is why I think that the inspector general for the bailout should have been a Congressional appointee. Nonetheless, Dodd gave a grown-up answer and Paulson seems to want to pout. I hope that the Dems leave it at that; let Paulson come crawling back and give him something he likes less, or wait to deal with the next administration.

Paulson's resistance to any such mechanism is a clear indication that the real point of this is not a sensible plan such as you or Paul Krugman might design but instead massive looting of the commonweal.

Well, yeah.

Max, obviously the Republicans are going to make lemonade from the sour, shriveled lemons they've been given to suck by the Bush administration's incompetence,

What we have here is a setup: the R's deregulate the industry and the industry runs itself into the ground; the R's organize a giant payoff for the bankers to save the market; then they try to cram it down the D's throat; when the D's pass it, they blame the whole mess on the D's for not working. And they would be correct!

We're not dealing with good actors acting in good faith, or bad actors acting in good faith, we're dealing with bad actors acting in bad faith. They just ripped out the steering wheel of the vehicle they're using to play chicken with and threw it out the window. To craft a working plan that can cope with the actual situation would require a much better structure.

but I'm not sure why you think Dodd's bill is so terrible as policy, as opposed to as politics. (Honestly, if they make it even -more- punitive, I'm not even sure it would be terrible as politics.) It's what a responsible, non-granting-godking-powers emergency package from Paulson would have looked like.

Because it goes almost all the way to nationalization but doesn't get there. The oversight protections are fine, but those effectively acts as camoflage. There's no solid mechanism for setting mortgage prices, no solid mechanism for getting equity and so on.

An emergency bill to deal with an emergency is fine, but if we wait, we have a different emergency to deal with, so the policy set is irrelevant. (Besides which, they can move the other moving parts of the bill, like executive compensation and homeowner help, into other bills and pass those.)

max
['If it doesn't deal successfully with the emergency, it's merely inept policy.']

Demagoguery can be a good thing, Leech. Your side has won many a battle with the creepiest lying bullshit imaginable, and while it was happening you smiled quietly to yourself.

If Congressional Republicans can be blown out of the water by demagoguery about for their craven water-carrying for the panicked executives who own them, that clears the decks for something positive.

Assuming the law passed, that's any 14 days in the next three and a half months, and then a Secretary of the Treasury whose main goal doesn't seem to be ripping off the taxpayer would be in place.

That assumes it won't be Phil Gramm. In any instance, it is still open to gaming for the next 90 days at least.

I think you're overestimating how easy it would be to game the system with someone who isn't colluding with you standing at the other end of the table.

But in this instance, the guy at one end of the table is the Treasury secretary and the guys at the other end of the table are the bankers.

max
['Thus, the collusion.']

while it was happening you smiled quietly to yourself.

Only in appreciation of craft.

What I am worried about is that every piece of shit bad loan will try to be included. I don't want to rewrite the entire economy just yet.

15

I do think that part of the process should be prosecution of all parties that participated in loan fraud, including the homeowners, mortgage brokers and appraisers.

I don't think prosecuting millions of people is practical. And it would increase the default rate to prosecute people who are current on the loans they lied to get.

Sec. 17. Executive compensation.

The Secretary shall require that all entities seeking to sell assets through a program established under this Act meet appropriate standards for executive compensation and shareholder disclosure in order to be eligible, which standards shall include

1. limits on compensation to exclude incentives for executives to take risks that the Secretary deems to be inappropriate or excessive;

2. a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate; and

3. such limitations on the entity paying severance compensation to its senior executives as are determined to be appropriate in the public interest in light of the assistance being given to the entity.

So the Secretary sets the rules and he says, 'Hey, they did ok!' and then nothing happens.

max
['It's hard to write good law.']

I don't want to rewrite the entire economy just yet.

I do. And it has to be done.

Look the price of oil had it's biggest one-day increase ever today, consensus based on the cost of the Paulson or whatever plan. The falling dollar and rising oil lower the value of the base collateral, houses (in several ways), and the MBS and derivatives priced indirectly on house prices. The foreign markets are talking with bonds & commodities.

Throw ever more Fed money at the problem? Just ain't gonna work, and will make things worse. This is a global problem, and any solution has to directly involve the SWF's. Maybe a Bretton Woods-type conference, but that might probably be politically DOA. We have fucked over the world when they had their own financial crises for too long.

Too big, too fast, too complicated. Give up trying to patch the holes.

Fuck it.

Jubilee times ten.

||

McCain is talking about amnestying Irish illegals. No good can come of this.

|>

Hey snarkout, thanks for 19. That makes a lot more sense.

Now, it seems that max is right here, and the situation they're suggesting is nearly unenforceable.

In order to ensure that the government will be able to get back its money no matter what (i.e. the 125% rule), any bank who sells assets to the Treasury would have to potentially promise all of their equity contingent on the Treasury guys getting a good price for the debt at the end. That's a super-steep price to demand, and probably unnecessary given how unlikely those assets are to be completely worthless. It seems like it would also prevent the banks from ever recapitalizing through equity, since the amount and likelihood of dilution for any new investors would remain incredibly uncertain until the markets stabilized (which itself depends on some recapitalization, and so on down) and the government fund started selling off assets.

I don't think prosecuting millions of people is practical

And yet we have the "War on Drugs".

12

You are assuming this is a liquidity problem not a solvency problem. Even if this is largely true I really doubt it is true for every large bank (where large refers to those banks generally considered too large for the government to allow to fail). Paulson's plan does not seem to have provisions for the orderly liquidation of insolvent large banks. This leads one to suspect he is not planning to admit there are any such insolvent large banks. Which he can only avoid by overpaying enough so that even the worst large banks are ok.

||
McCain's Chief of Staff just got outed with a Roy Cohn Award.
|>

45: Good Shearer reappears.

McCain is talking about amnestying Irish illegals. No good can come of this.

John McCain: FOR Irish terrorists!

max
['Am also Irish-y Catholic-y a bit.']

we should let great villains loose, provided only that their villainy consisted in depriving of their home a goose or two.

Does this mean that if a great villain evicted a goose, that would be a great crime, but we shouldn't imprison the villain for it? What led you to say that?

Going back to the original post, I am of course fully in favor of doing the maximum number of things to inconvenience, embarrass, humiliate, and harm whatever malefactors and enablers there are, regardless of whether anything else is accomplished by that.

43

... That's a super-steep price to demand, and probably unnecessary given how unlikely those assets are to be completely worthless. ...

There is a lot of space between completely worthless and what the banks need to get for the assets to remain solvent. And while even a bad mortgage pool is unlikely to be completely worthless many of the lower ranked tranches of CDOs based on bad mortgage pools have lost all value.

46: togolosh ain't kidding.

many of the lower ranked tranches of CDOs based on bad mortgage pools have lost all value.

They can't have lost all value unless the value of the underlying asset has gone to zero, which it hasn't. It may not be worth the price of recovery, but it is not zero.

NY State to Regulate CDS

62 Trillion.

Panic has set in, and it won't go away.

1) Win the election
2) Impeach Obama, if he protects the old order
3) Design a new world order.

Semi-related: so today I drove by the WaMu Home Loan center where I initially talked to a loan guy about buying a house here in ridiculously overvalued Ventura.

Well, I'm in the process of buying a house at a price I can afford that isn't a townhome or a condo, and the WaMu Home Loan center building is now FOR SALE.

I think I won.

I still don't get what the asset backing any particular tranche is. Is it a house? Is it a fraction of a house? A collection of fractions of many houses?

62 Trillion

Most of that balances out, but OMG has a lot of "wealth" been destroyed. Theory of money, and all that.

56: In theory, the latter. In fact, nothing.

Francophones: isn't "Yves" a guy name?

I still don't get what the asset backing any particular tranche is. Is it a house? Is it a fraction of a house? A collection of fractions of many houses?

I am not a structured finance guy, but as I understand it any MBS is a whole bunch of mortgages, some risky but most solid. The amount of risk premium paid is supposed to rated so the buyer has some sense of how much shit is in with the good.

If a borrower stops paying on the mortgage, the servicer begins foreclosure proceedings, or trust deed sale depending on local laws. If the property is not sold at the foreclosure auction, it belongs to the lending institution. The lender will now try to sell the asset for what they can get. What I don't know is what does the lending institution do with the money from the sale. In some cases the lenders had to buy back the bonds from the investors as per the contract, so the money would then go to erase the bad debt. But if they investors still own the bond, I don't know if the lender turns the sale proceeds over after the REO sale. I think it is spelled out in the prospectus, but who reads that shit.

I think I won.

Yes, yes, oh yess! Well done.

max
['Hurry up and get moved in tho before we all go broke.']

61: Oh, it's not done yet. We agreed with the sellers today that they only have to do $5k repairs, max, after the appraisal. Which is a totally hollow agreement, because the appraisal is going to say they have to do X work or else the VA won't give us the money, and the work'll cost whatever the work'll cost. But at this point, whatever moves these fuckers forward.

62. Did you get the seller to pay down your points?

I think I won.

Did you get a medal?

My very firm understanding is that 58 is, essentially, correct, while 53 is completely wrong. Since the definition of the lower tranches is that they're the first ones not to get paid, and there's a half dozen tranches in line before them, and those tranches must be filled from mortgages that are, even if they don't default, worth half what they were.

I guess, theoretically, some tiny amount of money could reach the lowest tranches from upstanding citizens who continue to pay on mortgages written for 2X the market value of the house. But that seems like a pretty slim reed.

It's not that the lowest tranches are worth tiny fractions of bad loans that still retain some value; it's that, by definition, they're last in the soup line, and there's one bowl of soup, and there's 6 people whose bowls get filled before the last tranche gets a taste.

I admit to the possibility that this is substantially wrong, but I'd be pretty surprised.

Ah. Ok. Just thinking of the possession issue when/if the squatters/looters show up and/or the bank system goes toes up.

max
['So you can say, 'Get off my lawn!' and mean it.']

To isolate on what would be my misunderstanding:

If all the other tranches get filled first, then the only way for the bottom tranche to get $$ is for every other one to get filled completely. If every other tranche gets filled completely, then what's the problem?

65 is right. My impression (and I don't know how I formed it, so it could have been beamed directly into my head by aliens who are trying to manipulate the bond market) is that the lowest tranches are not the issue. They went to speculative investors like hedge funds, investors who knew they were risky. The issue is the middle tranches. The middle tranches were themselves bundled up into new securities, and then retranched. It's these securities that the banks were holding and have devalued sharply.

Oh good lord. I can't believe the registrar/the online course catalog system is not able to include course descriptions for special topics courses. If they can switch the course listing to reflect the name of the topic in question, why can they not also put the course description in the little fucking box WHY.

"I believe you understand why it would be impossible for us to list a course description for every topic offered in a semester for every department." I believe I don't.

"You can list the description for a particular topic to be taught in a given semester in Blackboard and also in your syllabus." Bit late then, isn't it?

68, etc--now I'm remembering someone kindly linking to a pictorial representation of the concept behind the securitization of the mortgages... but now they do this to second order? Yikes.

JRoth- I overlooked anything that might not be in senior position. Of course that can go to zero, once the first position forecloses. I am chastised.

JRoth and Shearer have the right idea. Floyd Norris explained it all back in early August in the NYT.

First there were mortgages, taken out by homeowners. Then there were mortgage-backed securities. Those securities were sliced into tranches. Some tranches got first call on the interest and principal payments from the mortgages.

Each month, if money was left over, it went to the next level of tranches, and then to the next, and so on down. If there were enough mortgage defaults, the lowest tranche would be wiped out. More losses would make the next tranche up worthless, and so on.

70 - I know exactly the graphic you mean. It popped up in my head as I was writing my comment.

Also, thanks, registrar, it never would have occurred to me that I could put a course description in my syllabus. You've truly lifted the shads from my eyes. Harrumph!

The shades, too, but especially the shads. Do you know how uncomfortable it is to have an entire shad in each eye?

I'm very relieved to read 71 - there's nothing worse than feeling very confident about something about which you are totally wrong. And based on general expertise in this area, TLL certainly has better odds than I do.

Of course, this is emblematic of the utter collapse of our financial system.

And, I can't fucking believe they resliced the tranches again. Dumbasses.

59:Wikipedia:

Yves, pronounced [iv], is a common French male given name.

"Yves Smith" seems to be the pseudonym of a woman, though. Here's a bio. It's fairly straightforward to use the info there to determine her real name (not that her real name meant anything to me when I did so).

Do you know how uncomfortable it is to have an entire shad in each eye?

SOP in the Lake Erie region, is my understanding. That's why the Browns suck so badly.

53

They can't have lost all value unless the value of the underlying asset has gone to zero, which it hasn't. It may not be worth the price of recovery, but it is not zero.

This is not correct. The details are complicated but to simplify suppose you start with a pool of mortgages. Divide it into 10 tranches. Each tranch represents a certain fraction of the total principal amount and is entitled to interest at a certain rate. It is set up so that if nobody defaults there is enough money coming in to pay everybody. But if there is a shortfall due to defaults the first tranch has priority followed by the second, third etc. So the first tranch is the safest and will receive the lowest interst rate while the tenth tranch is the riskiest and will receive the highest interest rate. So if each tranch represents 10% of the principal amount and half the underlying mortgages have defaulted the tenth tranch will likely be completely worthless as there won't be enough money coming in from the pool to pay everyone ahead of them in priority.

63: No, are you kidding? It's hard enough getting them to freaking agree to pay for the fucking *required repairs*.

I did get a half-percent drop by paying 3/4 of a point, though, so I'm reasonably happy with that.

Various people are writing about Ruffini's strategy piece for Republicans: force the Democrats to pass a bailout, working with Bush, and then run against Bush and the Democrats.

I really think that the Democrats should make plans to play chicken and demonize Bush and the Republicans. There's plenty of ammunition, but Dems don't have the skillz.

At times like this I wish that Carville wasn't a right-wing, mercenary creep. He knows how to do that kind of thing.

Carville is right wing? Or right wing for a Democrat? He is certainly a hired gun, and assuredly a creep.

John, I also thought that the powers that be were trying to achieve zugzwang for the democrats. I still think that, but I also used to.

IOZ has a rhyme:

Prog-bloggers seem to believe that their legislators are getting steamrolled once again by a false sense of urgency, but just as their gang voted for the war in Iraq because they supported it, they're going to come to Jesus and throw cash at Finance because they support it. Who the fuck do you think they're talking about when they talk about restoring Confidence in the Market? You? Proggie please. Whose confidence? Yours?

I like that guy.

75: Much less a shad row.

Here's Mish's Plan He also links to a Professor Hussman's Plan. Everybody has got a plan. The worst plan is Paulson's.

According to what I understand Mish is an Austrian school economist, hardcore libertarian who would abolish the Fed, and yes, an Uberbear. There are a whole lot of things I would disagree with in his post.

But:

Jobs, Jobs, Jobs

I am a libertarian. I do not believe in makeshift government proposals. However, I would rather get something than nothing for $700 Billion. Paulson's proposal scores a big fat zero in term of providing an jobs or any real economic stimulus.

It is no secret that infrastructure in the US is decaying and needs to be fixed. A collapsing bridge in Minnesota is one key example. And what out our aging energy grid? Instead of giving $700 billion to banks that deserve to go under, I would rather give half that for jobs programs ...Mish

We are way way past monetary stimulus. It's over.
The Paulson plan is already into fiscal stimulus. But top down, and scarey as hell. A disaster in any form. But it, and any substitute that has the same goals, will be a mere footnote to the history to be written. I am not going to sweat the details of an irrelevancy. The patient can't be saved.

Time for the CCC and WPA. All money we can get, and we can't spare any for banking. Let's get ahead of the game, rather than looking back at the wreckage. .

And a trillion or 5 trillion or ten trillion are irrelevancies.

We are going down. Money, as we knew it, will soon be meaningless.

We will very soon be needing 50 trillion dollars or some other ridiculous number and we will say fuck it, what's real. Food & shelter & jobs.

I learned from Heinlein's Job (is that a real book?) that if you find yourself traveling through alternate realities, you should keep all your money in coins because they will be worth more than paper no matter what happens.

May apply here.

The Paulson plan is already into fiscal stimulus.

I'd peg it as the ultimate in fiscal stimulus, aimed entirely at the financial sector.

A disaster in any form. But it, and any substitute that has the same goals, will be a mere footnote to the history to be written. I am not going to sweat the details of an irrelevancy. The patient can't be saved.

I think they could rewrite the bill into a decent form that would more or less do what needs to be done, but they need to actually do that.

If they don't get the bill exactly right, the D's will get an albatross around the neck, and then we get President McCain, the economy implodes anyways and maybe that loon starts a war to save his ass.

max
['It is very possible the country may be better off with no bill at all.']

I learned from Heinlein's Job (is that a real book?)

Yes: Job, a Comedy of Justice.

Ladies and gentlemen, Minnesota's senior senator.

U.S. Sen. Norm Coleman said the massive government bailout of failing financial institutions is not only necessary but could make money for the federal government.

"The government could make 10 or 20 times what it pays on this, possibly," Coleman said during a campaign stop at Christy's Cafe in North Mankato Saturday morning.

Amazing.

91: If it weren't for Democratic obstruction, we could be running a 12 trillion dollar surplus by 2012. Damn Democrats.

Yeah, that is Norm-the-closeted-Gay-fake-Minnesotan-from-New-York-used-ta- be-a-Democrat-but switched-Republican-and-now-wants-to-switch-back-Coleman.

A man of principle.

But I digress. On topic, this is not meant for anyone here, but just once I'm gonna give a shout out to the imbecilic Republicans - I TOLD YOU SO!! I EFFING TOLD YOU SO YOU EFFING IDIOTS!!!!

"The government could make 10 or 20 times what it pays on this, possibly," Coleman said during a campaign stop at Christy's Cafe in North Mankato Saturday morning.

He simply forgot to mention that he keeps his books in Monopoly money.

max
['Don't ask him for change.']

'Don't ask him for change.'

But this is a change election.

What is perplexing me most is how I can't figure out how I feel about it. As an old fashioned FDR/LBJ liberal, I would support Federal intervention to prevent widespread financial collapse, in the sense of the idea that the government can't just step back and let markets collapse and damn the consequences for us all. But this is underwriting rich execs and banks who made bad investments at taxpayer expense! If I focus on the theory that this might prevent national/global meltdown, maybe, sure. Otherwise this is some bastardized version of the New Deal and FDR's vision of the second bill of rights as being distributive economic justice. I'm also really bothered by the lack of review and oversight for this proposal--while I am cool with government regulating markets, I do not think that lack of review is cool! Too much potential for abuse and aggrandizement of power!

So I'm buried with work and traveling most weekends and all I want to do, on top of dissertation and articles, is read about this and learn about commercial banking law and the regulation of industries. Very lame and time consuming. But I found this roundup of links useful, and this blog is all about commercial law and very useful, and if you are wondering why we have the FDIC and all that banking stuff in It's a Wonderful Life, this bonus post is a great read.

Ok, my day started at 4 am EDT and is still going at 7:40 PDT after a six hour flight and a full day of classes. I miss Unfogged.

If I focus on the theory that this might prevent national/global meltdown

See, that's the part of the theory that I'm not so sure about. Stave it off 'til just after the election and long enough for the rich to cut their losses and legal liability seems just as plausible. This is starting to feel a lot like the run-up to Iraq, where if we didn't act on the so-called experts' advice NOWNOWNOWNOW, we'd miss a vital window of opportunity to do something or other that was never clearly defined but was of life-or-death importance and if Democrats didn't go along they'd be sorry and never get elected to anything ever again anywhere. Or something.

if we didn't act on the so-called experts' advice NOWNOWNOWNOW, we'd miss a vital window of opportunity to do something or other

Matt Stoller:

I spoke to a Democratic chief of staff who told me that everything on the Hill is exceptionally confused. She said that leadership - Reid, Pelosi, Barney Frank, Rahm, Schumer, Dodd, Clyburn - were brought into a room with Paulson and Bernanke and told that if they did not act, jobs would be lost, people wouldn't get their paychecks, student loans wouldn't go through, credit card limits would be crammed down, etc. She said they were scared, and lots of Democrats are angry that they got scared by the GOP Daddy's in nice suits.

Fear is the most powerful emotion.

97: Yes, I think the "tell" on this move is that neither Paulson nor anyone else in the Government even hinted that something of this scale might be necessary before last week. Yes, yes, scary stuff happened, some more information came to light, but nothing that new and startling—other than yet another opportunity for the old squeeze play.

Yeah, the cynic in me thinks that's possible too.

Hi, apo.

God forbid any taxpayers express moral outrage or envy. It would demean the professionalism of Paulson and the industry.

Up to 10,000 staff at the New York office of the bankrupt investment bank Lehman Brothers will share a bonus pool set aside for them that is worth $2.5bn (£1.4bn), Barclays Bank, which is buying the business, confirmed last night.

The revelation sparked fury among the workers' former colleagues, Lehman's 5,000 staff based in London, who currently have no idea how long they will go on receiving even their basic salaries, let alone any bonus payments.

I work with a woman who's married to a corporate lawyer and has many friends in the financial industry, including at Lehman. She has brought up many time how bad she feels for friends her age (early 30s) who are losing jobs on Wall Street, and how that's really the tragedy here. She also will probably vote for McCain to keep the capital gains tax low, because she thinks it's unfair to be taxed on the profit from selling the Manhattan apartment her dad helped her buy. I sometimes choked on my food at lunch when she talks about this stuff -- ressentiment doesn't go down easy.

Time to inventory our assets. Law degree doesn't count. Gun, good, .22, not good, not here, really not good. Useful skills? Speak Canadian. Split firewood. Clean fish. Otherwise limited. Survival potential, same. WTF, might as well enjoy the ride down.

She also will probably vote for McCain to keep the capital gains tax low

I work with a guy who's refusing to vote for either candidate this year, but the issue that gets him all riled up and ranty is the estate tax, despite not having anywhere remotely near enough estate to be affected by it.

104: That's pretty rough. My annoying co-worker is an ex-Democrat who got into guns and the NRA and now votes Republican on gun-control issues. I'm flabbergasted. Who the fuck is talking about gun-control issues?

104: I have given up talking politics with my parents for the duration of the campaign, and maybe beyond that, because it's just gotten too damn obvious that the purported issues are just pegs to hang the tribal stuff on.

I thank god that my annoying relatives are mostly annoying Democrats, and I avoid talking politics with the annoying Republicans.

But really I came over here to complain that D2 is being all, "oh, I am too professional and ethical to comment on the financial meltdown" over at CT, and people are praising him for it, rather than pointing out what a fucking cunt he's being. Which is really irritating of you all.

I thought dsquared's position was quite reasonable.

I do believe that Comrade D is in the money, so to speak, with the the large banks.

max
['Not the sort of conversation that goes well.']

people who are current on the loans they lied to get

Many of them were conned and it's near impossible to sort out which. Throw the crooked mortgage brokers in jail.

There are a great many things that DSquared could say within the limits of a proper concern for the confidentiality of information with serious value, starting with a periodic set of pointers to people explaining things well for the general public. I find complete silence at this point nearly as off-putting as I did when Eugene Volokh refused to comment on torture issues.

I rarely bother writing to or calling Congress, but I think this is a critical one for all of us to weigh in on. I'm going to call the entire progressive caucus and leadership tomorrow to say slow down, reject the Paulson bill, and don't be railroaded into anything by the R's.

202-224-3121 for the Senate and 202-225-3121 for the House.

Seriously, pick up the phone.

I don't generally believe that contacts from people like me matter much...but I also believe in doing my part in case things work this time. So, called. :)

starting with a periodic set of pointers to people explaining things well for the general public.

Someone brought this up in comments and he explained that he didn't want to endorse particular explicators over others, which is a little high-minded but not incomprehensible.

It's not incomprehensible, I just think it's...something undesirable, and I don't want to commit myself to an adjective that would imply I felt any confidence in guessing his motives, since I don't.

My concern is that something's going to be done. I feel a responsibility to participate as usefully as I can in the general debate about this - both doing good things and not doing bad things. I will, like the rest of the general public, be getting information from people who seem to know more. I prefer getting it from people for whom I have some sense of their character, and d-squared is in that category - I don't always agree with him or even come close, but I respect his concerns and a bunch of things he's written over the years have strongly influenced me. And now, with something right at the center of his expertise...nothin'.

I can of course go listen to other people, and will. But it seems a weird dereliction of involvement, even taking his expressed concerns into account.

A rhyme for our times.

108:I tried to mock dsquared up at 31, but perhaps no one noticed behind the self-mockery.

Somehow I don't feel d is one of the bad guys,

Po-Mo, I was originally convinced by your idea that Paulson was running the bailouts like a hard-nosed dealmaker. But the AIG bailout required the participation of the Fed, so we don't know who provided the hard nose. Plus the oversight in the bailout is so weak that it has to be a clue as to intent.

Paulson seems to have only play in his playbook -- the "bad bank". That was the idea behind the super-SIV plan, and the idea behind this plan. If the banks are all really insolvent, then it's not sufficient to solve the problem. (Though the Dodd plan won't help here either.) Unless the plan is to overpay like crazy, which explains the lax oversight. (I assume the Democrats, or at least Dodd, understand that the plan is to overpay, and that's why they're demanding equity.)

A narrowly drawn plan to buy mortgage debt at near its actual value is a good first step, but it wouldn't solve the insolvency problem.

Looking this over, this was probably already better said by others. Fuckers.

Bob, I don't think d-squared is one of the bad guys, or anywhere close to it. I think that he's declining to be a good guy for reasons I'm not deeply convinced by.

Damn that's James Carville.

Watching The Assassination of Jesse James etc starring Brad Pitt & Casey Affleck. James Carville has a cameo. The movie is a somber nightmare. But beautiful.

Well, now Bernanke and Paulson in the room with congresspeoples is like Bush/Cheney talking before the AUMF. These can't be said by sane people, but Congress knew in their hearts that Bush woulda gone anyway without AUMF, all constitutional crisisy.

Why is every Senator so mad? Paulson can tear the world economy down, and will. Lehman showed his credentials.

This is where Paulson looks Dodd in the eye and says "Senator, things could get very very bad, you know." "Are you threatening...? "Are you crazy"

Course watching this psycho outlaw movie may have given me an attitude, but I have always seen the world this way.

I'm going to defend D2's character, and my best guess is that (it being 6.40am ish UK time) he's already at work. And will be at work for most of the day. And that anything he starts drafting may well be out of date by the time he starts redrafting, and he'll definitely want to redraft about this. I'm also going to force enough booze down the bastard's throat to get a full account out of him in the future.

I also think that his willingness to explain his silence rather than just vanish can be read with a bit of Kremlinology to extrapolate the motives of those with skin in the game who are talking.

I like that the best defense of D^2's character is that "he's already at work".

"He'd sooner call you a cunt than shake your hand, but he was a hard worker." D2, Poor Richard's Almanac salutes you.

121:Oh, people got lives and retain hopes and and momentum, ya know. And everybody's scared. D has clients, we might not like them, but he has built a relationship, and I'm sure they're scared.

Been said the Brad DeLong and many of the econbloggers have blown any possibility of a gov't job this last few weeks. These people are very good, but it takes more than very good to make it up there.

A year from now, two years, financial analysts jobs may become hard to find. D framed it as a matter of honour, but there is also survival.

And there is a cacaphony of voices out there. I have no reason to think dsquared is all that smarter than the ones I read.

Nationalise all mortgages!

123: Of course he's a hard worker. They're all hard workers. That kind of money doesn't lose itself.

FWIW, D2's reasons given in his CT post seem perfectly reasonable. In fact several of his reasons taken alone, never mind in concert with the rest, seem enough to me. But this is probably a topic for there (CT), no?

Somehow I don't feel d is one of the bad guys

As Robert Anton Wilson and Robert Shea explained in one of those little bits of the Illuminantus! trilogy that'll be with me for the rest of my life, it doesn't matter whether you're good, bad or indifferent when the system you serve in is evil. Did you really think every little cog in the money machine is an evil investment banker straight out of Wall Street?

rather than pointing out what a fucking cunt he's being

it is my job to be a cunt, darling[1]. (And yes, thanks, I have been at work for the last hour and am currently sucking my second espresso of the day). I've said my piece on CT so there's probably not much point repeating it; I understand that people are pissed off and I probably would be myself if roles were reversed but I've made my decision and I'm not going to change it. I have considered doing some sort of evening drinks in London under Chatham House rules, but at present that runs into the significant problem that I've not got the time.

[1] it's also my hobby.

this is probably a topic for there (CT), no?

I think CT probably has rules about calling their bloggers names.

129: Ah, I knew you'd understand. You bastard. I, myself, am up grading late. Which of us is suffering to less purpose, do you think?

re: 130

Ah, that's true. Curse them.

I find complete silence at this point nearly as off-putting as I did when Eugene Volokh refused to comment on torture issues.

Just because I feel it ought to be put on the record and I don't think anyone else has done so: That's a remarkably stupid and offensive analogy, Bruce.

Whoever it was who was asking for my legal analysis, in terms of enforceability, of one bill or another, there's no point to it. Laws governing the behavior of governmental entities in anything this size are going to get enforced to the extent Congress does: the fact that there's a clause making some behavior or other improper isn't going to have any particular effect in the absence of political will.

And yeah, dsquared doesn't owe us or anyone else financial analysis, and people being cross about the lack thereof are being silly.

Dsquared has said that his professional knowledge is mostly or all specific to a particular situation during a particular time frame, and that for that reason he can't really give general advice to the public and might do harm if he did so (e.g., if a friend applied his Monday advice on Tuesday, or if there was a conflict of interest between his clients and his internet friends and he ended up harming one or the other).

And also that he's presumably up to his ears right now trying to save his clients' asses as well as his own. These strike me as legitimate reasons in the immediate term.

He's been pretty good about giving a free critical overview of the biz at other times, and he probably agrees with what McManus said above, that there are a lot of people out there and Dsquared isn't necessarily even the best of them.

That leads me to a point I made over at CT, that in effect we all are ignorant peasants right now unless we're in the business, and even if one of us is in the business we might be one of the losers who make winning possible. My conclusion is that we're really all just ignorant peasants, and should do a good job of it.

Nobody really knows what's going to happen, and anyone who knows a bit more than someone else is going to use that knowledge to save himself and (if he can) feather his nest. The useful knowledge is secret, almost by definition. Very shortly after knowledge becomes public, adjustments are made and it becomes useless.

Most of humanity has been in this condition forever. It's not easy for educated folk like ourselves to accept the common condition.

Speaking as a peasant, my own feeling is that finance, government, the media, and law are all intrinsically criminal. Not merely that, but definitely that. The difference between me and the militias, the Greens, the Libertarians, and the Left on that point is that I feel that they're unreasonably optimistic.

I would add that the thing that pisses me off about this whole finance game is that it's more or less impossible to opt out. It would be nice if the big boys played for the billion-dollar jackpots far above our heads while the rest of us cozily lived our simple lives. But if that were allowed, the bigtimers would be negatively impacted. They need to have the whole world in their hands. Even if you renounce the big money, the big money game can wreck your life.

In their sober way I'fd imagine that he Amish are laughing at us. Maybe one of those weird sixteenth century peasant German hymns of theirs translates something like "Look at those silly motherfuckers!"

I find complete silence at this point nearly as off-putting as I did when Eugene Volokh refused to comment on torture issues.

What PF said in 133. This is one of the most egregious violations of the analogy ban that I've seen in quite a while. I think dsquared's position is perfectly reasonable, and it's unreasonable to expect him to serve as financial analyst to the blogosphere if that's something he doesn't want to do.

it is my job to be a cunt, darling[1]

is a pretty succinct description of finance/econ work, when you come right down to it.

It's also true that in this particular us-and-them game, Dsquared has chosen to be a them. But given the way I've just defined "us", it's not at all something to aspire to.

Eventually all truth will be on the market, where you get only the truth you can afford, or can produce yourself by inefficient craft methods. Once that Utopian free information market has been attained, not only will commoners with small information budgets be unable to foresee or respond to problems, after the disaster has hit they won't be able to understand what happened to them either. This will lead to a perfectly harmonious society with no class envy. We're about two thirds of the way there already. The Unfoggetariat is being folded into the mass as we speak.

Dodd vs. Paulson and Bernanke on CSPAN, right now!

135: My conclusion is that IF we're really all just ignorant peasants, and we should do a good job of it.

A revision error made the paragraph sound unbearably stupid.

I can bear it.

You need to buy this book, Apo.

Sample.

Liddy Dole is pushing the right-wing Republican propaganda line that this is all about Fannie and Freddie -- which is TOTAL BULLSHIT.

144: It's okay, PGD. She's going to get replaced soon.

This current problem is systemic. Problems like these are inevitable given the system we now have.

I'm a little angry at the huddled masses who want to ignore the system and live simple lives, but I'm only a little angry at them. They do now want to hurt anyone and they want to be productive and be modestly rewarded.

I'm more angry at the ultra-rich who knowingly or unknowingly reap the biggest rewards and pay the fewest penalties in this system.

I'm most angry at the shills like Limbough and Rove who make a grand living promoting what they know to be lies.

And today, at the very top of my angry list, are the academics, the learned economists who have zero excuses for supporting this crap, who knew all the problems and yet promoted this system anyway.

I think that if there is a bail out every single executive of any corporation that receives federal funds and every single economic 'adviser' that has either taught this crap, written a paper on this crap, or has advocated this crap to a politician should be required to take a semester of econ 101 all over again. I want to see daily videos of those classes on utube. I want to see every one of them reminded of what they clearly had forgotten amongst all their greed.

If the class is required for the peasants when they go bankrupt then it should be required for every one of the ignoramuses that had anything to do with the corporations going bankrupt. I want to see the double standard eliminated.

s/b "They do not want to hurt . . . "

'They do now want to hurt anyone' sounded very expressive and i thought you meant it

Blaming economists as a class is hitting out at a target that you can hit because you can't reach your real target.

I thought you people might appreciate this:

So the Financial Times frequently publishes special sections that are particularly noticeable since it's typically a two-section paper (one general/big news and opinions, the other all business and market news). These sections are usually somewhat interesting special reports on a country's finance industry, or a particular subsection of the finance industry. Today's special section? Yachts

Don't worry, Walt. He can't hit you when you're in your office.

are they spacegoing yachts with dimensions that better fit 12-ft-lizards?

I can't hit any of them really. I blame the proponents of globalization and the proponents of deregulation and the creators of derivatives because they personally got little from their actions, they should have know better, and they took a huge risk with the world's finances.

I suppose I'm coming to realize that 'globalization' will result in a global monoculture and we should know how risky that is. Hopefully we have learned that in our genetic research but perhaps not. Why is it sound financial advice at the individual level to diversify but at the global level that is not sound advice?

With globalization any problems and failures will be global. Is that really what we want? Why don't people ever talk about this exposure?

"they should have known better,"

Sorry, I'm not taking enough time on my proof reading.

That's learned helplessness, John. It's crazy for a small investor to try to time market movements because of the informational disadvantage, just as it would be crazy to outguess the US Army's tank tactics in the initial incursion into Iraq. But that doesn't mean the average person can't understand the big picture here, anymore than the average person couldn't understand the big picture in Iraq.

are they spacegoing yachts with dimensions that better fit 12-ft-lizards?

No, but the front page below-the-fold is entirely occupied by an ad featuring a yacht with a helicopter landing on it! Also, it contains articles clarifying that today's yacht buyers may be younger, but they're still really rich! and bemoaning how hard it is to find a good berth in St. Tropez or Portofino these days, even if you're willing to spend so! much! money!

135: My conclusion is that we're really all just ignorant peasants . . . . Most of humanity has been in this condition forever. It's not easy for educated folk like ourselves to accept the common condition.

Very good point.

Politicalfootball: I didn't realize until this morning how my comment might look to someone outside my head. Thanks for the clue serving. I am, as a general thing, distressed when people I'd like to call upon for information in a crisis feel obligated to clam up. But I don't mean to suggest a moral equivalence in cases.

I do, I admit, feel a bit puzzled about having the analogy ban tossed at me. This is probably a matter for some other thread if we're going to pursue it in detail, of course. Compactly, though: Are efforts to establish categories and groups frowned on? I'm not trying to be a smartass here, I'm just confused. Is defining and judging inevitably analogy-making? I don't think of it that way, but my own dictionaries tell me I may be wrong.

Walt, that would be fine if I thought the big guys understood the big picture. My understanding is that the the system has been tampered with to the point that no one has much of an idea what will happen. High rollers with big bankrolls thrive on chaos, but most of us don't.

In any case, I do have a limited understanding of the big picture: I'm at the mercy of events. Peasants understand that too. I also understand that we're seeing a power play by Paulson, Bush, and finance, and that only the courts and the Democrats stand in their way, and that in recent history he courts and the Democrats have been, in effect, nearly worthless. (OK, maybe ten years after their lives have been destroyed, those of the Guantanamo detainees who had no connection with al Qaeda or the Taliban will get their day in court.)

I've been paranoid about this stuff ever since about 1994, so I've been a boom and a bust already.

Good criterion from Dean Baker:

If the bailout were properly structured, firms would not be lining up to get in. It should be a last resort that involves selling most of the firm to the government, as happened with AIG. If banks are lining up to get in, then the people who designed the bailout should be chased out of town.

To go on, for whatever reason I find foreign and military policy much more transparent than finance. Finance seems to be deliberately counterintuitive and technical. I don't know why; foreign and military are equally dishonest and criminal. Maybe because it's harder to repackage military actions as the opposite of what they are, or to pretend that something's not happening when it is.

158:Unfogged is fricking free form fly-by commenting. My only objection is to the ObsWi type stuff in 158. They even have an ObsWi based adjective for it.

Proper response to criticism here is of the form:"Fuck off and die, slug"

I find myself agreeing a lot with John about the big picture. In the years following Enron's collapse I read several accounts of the debacle, and came away with that as a big strong lights-blinking aspect of the mess. People were doing things they didn't understand, but knew well enough that they were in trouble that they hid things from the people who might have understood and pointed out the flaws, who in turn often had a sense that something was wrong but didn't want to get involved with what might be revealed as trouble. Standard accounting is basically about getting everything clear and distinct, but the free-wheeling adventures in finance seem to have a big dose of deliberately induced ambiguity so that processes and outcomes can fit into whatever scheme seems most likely to pay off big at the moment.

So when companies say that they don't know, really, what's at stake for them anymore, I'm inclined to believe it. Which means that in my dream USA, all relief would come with a requirement for very open accounting, along with fun like automatic maximum sentences for higher-ups found guilty of violating existing rules along the way. Not holding my breath waiting for it, though. (In my messages to representatives, I did repeat the idea of "Do nothing until those seeking relief explain what their current problem is and what they've already done to punish those responsible.")

This is starting to feel a lot like the run-up to Iraq, where if we didn't act on the so-called experts' advice NOWNOWNOWNOW, we'd miss a vital window of opportunity to do something or other that was never clearly defined but was of life-or-death importance

Exactly. EXACTLY.

I didn't trust it then, and I trust it even less now.

153:With globalization any problems and failures will be global. Is that really what we want? Why don't people ever talk about this exposure?

As a Marxian, I certainly think about it. Social relations and all that. Whatever solutions and improvements may come, I want them to be global. "American" or "Western" solutions to climate change make no sense at all, for instance.

I favor globalization and free trade. Come the revolution, no place to hide from the guillotines.

If banks are lining up to get in, then the people who designed the bailout should be chased out of town.

Yeah, you can't let the fox design the next generation of henhouses.

Actually, I think that we should take a lot of the upper management to the hog farm and ask them if they're willing to die so that their company might live.

163:I think it was Michael Perelman who half seriously recommended Mandelbrot for the Economic quasi-Nobel yesterday. Uncertainty stuff.

Nobody is going to see the big picture. Nobody is going to understand what's going on. Not one million nobodies.

The attempt to control increases uncertainty. Blah-blah, one hundred-year-old stuff, but not internalized or turned into a praxis.

People still believe in science and reason. Don't define physics or genetics as a rational system unless you want your economics to try to follow the same model to catastrophe.

Finance is a confidence game, pure and simple. What Paulson is trying to do is restore confidence in the economy, and secondarily in the markets. And for all the joking about stocking up on ammo and groceries, whacha gonna do when you run out of both in two weeks, or two months and the financial markets are still fucked? There is certainly a fool me once, shame on you; fool me twice shame on me vibe to this, but I don't think there is much choice. Without restoration of confidence in the markets the end result is the entire world economy looking like Zimbabwe's.

According to Mirowski, Mandelbrot's first work using fractals was in economics, back around 1960 talking about Egyptian cotton prices. Mirowski commented that this was the first time that ideas from economics had ever influenced a hard science rather than the other way around, but that economists were oddly unable to appreciate that fact.

Yeah, you can't let the fox design the next generation of henhouses.

This is, however, a pretty good description of how the US economy works. The foxes are just about farsighted enough to want to keep the hen population stable.

erm a pretty good tongue in cheek description, that should have been.

It has to be more than a confidence game pure and simple, or bubbles would grow to infinity as long as people were stupid enough. People who believe it's simply a confidence game will be completely shameless and unrestrained in their attempts to fool people, and beyond that will accuse truthtellers of sabotaging prosperity. When a bubble or a Ponzi scheme bursts it isn't because someone wrongly lost faith.

What Paulson is trying to do is restore financial elites' confidence in the economy.

I take your point that nerve -- aka blind trust -- is an important component of the financial market. I don't believe you or I, or anyone else for that matter, can actually use that to predict what will happen next.

People are scared. People do crazy things when they're scared. People who are in positions of power are more likely to do crazy things that affect a lot of other people. All of those things are true. Whether it is true that we need Daddy Treasury Secretary to make everything better...uh-uh.

JE, I am purposefully using "confidence" with dual meaning, both as a con game and also that things will get better. If you don't think things will get better, you don't invest, buy stuff other than groceries, etc.

whacha gonna do when you run out of both in two weeks, or two months and the financial markets are still fucked?

Start kicking it Indian-style.

Whoever it was who was asking for my legal analysis, in terms of enforceability, of one bill or another, there's no point to it.

None at all?

Laws governing the behavior of governmental entities in anything this size are going to get enforced to the extent Congress does:

?

the fact that there's a clause making some behavior or other improper isn't going to have any particular effect in the absence of political will.

Right. So, as I said last night (but not here) the administrative aspect needs to be structured differently to make it go right. Say, a committee of Paulson, Bernanke, and three Democrats, and that committee administers the whole thing.

max
['Thank you!']

State of exception. There can be no law at the top.

Finance is a confidence game, pure and simple.

Yeah, the finance part (per Emerson) isn't magic; the magic part is getting people to believe the printed paper represents something else.

What Paulson is trying to do is restore confidence in the economy, and secondarily in the markets.

Other way around, I think.

And for all the joking about stocking up on ammo and groceries, whacha gonna do when you run out of both in two weeks, or two months and the financial markets are still fucked?

Cope with it. The bad time in any disaster is immediately after it happens. If the market well and truly collapses in the same way a bank collapse would've happened in the 19th century, then you have a brief interregum, followed by somebody, somewhere printing new paper.

max
['Bleh.']

One thing that came clear in the testimony today is that Paulson/Bernanke are trying to get the bad/toxic securities out of the system, not bail out failing financial institutions. The two are related but quite different. They see the financial institution failure as the symptom, the bad securities as the disease. That's behind a lot of the elements of their plan, including the discretion and the lack of equity participation. They've actually been pretty tough with the bailout standards on individual failing institutions.

Not saying I agree, just pointing out.

180: If that's the point, then the no-oversight provisions don't make sense. (Also, lots of people -- Krugman, for example, or max here in the comments -- are skeptical that's sufficient.) That does fit my suggestion earlier than Paulson's only play is the "bad bank" one.

181: I don't think they mind oversight, but they feel they need a ton of autonomy because they don't actually understand the structure of the complex assets they will be trying to purchase / encourage price discovery on. So they don't even understand the mechanisms they will need to use --simple reverse auctions or whatever won't work for many securities, they'll have to design various weird new price discovery mechanisms. They don't really know what these assets are.

They see the financial institution failure as the symptom, the bad securities as the disease.

This is exactly backwards, afaics.

Minor point that may help make sense of last week: after bailing lots of people out failed, Lehman was allowed to go down, even though that didn't make any sense. As I saw pointed out, Paulson is a veteran of Sachs, and Lehman is/was the traditional rival of Sachs.

Second minor point that may make sense of last week: the Federal Reserve bank examiners have been on premises at Sachs and Stanley, going over the books since those two were allowed access to the acronym credit windows back in March. Purpose: support for preparing to change status for the two banks in question. So THE FEDS KNOW, but of course, they haven't told anybody.

Third minor point: no bill is better than a bad bill, both in terms of the economy and in terms of the election.

max
['So there's plenty of oversight, it's just that they aren't telling anybody else.']

183: interesting question. The thing is that institutions holding these securities don't fully understand whether or not they are failing (because they don't know the value of their own assets), therefore they are reluctant to lend.

184: The third point is not at all a minor point.

Bernanke just made the point that healthy institutions are contracting credit based on their uncertainty about the value of their assets.

185: Right, and I understand that. But I can only see the existence of all of these questionable value securities as symptomatic of the flaws that got us into the mess in the first place. I'm a bit sympathetic to the idea that this may not be the right way to think about short term solution to the mess (though still lean towards ok, all you free market boosters, let it do it's thing and kill off the weak), but can't imagine how any long-term solution doesn't involve restructuring things.

The third point is not at all a minor point.

Agreed.

From TPM:

Bernanke spelled out the benefits that would accrue when the government can buy these mortgage assets at close to "hold to maturity" prices instead of the fire-sale price.

This is right on the edge of ambiguity. The Federal government should price them at hold-to-maturity prices, but they need to be correctly discounted for the risk, which is pretty high. But Bernanke's right that the actual market prices for these assets is below what they're really worth.

Bernanke just made the point that healthy institutions are contracting credit based on their uncertainty about the value of their assets.

I'm sure that the lack of tier 1 capital -- and the complete nonsense values being assigned to tier 3 capital -- has nothing to do with it. It's all uncertainty! If only banks could be certain, by trading their valuable-but-uncertain 1987 Fleer Mark McGwire cards and incredibly valuable trucker caps for crummy ol' T-Bills!

One thing that came clear in the testimony today is that Paulson/Bernanke are trying to get the bad/toxic securities out of the system, not bail out failing financial institutions.

I'm not so sure about that. What worries me most is when Bernanke specified that assets should be purchased at "hold-to-maturity" prices rather than "fire-sale" prices. Sure, it makes sense to avoid mark-to-market losses triggering solvency crises at all the other banks, but that horse has already left the barn. As it is, this seems like initial excuse-making to justify paying higher-than-market prices for securities in order to recapitalize banks through the assets side of the balance sheet. If they're concerned about the solvency as well as the liquidity of the banks (which they certainly should be), the responsible action would be to buy off the assets at market prices (which would probably provide a respectable return) and then an injection of cash by purchasing shares at a discount to the market price.

They're talking about experimental auction formats that will allow them to determine the right hold-to-maturity prices that will basically provide sufficient but not distressed levels of return on these assets. That sounds like bullshit without some really great details on possible mechanisms.

And Walt beat me to it. Though as someone who's a taxpayer and has little financials exposure at the moment, I really want the fund to pay market prices and get that excessive return.

That sounds like bullshit without some really great details on possible mechanisms.

A lot of the stuff floating around at the moment just sounds like ideologically driven nonsense, with little or no recourse to facts on the ground. A lot of it seems to boil down to the government trying to figure out how to assume the real costs of nationalization without the potential benefits, too, which is insane.

I'm not a professional, but my reading is exactly the same as PMP's - Paulson is signaling that this is simply intended to be a recap of the financial sector with no actual protections for the taxpayer, but he's not willing to just say that up front. The Paulson Slushpile is clearly going to be a buyer of first resort that lets the institutions that have gambled fecklessly -- Bank of America, Citibank, GMAC, I'm looking at you -- off scot free by letting them trade their dogmeat for cash at filet mignon prices.

letting them trade their dogmeat for cash at filet mignon prices.

Just for the record, even though I recognize the dangerous situation we're currently in, I remain opposed to industrialized farming of dogs. If it comes down to it, catch your own strays, the way God intended.

Just so.

Look at it this way: if we nationalized the banks, we'd own all the craptacular assets and then we'd have to give the banks a shitload of capital to shift the bank balance sheets into the black.

If we don't nationalize the banks, then we buy the craptacular assets with a shitload of a capital to shift the bank balance sheets into the black.

So what's the distinction, eh?

max
['Tis de facto nationalization.']

111

Many of them were conned and it's near impossible to sort out which. Throw the crooked mortgage brokers in jail.

As the saying goes you can't con an honest man. If you say on a mortgage application that your income was $160000 and it was actually $37000 (or $140000 for that matter) that is fraud and it is not hard to prove. Although it is rarely prosecuted.

I don't get the sympathy for the mortgage defaulters. Most were reckless or worse and many won't really lose anything. If you don't pay anything down, live in a nicer house then you could have rented while paying a teaser rate and then default when the rate resets what have you lost?

If you say on a mortgage application that your income was $160000 and it was actually $37000

Is there any evidence that this sort of thing is common enough to be even a small contributing factor to the overal mess?

I don't get the sympathy

That's a common reaction among robots.

(Though I'm not particularly sympathetic either)

134

And yeah, dsquared doesn't owe us or anyone else financial analysis, and people being cross about the lack thereof are being silly.

I think the real issue is he owes his employers his full attention at the moment.

In places where both are on the market, dogmeat is priced higher than filet mignon.

199

Is there any evidence that this sort of thing is common enough to be even a small contributing factor to the overal mess?

This and numerous other forms of fraud are a big part of the problem. One reason no one wants to buy this stuff is the pervasive fraud. See here for a description of "liar loans".

At least according to the reporter on "This American Life," sometimes the housing broker would misstate (or "falsify") a borrower's income so as to get them into a certain kind of mortage. That is probably straight-out fraud, and provable. Some of the other subprime mortages didn't require people to submit income paperwork----which is just crazy since I had to file 3 years of tax returns just to apply to rent an apartment in Manhattan.

190

This is right on the edge of ambiguity. The Federal government should price them at hold-to-maturity prices, but they need to be correctly discounted for the risk, which is pretty high. But Bernanke's right that the actual market prices for these assets is below what they're really worth.

That's easy to say but why should we believe it.

This and numerous other forms of fraud are a big part of the problem.

Oh, it exists. And certainly there was a fair bit of fraud/misrepresentation on the part of lenders too. I'm not at all convinced it made much difference to the overall problem, though.

This and numerous other forms of fraud are a big part of the problem. One reason no one wants to buy this stuff is the pervasive fraud.

Might I point out that many of the derivatives were based on fraudulent/incompetent value assessments? Or that RE agents, and low-level bank employees were often engaged in fraud themselves?

You could argue for allowing both the banks and the homeowners to go down, but most of the people arguing for 100% responsibility on the part of the homeowners seem to have no problem with saving the banks.

max
['If we save the banks, then we save the homeowners, since they are paying to save the banks.']

but most of the people arguing for 100% responsibility on the part of the homeowners

That position is either ignorant or willfully, and probably ideologically, stupid at this point.

(and probably ideologically driven)

207

Oh, it exists. And certainly there was a fair bit of fraud/misrepresentation on the part of lenders too. I'm not at all convinced it made much difference to the overall problem, though.

I think it did in part because the fraud contributed to the bubble. All the people who should not have gotten loans were bidding up prices.

191-192: it's easy to tee off on Bernanke and say this is a distinction without a difference, etc. But I think there's a real point here, or at least Bernanke's claim deserves closer scrutiny. He's saying the current situation really is different from past bailouts where you could put a line around a bunch of failed institutions and say, these banks have failed, they need to be put into some kind of receivership, we sell off the assets or take the collateral, etc. He seems to feel that the toxic assets have contaminated the entire financial system, in both solvent and insolvent institutions, so deeply that we need to directly attack the problem of neutralizing the assets. (Which he argues can be a government purchase process leading to price discovery so even those institutions that don't sell can price their assets). To make things worse, the assets are so screwed up they don't even understand how to run auctions or price discovery processes for a lot of them, that's why they need so much autonomy.

When you get down to it, then, he's arguing that the entire financial system has failed, not just specific banks. If the assets aren't comprehensively handled, the U.S. credit system as a whole will grind to a halt.

You can say this is a bunch of jive designed to allow the bailout of specific banks that have been irresponsible, but it's worth thinking about. It's kinda scary.

I think it did in part because the fraud contributed to the bubble.

My impression was that this was a small contribution, but I could be wrong, obviously. It's not clear that we'll really know for quite a while (may make some interesting reading in 5 years or so). I'm not using max's inclusion of `fraud' to the internal stuff, so much as incompetence (willful or no)

He seems to feel that the toxic assets have contaminated the entire financial system, ..., so deeply that we need to directly attack the problem of neutralizing the assets.

Yeah, I see this, but unless I'm misreading it also seems that he feels doing this will solve the problem, rather than be a (perhaps much needed) band-aid. Which seems bizarre.

further to 214: It may be that it's just to scary to talk about that part out in the open right now --- that what he's really saying is that we need a huge effort right now just to make an effective band-aid, and then we can get to the real work of fixing the problem.

From what I've seen a lot of the fraud was on the part of middlemen, who encouraged borrowers to leave lines blank or put in fictitious numbers. It started out with two people talking to each other, but there was complicity all the way up the ladder.

As I understand, if I do, there were lots of little gimmicks used to qualify unqualified buyers, and many of them did not require the buyer's knowledge or complicity. Also, contrary to various statements, many of the unqualified buyers were well-off speculators, not poor first-time homebuyers.

And then there were the ways in which the bad loans were diffused into every nook and cranny of international finance all the way to Singapore and Qatar via leveraging.

Things I don't understand.

Why feel sympathy for guys like this .

216: Right, it's not that there weren't a lot of weird things going on, some of which were fraudulent, others probably better described other ways. But as far as I can see`poor people buying houses to live in they really couldn't afford, and intentionally misrepresented their ability to pay' constitutes such a tiny part of the problem it seems at best befuddled to concentrated on them.

My brother worked as a mortgage broker for a couple of months around 2003 or 2004. He related all sorts of appalling tales from his office: brokers falsifying data sent upstream in order to get buyers qualified, then turning around and not giving the buyers the best deal they could find (they had a mechanism by which they could pocket the difference between the best and the taken rates). The whole inspection and appraisal process was a bad charade; inspectors and appraisers who didn't play ball didn't get much repeat business, so houses always valued at or above loan value with only minor repairs necessary.

All this is to say that Shearer's blame the buyer theory is flawed at best.

218: Right. Not-poor people got sketchy mortgages under questionable circumstances to spend more on housing than they could afford, too. I think that this sort of lending and borrowing was a (if not the) major contribution to the bubble.

I have a hard time describing a lot of it as borrowers defrauding banks, though - more like willful ignorance on the part of the bank.

214: right, but the point is no one really knows how to solve the problem short of nationalizing the financial system. So this is at least a big enough band-aid that it might allow the wound to heal.

219

All this is to say that Shearer's blame the buyer theory is flawed at best.

I said fraud was pervasive. It certainly was not limited to buyers but a lot of buyers were involved. As for example the guy the link in 217 is about.

I think that, as Republican appointees, even if Bernanke and Paulson are not working as Republican hacks (which we don't know), they have to realize that they are representing an administration which has no goodwill or credibility left at all and which has so far gamed every possible real or fictitious crisis for maximum partisan advantage.

So part of their job is reassuring non-Republicans that they aren't Republican hacks. And in the context of right now, they have to make very material, explicit up front concessions. They can't say "Trust us". They can't say "It's an emergency, we need to deal with that and leave the other questions for later." Because those things have been done too many times.

Alternatively, they can go the Bush route and put together a solid Republican bloc plus a couple of dozen Blue Dogs. But that probably won't happen because the Republicans don't want their fingerprints on anything.

And because there's a better than even chance that the Democrats will be in a stronger position in 2009, a plan rammed through this year might not be fully supported next year, so the reassuring effect won't be there.

220

I have a hard time describing a lot of it as borrowers defrauding banks, though - more like willful ignorance on the part of the bank.

If you knowingly put materially false information on a loan application isn't that legally fraud?

If this is preaching to the choir I apologize. If I am being redundant I apologize for that, too, but I think this point needs to be made over and over.

The potential for fraud seems to be one of the HUGE blind-spots in the Libertarian philosophy. I think there is great historical evidence which shows that while many individuals are honest the human population, when taken as a whole, is filled with people who are willing to do most anything, including commit fraud, to get money without working for it. It bother me when Libertarians dismiss that trait with a wave of their hands.

And James, I think whom one blames first is a big indicator of overall loyalties and general outlook on life.

I don't understand why, in the case of possible shared blame, some people insist on blaming those with the least power first. Can you explain that to me?

222: I think everyone agress there was fraud on both sides of the lending table. Of course, there will fraud there tomorrow, and next year and 10 years from now. This issue is, how much of the resultant mess is actually due to fraud, and how much from fundamentally flawed approaches to managing, estimating, and distributing risk? After all, many loans were made with apparently no fraud at all and yet defaulted -- at higher rates than allowed for. Are you really claiming this was caused by guys like your 217 (who, by the way, essentially nobody has claimed sympathy for, don't be disengenous) ?

no one really knows how to solve the problem short of nationalizing the financial system

No one knows whether nationalizing the financial system would solve the problem, either.

227 is true.

212: Yeah, I've been thinking about that too.

Part of what may be inspiring all this is that Bernanke and Paulson realize the inadequacy of their proposed fund. Without checking (though I've seen the numbers recently), I believe there are on the order of $10 trillion in various mortgage assets on the banks' books. Even though a decent chunk of that will be clean debt from before the major run-up or the super-terrible bundling of 2005 and later, that still leaves way more assets than the government can reasonably replace. In other words, no matter what, the banks will be left wtih some mortgage-backed securities on their books.

Given that, if Bernanke and Paulson buy up the securities they can at distressed prices, they're going to have to leave a bunch of other banks out to dry as they mark their remaining assets to market at today's super-low prices. So the only possible way for Bernanke and Paulson to try and help the entire banking sector with their vast balance sheets using this (relatively) small amount of money is through buying enough assets across the different categories of mortgage-backed debt at reasonable prices that pretty much every bank can mark their books to a higher market value, and thus avoid the insolvency disaster.

Though I can see why this may appear to be the only hope, it also seems like a rather poor one. This will only actually help the banks if the market mechanism used to suss out the hold-to-maturity values looks legitimate. Otherwise, even if the banks get to mark their books up, no one will be willing to lend them money or invest in their equity since everyone will fear that their remaining mortgage debt values and equity cushion are built on bullshit. And since other market participants wouldn't believe the supposed hold-to-maturity, the next sale of mortgage debt would probably be at fire-sale prices by a panicked bank, thus dragging us straight back into this illiquidity & insolvency quagmire.

So, basically, I can understand where they might be coming from, but if Bernanke and Paulson can't explain ex ante why their chosen auction mechanisms will produce reliable and accurate prices, then I don't think it will work at all. They'd be better off trying to use even more money to recapitalizing banks while buying up the assets that they can.

Required reading for Shearer. Yes, plenty of people were lying, but it was mortgage industry policies that enabled / encouraged it and turned it into an epidemic, which is why it's natural to focus on the mortgage industry as the bad actor.

212 - Even if you accept that as given, why should anyone should believe this administration when Paulson says that doing things with zero oversight or taxpayer protection is the only way to get the bad assets off banks' books? If they want to recap the banks, they should do it honestly. As it is, this is a stealth recap -- paying above-market prices for toxic assets -- that doesn't serve the purpose of any real price discovery.

will produce reliable and accurate prices, then I don't think it will work at all.

Which is why this looks scarily like a `and a pony' situation. `Trust us, it'll be ok' doesn't hold a lot of water from these guys, and if they pull this move and nobody accepts the valuation things are much worse off.

What Paulson is trying to do is restore confidence in the economy, and secondarily in the markets.

That's a pretty optimistic view. I think what Paulson is primarily trying to do is loot the treasury, and secondarily trying to restore confidence in the economy and markets.

If you knowingly put materially false information on a loan application isn't that legally fraud?

And if you, as a mortgage broker, tell the applicant to put false info in, or if you direct an applicant to a loan with worse terms than the ones for which she qualifies, or if you hire a dishonest appraiser in order to facilitate an inflated HELOC....

Look, James, we all know that there were dishonest homebuyers out there. We also know that there were dishonest bankers and mortgage brokers. The question is why bankers should get bailed out but not homebuyers.

Further: a lot of defaults are coming from people with ARMs, and balloon rates, and interest-only, etc. All of these instruments had an inflationary effect on the housing market, without providing long-term material benefit to the buyers. All of these instruments were sold by professionals to novices. I have a very hard time viewing the professionals as the victims here.

One of these professionals was, of course, Greenspan. AFAIC, Greenspan's recommendation of ARMs at a time when he knew that interest rates were headed only up was far more fraudulent - mealfeasance comes to mind, but I don't think it's quite the right term - than a homebuyer rounding up his income on a loan form.

If you knowingly put materially false information on a loan application isn't that legally fraud?

Legally, yes. But the banks deliberately did not verify claimed income that the knew was likely to be misreported, precisely so that they could pocket the money if things worked out and claim that they'd been defrauded if things didn't. It was then and is now complete bullshit.

As the saying goes you can't con an honest man.

And yet the people who get conned are generally considered by the law to be victims, not perpetrators. I think that's the correct approach.

From the point of view of the home buyers, including well-off speculators, there's been so much magical thinking about capitalism and finance, and so much "Follow your dream! Aim for the stars!" sloganeering, and so much self-help and prosperity theology and empowerment optimism, that only nasty people like me are capable of skepticism or negativity any more.

I'm glad everyone's pretending like 229 actually had subject-verb agreement and wasn't missing the occasional vital word. Because if you're not, do so.

Datapoint: Cleveland has been ravaged by foreclosure (among the worst in the country), while the Pittsburgh market has hardly been affected at all. Why should this be? Are Pittsburgh homebuyers more virtuous than those of Cleveland - less likely to hoodwink James' poor, defenseless banks? It pains me to say it, but I don't believe that we can blame the poor moral fiber of Ohioans for this one. We certainly know that neither city has seen economic or population growth that would lead towards significantly different housing markets. So what's left? Just this: banks and homebuyers in SW PA were more financially conservative. ARMs, interest-only, and the rest never became common here (this is documented). And, in the absence of profligate lending practices, lying, no-good homebuyers never had the opportunity to fuck up the market.

Simple as that.

James, the more interesting thing here to me is why you are insisting on focusing on home buyers. Out of all the bad actors involved, they seem if anything the least culpable. Even if you don't buy that (fair enough), it's simply laughable to pretend any sort of objective look at it (based on, of necessity, poor information at the moment, accepted) would leave them as the overwhelming cause, in proportion to your focus. So I'm really quite curious why you return to them this way.

Here is a short summary. Loans that are fraudulently obtained are not discharged in bankruptcy. If a bank can get a borrower to lie to them in the process of the loan application, the bank ends up in an advantageous position, whether or not they actually believed the lie.

All of these instruments were sold by professionals to novices.

This is the key. And the real system-threatening fraud took place when those professionals turned around and lied about the quality of those crappy mortgages so that they could securitize them.

225

And James, I think whom one blames first is a big indicator of overall loyalties and general outlook on life.

I am not blaming the reckless and worse borrowers first, many are pretty close to last among the people at fault. But that doesn't make them victims.

I don't understand why, in the case of possible shared blame, some people insist on blaming those with the least power first. Can you explain that to me?

People form opinions in accordance with an overall view of the world. So if you have a pre-exisiting animus towards a group you will tend to blame it for things whenever at all plausible. Powerless groups are often unpopular.

If nationalizing the financial system wouldn't solve the problem, then nothing will.

The way the mortgage debt got spread out throughout the banking system is that through various activities they were able to make the debt to appear as very low risk. Banks hold low-risk debt as collateral. Among debt eligible to be held as collateral, mortgage debt had the highest return, so everybody wanted it.

James, the more interesting thing here to me is why you are insisting on focusing on home buyers.

Just doing his part to insure that shit continues to roll downhill.

Paulson lies today about what he said yesterday. Per my 223, he's in a very hard place.

Tripp: I don't understand why, in the case of possible shared blame, some people insist on blaming those with the least power first. Can you explain that to me?

Shearer: People form opinions in accordance with an overall view of the world. So if you have a pre-exisiting animus towards a group you will tend to blame it for things whenever at all plausible. Powerless groups are often unpopular.

James, Tripp wasn't asking a theoretical question about people in general. He was asking about you specifically.

In this case, your customary cold-blooded hyper-rationality seems to have been overridden by your conservative tendency to blame individuals, specifically low-status individuals.

People form opinions in accordance with an overall view of the world. So if you have a pre-exisiting animus towards a group you will tend to blame it for things whenever at all plausible. Powerless groups are often unpopular.

That makes sense. Why do you have a pre-existing animus towards people of limited financial means?

Because they can't fight back? Is there something in your personal life that explains it? Or is it something else altogether?

I am not blaming the reckless and worse borrowers first, many are pretty close to last among the people at fault.

And how about all the people who behaved exactly as the best advice they could get told them they should? Fwiw, I'm guessing these vastly outnumber the `reckless & and worse'.

If nationalizing the financial system wouldn't solve the problem, then nothing will.

The latter isn't completely implausible.

Can I just say how bizarre it is to see Krugman quoting a fat young Englishman who's called more people cunts than you've had hot meals? (And he's right, too: that post is why God made Blogger.)

Look, the reason that this has ratcheted up past bad home loans is that too many of these instruments bought insurance instead of doing due diligence. Then more insurance was bought in the form of default swaps. That counterparty risk was the reason for the AIG bailout. Remember insurance is a sharing of risk, but when the hurricane comes, everybody is wiped out.

226

... This issue is, how much of the resultant mess is actually due to fraud, and how much from fundamentally flawed approaches to managing, estimating, and distributing risk? ...

You can't separate things like this as part of managing and estimating risk is evaluating and managing fraud risk which obviously was not done adequately.

... (who, by the way, essentially nobody has claimed sympathy for, don't be disengenous) ?

There has been talk of tearing up mortgages and other seemingly indiscriminate sympathy for defaulting borrowers.

....Krugman quoting a fat young Englishman Brit who's called more people cunts than you've had hot meals?

Oh man, the Welsh Mafia is going to have a field day now. Sorry, Cymrulanders!

249: I just saw this!

Ya gotta watch that indiscriminate sympathy, getcha in real trouble sometime.

It is very natural to feel contempt for the weak, just as it is natural to admire the powerful. You want to shun those who you think would bring you down and be near those who you think would bring you up.

Haidt, I gather would actually attribute this to the purity instinct, which in part involved shunning sick members of the tribe to avoid contagion. I'm actually tempted to classify admiration/contempt as its own moral instinct. My ethics text does this. OTOH, the author and I are just philosophers working with personal intuition.

A young relative of mine got a house with a subprime loan. Everyone in the family told her not to; she had an OK job but her boyfriend, whose commitment was weak anyway, didn't. She ended up losing the house, which was unfinished anyway because the builder went bankrupt before she did.

I have no idea whether she herself swore to false information or not. Certainly there was collusion all the way up the chain, though, probably including the builder.

The middleman recruited his suckers through a church.

230

... Yes, plenty of people were lying, but it was mortgage industry policies that enabled / encouraged it and turned it into an epidemic, which is why it's natural to focus on the mortgage industry as the bad actor.

Actually I sort of agree with this, likely there will always be people who are willing to borrow money and not pay it back if anyone is dumb enough to lend it to them. So you need to take measures to prevent people from lending to them especially on a large scale. As unfortunately the resulting losses are not confined to the dumb lenders.

Rob, I'd include it under "respect" (or is it "hierarchy"). Most societies are in some way anti-egalitarian.

The purity thing might apply to blameless people with bad luck, who might seem to be tainted by some curse or inborn defect.

There has been talk of tearing up mortgages and other seemingly indiscriminate sympathy for defaulting borrowers.

Only in the face of indiscriminate sympathy for screwup lenders. The only thing remotely close to what you've described that I've seen has been in the context of `If you're bailing out all the guys who fucked up at bank X, why aren't you talking about bailing out Y?'. And even then with the caveat that trying to identify and sort out the source of actual fraud is probably more expensive than it's worth to pursue. I'm pretty sure that precisely nobody has said `let's identify the fraudlent buyers and give them a pass'.

You can't separate things like this as part of...

Of course you can't completely separate this. However, it's inane to assume a-priori that a) the effect of fraudulent applications originating from the buyers were poorly estimated and b) this was a major contributing factor. That's a terribly inept set of assumptions to begin with, and not well supported once you look at the details, either.

There's lots of blame to go around, James, but all the information I've seen suggests that most of the blame does not belong where you are suggesting. So why are you harping on it? Look to the guys tranching up big steaming piles of crap and selling them as shortcake. The existence of a few two-bit hustlers like you've pointed to in 217 is as nothing in the face of standard bloody practice of these weasels in nice suits.

There has been talk of tearing up mortgages and other seemingly indiscriminate sympathy for defaulting borrowers.

Tearing up mortgages is not being suggested out of sympathy for defaulting borrowers, any more than Chapter 11 exists out of sympathy for debtors. It's to resolve collective action problems between creditors.

actually 261 is a good point I should have mad in 260 --- none of this has anything really to do with sympathy, per se.

259: That makes sense. I had been thinking of the authority instinct as separate from philosophical ideas about nobility, e.g. in Confucius, which is how I'd been thinking about admiration.

My best guess is that my young relative's error was the kind of magical thinking I described in 237, rather than fraud. Even the middleman might have been unaware of what he was doing. Somewhere up the line, probably the next step, responsible people who knew what was happening let the loan pass, and apparently the fraud was repeated all the way up the food chain, the way mercury is concentrated in carnivores that eat carnivores that eat carnivores. And lo! Civilization as we know it comes to an end, because of sophisticated, brilliant, highly skilled professionals who know things that we don't!

The middleman recruited his suckers through a church

Churches were extremely fertile ground for those guys. Any personal recommendation was exploited. The incentives were perversely wrongheaded, all the way up the chain. I submit that any commission structure needs to be capped.

I'm sure that there's also a lot of self-selection of people who engage in financial magical thinking into these sorts of sales positions. Why lie when you can find people who believe the line they're selling?

Mr. Squared just got name checked by Krugman. One day of shutting the fuck up and now he's some kind of celebrity.

Look to the guys tranching up big steaming piles of crap and selling them as shortcake.

You've got to admit it, though: that was a neat trick while it lasted.

266: This generalized for salespeople in all fields.

263: Rob, I think that Haidt's ideas are very useful for looking at traditional societies and traditional ethics, Confucianism being one case.

I think that the real oomph of Haidt comes when you look at modernity. Modernity reduces the importance of purity especially, and hierarchy/respect and solidarity/loyalty to a degree, producing an individualistic, utilitarian harm/fairness ethic. Libertarians and country-club Republicans differ from liberals only in interpreting fairness differently.

New Deal liberals affirm neighborhood and class solidarity (and sometimes purity) more than neoliberals do -- much less libertarians. Nationalist conservatives affirm national solidarity and to a degree, neighborhood solidarity. "Social conservativism" is about community solidarity and purity, as is racism.

Churches were extremely fertile ground for those guys

When your audience is predisposed to believe in people rising from the dead and walking on water, it's a small leap to believing in free money.

234

And if you, as a mortgage broker, tell the applicant to put false info in,

Fraud.

or if you direct an applicant to a loan with worse terms than the ones for which she qualifies, .

Andrew Cuomo as Clinton's HUD secretary made this legal (with no disclosure requirement). See the Village Voice article I linked in an earlier thread.

or if you hire a dishonest appraiser in order to facilitate an inflated HELOC....

This is borderline and almost impossible to prove.

At this point what I'm trying to do is figure out Bernanke's thought process before criticizing it. Unless you think it's all a giant conspiracy thing -- which I could maybe buy with Paulson, but not Bernanke -- there must be some story he is telling himself where this thing makes sense. What is it?

One thing is that Bernanke's close study of the Depression makes him very sensitive to the ways panic-driven credit market lockup can destroy real asset values. Last week, there was a brief period where banks basically refused to lend to each other at anything but loanshark rates. You wouldn't need much of that before the economy started to tank in the most dramatic way since the Depression. So saying this is a "band-aid" is not the issue so much, if you can put a band-aid on until the panic goes away you've averted the crisis.

Also, 229 is a fantastic comment. Thinking about all of this as creating a baseline for mark-to-market and maybe it starts to make sense? Except, is there any guarantee that people will see the government auction price as establishing a "real" price that they can count on?

Salesmen are usually optimistic, fully committed to life as it is, and conservative (with some exceptions for people who sell products bought mostly by liberals, I suppose.) You really have to believe in what you're doing.

All my life I've looked for put-in-your-time-and-go-home jobs. My goal has been to be overqualified, appreciated, and unbothered. Increasingly starting in the late 1980s (I think) employers have wanted dedication and enthusiasm, and I can't either fake or feel that. Whole-person jobs, whereas I want a specified-duties job. Japanese management. Hate it.

And come to think of it, small businessmen selling a product to liberals sometimes turn out to be extremely conservative.

Except, is there any guarantee that people will see the government auction price as establishing a "real" price that they can count on?

"People" isn't the issue here, I think - it's establishing a spurious value for the toxic assets that nobody believes which nonetheless will permit banks to avoid writedowns against their regulatory capital.

236

And yet the people who get conned are generally considered by the law to be victims, not perpetrators. I think that's the correct approach.

So who are the victims here? The people who borrowed money and didn't pay it back or the people who lent money and weren't repaid?

All my life I've looked for put-in-your-time-and-go-home jobs

JE builds a Cadillac, One Piece at a Time
http://www.elyrics.net/read/j/johnny-cash-lyrics/one-piece-at-a-time-lyrics.html

there's been so much magical thinking about capitalism and finance, and so much "Follow your dream! Aim for the stars!" sloganeering, and so much self-help and prosperity theology and empowerment optimism, that only nasty people like me are capable of skepticism or negativity any more.

So true. Basically, this principle is the core of the pop American belief system. Can't get much more childish.

So saying this is a "band-aid" is not the issue so much, if you can put a band-aid on until the panic goes away you've averted the crisis.

Band-aids are fine to stop the bleeding. The point was, if you believe that's the only thing wrong, from here it looks like you're engaging in magical thinking. So it's fine to say we've got to avert the crisis, and this is how I think we should do it, but you've got to follow that up (sometime, anyway) and here's how to fix the fundamental problem that gave us this crisis in the first place. It's perfectly sensible to want to deal with a crisis first.

In the case of Paulson and Bernanke, I'm not exactly thinking of fraud on their part, but more of knee-jerk Republicanism. I doubt that either of them understands how totally discredited the Bush administration is, or that they personally are thought of as agents of Bush. But they are, and rightly so. Someone needs to give them the word.

One of the horrors of economics is that it enables bloody-minded ideologues to think of themselves as pure scientists and above-the-battle professionals. This is what neo-Marxists call The Imaginary, I think, something a bit more fundamental than the Christian imaginary or the self-help imaginary.

So who are the victims here? The people who borrowed money and didn't pay it back or the people who lent money and weren't repaid?

The people who bought houses at wildly inflated prices but are going to repay their loans. The people who unknowingly lent money to fund this whole charade. The people who are going to have to pay for it all in the end.

240

James, the more interesting thing here to me is why you are insisting on focusing on home buyers. Out of all the bad actors involved, they seem if anything the least culpable. Even if you don't buy that (fair enough), it's simply laughable to pretend any sort of objective look at it (based on, of necessity, poor information at the moment, accepted) would leave them as the overwhelming cause, in proportion to your focus. So I'm really quite curious why you return to them this way.

Because there doesn't seem to be any dispute here that the other parties are blameworthy.

Because there doesn't seem to be any dispute here that the other parties are blameworthy.

But is there really dispute that there were occasions of fraudulent behaviour on the part of buyers? I don't think so. They exists, it just doesn't seem to be very important. So I'm curious because of your focus on the unimportant aspect (as I see it).

I think that the stopgap metaphor is better than the bandaid metaphor. If there's a crack in the dam, first you want to stabilize it and keep it from enlarging. After that you deal with the longterm problem.

The people who bought houses at wildly inflated prices but are going to repay their loans

Same guys who pay their taxes. Double whammy.

241

Here is a short summary. Loans that are fraudulently obtained are not discharged in bankruptcy. If a bank can get a borrower to lie to them in the process of the loan application, the bank ends up in an advantageous position, whether or not they actually believed the lie.

Only if you ignore the fact that the loan is more likely to default. I think banks would be best advised to prefer honest borrowers.

James, another way to look at this was: "Why did this happen?" Was it because suddenly a large number of people started filing fraudulent applications? Or was it because a lot of brokers and middlemen started soliciting fraudulent applications, without necessarily explaining that they were fraudulent, and when they passed these applications up the line everyone at every level passed them on through?

I don't think that it was because there was an unexpected flood of people coming in the door willing to lie. The brokers and middlemen were soliciting vigorously. Everyone was getting their spam and robocalls.

I think banks would be best advised to prefer honest borrowers.

And borrowers best advised to prefer honest bankers. But these are no new information to anyone.

I think banks would be best advised to prefer honest borrowers.

Or they could do what bankers have always done, "trust but verify." Don't take the borrowers word for things, make them send you pay stubs, pull a credit report, and get their tax returns from the IRS.

The point was, if you believe that's the only thing wrong, from here it looks like you're engaging in magical thinking. So it's fine to say we've got to avert the crisis, and this is how I think we should do it, but you've got to follow that up (sometime, anyway) and here's how to fix the fundamental problem that gave us this crisis in the first place.

In fairness, they all say exactly this in testimony. They all say that the fundamental problem is inadequate / outdated regulation, so the $700 billion is a stopgap to prevent current panic, then this will give us time to overhaul regulation, etc.

When your audience is predisposed to believe in people rising from the dead and walking on water, it's a small leap to believing in free money.

The word you are looking for is "gullible." The term for that group of people is authoritarian follower. The same people targeted by the GOP.

And James, you sure are doing a lot of squirming to get out of answering the question of why you blame the gullible and powerless people first. I'm starting to think you are exhibiting the authoritarian characteristic of parroting memorized slogans and talking points instead of following a chain of reasoning.

Are you aware that you are doing this? Authoritarian followers are very unaware of their own personal characteristics.

The brokers and middlemen were soliciting vigorously.

Soliciting people who had never been able to buy a house before. Seriously, the sad thing is that some very good products that helped people have been so thoroughly discredited that many of those people will never be able to buy homes again. Now, home ownership may not be as cool as receiving total consciousness on your deathbed, but it is often part of a virtuous circle of improved neighborhoods and schools, civic pride, magical thinking and Tony Robbins.

In fairness, they all say exactly this in testimony.

Ok, I'll believe there is more of this than I've read --- in a futile attempt to get actual work done, I've been neglecting to stay on top of this.

Since the Republicans are gaming this, as per usual, there doesn't seem to be much chance of a bipartisan solution. The Democrats need to decide what their solution would be, and then deliver it in ultimatum form to Paulson and Bernanke. (This will be a life-changing event for them.) Paulson and Benanke then have to twist Bush's arm.

And a pony.

In fairness, they all say exactly this in testimony. They all say that the fundamental problem is inadequate / outdated regulation, so the $700 billion is a stopgap to prevent current panic, then this will give us time to overhaul regulation, etc.

This sounds very much like "This is the last time, I promise. Stake me this last time and as soon as I get back to even I promise to give up gambling. I know I've promised before but this time I really mean it. Really."

I want a rainbow pony. With sparkles.

The Democrats need to decide what their solution would be

It would be a grave mistake to take the heads-on-pikes solution off the table pre-emptively.

The Democrats need to decide what their solution would be

Dodd may be an imperfect vessel for this action, given how he is a special friend of Angelo, but I think he has the best shot.

247

That makes sense. Why do you have a pre-existing animus towards people of limited financial means?

Because they can't fight back? Is there something in your personal life that explains it? Or is it something else altogether?

Personally I am very conservative financially and so naturally unsympathetic to people who get in trouble through reckless borrowing. Same as if they got in trouble via drugs or alcohol.

We are all imperfect vessels, TLL.

They all say that the fundamental problem is inadequate / outdated regulation, so the $700 billion is a stopgap to prevent current panic, then this will give us time to overhaul regulation, etc.

Sure, but that makes no sense. Someone paid $400k for a house three years ago, that under a sane lending regime is only going to be worth $200k. So there's $200k of debt out there that is not going to be paid back. Right now, this is bad for everyone holding debt (i.e. with savings), because they don't know if they're the one holding the bag. Identifying the bagholder dosen't render them any less fucked, nor does it help people who have gotten used to spending money that they don't have but are now cut off from.

My hog yard is ringed with nicely sharpened fenceposts.

Soliciting people who had never been able to buy a house before. Seriously, the sad thing is that some very good products that helped people have been so thoroughly discredited that many of those people will never be able to buy homes again.

I doubt this. If a product is really that good, it'll come back eventually, and probably sooner rather than later. Which ones did you have in mind?

Shearer is a conventionally nasty Republican. His reasons are the same as the others' reasons.

home ownership ... is often part of a virtuous circle of improved neighborhoods and schools

The thing that especially gets me is that some iportion of those homes that were enabled by the cheap credit are pure liabilities. The ones in floodplains or in towns distant from jobs, or in the deserts outside L.A. Not only could people not genuinely afford to purchase them, but the physical structures themselves impose societal costs (if we attempt to protect them, or preserve them until population growth catches up). The increased increment in house size is a problem too, if it has to be heated and cooled and maintained.

303: Not during the ten-year recession.

So if you have a pre-exisiting animus towards a group you will tend to blame it for things whenever at all plausible.

True enough. I guess this explains why I tend to blame the owners of custom-built yachts.

We are all imperfect vessels, TLL.

Perhaps the Magic Negro will restore the magical thinking that is necessary for growth to go on forever, in ever expanding abundance. Boy, no wonder the Armageddonists are gaining followers.

We are all imperfect vessels, TLL.

Not me.

Oddly, the Armageddonists and the Prosperity Christians are often the same people.

A certain tranche of American Christians would be loathsome and evil even without the social conservativism. For some reason they have been allowed to represent all Christians, probably because they're more fervent. Armageddonism is rejected by every major denomination, as far as I know, including some of the fundamentalist denominations.

Which ones did you have in mind?

Piggyback seconds, for one. Allows for people who have demonstrated the ability to make the payments to buy a house for no money down. Saving the down payment can be a bitch. Skin in the game is the new watchword.

273: In a truly frightening development, I actually saw a very good comment on the consequences of an equity plan combined with higher asset prices at Matt Yglesias's place! I never thought anything good would come from that comment section, and figured my continued insistance on reading it was just bloody-minded masochism to hurt myself for avoiding work.

Anyway, it's a good point about why punitive measures disproportionately hurt any plan that insists on paying above-market prices for the assets. Though the comment misses that banks which do the asset trade-in and take their punishment will be trusted far more than those who merely mark up the same assets they always held.

This really does all convince me that the only way to really get the banks to do the asset trade that will encourage private interbank lending while getting a fair shake for US taxpayers would be to buy the assets at market prices, but also buy equity in the bank to recapitalize it after purchasing its assets. It'll be (potentially way) more expensive, but I'm pretty sure it would work and be the most likely plan to more-or-less pay for itself. It would also provide the government with most of the potential rewards of nationalization only without actually setting the precedent of nationalizing an entire industry.

So who are the victims here? The people who borrowed money and didn't pay it back or the people who lent money and weren't repaid?

James, I'm seeing your problem. The people who loaned the money did get repaid - by the people who bought the securitized loans from them. The lenders were scamming both ends - convincing people to take loans they couldn't afford, and convincing other institutions that they hadn't done this. That's where the relevant fraud is.

There are many scams that take this form - and like I said, the law is clear on who the victims and perps are. Yes, con victims are often guilty of some misdeed, but if they ever get prosecuted, I haven't heard of it.

And sure, you have the occasional home buyer who conned the con artists, but the systemic problem wasn't caused by homebuyers, it was caused by lenders.

Armageddonism is rejected by every major denomination

So they say. And Skull and Bones is just a group of preppy Elis, engaging in hijinx.

273

Also, 229 is a fantastic comment. Thinking about all of this as creating a baseline for mark-to-market and maybe it starts to make sense? Except, is there any guarantee that people will see the government auction price as establishing a "real" price that they can count on?

No, because one of the problems with this stuff is that it is very volatile. So even if you know what it was worth yesterday, who knows what it is worth today.

I am in favor of all results-neutral punishment. That is to say, unless punishment clearly would do more harm than good, it should be inflicted. Punishment is a good thing in itself, whether or not it accomplishes anything else (such as deterrence, rehabilitation, etc.).

I'm a conservative in this single case.

Piggyback seconds, for one. Allows for people who have demonstrated the ability to make the payments to buy a house for no money down. Saving the down payment can be a bitch. Skin in the game is the new watchword.

Are they actually discredited? Or is it just a matter of declining house prices meaning that 100% LTV quickly becomes 110% LTV, so piggyback seconds are effectively unsecured with the interest rate that entails?

Punishment is a good thing in itself

And yet you chased off The English Courtesan.

283

But is there really dispute that there were occasions of fraudulent behaviour on the part of buyers? I don't think so. They exists, it just doesn't seem to be very important. So I'm curious because of your focus on the unimportant aspect (as I see it).

My guess would be over half of foreclosures involve fraud on the buyer's part. Is that important or not?

No, I actually just said that on the internet no one knows that you're a dog. Wrongly, I think, because that episode began when someone linked to her actually-existing promo site.

declining house prices meaning that 100% LTV quickly becomes 110% LTV

Plus cost of sale. One unexpected result will be the elimination of commissions for real estate brokers, substituted by a flat fee. Banks already are doing that for REO sales.

James, do you realize that you simply ignore points you have no answer to? That's very defective rationality.

My guess is that your guess is wrong. Various people above have spelled that out.

My guess would be over half of foreclosures involve fraud on the buyer's part. Is that important or not?

It depends on the fraud. I say that no bank had any business relying on a borrower's stated income to make a loan. Occupancy fraud (claiming to occupy investment porperty) is a bit harder to detect, but also has much less effect on things.

287

James, another way to look at this was: "Why did this happen?" ...

Suppose there is an electrical blackout accompanied by looting. What caused the looting? Obviously in one sense the electrical blackout, in another sense the presence of a large number of people willing to loot if the opportunity presents itself. Or see 258.

Are victims of the Nigerian scam and its variants virtuous people? Are they sometimes people who are willing to engage in criminal conspiracy?

It doesn't matter. The law rightly recognizes that such people are victims of scam artists, regardless of the personal flaw that the scam artist successfully exploits.

James, the outright fraud like fraudulent income is more like 10% of the foreclosures so far. Sorry, no cite. Many of the loans were written as primary or secondary homes, when in fact they were spec. That is harder to prove, and will never be prosecuted.

318: No no, he was one of the few people who were (weirdly) nice to her.

291

And James, you sure are doing a lot of squirming to get out of answering the question of why you blame the gullible and powerless people first. I'm starting to think you are exhibiting the authoritarian characteristic of parroting memorized slogans and talking points instead of following a chain of reasoning.

As I said in 243 I don't blame them first.

324 - Your analogy betrays your bias. In your world, bankers who commit fraud are simply part of the natural order - like a blackout.

It is very natural to feel contempt for the weak

Rereading the Iliad again. Obviously, lots of pre-modern thinking/ethos in there, but not to hard to compartmentalize that stuff. But I really had trouble with the scene at the end of Book One where all the deathless gods are laughing - at poor Hephaistos, hobbling from chair to chair to serve them their nectar and ambrosia. It just seems so awful somehow, the gods laughing at the cripple.

301

Sure, but that makes no sense. Someone paid $400k for a house three years ago, that under a sane lending regime is only going to be worth $200k. So there's $200k of debt out there that is not going to be paid back.

This does not follow. If that person can afford to pay his mortgage he likely will. Any plan that encourages him not to will make things far worse than they already are.

329 gets it exactly right, and somehow fails to note that, in this case, most of the looting was performed by the blackout. Or by the bankers, anyway.

This is why analogies are banned, you know.

The gods are dicks.

287: Wrong, James. This happened when mortgage brokers started soliciting bad loans. And as someone pointed out above, sometimes the fraud wasn't even by the borrower, but was done in the office. In other cases the broker/solicitor coached the buyer.

If that person can afford to pay his mortgage he likely will.

But he would be foolish to do so, and a corporation in a comparable situation would be considered to be failing its fiduciary duty if it did so. If you have negative equity in your home, there is no earthly reason not to mail in the keys. The negative hit to your credit score is worth a fuckload less than $200k.

My guess would be over half of foreclosures involve fraud on the buyer's part.

Do you have any reasoning (other than personal bias) behind that number? It seems bizarrely high to me. Perhaps if you interpret `fraud' maximally broadly, and also include all cases where the primary fraudulent behaviour was on the part of the lender you might get close to that number. Perhaps.

Occupancy fraud (claiming to occupy investment porperty) is a bit harder to detect, but also has much less effect on things.

I disagree with this. I think that this kind of fraud artificially inflated the buyer pool, which in turn stoked the real estate bubble. Make no mistake, the extra liquidity created by structured finance instruments had to find an outlet, but I think that the smart guys were fooled that these phantom homeowners existed.

The gods are dicks.

So fucking true. I'm looking forward to when Ares gets stabbed and goes running back to Olympos, blubbering.

Is there a negative missing in 337? Surely "smart guys" weren't fooled.

No no, he was one of the few people who were (weirdly) nice to her

Details, details. You try making a cheap spanking joke.

322

James, do you realize that you simply ignore points you have no answer to? That's very defective rationality.

What am I ignoring?

1. That the primary agency in this case was the people who solicited bad loans, which is what I said. That's why we have the problem, not because of a flood of fraudulent individuals borrowers. (Blackouts are not agents. Your response didn't answer the main point.)

2. The report that many applications were altered in the broker's office. The claim that knowledgable brokers coached ignorant borrowers.

326

James, the outright fraud like fraudulent income is more like 10% of the foreclosures so far. Sorry, no cite. Many of the loans were written as primary or secondary homes, when in fact they were spec. That is harder to prove, and will never be prosecuted.

It is still fraud. What fraction were falsely represented as not being spec? And there is also lying about the source of a down payment and misrepresenting the sale price.

I disagree with this. I think that this kind of fraud artificially inflated the buyer pool, which in turn stoked the real estate bubble. Make no mistake, the extra liquidity created by structured finance instruments had to find an outlet, but I think that the smart guys were fooled that these phantom homeowners existed.

But you can always get loans for investment property. You just have to pay a bit higher interest rate and undergo a bit more strict of an underwriting process. It's the nonexistence of the underwriting process that was the problem.

This does not follow. If that person can afford to pay his mortgage he likely will.

Right. But he generally can't. His loan probably has low initial payments that he can sort of afford but don't service the debt, and in a couple of years the payments increase to something that does service the debt but that he has no chance of being able to pay. Or he lost his job as a mortgage broker, so the income he used to get the loan has gone away.

339. Surely "smart guys" weren't fooled

I think they were. I don't think the boys at the trading desk at Lehman meant for this to happen. As Monsieur Jean-Baptiste Colbert reminds us, the idea while plucking the goose is to get the maximum amount of feathers with a minimum of hissing. They have killed the goose.

Does 345 mean that you think that the loan originators really are the worst actors here*? In that they passed along loans that they knew to be crap (through a combination of foolishness, collusion, and fraud) to the CDOs, but the CDO folks had no clue how much crap was in those loans?

I guess what I don't understand about that theory is that it became obvious awhile ago that the loans were largely crap, yet it seemed to take forever for the CDOs to collapse. Maybe that's just the friction in the system, but it seems to me that, if you (as a trader) genuinely believed that a stack of mortgages originated in 2005 were as sound as a stack from 1999, then found out they were crap, you would freak out right quick.

* Not an effort to point fingers, just a way to understand the dynamics

I still support troll-rating Shearer, BTW. He takes over threads in an unamusing way. We're mostly arguing against him because we find him annoying. No one here actually denies that there was borrower fraud, and it isn't even clear that he overestimates its importance by a lot. It's pretty clear that many of his attitudes are nasty, but that's not something that can be argued about.

I say, start a new blog for everyone who wants to argue with Shearer, and link to it!

Holy shit, did you see the pic over at Eschaton?

I want a rainbow pony. With sparkles.
not a rainbow pony, but
the best!
a little bit on topic too

341/346: Ok, let's simplify this, the cartoon version as I see it is roughtly this. A hyperactive financial system looking for more magic growth ponies gave personal-level incentives to push risky lending behavior within the financial sector. This cashflow in turn aimed money at developers to push out into lower value properties, and direct lenders to fuel the building with (particularly sub-prime) loans, while the financial whiz kids mistakenly convinced each other that if they just piled the stuff up big enough they were smart enough to manage the risk.

End result: a) Lots of crappy houses were built, many in places they shouldn't ever have been (advantage, housing starts & GDP). b) Lots of people who were not traditionally home-buying material were told by politicians, bankers, financial advisers etc. that the only real American thing to do was buy a house, under whatever terms they could get one. They took the advice from professionals (advantage, lenders & GDP short-term). c) Lots of crappy little outfits had lots of financial incentive for individuals to push as many of these loans out the door as fast as they could (and flip them the next day, of course, cause they couldn't afford to carry any of it). If people cut corners, encouraged their buyers to lie a bit, or even lied for them --- well, who cared? Everyone was making too much money to worry about that, right? (advantage: banks & GDP short term). d) back in the big leagues, the incentives ran to creating ever bigger piles of this stuff, wrapped up in the sexiest of hip new acronyms, all tranched into respectablility. The high flying finance boys were looking good and making a bundle. (advantage financial markets, turns out short term)

until everything fell apart, of course.

Now, explain to me exactly how the poor schmuck who got played into buying a $80,000 property for $250000 in the middle of a half-assed subdivision in the desert that shouldn't have been built in the first place are the ones we ought to be mad at?

They got played James. Even if they fudged the numbers a bit (and they had help in this) , they aren't the problem.

Anyone more cluefull about this all than I willing to fix what I've got wrong?

I suspect that the CDO guys thought they knew how much crap was in the loans, possibly because they were applying a fudge factor to what the originators were giving them. Of course, I also suspect that the originators thought that the CDO guys knew what was in the loans, too. After all, the CDO guys were some sharp Manhattan bankers, right?

348 - That is freakin' awesome.

Let us not forget the ratings agencies among our villains.

The further you get up the ladder from the lender, the more willing I am to ascribe the problems to stupidity rather than fraud. Purely ex recto, I'd guess that AIG is more victim than perp.

351: Well yeah, that's sort of the point. Everybody knew there was crap there, the question was how much. And lots of `smart people' said, "trust us, we've got it sorted out". People believed them. Other people believed they had figured it all out. They were all (somewhat unsurprisingly) wrong. Everybody added their fudge factors, but that didn't, int the end, cover enough asses.

353: I should have added that to the cartoon. I meant to, but it got lost in the typing somewhere: "respected agencies blessed the big piles so everyone knew it was going to work out ok"

Now, explain to me exactly how the poor schmuck who got played into buying a $80,000 property for $250000 in the middle of a half-assed subdivision in the desert that shouldn't have been built in the first place are the ones we ought to be mad at?

Most of us were in no position to contribute to the housing bubble by misrepresenting the value of a bunch of loans. A lot of us were in a position to contribute to the housing bubble by getting some questionable stated-income option-ARM refinance deal. I could have bought a house with some hairball loan, but instead I waited until I had a big enough down payment to get a mortgage I could afford on my salary. The fact that someone in my situation took the irresponsible route and now I have to bail them out is annoying in a more personal way than some dipshit banker in New York perpetrating some fraud on some other dipshit banker.

the poor schmuck who got played into buying a $80,000 property for $250000 in the middle of a half-assed subdivision in the desert that shouldn't have been built in the first place

Especially since he was a drywall hanger and his wife was an originations clerk for a mortgage broker, pulling in $60K each. Now they have to return the ski boat and the SUV.

342

That the primary agency in this case was the people who solicited bad loans, which is what I said. That's why we have the problem, not because of a flood of fraudulent individuals borrowers. (Blackouts are not agents. Your response didn't answer the main point.)

The primary problem was the bankers and others who recklessly invested the money entrusted with them and the politicians and regulators who failed to supervise them adequately. Blame Andrew Cuomo for allowing mortgage brokers to legally accept kickbacks from banks without disclosing them before you blame the brokers. If everybody was honest we wouldn't need police but unfortunately they aren't and we do and in this case the police failed in their duty. But that doesn't completely excuse the people who took advantage whether brokers or borrowers.

The report that many applications were altered in the broker's office. The claim that knowledgable brokers coached ignorant borrowers.

I doubt that a significant fraction of applications were altered after they were signed (or had signatures forged). I expect brokers did advise borrowers in ways that encouraged fraud. Brokers also sold ignorant borrowers unsuitable products.

The further you get up the ladder from the lender, the more willing I am to ascribe the problems to stupidity rather than fraud.

= "The smarter someone is, and the more authority they have, the more stupid they are."

356: Ok, so I'll put to you the same question I put to James (but he didn't answer). Do you believe this is actually the common case? I mean, I'm sure some people were irresponsible, and others even fraudulent. Mostly though, it seems to me people did what they were advised to by people who did this for a living. If you've got evidence that the primary factor is a bunch of people knowingly rolling the dice one way or another, I'd love to see it. The foreclosure info I've got, anectdotal or otherwise,doesn't support your position --- but it's hardly complete. So I'm interested.

"you're position" s/b "that position"

The fact that someone in my situation took the irresponsible route and now I have to bail them out is annoying in a more personal way than some dipshit banker in New York perpetrating some fraud on some other dipshit banker.

Personalization is pretty much the Republican Party's core strategy. Blame some guy who you might have met or might have seen, that no good bum down the block.

Blame some guy who you might have met or might have seen, that no good bum down the block.

Add to that statement that he got one of those loans reserved for minorities, and you've got a winner, JE.

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I believe this is an example of what labor historians call "collective bargaining by riot."

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I doubt that a significant fraction of applications were altered after they were signed (or had signatures forged).

Others disagree, including people who've seen it. I've also heard of people being told to leave lines blank.

In any case, the disagreement is rather small, and we've gotten sucked into James's trap. there are many, many much, much more interesting things to talk about. I blame myself. And you guys. And society.

364. Was McManus identified as an outside agitator?

335

But he would be foolish to do so, and a corporation in a comparable situation would be considered to be failing its fiduciary duty if it did so. If you have negative equity in your home, there is no earthly reason not to mail in the keys. The negative hit to your credit score is worth a fuckload less than $200k.

This isn't exactly correct. Many commercial real estate loans are explicitly non-recourse in which case it is understood that the borrowerer can and will walk away if the loan gets too far underwater. Most home loans are not so you are legally obligated to pay if you can. It is true that you can often get away with not paying just as you can often get away with cheating on your taxes but in both cases encouraging people to ignore their legal obligations is socially destructive.

James is hardline on debtors. This has come up before.

Blame Andrew Cuomo for allowing mortgage brokers to legally accept kickbacks from banks without disclosing them

Called yield spread. I never understood how this was legal. There was a certain amount of wholesale/ retail price differential, and in principle it should work. But only if all parties are fully informed.

350

Now, explain to me exactly how the poor schmuck who got played into buying a $80,000 property for $250000 in the middle of a half-assed subdivision in the desert that shouldn't have been built in the first place are the ones we ought to be mad at?

I am not especially mad at him but I don't see why he should end up with the house if someone else is willing and able to pay more for it.

If you have negative equity in your home, there is no earthly reason not to mail in the keys.

Sure there is. You might like the neighborhood, schools, etc. People go underwater all the time without triggering default, and if you stay in that house long enough the value may come back. Now, if you have negative equity and can no longer make the payments for whatever reason, jingle mail makes more sense.

360: It depends on what you mean by "knowingly". I think that it's obvious that house prices can't continue to go up by 15% a year forever, and any plan that assumes that they will is doomed to failure. I also think that it's completely ludicrous for someone to loan me hundreds of thousands of dollars without making an effort to ensure that I can pay it back. I think that these sorts of transactions are rolling the dice, no matter what the nice mortgage broker tells me.

344

Right. But he generally can't. His loan probably has low initial payments that he can sort of afford but don't service the debt, and in a couple of years the payments increase to something that does service the debt but that he has no chance of being able to pay. Or he lost his job as a mortgage broker, so the income he used to get the loan has gone away.

That's in the subprime pool. There are also a lot prime loans underwater at this point. These people largely can afford to pay (which is why they were prime loans) and if they start defaulting in large numbers things will get much worse.

There are many many much much more interesting things to talk about.

360

Ok, so I'll put to you the same question I put to James (but he didn't answer). Do you believe this is actually the common case? ...

I believe most of the people now defaulting were reckless (or worse) by my standards. My standards may be unrealistically high.

I think that it's obvious that house prices can't continue to go up by 15% a year forever

It's also obvious that unending growth in a closed system is impossible, but our current economy is largely based on roughly that idea.

So accepting that `forever' doesn't work, if people who should know are telling you that you can bet on `long enough' do you listen? If you're getting offered basically the same deal everyone you know has, do you think it's crazy? How about if you also easily get confused by time value for money calculations (describes a large percentage of the population, something retailers and CC companies rely on), and can't make sense of `points'. Do you do what `smart people' are telling you you ought to?

I suspected that the people who post here skew to both more educated and more intelligent than average. I'm not going to hold everyone in the housing market to the same standards I'd hold myself to, or even most of the people I know. Particularly when there is as much information assymmetry as in a typical mortgage interaction.

368

James is hardline on debtors. This has come up before.

For the record I don't approve of tax cheats either.

I believe most of the people now defaulting were reckless (or worse) by my standards. My standards may be unrealistically high.

I can understand this, with your caveat. I would never, ever manage my finances in the way that most people seem to. I also realize I have more choice in this than many do.

d) back in the big leagues, the incentives ran to creating ever bigger piles of this stuff, wrapped up in the sexiest of hip new acronyms, all tranched into respectablility. The high flying finance boys were looking good and making a bundle. (advantage financial markets, turns out short term)

I thought that was a great summary, soupy. I do think it is important to emphasize that when the lenders were moving the subprime loans, they were not doing so so they could make money off the interest in the long run (in which instance finding a good borrower would be paramount) but instead were making cash up front by repackaging and reshopping the loans to some other sucker. Which allowed to make more loans, which allowed them to make more money reshopping, which allowed to expand and buy stocks & etc. In short, the lenders had a strong incentive to make as many loans as possible.

That said, I also agree with TLL that many of these people had a high-flying worm's eye view (so to badly speak) and had no grasp on just how many loans they were repackaging were bad. (Of course, low level brokers were working off of commission so they had a stake in moving as many loans as possible as well.)

max
['Woo.']

I don't see why he should end up with the house if someone else is willing and able to pay more for it

But that isn't what is happening. Lots of them are standing empty, damaging cities.

It's also obvious that unending growth in a closed system is impossible, but our current economy is largely based on roughly that idea.

Only roughly. I should have said that house prices can't go up much faster than the incomes from which the debt incurred to buy them must be serviced (15% given current circumstances) forever.

Lots of them are standing empty, damaging cities.

If they're in the Valley, turn them back into farms. Or just go fallow, since there ain't enough water.

381: Yes, only roughly. But my larger point was basically that I expect the subtlety of your correction in 381 would be lost on a lot of people. After all, many people couldn't tell you how much financing their last car purchase will cost them (but they can tell you the monthly bill). Same goes for how their CC billing cycle works and how precisely advances differ from regular charges.

Speaking as a peasant again, I still believe that financial sophistication was a necessary before this problem could get as bad as it did. With old-fashioned bonehead finance the higher-level people probably would have understood what they were getting into. Maybe the high level incompetence was the result of an increase of the complexity of the system.

Vacant houses are good habitat for bats and other wildlife.

383: Right. This is the problem. Do you prohibit things that are beyond the grasp of the lowest common denominator? This seems bad from a societal point of view. Do you take the SEC approach where certain things can only be sold to "qualified investors" aka "people with more than $1 million to their name"? Then you're discriminating against the disadvantaged. I don't know what the right way to go is.

Is there some rule that every thread has to consist of arguing with Shearer? Because I missed that clause in the user agreement.

My ex and I got a supplemental loan that covered the down payment, allowing us to buy a house probably three to five years before we otherwise would have. Given how things turned out that might have been better, but all the loans will be paid off despite the fact that we got divorced. For a young couple in our situation having that option was absolutely great, and it would be sad to see it vanish for others just because of the irresponsibility of a bunch of venal shitheads. The lender, incidentally, was Countrywide.

Anecdata.

What Walt just said. Shearer penetrates our defenses with impunity.

You need to set out your skirmishers, JE. I thought you said you knew this stuff?

Shearer is a master.

So the only possible way for Bernanke and Paulson to try and help the entire banking sector with their vast balance sheets using this (relatively) small amount of money is through buying enough assets across the different categories of mortgage-backed debt at reasonable prices that pretty much every bank can mark their books to a higher market value, and thus avoid the insolvency disaster.

Price supports! Let us suppose the poor corn farmers are distressed due to an economic slump. Corn had been selling at 100$/ton {shrug} and stagnant and now it's selling for 50$/ton {shrug} and falling. Meanwhile, the poor farmers are being foreclosed left, right and center by the banks (heh), but the poor corn farmers are only profitable at 105$/ton.

So, what the Feds can do is to go in and buy corn at 150$/ton, which will give the farmers lots of money to play with, enabling them to hold off foreclosure and maybe save some money up, and that will cause the supply of corn to dwindle until there is a corn frenzy of some sort and the price of corn is rising past 105$/ton, at which point the Feds can unload the corn at, say, 110$/ton.

How much corn does the Fed have to buy at 150$/ton to get corn prices up to 105$ and rising?

So, yeah, price supports for toxic financial waste.

max
['It's a Corn Inferno!']

Vacant houses are good habitat for bats and other wildlife.

If we get 21st Century ghost towns, do we have to wait before setting up the tourist traps? Do we need some period dress for the re-enactors? Should we only take euros?

The key development is the way financiers were able to make risky debt look like AAA debt. If hedge funds alone were gambling on housing prices going up forever, the world's reaction would be much closer to a shrug of the shoulders.

How much of this was incompetence, and how much of this was intentional? Consider this. Debt is rated by ratings agencies. Who pays to get the debt rated? The buyer, who has the most incentive to see the bond rated accurately. Oh, no. It's paid for by the seller. The investment banks were creating new mortgage-backed debt, and then paying the ratings agencies to rate it. They would give the agencies one day and a single spreadsheet of data about the mortgages. The agencies would say "Okay!", because this was a major source of revenue for them, and by an eerie coincidence, they would come back with ratings like AAA or AA. This allowed the investment banks to sell the debt to commercial banks, which then held the debt as capital. Somebody knew the debt was risky, because it paid higher interest rates than AAA-rated corporate debt, which is why the banks liked holding it as capital.

So while the ratings agencies, investment banks, and commercial banks may have all been fooled, it was also in their interest to be fooled in the particular way they were.

A retro golf course with retro golf dress and retro golf carts could be a tourism winner right now. Japanese tourists would eat it up. Palmer impersonators, Nicklaus impersonators, Hogan impersonators. Retro cocktails in the bar. Retro call girls. Eisenhower on the TV.

I'm torn between the idea that complicated finance incidentally produces local incompetence and thus makes fraud possible, and the idea that that's exactly what it's intended to do.

But don't mind me. I'm genuinely and sincerely ignorant. I'm just applying my innate Leveller paranoia to a field I don't understand at all.

So while the ratings agencies, investment banks, and commercial banks may have all been fooled, it was also in their interest to be fooled in the particular way they were.

Exactly so. I believe that the packagers deliberately put some shit in with the meatloaf, just enough so it wouldn't taste too bad to the rating agency. What I don't get is how when they resliced some z tranche stuff, the first tranche of that some how gets an A rating. Hello, it was shit to start with, it won't matter if they are first in line to get nothing left.

Somebody knew the debt was risky, because it paid higher interest rates than AAA-rated corporate debt, which is why the banks liked holding it as capital.

But the debt wasn't risky... as long as the market was rising. Dow 36000, doncha know.

Bad business model. Sorta like LTCM, which was perfectly fine as long at least one market was going up. Of course, if all the markets went down at once...

max
['Oopsie.']

392: Fabulous. A Farm Bill or CAP for Wall Street.

= "The smarter someone is, and the more authority they have, the more stupid they are."

Eh, not really. I'm just putting the locus of the fraud at the lenders' offices (including the lenders who created and sold the various mortgage-backed derivatives). The raters are also pretty clearly culpable.

The buyers of those mortgages and derivatives - and especially the insurers of those derivatives - seem like they are potentially just stupid.

And I'm not endorsing stupidity as a good thing, mind you. James's non-controversial point is, well, non-controversial - borrowers should have been more careful/honest. Likewise, I say, AIG should have thought through its risks more carefully, but if anybody at AIG needs to be in jail, I haven't heard about it.

So while the ratings agencies, investment banks, and commercial banks may have all been fooled, it was also in their interest to be fooled in the particular way they were.

One of the fun things about complex social structures is that crazy, destructive patterns of behavior can chug along for quite a while even when everyone involved knows they're crazy and destructive. As long as each actor has an incentive to play along and no incentive to upset the applecart, it's very easy to beaver away all day, go home and bitch about how nuts it all is, and get up tomorrow and do it all again.

A retro golf course with retro golf dress and retro golf carts could be a tourism winner right now. Japanese tourists would eat it up

I like it. Once it's up and running, we can sell it to them, like Pebble Beach.
http://www.businessday.com.au/business/japanese-firms-on-overseas-buying-spree-20080826-42pi.html

394

So while the ratings agencies, investment banks, and commercial banks may have all been fooled, it was also in their interest to be fooled in the particular way they were.

Their short term interest, not long term.

Pop quiz: bonuses are based on (a) short term results, or (b) long term results?

For Emerson and others who want to better understand this thing, I recommend trying to get hold of the recently published paper The Panic of 2007 . It's by an economist, but in narrative explanatory as opposed to prescriptive mode, so perhaps Emerson will be able to stomach it.

I remember saying that I wanted to understand things better. I've pretty much adopted the persona of the murderous, ignorant peasant.

I don't remember saying

Doesn't the hog farm mark you as a yeoman? Or does some baron actually own the land on which you serve, Assistant Pig Keeper?

When the housing price bubble burst, this chain of securities, derivatives, and off-balance sheet vehicles could not be penetrated by most investors to determine the location and size of the risks. The introduction of the ABX indices, synthetics related to portfolios of subprime bonds, in 2006 created common knowledge about the effects of these risks by providing centralized prices and a mechanism for shorting. I describe the relevant securities, derivatives, and vehicles and provide some very simple, stylized, examples to show: (1) how asymmetric information between the sell-side and the buy-side was created via complexity; (2) how the chain of interlinked securities was sensitive to house prices; (3) how the risk was spread in an opaque way....

From the abstract. It seems in line with my paranoid allegations.

Their short term interest, not long term.

Hence the term `bubble'.

I'm a simple man, Leech, but I knows pigs. Master just wants him that tasty Republican ham.

396

I'm torn between the idea that complicated finance incidentally produces local incompetence and thus makes fraud possible, and the idea that that's exactly what it's intended to do.

I have read that poker pros prefer the more exotic games when playing with rubes because it maximises their edge. No fraud is required. The division of mortgage pools into tranches with supposedly greater total value reminds me of the famous dissection paradox in which an 8x8 square is cut into pieces that can purportedly be reassembled to form a 5x13 rectangle.

tasty Republican ham

Honestly, I found the Hastert bacon a bit unappetizing.

8x8 square is cut into pieces that can purportedly be reassembled to form a 5x13 rectangle.

And Wall Street keeps the extra! What could go wrong?

I think that the processor just smoked Hastert directly. He was a rare prize.

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I came home from work, flipped on the TV, and Alan Alda was explaining trolley/switch/fat man problems.

This can only be the apocalypse.
|>

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I should add that said trolley problems were illustrated with little dioramas populated with dolls, including a Hawkeye Pierce action figure at the switch.
|>

What the heck were you watching? Bill Nye the Philosophy Guy?

LB, is it possible that they're just sprinkling some sort of happy powder all over Manhattan to tide us over until Congress figures out the bailout?

I'm sorry, I didn't catch that -- my keyboard just turned into a small planting of herbaceous groundcover.

(Actually, it was some Scientific American TV show -- it went on to put Alan Alda into an MRI while having him play econ. games.)

Hawkeye's last name is (was) Pierce?? Oh. I neverknew that.

Uh, actually I did, now that I think about it. Somehow the meaning never occurred to me. Go figure. I was a teenager.

Meaning? Or just that the character's name is also an English word?

420.1: Eh, as long as it smells good when you mow it.

I have read that poker pros prefer the more exotic games when playing with rubes because it maximises their edge.

Oh, I get it: you're actually a professional gambler, and they know you by name at some of the finest of the state-run casinos. Or maybe you have a flashy nickname, like Slim Jim Shearer or something.

Or maybe this thread (and so many others like it) is the game, and we're the rubes and you're the pro? Hmm...

Actually, though I disagree with James B. Shearer on just about everything (well, except when I'm posting in his name, of course), I object to the notion that he's a troll.

James is a unique but annoying creature who takes over threads by diligently, incredibly diligently, arguing peripheral points, sometimes obnoxious winger standards, in a reasonable and competent way.

Other times he says interesting things. What to do?

Crossbreed him with mcmanus.

423->426.

422: Meaning? Or just that the character's name is also an English word?

Yeah, that. An English word which, when conjoined with the nickname, has meaning. Never noticed that.

I'm sorry to say that when Shearer joins threads, I tend to abandon them. Tragic, I'm sure.

426: You know, that's not a half-bad idea (er, except for the absolute limits imposed by the dictates of biology, of course). The reason why most revolutions fail is that the Jacobins are too wild-eyed and romantic, and they start running off in all directions. Imagine revolutionary fervor disciplined by all due diligence, with some professional poker tricks thrown in for good measure. Scary thought, eh?

429: would have to make sure that you didn't end up with an incoherent automaton instead of a passionate genius, though. Still, it's the best possible use of human cloning I've heard so far.

429: It is a scary thought, especially if you throw in the obsession with peripheral points and the professed need to mow the lawn.

401: One of the fun things about complex social structures is that crazy, destructive patterns of behavior can chug along for quite a while even when everyone involved knows they're crazy and destructive. As long as each actor has an incentive to play along and no incentive to upset the applecart, it's very easy to beaver away all day, go home and bitch about how nuts it all is, and get up tomorrow and do it all again.

I just saw this (reading the thead idly backwards as I am), and decided it bore repeating.

Shall I say: stop it. Well.

OK, please, someone explain the Hawkeye Pierce thing more slowly to me. Does "hawkeye" have some seedy double meaning?

Yeah, that was what I meant to ask. "Hawkeye Pierce" doesn't mean anything to me as a phrase.

Oh, I just saw this. "Hawkeye Pierce" suggests, you know, piercing gaze, cuts to the heart of things, with an eagle eye, as it were. As a raptor (bird of prey), a hawk or eagle. No?

Barney Frank apparently just decided to destroy his reputation

As I understand, he's always been in the pocket of finance. He might have chosen this moment to be statesmenlike, but no. Pretty much erases my good opinion of him.

There are no good guys at this level, as William Burroughs said.

John, the TPM post notes:

*Ed. Note: A well-placed Hill source subsequently tells us that this version has actually been circulating for a couple of days, and that while it's still mostly operative, it is not the latest iteration of the alternative to the Bush plan.

We can hope, I guess.

There have been so many reports over the week that it's hard to be sure what's still operative. Paul at LGM was outraged tonight by a stale news report. How stale? 24 hours.

Bush in his speech endorsed both some sort of executive compensation provision, and a bipartisan committee to run the program. So there has been some movement.

The comments in FDL say that Obama is talking about a bupartisan, watered down bill, and that seems to be what he offered McCain (before McCain went bozo on him). He also mentioned deferring medical insurance and other domestic programs because of this crisis.

Sirota, today, is also suspicious of Frank, and Dodd is too. Frank's coziness with finance is pretty well known, I think.