[Rhodes22-list] Economics/Politics - Significant Post about economic and political mess

Sun Sep 21 08:34:49 EDT 2008

Ed,

It will take years to unravel this whole puzzle and no doubt a lot of
money will be made writing books about it, but here's what we know for
now.  The economy was about to grind to a stop like an engine running
without oil, ie, financial institutions were about to stop lending
money because no one trusted anyone.  The root cause was a lot of
really nasty mortgages made with horrendous lending practices. Add in
some new debt instruments that no one really understood (Mr. Buffet
excepted) and the problems accelerated. The "fix", if you want to call
it that, is for the federal government to allow financial institutions
to dump their toxic assets, clean up their books, and go back to "mark
to market" accounting with assets of determinable value.  What this
will cost the government is unknown because the value of the assets to
be dumped is unknown.  Just like the RFC during the Great Depression
and the Resolution Trust in the late 80's, some of these assets do
have value and the taxpayer will get some of their money back.  One of
ideas being floated now is a reverse auction where institution bids
down to a price that they are willing to sell the government the bad
assets. This is truly new territory. Lehman Brothers had a chance to
be acquired by Bank of Korea and CITIC bank of China months ago but
thought they could get a better price.  Now they'll settle for pennies
on the dollar.

Ever heard of a NINJA loan?  Neither had I until a couple of years ago
and it didn't make sense then and it sure as hell doesn't now.  NINJA
- no income, no job or assets.  Who in their right mind would make
such a loan?  No one, unless they thought they could palm the risk off
on someone else.  Fanny and Freddie are the biggest culprits in this
mess.  Now here's where it gets interesting. They and most banks
operated using sound lending practices until the late 70's when the
Community Reinvestment Act was passed by Carter. (I'm going to use a
"cheap and easy" citation here instead of financial news articles to
save time)

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

Clinton strengthened the act in 1995 and shoved more bad lending
practices down bankers throats. One of the "leaders" in subprime
mortgages was Superior Bank in Chicago.

http://query.nytimes.com/gst/fullpage.html?res=9C05E4D71E3CF934A3575BC0A9679C8B63&sec=&spon=&pagewanted=1

Superior went belly-up in 2001.  Who ran Superior?  Penny Pritzker, B
Hussein Obama's finance 2008 finance chairman, financial sponsor, and
also chairman of the successor to the Chicago Annenberg Challenge. The
point is, the demo model for subprimes was Superior and it failed.
Pritzker was to the sub prime mortgage what Michal Malkin was to junk
bonds.

In 2003 the Bush administration tried to reform Freddie and Fannie and
was shot down, led by Barny Frank.

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63

Some Senators saw the handwriting on the wall in 2005 and again tried
to reform Fan & Fred.

http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

By 2007, the problems were too big too ignore because so many
homeowners were defaulting.  The financial markets stayed intact
because these "toxic mortgages" were hidden behind some really clever
debt instruments.  Then everyone got scared.

I'll post more as information trickles in.  Both political parties
have their fingerprints all over this mess and Wall Street threw some
good old fashioned GREED into mix for the final meltdown.  Follow the
money-

http://www.opensecrets.org/industries/mems.php

What interesting times we live in!

Brad

On Sun, Sep 21, 2008 at 6:16 AM, Tootle <ekroposki at charter.net> wrote:
>
> Brad,
>
> You are the accountant on this forum.  If there are others, they do not have
> courage so speak up.
>
> This is also an ethical question, a legal ethical question.  And lawyers
> should be speaking up.  But alas, they claim Marxism is good.  Or they say
> their practice is limited to real estate transactions or business matters.
> What the hell caused this mess?
>
> In South Carolina when the state legislature is not in session, lawyer
> represenatives represent clients before judges they elect.  Right and Wrong,
> good and evil, when working in a gray areas, it is important that actions
> withstand the scrutiny of sunlight.
>
> Brad said, "Here's something you don't hear much about - I've read exactly
> two articles that discussed "mark to market" including one from Steve
> Forbes.  He didn't name it but he's referring to FASB 157 (Financial
> Accounting Standards Board) which went into effect November 15, 2008 that
> requires all assets including level 3 assets which include collateralized
> debt obligations (what Warren Buffet described as "weapons of mass financial
> destruction" in 2002) to be shown on the books at market value.  There lies
> the problem, no one knows what these obligations are "worth" and when faith
> in these instruments failed, the system started grinding to a halt.
>
> If the people had been honest and ethical from the get go they would have
> held the actions and the paper they were written on to sunlight and a simple
> test of right and wrong.  These events remind me of the lady who spilled the
> beans in the Enron situation.  And the media said Enron was big?
>
> As you find time tell us where to find Steve's article and Warrens
> admonition.  And post any relevant sources.
>
> Yes, Marxism is at issue because of the Federal requirement of banks to loan
> in questionable situations instead of holding federally backed loans to a
> high standard.  The government compelled bankers to disregard risks.
> Dictatorship, Marxism, Socialism, Progressivism, call it what you want, it
> is wrong and leads to garbage.
>
> Ed K
> Greenville, SC, USA
> attachment:
> http://www.nabble.com/file/p19593492/401k.jpg 401k.jpg
>
>
> Ed,
> The subject line should probably be edited to include 'Politics' since
> that is always an aspect of economics, but let's stick primarily to
> economics for now.
>
> First, a quick personal note.  My union called me this week - the wife
> of one of our members is dying from cancer and he has burned through
> his sick leave to be by her side.  They asked me to cover one of his
> trips last night, which I did.  I contacted my superior in the
> training department and asked that he get the word out to fellow
> instructors to consider flying "back-side-of-the-clock" trips for
> landing currency instead of the usual afternoon "gentlemen" trips, and
> they have stepped-up to the plate.  This is a great country, and I am
> fortunate to work for a wonderful company and with a very professional
> union.
>
> Now about this little "financial problem" we face, it is bad. Just as
> in every major airline crash that leaves a smoking hole in the ground,
> the press immediately jumps to conclusions, focuses on the horror, and
> is usually wrong in their analysis. What we are witnessing here is not
> a crash (despite the MSM comparisons to 1929) but more like a GPWS
> (ground proximity warning system) encounter - if immediate action
> isn't taken, disaster will be the result. Like every aircraft
> accident, the usual suspects start their spin, "It was the pilots
> fault", "It was Boeings fault", "It was the company's fault", "It was
> the weather".  The reality takes years to discover and the root causes
> are often something completely different than the original pundits
> analysis. And most importantly, there is usually plenty of blame and
> responsibility to go around.
>
> Here's the quick and dirty on what we know.  The financial markets
> were about to shut down because the trust and faith in the underlying
> assets that props-up the entire system were suspect.
>
> I'll go into a more thorough analysis tomorrow after a good nights
> sleep.  Here's something you don't hear much about - I've read exactly
> two articles that discussed "mark to market" including one from Steve
> Forbes.  He didn't name it but he's referring to FASB 157 (Financial
> Accounting Standards Board) which went into effect November 15, 2008
> that requires all assets including level 3 assets which include
> collateralized debt obligations (what Warren Buffet described as
> "weapons of mass financial destruction" in 2002) to be shown on the
> books at market value.  There lies the problem, no one knows what
> these obligations are "worth" and when faith in these instruments
> failed, the system started grinding to a halt.
>
> I'm not very happy about the federal government nationalizing roughly
> 7% of the economy but let's hope this only a temporary jolt of
> medicine and the government will divest themselves of their new
> "ownership" position as quickly as they acquired it.
>
> We'll discuss the culprits tomorrow.
>
> Brad
>
> On Fri, Sep 19, 2008 at 6:26 PM, Tootle <ekroposki at charter.net> wrote:
>>
>> Brad just posted a significant post to the list, but its significance gets
>> lost in subject line.  All shoud read his last post:
>>
>> http://www.rhodes22.org/pipermail/rhodes22-list/2008-September/054616.html
>>
>> I am referring to the briefing to Congress.
>>
>> Ed K
>> Greenville, SC, USA
>> --
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> http://www.nabble.com/file/p19593492/401k.jpg 401k.jpg
> --
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>
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