If you’re still scratching your head over the financial mess, a friend at VCU kindly forwards the explainer below, which he has been sharing with students.

The kicker is in the last paragraph.

Collateralized Debt Obligations (CDO’s) are the repackaged mortgage instruments that were used to resell bundles of loans containing hi-risk mortgage loans and remove them from the portfolio of the originating lenders.  They were repackaged yet again and sold on the world markets using leverage that amplified the risk.  Some estimates I’ve heard are that there were less than $1 trillion worth of bad mortgages that have created risky investments of over $60 trillion in value throughout the world. 

This was recognized as a high risk activity by the originators, and their search for financial backing developed an assurance package called Credit Default Swaps (CDS’s).  These were essentially insurance policies against default of the CDO packages, but registering as an insurance company would have required compliance with the cash reserves necessary for that registration.  Since the debt packages were so huge, no-one could afford that type of registration due to the reserve requirement, so they created the CDS as an entity NOT categorized as an insurance product even though that was its essential characteristic. 

So now we have large corporations holding risky assets, some of whom have been seized, bought on the cheap, bankrupt and more.  This is bad for the markets, and has shown up in the gyrations of late.  We also have other large corporations who have guaranteed the risky investments against default.  They have not been required to disclose their level of reserves or much of anything, so we don’t know if they are capable of absorbing the losses that will ensue if the CDO’s they covered go into default.

This Friday we have a major test of the creation of CDO’s and CDS’s.  Lehman Brothers (in bankruptcy now) had $110 billion of their debt covered by CDS’s.  That debt is now in default and the CDS coverage is due to settle.  If the issuing firms are able to cover the contracts we may see the end of much of the market turbulence we’ve been watching.  If they can’t, hang on to the overhead straps,‘cause we’re in for an even rougher ride!

Look at the link I sent. This story is getting buried.

The corporate CEO’s have a lot mroe to answer for.

Agreed, Biscuit. There are a number of special interests, groups, politicians and corporations responsible for the financial mess. It is the “perfect storm”. However I take issue with those who claim it was solely the fault of Bush or GOP congress or greedy corporations.

In reality it is a mess of “unintended consequences” due to social engineering. The stage was set by relaxing credit rules, exacerbated by lenders exploiting the rules to sell the new market and make a lot of money. This is what happens when politicians pander to special groups and do not think it through.

Now you and I will pay the mortgages of those who should never of had one in the first place. Then finance the lenders bad mortgages. And pull the politician asses out of the fire. Meanwhile nothing will change.

More new welfare programs to bend the rules are on the way. Again, you and I will pay for them.

I was just saying you could argue that pressure from minorities may have started it but had little or nothing to do with how it turned out. Big profits is what fueled the meltdown, pure and simple.

Plus, if they had put heavy limits on it, it might have turned out just fine even with a few dubious loans to minorities.

Lastly, even though pundits did sound an alarm, I’m not convinced the right people were listening. (whatever)

Regardless, you may be correct that the city of Richmond is poorly managed. That rumor has been floated at times. (understatement?)

Property values do go up in the suburbs but suburban neighborhoods can age, and age rapidly. It isn’t so much plastic houses, just the quick turnover and turnaround in suburbia. Amenities are often better not worse in cities. Richmond has them all, good bad and ugly.

Thank you Biscuit for revealing your NObamaBiscuit self: “You can be your typical evil self and call me “dense” if you wish but it won’t change facts.“ I love it.

Even better: “The mortgage cos. were only going to go just so far to pander to minorities. They kept this ball rolling because they were making big money. You can’t rewrite history for your own political convenience (but I’m sure you will try.“  Exactly. The mortgage companies made “big money”. Pandering to minorities, due to political pressure from those of your ilk, got it started and others jumped on the $$ bandwagon.

Suburbia started as affordable housing outside of the city, plus, lower taxes. Today it also means not living with those who wish us harm, high taxes and lousy schools. Property values go up, not down in the average neighborhood. More amenities, restaurants, parks, etc.

There are no stores to walk to in the City. Plus, no transportation to get from one end to the other. Many areas are simply not safe. Cities like Richmond are poorly managed, always broke and never have vision for a better tomorrow. It deserves what it is.

Mr. Murphy,

You misunderstood everything I said and I disagree with everything you said. You can be your typical evil self and call me “dense” if you wish but it won’t change facts.

The mortgage cos. were only going to go just so far to pander to minorities. They kept this ball rolling because they were making big money. You can’t rewrite history for your own political convenience (but I’m sure you will try).

JTB and Larry are not entirely wrong about suburban housing. The houses do not deteriorate any more than other housing but the neighborhoods can at times be more vulnerable to aging.

Suburbanites tend to chase the new, the fad, and the trendy as they sprawl outward. This leaves older closer in neighborhoods without the walking distance amenities that poor urban neighborhoods have, and under the stress of families (kids and dogs) the houses do not always age gracefully.

A suburban home may not have the slate roof of a Windsor Farms house, but it isn’t really the construction that makes the biggest difference. It is the fact that a desirable home in a good neighborhood is an investment worth keeping up.

Good neighborhoods in the suburbs do better over time same as in the city, mainly because the homeowners maintain their homes and keep up the appearance, whereas modest and inexpensive in lesser neighborhood homes are subject to the slings and arrows of wear and tear and declines in property values.

http://southernstudies.org/facingsouth/2008/10/follow-up-our-investigation-into.asp

Larry, the evidence does not support your view or JTB. Plus, simply not true: “plastic and stick houses slapped together in endless suburban tracts were EVER worth $500,000 or more? Those cheaply built homes have already begun to deteriorate…” New building materials have made better houses with less maintenance and more green.

If you want to criticize suburbanites for their beliefs, that is another issue. It has nothing to do with their houses.

The mortgage mess was not as created by suburbanites. It was initially generated by the do-gooders lowering mortgage credit requirements for your city dwellers. Sorry, you can’t blame suburbia.

The most mature & astute view on this mess is found in J. Tyler Ballance’s post below. I repeat the important experts here:

(1.) “Did any of us really believe those plastic and stick houses slapped together in endless suburban tracts were EVER worth $500,000 or more? Those cheaply built homes have already begun to deteriorate…“

(2.)“For those who sunk huge sums into those plastic and stick ‘McMansions’ your only hope is to renegotiate…and start over in a house that you can really afford.“

Too bad though. I think many people STILL believe that living in a Super Glue-and-paper subdivision is worth it. Including a few dumbasses reading this post right now.

ED: “The kicker is the fact that subprimes are profitable. If subprimes were not profitable none of this would ever have happened.“   
YES THEY WERE PROFITABLE. If not why would they continue to make bad loans to people who could not pay?

“This is damage control, pure and simple, by conservative economists.“
  Everyone but yourself and DEMs understand that mortgage companies made a lot of money selling to people who should never of had a loan in the first place.

“The conservatives know this; they just don’t want to cede the high ground to those detestable liberals and they are ticked off social engineering was a part of their downfall.“
There is no “high-ground”. Both the DEMs and GOP are responsible for the meltdown. Social engineering was the cause and efficient American financial engineering was the stimulus.

“Very few of them admit to having seen this coming. Either they did not know a problem existed or else they were blinded by greed.“
Alarms were made by countless business experts and GOP politicians, all denied by the DEMs. BFrank and CDodd were no where to be found. How dense are you?

Simmer’s link says lack of regulation is not to blame.

The banks were forced to lend. The problem with that line of reasoning is that it implies that if the market were unfettered the lenders would be responsible.

Seems like pure fantasy to me. They are not being responsible now when they easily could. They won’t in the future either.

The kicker is the fact that subprimes are profitable. If subprimes were not profitable none of this would ever have happened.

This is damage control, pure and simple, by conservative economists.

Regulations are not chains binding the market up but just the rules of the game. We already have a long list of rules governing finance, just the wrong set.

The conservatives know this; they just don’t want to cede the high ground to those detestable liberals and they are ticked off social engineering was a part of their downfall.

Very few of them admit to having seen this coming. Either they did not know a problem existed or else they were blinded by greed. Either conclusion is quite damning.

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