MarketNeutral
23rd April 2010, 01:56 PM
Irrational greed worked overtime when it came to the mortgage loans Wall Street manipulated in creating the “subprime†credit bubble. The greed starts at the top: Investment banks control the money flow spigot. Wall Street bankers made huge fees raising money for mortgage companies by repackaging and selling bundles of home loans as securities to naive institutional investors worldwide, usually without full disclosure. Mortgage executives and their brokers also got rich making big fees and commissions on loans to millions of marginal credit homebuyers, who were chasing the great “American Dream†of home ownership. In 2007, the politics driving the pro-Wall Street government policy was exposed. Still, nothing was learned, today it’s far worse.
Fortunate for Wall Street, the newly-appointed Treasury Secretary Hank Paulson happened to be a former CEO of Goldman Sachs, a leader making huge fees hustling securities backed by subprime mortgages. In 2008 Paulson acted surprised at the meltdown. He shouldn’t have been: Back in 2006 Paulson warned the White House of the dangers a month after taking office. Later when forced into action, Paulson engineered a bailout of Wall Street banks, rather than focus on the millions of homeowners facing foreclosure. Paulson’s top priority protecting his buddies at Goldman and AIG, the main insurer of tens of billions of Goldman’s toxic debt, which Goldman secretly shorted after selling to the debt to clueless investors (a conflict of interest), debt that would have driven Goldman into bankruptcy.
The dotcom bubble burst in 2000 … and was quickly replaced by a new irrational bubble as investors jumped on the real estate bandwagon. Suddenly, housing was the “new hope†across America, the engine driving 30% of the economy, and Main Street’s retirement nest egg. Rapidly rising home prices dominated the news, exciting investors. Disappointed with low returns in stocks, we believed rising housing prices would help us recover what we lost during the recession. The Fed’s monetary policies did jump-start the economy by encouraging new construction. And even as war debt dragged on the economy, Fed policies fueled enormous growth in housing values nationally, in borrowing, and added to the labor market, as interest rates dropped, creating easy money.
‘Tipping point’—risky sub-primes, resets and defaults
The real estate market, mortgage lending business and the credit card industry pumped huge sums into consumer spending through new home financing, refinancings, home equity mortgages, adjustable rate mortgages, rapid-turnover, condo-flipping, plus loose underwriting standards that resulted in too many people buying much more home than their income would support, through low-interest starter mortgages with minimal down payments. Housing mania was spreading rapidly across the world. In 2005. The Economist wrote:
“Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it comes. … Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000,†with an estimated $30 trillion added worldwide in five short years, an increase of 75% for a total of $70 trillion. “House prices are at record levels in relation to rents and income†said The Economist, while predicting an eventual “meltdown.â€
Despite denials, Paulson, Bernanke and Greenspan before them, knew a disaster was ahead, but greed blinded them. By 2006 we heard two housing industry leaders, Toll Industries, a leading luxury homebuilder and Countrywide Mortgage warned that the industry was in trouble. The Fed said one thing, even as the Countrywide CEO said “In 59 years in the business, I’ve never seen a soft landing.†Economist Robert Shiller, author of the 2000 bestseller, Irrational Exuberance, said “there’s a good chance home prices will be down 10% to 30%†beyond 2010!
Did Wall Street’s insatiable need for new product force mortgage lenders to make bad loans?
The problem centered in the riskier sub-prime loans, over $600 billion lend in one year to marginal homeowners with weak credit. As the slide accelerated, hard-hitting headlines surfaced, revealing the true source of the problems: “Wall Street fueled Growth at New Century,†a subprime lender, that lost over 90% of its value in a month. The stock was above $30 and dropped to about a dollar—before its bankers pulled their backing and forced them into bankruptcy. That headline wasn’t in some local liberal newspaper, the pro-business Wall Street Journal was on the attack.
Perhaps even more revealing, The Journal made it clear that they were pointing fingers specifically at Wall Street’s investment bankers like Morgan Stanley, one of world’s top financial institutions. “Subprime lenders took cues from Wall Street. Investment banks and hedge funds were ravenous for the riskiest types of loans, whose higher yields made them vital ingredients in investment packages offered to investors globally. New subprime loans made in 2006 totaled about $605 billion, or about 20% of the total mortgage market, up from $120 billion, or 5%, in 2001, according to Inside Mortgage Finance, an industry newsletter.â€
“Wall Street is deeply entrenched in the entire mortgage market, including loans to more creditworthy borrowers, on which defaults so far have remained low. Last year, banks and brokerage firms pocketed $2.6 billion in fees from underwriting bonds that use mortgages as their collateral, nearly double 2001’s figure. Wall Street banks also extended billions of dollars of short-term credit, called warehouse lines, that allowed lenders like New Century to fund mortgage loans.â€
New Century was a Wall Street darling. Their “loan originations jumped to $59.8 billion in 2006 from $6.3 billion five years before.†They were “an especially valuable client. It has spent about $38 million in fees just for stock and bond sales since 1998. The company is structured as a real-estate investment trust and, under rules governing REITs, must pay out the vast majority of its earnings as dividends. That meant it needed to return frequently to Wall Street to raise money and keep its operations going.â€
From dot.coms to sub-prime lenders … Wall Street’s controls the money spigot
“Morgan Stanley has helped underwrite $9.8 billion of stock and bonds for New Century since 1998, pocketing about $17.4 million in fees, according to data-tracker Thomson Financial.†They continued: “Wall Street firms such as Morgan Stanley and Bear Stearns also compete with subprime lenders by offering their own mortgage loans via brokers. On an online forum for mortgage brokers last week, Christopher Logan, an account executive for Morgan Stanley’s recently acquired Saxon Mortgage subprime-lending arm, said his company is still eager to lend as others bow out. ‘With Morgan Stanley as our parent, we have the stability and strength, which is what it takes to survive in today’s subprime.’ wrote Mr. Logan.â€
Unfortunately, “the shakeout in the subprime area is the latest of the mortgage industry’s periodic purges of dubious practices and weak lenders. In the mid- to late-1980s, savings-and-loan institutions moved into risky lending, sometimes to cover losses after interest rates turned against them. Courts found that some executives looted dying S&Ls. A 1989 government bailout ultimately cost hundreds of billions of dollars.â€
A report in The Nation concluded that “this was not an unavoidable tragedy, subprime mortgages prey on the poor, the uninformed and minorities. They offer high-credit-risk clients homeownership at interest rates well above the going rate–above what many can pay. Common sense suggests mortgages shouldn’t be sold to those who can’t afford them, certainly not in such massive numbers. … According to the Center for Responsible Lending, one out of five subprime mortgages inked in the past two years will end in foreclosure. The losses are staggering: It is estimated that homeowners will collectively be out $164 billion, with millions of families stripped of their most valuable asset.â€
Greed blinded Wall Street to risks, creating mortgage bubble, now setting up another
http://www.zelmanassociates.com/coverage_universe.aspx
Fortunate for Wall Street, the newly-appointed Treasury Secretary Hank Paulson happened to be a former CEO of Goldman Sachs, a leader making huge fees hustling securities backed by subprime mortgages. In 2008 Paulson acted surprised at the meltdown. He shouldn’t have been: Back in 2006 Paulson warned the White House of the dangers a month after taking office. Later when forced into action, Paulson engineered a bailout of Wall Street banks, rather than focus on the millions of homeowners facing foreclosure. Paulson’s top priority protecting his buddies at Goldman and AIG, the main insurer of tens of billions of Goldman’s toxic debt, which Goldman secretly shorted after selling to the debt to clueless investors (a conflict of interest), debt that would have driven Goldman into bankruptcy.
The dotcom bubble burst in 2000 … and was quickly replaced by a new irrational bubble as investors jumped on the real estate bandwagon. Suddenly, housing was the “new hope†across America, the engine driving 30% of the economy, and Main Street’s retirement nest egg. Rapidly rising home prices dominated the news, exciting investors. Disappointed with low returns in stocks, we believed rising housing prices would help us recover what we lost during the recession. The Fed’s monetary policies did jump-start the economy by encouraging new construction. And even as war debt dragged on the economy, Fed policies fueled enormous growth in housing values nationally, in borrowing, and added to the labor market, as interest rates dropped, creating easy money.
‘Tipping point’—risky sub-primes, resets and defaults
The real estate market, mortgage lending business and the credit card industry pumped huge sums into consumer spending through new home financing, refinancings, home equity mortgages, adjustable rate mortgages, rapid-turnover, condo-flipping, plus loose underwriting standards that resulted in too many people buying much more home than their income would support, through low-interest starter mortgages with minimal down payments. Housing mania was spreading rapidly across the world. In 2005. The Economist wrote:
“Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it comes. … Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000,†with an estimated $30 trillion added worldwide in five short years, an increase of 75% for a total of $70 trillion. “House prices are at record levels in relation to rents and income†said The Economist, while predicting an eventual “meltdown.â€
Despite denials, Paulson, Bernanke and Greenspan before them, knew a disaster was ahead, but greed blinded them. By 2006 we heard two housing industry leaders, Toll Industries, a leading luxury homebuilder and Countrywide Mortgage warned that the industry was in trouble. The Fed said one thing, even as the Countrywide CEO said “In 59 years in the business, I’ve never seen a soft landing.†Economist Robert Shiller, author of the 2000 bestseller, Irrational Exuberance, said “there’s a good chance home prices will be down 10% to 30%†beyond 2010!
Did Wall Street’s insatiable need for new product force mortgage lenders to make bad loans?
The problem centered in the riskier sub-prime loans, over $600 billion lend in one year to marginal homeowners with weak credit. As the slide accelerated, hard-hitting headlines surfaced, revealing the true source of the problems: “Wall Street fueled Growth at New Century,†a subprime lender, that lost over 90% of its value in a month. The stock was above $30 and dropped to about a dollar—before its bankers pulled their backing and forced them into bankruptcy. That headline wasn’t in some local liberal newspaper, the pro-business Wall Street Journal was on the attack.
Perhaps even more revealing, The Journal made it clear that they were pointing fingers specifically at Wall Street’s investment bankers like Morgan Stanley, one of world’s top financial institutions. “Subprime lenders took cues from Wall Street. Investment banks and hedge funds were ravenous for the riskiest types of loans, whose higher yields made them vital ingredients in investment packages offered to investors globally. New subprime loans made in 2006 totaled about $605 billion, or about 20% of the total mortgage market, up from $120 billion, or 5%, in 2001, according to Inside Mortgage Finance, an industry newsletter.â€
“Wall Street is deeply entrenched in the entire mortgage market, including loans to more creditworthy borrowers, on which defaults so far have remained low. Last year, banks and brokerage firms pocketed $2.6 billion in fees from underwriting bonds that use mortgages as their collateral, nearly double 2001’s figure. Wall Street banks also extended billions of dollars of short-term credit, called warehouse lines, that allowed lenders like New Century to fund mortgage loans.â€
New Century was a Wall Street darling. Their “loan originations jumped to $59.8 billion in 2006 from $6.3 billion five years before.†They were “an especially valuable client. It has spent about $38 million in fees just for stock and bond sales since 1998. The company is structured as a real-estate investment trust and, under rules governing REITs, must pay out the vast majority of its earnings as dividends. That meant it needed to return frequently to Wall Street to raise money and keep its operations going.â€
From dot.coms to sub-prime lenders … Wall Street’s controls the money spigot
“Morgan Stanley has helped underwrite $9.8 billion of stock and bonds for New Century since 1998, pocketing about $17.4 million in fees, according to data-tracker Thomson Financial.†They continued: “Wall Street firms such as Morgan Stanley and Bear Stearns also compete with subprime lenders by offering their own mortgage loans via brokers. On an online forum for mortgage brokers last week, Christopher Logan, an account executive for Morgan Stanley’s recently acquired Saxon Mortgage subprime-lending arm, said his company is still eager to lend as others bow out. ‘With Morgan Stanley as our parent, we have the stability and strength, which is what it takes to survive in today’s subprime.’ wrote Mr. Logan.â€
Unfortunately, “the shakeout in the subprime area is the latest of the mortgage industry’s periodic purges of dubious practices and weak lenders. In the mid- to late-1980s, savings-and-loan institutions moved into risky lending, sometimes to cover losses after interest rates turned against them. Courts found that some executives looted dying S&Ls. A 1989 government bailout ultimately cost hundreds of billions of dollars.â€
A report in The Nation concluded that “this was not an unavoidable tragedy, subprime mortgages prey on the poor, the uninformed and minorities. They offer high-credit-risk clients homeownership at interest rates well above the going rate–above what many can pay. Common sense suggests mortgages shouldn’t be sold to those who can’t afford them, certainly not in such massive numbers. … According to the Center for Responsible Lending, one out of five subprime mortgages inked in the past two years will end in foreclosure. The losses are staggering: It is estimated that homeowners will collectively be out $164 billion, with millions of families stripped of their most valuable asset.â€
Greed blinded Wall Street to risks, creating mortgage bubble, now setting up another
http://www.zelmanassociates.com/coverage_universe.aspx