Part of the problem lies with the Cato Institute and its deregulation dogma—laissez-faire free market zap, as subscribed to by Christopher Cox, Chair of SEC. The latter led the charge to use taxpayers money to bailout the Banks. If people are using their brains then this deregulated crash should put an end to the Cato Institute crap.1983: CMO (Collateralized Mortgage Obligation) was
invented by Freddie Mac. This CMO tool allowed mortgages to be turned into securities and made local lending markets more liquid. Mortgages were transferred to a trust, then sliced into three segments, with different bonds for each segment. The CMO was a genuine invention and had a profound impact on the mortgage industry. Traditionally, mortgage lenders were one-stop shops. The CMO turned the U.S. industry into highly focused sub-sectors–raising risk and lowering accountability.
1994: The CMO market crashed when the U.S. Federal Reserve raised interest rates. However, banks embraced securitization and started packaging up mortgages and other loans as collateralized debt obligations (CDOs). They could still collect hefty fees while encumbering little if any of their capital. Lending, in other words, was becoming costless. When money is free, and lending is costless and riskless, the rational lender will keep on lending until there is no one else to lend to.
2003: U.S. mortgage lenders were running out of people they could plausibly lend to and started going after prospects with little hope of repaying their loans. NINJAs. That was the start of a boom in subprime lending.
28 April 2004: Five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks. The banks wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments. The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. One commissioner, Harvey Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told—those with assets greater than $5 billion. “We’ve said these are the big guys,” Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.” The then-chairman of SEC, William Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later. With that, the five big independent investment firms were unleashed to cause the biggest Wall St crash since the 1930’s. Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio—a measurement of how much the firm was borrowing compared to its total assets—rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly. Since Christopher Cox became chair of SEC he has judiciously pushed for further deregulation measures, in the manner of the Cato Institute dogma, and has consistently refused to oversee complaints against company misdemeanours. The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President George W. Bush. A similar closeness to industry and
laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies. “It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick Hills, a Republican who was chairman of the SEC under President Gerald Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”
[because they’re ignored as inconvenient rules]2005: More than a third of subprime loans were for more than a home’s value. “Light-documentation mortgages transmuted into ‘NINJA’ loans–No Income, No Job, or Assets.”
2004—2006: After a two year period between 2004 and 2006 when US interest rates rose from 1% to 5.35%, the US housing market bubble begins to deflate, with prices falling and a rise in homeowners defaulting on their mortgages. Default rates on sub-prime loans—high risk loans to clients with poor or no credit histories—rise to record levels.
The US banking sector packaged sub-prime home loans into mortgage-backed securities known as CDOs (collateralised debt obligations). These were sold on to hedge funds and investment banks who decided they were a great way to generate high returns (and big bonuses for the oh-so-clever bankers that bought them).
Fannie and Freddie were the inventors of the mortgage-backed security, the principal cause of the housing bubble and its subsequent deflation. They won plaudits for it. For years, the unbundling and reselling of mortgages was deemed a good thing, the secret of the US housing market’s successful rise. Alan Greenspan, former Fed chairman, praised it ceaselessly as a breakthrough that did much to widen home ownership (a la Thatcher). But it weakened mortgage originators’ oversight of loan quality–without securitisation and the backing of Fannie and Freddie, could there ever have been “NINJA” mortgages (No Income, No Job or Assets)? When securitised loans go bad, they are much harder to restructure.
Fannie and Freddie did well for decades with CMOs (collateralised mortgage obligations) or CDOs (collateralised debt obligations). But until the repeal of
*Glass-Steagall, the commercial and investment banks couldn’t get in on the game. When they did, they did whatever it took to “buy” market share and make lots of money in the short run.
*The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act, which passed in Congress with a 343-86 vote in the House of Representatives, before being sent to conference committee; the final bipartisan bill (Senate: 90-8-1, House: 362-57-15) was signed by
President Bill Clinton.
March/April 2007: New Century Financial corporation stops making new loans as the practice of giving high risk mortgage loans to people with bad credit histories becomes a problem. The International Monetary Fund (IMF) warns of risks to global financial markets from weakened US home mortgage market.
June 2007: Alarm bells ring on Wall Street as two hedge funds of New York investment bank Bear Stearns lurch to the brink of collapse because of their extensive investments in mortgage-backed securities.
July/August 2007: German banks with bad investments in the US real estate market are caught up in the crisis, including IKB Deutsche Industriebank, Sachsen LB (Saxony State Bank) and Bayern LB (Bavaria State Bank).
US President George W Bush rejects government intervention to ease the crisis in the home mortgage market and says he wants the market to work. He later pledges help for struggling homeowners to help ease the mortgage crisis.
Foreclosures of US homes in July were up 93 percent from a year earlier, to 180,000 owners.
9 August 2007: Investment bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them, owing to a “complete evaporation of liquidity” in the market. It is the clearest sign yet that banks are refusing to do business with each other.
The European Central Bank pumps 95bn euros (£63bn) into the banking market to try to improve liquidity. It adds a further 108.7bn euros over the next few days.
The US Federal Reserve, the Bank of Canada and the Bank of Japan also begin to intervene.
17 August 2007: The Fed cuts the rate at which it lends to banks by half of a percentage point to 5.75%, warning the credit crunch could be a risk to economic growth.
21 August 2007: UK sub-prime lenders begin to withdraw mortgages or put up the cost of borrowing for UK homeowners with poor credit histories.
28 August 2007: German regional bank Sachsen Landesbank faces collapse after investing in the sub-prime market; it is sold to larger rival Landesbank Baden-Wuerttemberg.
3 September 2007: German corporate lender IKB announces a $1bn loss on investments linked to the US sub-prime market.
4 September 2007: The rate at which banks lend to each other rises to its highest level since December 1998. The so-called Libor rate is 6.7975%, way above the Bank of England’s 5.75% base rate; banks either worry whether other banks will survive, or urgently need the money themselves.
September 2007: Worried savers besiege British bank Northern Rock. British government and Bank of England guarantee the deposits; the bank is nationalised. The US Federal Reserve (Fed) starts series of interest rate drops to ease impact of housing slump and mortgage crisis.
October 2007: Profits at US financial giant Citigroup drop sharply. IMF lowers 2008 growth forecast for the euro area to 2.1 percent from 2.5 percent, in part because of spill over from the US subprime mortgage crisis and credit market crunch.
December 2007: Bush unveils plan to help up to 1.2 million homeowners pay their loans.
January 2008: Swiss banking giant UBS reports more than $18bn in write-down due to exposure to US real estate market. In the US, Bank of America acquires Countrywide Financial, the country’s biggest mortgage lender. Fed slashes interest rate by three quarters of a percentage point to 3.5 percent following sell-off on global markets. Another cut at month’s end lowers it to 3 percent.
February 2008: Fannie Mae, the largest source of money for US home loans, reports a $3.55bn loss for the fourth quarter of 2007, three times what had been expected.
March 2008: On the verge of collapse and under pressure by the Fed, Bear Stearns is forced to accept a buyout by US investment bank JP Morgan Chase. The deal is backed by Fed loans of $30bn.
In Germany, Deutsche Bank reports a loss of 141 million euros for the first quarter of 2008, its first quarterly loss in five years. Fed spearheads coordinated push by world central banks to bolster global economic confidence by announcing moves to pump $200-billion liquidity into markets.
Carlyle Capital falls victim to US credit crisis as it defaults on $16.6bn of indebtedness. US frees up another $200 billion to back troubled Fannie Mae and Freddie Mac.
April 2008: IMF projects $945bn losses from financial crisis. G7 ministers agree to new wave of financial regulation to combat protracted financial crisis.
June 2008: Home repossessions more than double as US housing crisis deepens. Bear Stearns execs join 400 charged with mortgage fraud.
July 2008: California mortgage lender IndyMac collapses. Troubles for Fannie Mae and Freddie Mac continue to grow. US Treasury and Fed move to guarantee debts of Fannie, Freddie. Bush defends move, telling Americans to take a “deep breath” and have “confidence in the mortgage markets.”
US Congress gives final passage to multi-billion-dollar program to address mortgage and foreclosure crisis. Spain’s largest property developer, Martinsa-Fadesa, declares insolvency.
7 September 2008: US government seizes control of Fannie, Freddie in $200bn bailout.
15 September 2008: Lehman Brothers investment bank declares $600bn bankruptcy. Merrill Lynch acquired by Bank of America.
17 September 2008: US bailout of AIG insurance giant for $85 billion.
19 September 2008: White House requests $700-billion bailout plan from Congress for all financial firms with bad mortgage securities to free up tightening credit flow.
22 September 2008: Last two standing investment banks, Morgan Stanley and Goldman Sachs, convert to bank holding companies.
26 September 2008: Fed seizes Washington Mutual in largest ever US bank failure.
29 September 2008: US House of Representatives rejects mammoth $700-billion bailout plan.
29 September 2008: Governmental bailouts announced for key banks in Britain, the Benelux and Germany as well as a state takeover of a bank in Iceland. British government intervenes to save major mortgage lender Bradford & Bingley. Netherlands, Belgium and Luxembourg to take over substantial parts of Belgian-Dutch banking and insurance company Fortis.
German Finance Ministry announces that government and top banks were moving to inject billions of euros into troubled mortgage lender Hypo Real Estate. Iceland government and Glitnir bank announce state takeover of 75-percent stake in Glitnir.
30 September 2008: Wachovia Bank teeters on collapse, starts negotiating with Citigroup for takeover deal.
1 October 2008: US Senate adopts massive bailout plan, adding sweeteners to get House acceptance.
3 October 2008: Wells Fargo bank and the fourth-largest US bank Wachovia Corp announce merger.
The largest government intervention in capital markets in US history clears the US House of Representatives, becoming law with signature by President Bush.
5 October 2008: German bank Hypo Real Estate (HRE) bailout collapses.
Court prevents Wells Fargo buying Wachovia.
6 October 2008: BNP Paribas, the French bank, agreed this morning to pay €14.5 billion (£11.2 billion) in cash and shares to take control of stricken bank Fortis. France’s biggest bank will gain control of Fortis’s banking businesses in Belgium and Luxembourg for €9 billion.
Fortis' capital base was hit by its acquisition last year of part of ABN Amro in a deal with the Royal Bank of Scotland and Santander, of Spain. Fortis shares have fallen by 70 per cent this year.
Iceland’s Banking system is in meltdown and looking to be rescued. Global Stock Markets continue to drop like a stone. Global recession looming.
