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alstry (35.96)

America Was Screwed!!!!

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July 26, 2009 – Comments (5)

Using public records and Internet searches, the Herald-Tribune identified hundreds of deals that exhibited classic red flags for fraud. They include sales between family members and business partners in which prices increased $100,000 or more overnight. In other cases, flippers repeatedly traded properties from their company to their own name, each time increasing the price and the amount they borrowed.

Lenders knew they were writing bad loans, but did it anyway because they were making so much money on underwriting fees, said Jack McCabe, a Deerfield Beach-based real estate consultant ...

http://www.calculatedriskblog.com/2009/07/herald-tribune-lenders-ignored-mortgage.html

Banks didn't give a damn what they infected with debt.....the more the better.  It didn't matter whether the loan would ever get paid back or how many families were destroyed in the process....the money flowing in was incredible.

Mortgages were granted to homeless people, migrant workers, and many without any documentation.

But the real money wasn't in underwriting the debt as the article suggests.  The big dollars came from securitzing the loans into packages and selling those packages around the world to any fool that would buy them.  But it didn't stop there, in order to really cash in, the banks started selling insurance on the loans......often selling much more insurance than there was debt outstanding.

The real money was in the insurance, credit default swaps....  weapons of financial mass destruction was Warren Buffett's characterization.  The game for the banks was to lend to anyone they could, and as much as they could.....the more they lent, the more inventory for securitiztion and then the cash register could really start ringing by selling the swaps.

The problem with over insuraning an item is that can distort the purpose behind the item being insured.  For example, let's say you allow insurance on your house to be sold to your entire neighborhood.  And each neighbor buys enough insurance to replace the value of your home.  If enough neighbors get to cash in if your home gets destroyed, guess what might happen when you and your family are on vacation?

With credit  default swaps, banks were incentivized to lend without regard to ability to pay or collateral safety.  As a result, homes that should have sold for $100K sold for $200K.....commercial property was not too much different, and same with private equity deals.  Often, the banks threw more money at the borrower than the borrower actually wanted  at the outset.

And it spread to credit cards....remember all those solicitations in the mail? ...and auto loans, and trillions worth of home equity loans.  The credit was flowing and the debt was accumulating...until the banks lent out more money than existed in the entire nation.

For some, it was a ripe environment for fraud.  For most of the rest of America, people were forced to borrow money to pay prices on homes and other things that were simply unsustainable based on bubble pricing.  Once loans started defaulting and the banks started actually checking credit, the prices of homes, commercial real estate, and private businesses crashed.

Those of us that saw it early knew the crash was coming.  But for many, entire life savings were wiped out and homes foreclosed.

The banks didn't care, they were cashing in on the swaps...both up and down becuase they had access to the actual performance of the portfolios, in real time.....while cities, states, and pension funds lost billions on an investment vehicle they really didn't understand that was sold to them by the banks......AND profited from their loss.

And these are the institutions that we are bailing out???  Since when was the rapist the victim?

These are absolute crazy times in our nations history.  From my perspective, critical thinking has broken down and the pain is just beginning.

Welcome to Alstrynomics and you have just met the Zombulator.

5 Comments – Post Your Own

#1) On July 26, 2009 at 10:53 PM, checklist34 (99.71) wrote:

you've really picked up the posting pace lately, alstrus pessimus.

i cannot recall ever reading, in any of your blogs, a suggestion or strategy.  Like "do this to make money on the crash".

thoughts on that?  Or is there no money in blogging advice, just in pessimism?

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#2) On July 26, 2009 at 11:05 PM, alstry (35.96) wrote:

check,

you make the presumption that money will have a value or be relevant....

how much was money worth if you lived in New Orleans the day after Katrina hit?  How much will money be worh if municipalities stop prosecuting crimes due to budget contraints, fire police officers, and crime rises out of control?  How much is money worth if a pandemic breaks out and we are confined to our homes?

As Bernanke will tell you in a few days, we are dealing in unchartered times....so you have to apply unchartered thinking.

That said, I have said on numerous occasions that paying down debt, holding cash, and accumlating a bit of physical metal might not be be bad stratagy.

Then, if you have extra jing, and you want to try to play a market dominated and manipulated by high frequency traders that are capable of front running your trades.....lots of due dilligence is necessary as we are likely heading into The Greatest Depression in our nation's history....but that doesn't mean a stock will go up or down.... because fundementals have little relavance and banks and analysts have incentives to lie.

The game is rigged, the SEC knows it, and few are capable of doing anything about it.

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#3) On July 26, 2009 at 11:55 PM, jarlers5x4 (< 20) wrote:

Alstry,

 

I'm a new caps member; I luckily found your blogs and after reading a few I decided to read through all of your posts over the past few years.  I believe that you provide great content for this community and hope you continue to prolifically share your thoughts.

 

 I couldn't find a way to email you so just posting this comment here... hope you'll be able to respond and keep these ideas/questions in mind as you grace the caps community with your perspective/opinions...

 

Firstly, OK so you believe the Greatest Depression in our nations history is coming.  I'm curious to know to what degree you believe you are able to at least somewhat anticipate the timing of when swings of the stock market.   Are you a strong enough trader that you feel you'll be able to anticipate when this rally starts to turn the other way?  Do you have a few different points at which you expect to start more heavily selling short?  Do you have a rough ultimate low target for the Dow and when do you see this happening by?  You point to 9.09 as a key date... do you expect that to be sort of an important time area that whatever happens it will severely accelerate a down move in the markets?

 

OK now on to a more interesting question... a main reason why I'm attracted to your posts is coincidentally I share a very similar outlook about how, though it's not quite obvious, I believe we are living in possibly the greatest turning point certainly in modern history... I agree with"it's not the end of the world, just massive change".  If possible (although maybe it might feel more proper for you to give your two cents when the time comes), could you weigh in on a few things:

 

1) what kind of world do you think will emerge out of this transformation?  capitalist?  socialist?  good?  bad?

2) to what degree do you believe that the world need leaders, thinkers to work to transform this world into a better place... i.e. part of my wants to get involved in public policy, nonprofit work, thinktanks, etc to try to help re-shape this world; but then, another part of me feels that perhaps thinking, working to re-shape the world is part of the old paradigm of thought and maybe not necessary or helpful for this world to reach a state which is truly beautiful for us to live in.  Are there certain key points where you believe the American public, leaders need to focus on for this to end up being the right transformation for the world?

 

if these ideas/curiosities/inquiries don't blend well with what you'd like to post on then feel free to not respond, but I hope that you can at least work some of these questions into some of your future responses.

 

thanks!

 

what to do?... watch?... get involved?

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#4) On July 27, 2009 at 12:21 AM, awallejr (79.49) wrote:

Actually this is one of his more accurate blogs.  It does describe what took place.  And I will say it again, thanks largely to basically changing Glass-Steagall Act in 1999 to allow that.

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#5) On July 28, 2009 at 12:51 AM, SuperCharge (85.33) wrote:

"Lenders knew they were writing bad loans, but did it anyway because they were making so much money on underwriting fees"

It was more like some of the lenders knew they were writing bad loans, and many knew that some of the loans would go bad. They were all simply playing the numbers game.

I think most people care about what happens even if they try to make profit in the meantime. You're absolutely right though, too many individuals in the banking industry are making way too much money off of this while others suffer.

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