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The "Subprime Crisis" is a Lie



June 05, 2008 – Comments (6)

I've been saying for a while that this is not a subprime crisis, but a leverage problem. All over the country, people borrowed more than they could afford, gambling on a single key point: That they could refi based on the ever-increasing value of a house.

This did not happen just with subprime. It happened everywhere, as this quick discussion of deliquencies and ARMs at Calculated Risk makes clear.

Which brings us to my conspiracy theory du jour (or semaine, really).

The WSJ analyzed LIBOR and said it looked like banks were understating their borrowing costs, and that this was, in turn, keeping LIBOR at an artificially low level. Some of the fallout from this was (surprise, surprise) that LIBOR jumped up shortly thereafter. (I would argue that turning on the lights scared away the roaches...)

The Journal's hypothesis, IIRC, was that banks were understating their borrowing costs in order to appear stronger, or less weak, to their peers.

What if this wasn't the unintended consequence a self-perception problem, but a concerted attempt to game LIBOR? What if banks wanted LIBOR to be artificially low?

Why would they want to do that? How about to keep ARM-resets as low as possible? Why would they want to cut the amount of dough paid by homedebtors on their mortgages? Wouldn't that take money out of their own pockets?

Out of one pocket, maybe. But consider that the real goal may not be to squeeze more nickels out of the sheeple, but to keep them from defaulting on their homes, thereby making all those MBSs even more worthless, and dumping more crummy foreclosure inventory on the market where it sells for 50 cents on the bank's original buck.

Looking at it that way, might it make sense from the banks' point of view to game LIBOR in order to try and push it lower? Keep those resets a bit more affordable, and maybe those sheeple will make a few more payments -- maybe keep the securitized mortgages current long enough to unload them on some other sucker -- like the Fed or the FHA?

I'm just sayin... (And I doubt I'm the only one to speculate about this...)

6 Comments – Post Your Own

#1) On June 05, 2008 at 2:15 PM, chk999 (99.96) wrote:

I think this comes under the heading of "never attribute to malice what can be adequately explained by stupidity".

In this case I don't think the banks can plan well enough to pull this off. 

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#2) On June 05, 2008 at 2:52 PM, Zippidy2 (41.28) wrote:

This may all be correct; I believe that the majority of this mess is to be blamed on the borrower that shouldn't have tried to buy a house in the first place.  Maybe even a false sense of home ownership entitlement is partially to blame based on our gimme society.

The end state is that it will be completely hosed when the Democrats get into office and have the government (that can't run itself) take over and mandate thier liberal fix.

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#3) On June 05, 2008 at 3:18 PM, TMFBent (99.33) wrote:

In this case I don't think the banks can plan well enough to pull this off. 

Perhaps. But it only takes a few of the dozen or so to get the job done. And all the "planning" it takes is to undershoot your estimates. Plenty of plausible deniability for anyone who wants to say "No way, not us!"

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#4) On June 05, 2008 at 3:22 PM, EScroogeJr (< 20) wrote:

Bent, the rule of the thumb is, never look for conspiracies when stupidity would explain the facts just fine.

zippidy2, the sense of entitlement was true because everybody is entitled to a house, and by that I mean, everybody. The reason is that houses are cheap to build, the cheapest house costing $30, at least that's what Sears charged for a tent the last time I checked.

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#5) On June 05, 2008 at 6:50 PM, eskatonic (28.61) wrote:

interesting idea but I think I'll have to throw in with chk999 and escrooge

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#6) On June 06, 2008 at 1:29 PM, dth20k (73.11) wrote:

Sir, you are a voice of reason.  I really appreciate that lets one of their star analysts share his observations and off the cuff stock picks through CAPS.  And on this topic, I think you are dead on.  Once you see one roach (i.e. the continued AAA rating of Ambac) there are always more--trust me, I live in Brooklyn.  It will be interesting to see how these "self-regulating" mechanisms like Libor and the rating agencies come through all of this.

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