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...)
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