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Where Are the Regulators?



February 03, 2008 – Comments (4)

I was reading an excellent piece by Nobel Prize winer Joesph Stiglitz on his thoughts on the World Economic Forum.

One of the things that he said that is proving to be a lesson that Wall Street sociopaths, morons, idiots, scam artists, con men, swindlers bankers refuse to acknowledge (or perhaps once a swindler always a swindler) that Stiglitz said is:

Bankers – and the rating agencies – believed in financial alchemy. They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings. But one lesson of modern finance theory is that, in well functioning financial markets, repackaging risks should not make much difference.

If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1% cream, 2% cream, or 4% cream. There might be some money in repackaging, but not the billions that banks made by slicing and dicing sub-prime mortgages into packages whose value was much greater than their contents.

It seemed too good to be true -– and it was.

These are supposed to be intelligent people.  US and European banks are working together to try and "shore up" the the mortgage insurers.  I can't help but think this anything but smoke and mirrors to delay the day of reckoning when the risk comes home.  I can not help but believe it is perpetuating a further fraud on the markets.  

From my understanding of what I read in a letter from one of the largest share holders of one of these companies many of these insurance contracts have time limits.  They expire and new insurance contracts will not be written.

Give the appearance that everything is ok and that the nay sayers really don't know what they are talking about and more get suckered into taking this junk off the banker's hands, or get suckered in to believing that a discount is a deal when without the appearance they are insured in fact the junk may be worth zero.

Naked Capitalism thinks that the worst thing happening here is that the bankers are spending money shore the insurance companies up when they will lose their AAA rating later.

I have more sinister beliefs, they are trying to delay the inevitable for either personal interests or because of cost is less than if it enables them to get rid of more of their junk.

So, where are the regulators and how did they let this happen?

4 Comments – Post Your Own

#1) On February 03, 2008 at 3:34 PM, stockcommander (96.72) wrote:

Too few - not enough backing - the truth isn't something that most people want to know. Some people less than others ...

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#2) On February 03, 2008 at 3:46 PM, Tastylunch (28.71) wrote:

From my personal observations, regulators and regulations seem to act purely reactively. They never act until the sh!t hits the fan . Nobody cares about enforcing the rules when everybody is making money.

It was that way after Enron, the S&L crisis and especially 1929. I don't think that will ever change. It's just one of the flaws of human nature and our system. 

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#3) On February 03, 2008 at 6:45 PM, dwot (29.27) wrote:

Tastylunch, and then idiots that follow undo regulations that were put there for solid reasons.  I was shocked to zero down loans at my bank.  After our housing bust in 81 we had 10% down requirement and insurance required for before 25% and the rate was 2.5%, so it wasn't cheap insurance.

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#4) On February 03, 2008 at 9:23 PM, abitare (30.22) wrote:


FYI - I just posted a good debate video on my blog. But here is a good summary of Nouriel Roubini. Professor of economics at New York University's Stern School of Business, is calling it the worst housing recession since the days of the Great Depression. Roubini said he believes that a U.S. economic recession began in late 2007 and "is going to be much more severe" than economic recessions earlier this decade and in the early 1990s, with credit problems spreading across the financial system and impacting all forms of home loans, commercial real estate loans and even auto loans, among other forms of financing.

"What we're worried about today is a systemic financial crisis. This is a severe, massive problem. It's going to take years to adjust," said Roubini. Home prices have already fallen 15 percent to 20 percent in some areas from their peaks during the latest housing boom, with housing starts tumbling 40 percent and sales sliding about 50 percent, he said.

If prices fall 30 percent from the peak, that would represent about $6 trillion in lost value and millions of homeowners with negative equity, he said.

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