A good and brief description of how the housing boom, deregulation, CDOs, and market ideology led us into this mess…
Can’t Grasp Credit Crisis? Join the Club – New York Times
Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors.
Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.
All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.
If you haven’t been watching the slow, ugly waltz to recession, the role of the bond insurers in the housing mess in the US has been crucial. Bored with insuirng boring (but so important) municipal bonds, the insurers decided to lend their good name too the high risk securitized mortgages which were the basic log on the bonfire of the housing fever.
They insurers now face lots of uncertainty ad because the rating they give to ANY bond becomes the rating for EVERY bond, their former gold standard (but boring, of course). Idiots. Boring can be good in all things financial). The ripple effect of not covering their claims and loosing their rating will be wide, profound, and in some schoolyard way, unfair. Why should my little borough face a credit crunch because the Martini swilling money classes in NY were “bored” by municipal bonds?
Anyway, enter Warren Buffet, superman of the financial age.
Warren Buffett throws $800bn lifeline to bond insurers – Times Online
Warren Buffett, the world’s third-richest man, has offered to help out three of the biggest bond insurers by reinsuring the $800 billion £408 billion of local government securities they underwrite.
Mr Buffett told CNBC television in the US that his firm, Berkshire Hathaway, had approached MBIA, Ambac and FGIC and offered to take on their municipal bond liabilities by providing a second level of insurance.
One of the aphorisms that Castells throws around that rolls around in my read is that in the information age what matters is not “the flow of power but the power of flows.” Maybe, as the hobbling of mighty banks and investment houses to the power of credit ratings and cash flows away. But, doesn’t Buffet’s potential to single-handedly right the global financial system offer a different new vision of power- the power of the super-duper rich to make singular impacts in the gargantuan global financial economy?