Wednesday, April 21, 2010

All You Really Need to Know About Credit Based Expansion

The following lines from Bill Black's prepared testimony to the House Financial Services Committee really are all you need to know. Lifted from Tim Iacono's site:
Lehman’s principal source of (fictional) income and real losses was making (and selling) what the trade accurately called “liar’s loans” through its subsidiary, Aurora … The FBI began warning publicly about the epidemic of mortgage fraud in 2004 (CNN).

That loss, however, may not be recognized for many years – particularly if the liar’s loans become so large that they help hyper-inflate a financial bubble. In the near-term, making massive amounts of liar’s losses loans creates a mathematical guarantee of producing record (albeit fictional) accounting income. As long as the bubble inflates, the liar’s loans can be refinanced – creating additional fictional income and delaying (but increasing) the eventual loss. The industry saying for this during the S&L debacle was: “a rolling loan gathers no loss.”


"Young fool, only now, at the end, do you understand!" - Darth Sidious to Luke Skywalker

Extend and Pretend is option one, and it still is.

Jesse has the video embedded here.

Have a good night.

4 comments:

Moneta said...

That's why deflation or inflation does not really matter.

The net effect will be a drop in purchasing power.

----

On another note...

Because government has taken over the fiancials indsutry, I believe Goldman is not out of the woods yet.

I have been enjoying their hubris... because they don't seem to understand that they are throwing oil on a fire. They think so highly of themselves, they think they are above the system. That more than anything else will guarantee their downfall.

IMO, Goldman was USED to prop up the system. And they don't see it because they think so highly of themselves. Why Goldman? Among many reasons, the fact that the Secretary of Treasury was Paulson is a huge factor. But he's not there anymore and the system is now propped up.

My spidey sense tells me that government officials, essentially controlling banks are not too happy with million $ banker bonuses vs. their 100K incomes... especially when this money has been hand delivered by them.

I think regulation will come but if you've ever worked in government, you'd know that it takes time.

That's my forecast for the next 2 years.

Everybody keeps on comparing today with 1936. I can't help but think we're closer to 1930-31.

Anonymous said...

So how is it the fed ends QE and the bond rates dont do anything? Speculation was they (& mortgage rates) would rise 50-100bp, maybe more. Instead, they did jack shit.

GawainsGhost said...

Who is going to regulate the regulators when the regulators aren't regulating? Just asking.

Anyway, I was out and about yesterday, driving around, checking on houses. I got a new assignment from MGIC for a drive-by price opinion and a historical price opinion on a house they're thinking about acquiring. Hmmm.

Nice house, or at least it looked like one from the street. Corner lot, side entry garage, 4/2.5/2, 2115 sf, wood privacy fence, built in 1994. Vacant and on lock box. No doubt they'll be asking for a full interior price opinion soon.

This house sold for $154,397 in March of 07. And it's already been foreclosed on. This is why they're asking for a historical--they want comparable sales within six months prior to the sold date, because they're questioning the appraisal. Then they want to know the current fair market value to see if it would be profitable to acquire and sell the house.

Problem is, from my intitial research I'm looking at prices in the $120,000s and $130,000s. Nothing like appraisal fraud and price deflation, is there?

Anyway, as I was heading back I thought I'd stop by Hastings, maybe pick us a CD or two and a new carry case. It's boarded up! Closed since February. Wow.

This was a nice store. It had a coffe and pastry shop with tables, a book section, a music section, a movie section, an accessories section. It was a one-stop, everything you needed, shop. Now it's gone.

Maybe Hastings couldn't compete with Barnes and Noble right down main street. Or maybe internet sales did it in. I don't know.

But anyone who thinks commercial real estate is not the next disaster looming is deluding themself.

getyourselfconnected said...

Moneta,
good stuff.

Anon,
if you know how the FED MBS buys work, they still have not exited the stage even now, it takes time for settlement. I fully expect mortgage rates to go up in a slow bleed that gathers steam as the wave of forclosures hit later this year. Then we will see. As of now, yup, not much moving at all. And yes, that does surprise me.

Gawains,
the death of the small store is a sad side effect of the chain megastores.