Can you precisely categorize the problem in your own words in a sentence, or two?
Can I precisely what? The subprime problem is not new news......its been talked about for nearly a year now. You posted the article.....did you not understand what you were posting? Oh wait.....its Spitzer's governmental interference that has you all up in arms even as you don't understand the problem. That's why you posted the article. I wonder how many times you complain about gov't interference without understanding the problem.
Nonetheless, don't feel bad.....you're in similar company....it seems Bernanke and Bush don't understand the problem either.
Is it that some organizations put out bonds that they now can't pay? Well investments come with risks. Why should that justify a bailout (whether from government funds, or from banks pressured by the government)
The municipalities that issued bonds, got a break on the interest through using the insurer, if the insurer took unjustified risks 1 - That's not the banks fault, 2 - Bailing them out increases the chance that they or someone in a similar position will again take unjustified risks. If the municipalities have to pay higher interest in the future, well 1 - They chose to work with these insurance companies, and 2 - They enjoyed the lower interest rates then their own fiscal situation would warrant while the insurance lasted. They also got another break by issuing variable rate bonds, if that comes back and hits them now its because they assumed risk when they didn't fix the rate.
Well let me explain to you the problem "in my own words" but it ain't going to be a sentence or two. You know how we're always talking about capitalism in America. Well in the 1990s, the monoline insurers were doing what they do best. They were insuring municipal bonds and making a very nice profit at it. However, like all American capitalists, they had a serious hunger, and I mean a serious hunger, for even bigger profits. And they started looking at the mortgage lending business, and specifically at the mortgage insurers like MGIC. And they began to drool big time. So they got into the mortgage insuring business in addition to insuring municipal bonds. Apparently, they didn't use the CDO instrument for their mortgage loans but turned the mortgage loans into bonds. I've not bothered to check how they created those instruments but created them they did..........in large numbers.
Now we come to the subprime debacle. In those mortgage bonds the monoline insurers created are the same subprime garbage banks are holding in their CDOs. Just as the banks don't have enough reserves to cover potential losses of the loans in their CDOs so too the insurers don't have enough reserves if they have to make good on all the mortgages they have insured.
Consequently, the insurers are now in very serious trouble. Now why does this issue make the subprime problem many times worse? Remember, the insurers also insure municipal bonds.....in fact that's all they did before they got greedy, I mean capitalistic and did what good capitalists do.....lust for more profits. Most of the municipal bonds issured by cities, counties and states in this country are insured by the monoline insurers. Think about it........most bonds issued to built new sewage plants, new highways, new airports etc are insured by the monolines. Its the very backbone of America. That's why muni bonds are considered such safe havens for investors.......first there is the financial worth of the gov't unit itself behind the bonds and then there is the insurer backing up the municipality.
That's all changed now........the monoline insurers are in big trouble. They still have triple A ratings but everyone knows those ratings are a sham......that the S&P is afraid to change those ratings to what they really should be for fear that the markets will become completely unhinged. Let me show you the chart of just one monoline insurer to give you an idea of how bad it is:
clearstation.etrade.com
That's right....in six months ABK's stock has dropped from $84 to $10.
If the bond insurance companies aren't bailed out maybe states and municipalities will be more careful about the bonds they issue and the organizations (if any) they have insure them.
But instead Spitzer wants to use New York's power as a regulator to force someone else to pay for the problem.
Do you have any idea how many foreign investors invest in muni bonds? Do you have any idea how many trillions of dollars we are talking about here? Do you have any idea what will have happen if all those investments come crashing down? As bad as the subprime problem is, this one is ten times worse. The credit markets are frozen in fear over this one. And foreign investors are beginning to see the US as some overdone banana republic.
And why are we in this pickle....because you rightwing bullsh*tters who only have a small grasp of how things work are forever complaining about how you hate gov't interference in your affairs. Well, dude, you had the bank and insurance regulators looking the other way as lenders, banks, real estate agents and the monolines did their thing. And now we have a big, big problem that Bush and Bernanke can't seem to figure out. Our only hope is Paulson......I suspect he understands fully what the problem is......at least I hope he does.
And if you think I am exaggerating.....ask Jim McMannis about what he saw as a real estate broker doing business over the past 7-10 years. He knows how badly real estate and lending standards were violated during that time.
And making matters worse, the subprime virus has not only infected lending and banking institutions throughout this country and in some cases, in other countries but now its into the insurers of municipal bonds. What's scary is how many different private organizations bought into this scam. Every day now, some new bank or lender admits to huge losses from subprime even as they claimed six months ago they were uneffected.
So Tim, this is your wonderful capitalism at its very best. And I know you ain't buying this one bit.....because in your heart of hearts, you can't possibly believe that private enterprise could be this greedy, this callous and this stupid. |
