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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (68915)	8/27/2006 4:36:05 PM
From: ild	Respond to of 110194

<<< In the subprime world, that was exactly what happened.>>> IMO what has happened in the subprime world was that bigger, better capitalized banks have squeezed out smaller players. Originally the margins were huge, but by now the margins fell to the point where smaller outfits are no longer profitable. Even CFC said it didn't want to compete for market share. But it's all just the beginning as the defaults have not yet started in earnest.

To: Ramsey Su who wrote (68915)	8/27/2006 5:08:07 PM
From: ridingycurve	Respond to of 110194

You are correct. It was called Regulation Q and it allowed S&L's to pay slightly higher rates than commercial banks. As we all know, home ownership is a God given right and must be encouraged at all cost. Why did Reg Q go away? It was essentially rendered obsolete by the emergence of the capital markets. Savers were presented higher yield alternatives, with money market mutual funds one of the primary competitors. The effect was devastating, and thus was written the first chapter in the demise of the S&L industry. It had to pay ever escalating rates to attract and hold deposits. Once the average cost of funds and G&A expense exceeded fixed-rate loan income, the negative earnings quickly diminished capital. Capital, incidentally, was only required to be 2% since the S&L business model was regarded as so safe. Many shops became insolvent, but the FSLIC did not have nearly the resources to liquidate them. Thus was born "regulatory capital", whereby realized losses from the sale of underwater loan pools were miraculous deemed to be capital. All the losses that developed later were simply the result of misguided attempts by congress to salvage the industry rather than bite the bullet.

To: Ramsey Su who wrote (68915)	8/27/2006 6:16:03 PM
From: ridingycurve	Read Replies (1) \| Respond to of 110194

Sorry, I didn’t address your second question. The obvious problem with the S&L industry was that it suffered from nearly insurmountable interest rate risk. In its infinite wisdom congress attempted to address this problem by throwing open the doors to higher yielding, lower duration lending. Particularly, those were commercial and commercial real estate lending for which S&L personnel had no training and expertise. Additionally, S&L’s had neither the capital nor the loss reserves necessary to engage higher risk forms of lending. There were also extraordinary powers granted for direct investment, whereby S&L’s effectively took ownership interests in projects in lieu of interest payments. While many poor quality loans and loan participations were underwritten in good faith, crooks spotted the sugar tit represented by the expanded powers and bailed into the industry on both sides of the desk. To compound matters, Federal Home Bank Board examiners were not trained for review of complex lending, and often could not identify poor quality loans when they was staring them in the face. It was not until the regulatory function was moved to the FHLB System (later the OTS) that the examination staff began to come up to speed in both experience and numbers. This was partially accomplished by hiring experienced examiners away from other bank regulatory agencies. One other factor of note……..for an extended period of time “classified” loans had no regulatory significance for either capital requirements or enforcement actions. In fact, the OTS had no enforcement powers similar to those granted to the other regulatory agencies (cease and desist, removal from office, and withdrawal of deposit insurance in the case of the FDIC). The OTS could bark, but it couldn’t bite.