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on a trader who profited from the fannie mae meltdown
From a Greenspan speech selectively/dishonestly
quoted by Michael J. Burry.
Greenspan, 8 April 2005
“With these advances in technology, lenders have
taken advantage of credit-scoring models and other techniques
for efficiently extending credit to a broader spectrum
of consumers. The widespread adoption of these models
has reduced the costs of evaluating the creditworthiness
of borrowers, and in competitive markets cost reductions
tend to be passed through to borrowers. Where once more-marginal
applicants would simply have been denied credit, lenders
are now able to quite efficiently judge the risk posed
by individual applicants and to price that risk appropriately.
These improvements have led to rapid growth in subprime
mortgage lending; indeed, today subprime mortgages account
for roughly 10 percent of the number of all mortgages
outstanding, up from just 1 or 2 percent in the early
1990s.” [Quoted from federalreserve.gov]
Greenspan warned about the looming
danger of Fannie Mae:
6 April 2005
“As I concluded last year, the GSEs need a regulator
with authority on a par with banking regulators, with
a free hand to set appropriate capital standards, and
with a clear and credible process sanctioned by the
Congress for placing a GSE in receivership, where the
conditions under which debt holders take losses are
made clear. However, if legislation takes only these
actions and does not limit GSE portfolios, we run the
risk of solidifying investors' perceptions that the
GSEs are instruments of the government and that their
debt is equivalent to government debt. The GSEs will
have increased facility to continue to grow faster than
the overall home-mortgage market; indeed since their
portfolios are not constrained, by law, to exclusively
home mortgages, GSEs can grow virtually without limit.
Without restrictions on the size of GSE balance sheets,
we put at risk our ability to preserve safe and sound
financial markets in the United States, a key ingredient
of support for homeownership.” [Quoted from federalreserve.gov]
Burry in April 2010:
“But that is not how I remember it. Back in
2005 and 2006, I argued as forcefully as I could, in
letters to clients of my investment firm, Scion Capital,
that the mortgage market would melt down in the second
half of 2007, causing substantial damage to the economy.
My prediction was based on my research into the residential
mortgage market and mortgage-backed securities. After
studying the regulatory filings related to those securities,
I waited for the lenders to offer the most risky mortgages
conceivable to the least qualified buyers. I knew that
would mark the beginning of the end of the housing bubble;
it would mean that prices had risen — with the
expansion of easy mortgage lending — as high as
they could go.”
“Observing these trends in April 2005, Mr. Greenspan
trumpeted the expansion of the subprime mortgage market.
“Where once more-marginal applicants would simply
have been denied credit,” he said, “lenders
are now able to quite efficiently judge the risk posed
by individual applicants and to price that risk appropriately.”
” [Quoted from nytimes.com]
A fascinating article, but what is
most fascinating to me is the naivete of the ‘reporter’,
“Somewhere between 30 and 40 percent of the
activity in the Greek economy that might be subject
to the income tax goes officially unrecorded, he says,
compared with an average of about 18 percent in the
rest of Europe.”
That is, it is around half as bad throughout
Europe, according to him.
Most of this can be repeated in the
Brown the Clown’s Enron accounting
has increasingly aggravated the mess.
Socialism always drives corruption.
It is deep in its nature.
“The structure of the Greek economy is collectivist,
but the country, in spirit, is the opposite of a collective.
Its real structure is every man for himself. Into this
system investors had poured hundreds of billions of
dollars. And the credit boom had pushed the country
over the edge, into total moral collapse.”
The casual unthinking acceptance
of collectivism by the ‘reporter’.
Ah, later on he does see his reflection:
“Thousands upon thousands of government employees
take to the streets to protest the bill. Here is Greece’s
version of the Tea Party: tax collectors on the take,
public-school teachers who don’t really teach,
well-paid employees of bankrupt state railroads whose
trains never run on time, state hospital workers bribed
to buy overpriced supplies. Here they are, and here
we are: a nation of people looking for anyone to blame
but themselves. The Greek public-sector employees assemble
themselves into units that resemble army platoons. In
the middle of each unit are two or three rows of young
men wielding truncheons disguised as flagpoles. Ski
masks and gas masks dangle from their belts so that
they can still fight after the inevitable tear gas.
“The deputy prime minister has told us that they
are looking to have at least one death,” a prominent
former Greek minister had told me. “They want
some blood.” Two months earlier, on May 5, during
the first of these protest marches, the mob offered
a glimpse of what it was capable of. Seeing people working
at a branch of the Marfin Bank, young men hurled Molotov
cocktails inside and tossed gasoline on top of the flames,
barring the exit. Most of the Marfin Bank’s employees
escaped from the roof, but the fire killed three workers,
including a young woman four months pregnant. As they
died, Greeks in the streets screamed at them that it
served them right, for having the audacity to work.
The events took place in full view of the Greek police,
and yet the police made no arrests.”
basel 2/3 kicks the ball far down the road to 2019
Basel 2 (now some hacks are going on
about Basel 3) requires reserves to move from 2% to 7%,
or is it 4.5%?
Tier one (shares and retained
capital): 4.5% by 2015,
plus 2.5% ‘capital conservation buffer’ by
“The Basel Committee on Banking Supervision
announced that the total capital that banks need to
hold will remain at least 8% of their risk-weighted
assets. But it will be strengthened by an additional
capital buffer representing 2.5% of risk-weighted
assets, taking it to 10.5%.
“Of that, common equity--the most loss-absorbing
form of capital--must represent 4.5% of risk-weighted
assets. Including a 2.5% conservation buffer, which
will be of the same quality, banks will be required
to hold a minimum common equity ratio of 7%.
“Banks with ratios below the 7% mark will have
to retain their earnings in order to reach that target
as soon as possible, the Basel Committee said.
“Tier 1 capital will rise to 6.0% from 4.0%
currently." [Quoted from online.wsj.com]
“The 16-member euro area is likely to recover
at a faster pace this year than previously estimated
as the second quarter performance, particularly in Germany,
progressed markedly. But, the aggregate growth figure
masks uneven developments across member states.”
“The commission's interim forecast published in
February and September, is based on updated projections
for Germany, France, Italy, Spain, the Netherlands,
Poland, and the U.K. The commission upwardly revised
GDP estimates for all the seven economies.
“More than doubling the growth forecast for Germany,
the commission said the initially largely export-driven
recovery is increasingly becoming more broad-based.
Germany's GDP growth is seen at 3.4%. Similar growth
is projected for Poland.
“Among those seven nations, only Spain is expected
to contract this year by 0.3%, but slightly better than
the earlier forecast for a 0.4% decline. The French
and Italian growth outlook were upwardly raised by 0.3
percentage points to 1.6% and 1.1%, respectively.”
“JUNE 26, 2010
The Keynesian Dead End
Spending our way to prosperity is going out of style.
“Today's G-20 meeting has been advertised as
a showdown between the U.S. and Europe over more spending
"stimulus," and so it is. But the larger story
is the end of the neo-Keynesian economic moment, and
perhaps the start of a healthier policy turn.”
Many people are writing articles on
Keynesianism without understanding economics, or Keynes.
The linked article is interesting,
mostly for the lack of understanding of Keynes.
There is, at the heart of the situation,
much confusion between money and work. In fact, several
Keynes was a pragmatist, not a dogmatist.
Before real progress is made, you first
have to decide just what you wish to achieve.
The approach of Obama or Brown the Clown
is clearly ludicrous. Not even a donkey would be able to stop guffawing
at the notion of “spending our way to prosperity”.
Certainly Keynes would never have fallen for such nonsense.
Do you want more work? Then bury
bottles with money in and pay people to dig them up,
as Keynes advised in satire.
Do you want the unemployed to have
money to spend? Then give it to them for free and stop
Do you want some work done that
the lazy shirkers will not do? Then try Hitler’s
approach - point guns at them.
Alternatively, with more sense, make
the handouts dependent on the recipients doing the jobs
you want done. Of course, the unions will not like what they
will then call cheap labour.
But do not become muddled between these
Now what if you have no work you
want done? Then, if you want to be Nero or a pharaoh,
and believe the unemployed should be kept busy and out
of trouble, you bury bottles or build pyramids, or even
motorways. But but but .... what you most definitely
do not do is use huge modern machinery. You issue the
‘workers’ with pickaxes, or even with tooth
Returning to money. The money printing
in the UK was sensibly used to wipe out debt and give
the government banking system more tokens to play with.
That bit has damn-all to do with work or ‘unemployment’.
So don’t be confused!
“The big three credit ratings agencies were
threatened yesterday with fines and the creation of
a new state-backed competitor, only weeks after European
leaders attacked them for exacerbating Greece’s
problems with downgrades.
“The agencies will be subject to a new European
supervisory body with the power to hand out fines and
suspensions under plans unveiled in Brussels.”