Ken Mac
Platinum Member
That is a fairly accurate summation of the chain of events that caused the mortgage crisis to blow up into a global contagion. But you have to start with Carter and especially Clinton who created 'feel good' but grossly misguided lending acts that literally forced banks to lend to burger flippers who had no business owning a home. ARMs were a big part of the defaults, but when you throw away your solid lending requirements to be nice to the underclass, you are playing with dynamite. And let's not forget Barney Frank who vehemently defended the collapsing Federal Mortgage programs until it was too late.You can’t be serious? Really?Holy cow, you are not exactly bothered by historical facts are you?There is absolutely no doubt that the trillions Bush borrowed for his military ventures are what caused the housing market collapse.
In fact, it cause a world wide recession.
The housing that started to fail at the beginning of the housing crisis, like in 2007, had been paying their mortgage payments for years. So it was NOT from people over extending to buy homes they could not afford.
Subprime Mortgage Crisis | Federal Reserve History
Not totally accurate, but they are discussing how the banks got harmed, not what caused the fall in the first place.
The pooling of high risk mortgages into toxic derivatives allowed banks to get federal guarantees on bad loans.
That greatly amplified the effects of the crisis and caused the government to bail out the banks, but is not what stared it.
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In the early and mid-2000s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors. New financial products were used to apportion these risks, with private-label mortgage-backed securities (PMBS) providing most of the funding of subprime mortgages. The less vulnerable of these securities were viewed as having low risk either because they were insured with new financial instruments or because other securities would first absorb any losses on the underlying mortgages (DiMartino and Duca 2007). This enabled more first-time homebuyers to obtain mortgages (Duca, Muellbauer, and Murphy 2011), and homeownership rose.
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What started the crisis was the deception of the British LIBOR in ARMs.
Libor scandal - Wikipedia
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WSJ Libor study
On 16 April 2008, The Wall Street Journal released an article, and later study, suggesting that some banks might have understated borrowing costs they reported for the Libor during the 2008 credit crunch that may have misled others about the financial position of these banks.[27][28] In response, the BBA claimed that the Libor continued to be reliable even in times of financial crisis. Other authorities contradicted The Wall Street Journal article saying there was no evidence of manipulation. In its March 2008 Quarterly Review, the Bank for International Settlements stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."[29] Further, in October 2008, the International Monetary Fund published its regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank's marginal cost of unsecured U.S. dollar term funding."[30]
A study by economists Connan Snider and Thomas Youle, in April 2010 corroborated the results of the earlier Wall Street Journal study, concluding that the Libor submissions by some member banks were being understated.[31] Unlike the earlier study, Snider and Youle suggested that the reason for understatement by member banks was not that the banks were trying to appear strong, especially during the financial crisis period of 2007 to 2008, but rather that the banks sought to make substantial profits on their large Libor interest-linked portfolios.[32] For example, in the first quarter of 2009, Citigroup had interest rate swaps of notional value of $14.2 trillion, Bank of America had interest rate swaps of notional value of $49.7 trillion and JPMorgan Chase had interest rate swaps of notional value of $49.3 trillion.[33] Given the large notional values, a small unhedged exposure to the Libor could generate large incentives to alter the overall Libor. In the first quarter of 2009, Citigroup for example reported that it would make that quarter $936 million in net interest revenue if interest rates would fall by .25 percentage points a quarter, and $1,935 million if they were to fall by 1 percentage point instantaneously.[34]
Central banks aware of Libor flaws[edit]
In November 2008, the Governor of the Bank of England, Mervyn King, told the UK Parliament that since the start of the financial crisis, "hardly anybody is willing to lend to any bank around the world for three months unsecured; they want to lend secured." As a result, he said that Libor had become "in many ways the rate at which banks do not lend to each other, ...it is not a rate at which anyone is actually borrowing."[35][36]
The New York Federal Reserve chose to take no action against them at that time.[37][38] Minutes by the Bank of England similarly indicated that the bank and its deputy governor Paul Tucker were also aware as early as November 2007 of industry concerns that the Libor rate was being under-reported.[39][40] In one 2008 document, a Barclays employee told a New York Fed analyst, "We know that we're not posting an honest Libor, and yet we are doing it, because if we didn't do it, it draws unwanted attention on ourselves."[38]
The documents show that in early 2008, a memo written by then New York Fed President Tim Geithner to Bank of England chief Mervyn King looked into ways to "fix" Libor.[41][42] While the released memos suggest that the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform, there is no documentation that shows any evidence that Geithner's recommendations were acted upon or that the Fed tried to make sure that they were. In October 2008, several months after Geithner's memo to King, a Barclays employee told a New York Fed representative that Libor rates were still "absolute rubbish."[38]
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Mortgage rates manipulated on reset date[edit]
Homeowners in the US filed a class action lawsuit in October 2012 against twelve of the largest banks which alleged that Libor manipulation made mortgage repayments more expensive than they should have been.
Statistical analysis indicated that the Libor rose consistently on the first day of each month between 2000 and 2009 on the day that most adjustable-rate mortgages had as a change date on which new repayment rates would "reset". An email referenced in the lawsuit from the Barclay's settlement, showed a trader asking for a higher Libor rate because "We're getting killed on our three-month resets."[61] During the analysed period, the Libor rate rose on average more than two basis points above the average on the first day of the month, and between 2007 and 2009, the Libor rate rose on average more than seven and one-half basis points above the average on the first day of the month.[62]
The five lead plaintiffs included a pensioner whose home was repossessed after her subprime mortgage was securitised into Libor-based collateralised debt obligations, sold by banks to investors, and foreclosed. The plaintiffs could number 100,000, each of whom has lost thousands of dollars.[63] The complaint estimates that the banks earned hundreds of millions, if not billions of dollars, in wrongful profits as a result of artificially inflating Libor rates on the first day of each month during the complaint period.[62]
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It was the fact US ARM mortgages were based on the British LIBOR instead of US Prime that caused the disaster.
If the homes had adjustable rate mortgages based on the US prime, their payments would have gone down with economy going down, and they would not have defaulted.
It was their payments almost doubling that caused them to default.
Personal responsibility was the root cause
and "the really smart guys" that put CDO's together are the ammunition that was provided
Interest rates just lit the fuse