The Problem That Won’t Go Away

With everyone hoping for positive GDP growth in Q3 and Goldman Sachs analyst Jan Hatzius now predicting growth at an annual rate of three percent in the second half of the year, the banks, investors, and politicians are all hoping that that nasty problem of foreclosures would just go away already. Unfortunately for everyone – especially the people losing their houses – there’s no reason for it to go away.

Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.

Calculated Risk provides this great chart from Matt Padilla (see the CR post for definitions of the categories):

90-day-chart-big

The foreclosure problem has gotten a little more press recently as the Treasury Department attempts to follow through on its “name and shame” campaign to pressure mortgage servicers to modify more loans.

There seem to be two main explanations for why more loans are not being modifyied. The New York Times recently reported that for the servicers at the center of the process, it is simply more profitable to make fees off of delinquent loans than to foreclose on them and give up that stream of fees. On this theory, the cash incentives being provided by the government are simply not big enough to change their financial incentives.

The servicers prefer to argue that their hands are tied by the investors who own the mortgage-backed securities that have swallowed up the mortgages. On this theory, the Pooling and Servicing Agreements that govern these securitization trusts restrict the ability of servicers to modify mortgages. However, an article by Karen Weise in ProPublica yesterday casts serious doubt on this claim. Weise follows a household that is trying to get a modification of their mortgage, serviced by Wells Fargo, under the Making Home Affordable plan. Wells Fargo claims that it cannot modify the mortgage under those terms because “the investors need their money,” and instead proposed a different modification, which would increase the loan principal by $80,000. However:

researchers at UC Berkeley’s law school looked at the contracts covering three-quarters of the subprime loans that were securitized in 2006. The researchers found that only 8 percent prohibited modifications outright. About a third of the loans were in contracts that said nothing about modification, and the rest set some limits but generally gave the servicers a lot to leeway to modify, particularly for homeowners that had defaulted or would likely default soon.

And that is the case with the loan in question, for which the servicer need only make a “reasonable and prudent determination” that the modification is in the investors’ interests. What’s more, in this case, “Deutsche Bank [trustee for the securitization trust] spokesman John Gallagher said servicers are ‘solely responsible’ for deciding all modifications.”

According to Weise’s article, the administration anticipated servicers’ fear of being sued by investors, but a key phrase in the proposed legislation was removed by Congress as a result of lobbying efforts. Servicers would probably have preferred the phrase be left in, but the end result is it gives them a convenient excuse for failing to modify mortgages – which, as the Times pointed out, is often in their own financial interests.

It will be interesting to see if the administration chooses to take serious action to reduce foreclosures, or whether it sticks to a “name and shame” strategy that is likely to be ineffective.

By James Kwak

49 responses to “The Problem That Won’t Go Away

  1. Eric Dewey, Portland, Oregon

    Barney’s right: it’s soon time to cramdown to be resurrected.

  2. We got out of our mortgage by taking a $40k personal loan from my father, to be paid back over 40 months. We basically borrowed against our inheritance. Otherwise we’d be adding to the blue column right now, and hoping for a quick foreclosure against our property.

    Obama’s policies are definitely weakening the middle class and strengthening the banks. Except for fundamentals I’m out of the economy for the next five years while I pay down debt incurred from the housing market bubble because I had to relocate for a job. Given my age and income I don’t ever expect to be able to afford a home again.

    In my opinion this administration, which I supported and believed in, has been a disaster. Fiscally the large banks will continue to be rewarded and the consumers will continue to be abused. I have now made it my life’s goal to do as little business with Wall Street as possible, and to mistrust anything associated with the Federal Government. Neither have the citizen’s interests at heart.

  3. I would like to hear James’ or Simon’s take on this story currently rising up reddit’s economics section:

    http://www.chrismartenson.com/blog/fed-buys-last-weeks-treasury-auction/23880

  4. “Unfortunately for everyone – especially the people losing their houses”

    I continue to be surprised at the knee-jerk characterization of foreclosure as something bad for the borrower. Yes, it has some unpleasant aspects such as credit rating reductions and looking for a new place to live. But the frequently huge improvement to the balance sheets of the borrowers is incredibly valuable to many – even most – of these borrowers. Even the forebearance taxes are being waived. People are generally aware of where their self-interest lies and even if they won’t articulate it so boldly their actions are clear: foreclosure is a net benefit for millions of borrowers.

  5. Eric, a “net benefit” presumably because in the US a mortgage debt is against the home not the person?

    In the UK and, I believe most other countries, it is against the person so a foreclosure is often the start of a journey towards bankruptcy.

  6. Only in non-recourse states.

  7. Make foreclosure a de facto bankruptcy filing. The judges can then “cramdown” if that is best, but it should also make borrowers with substantial other assets think long and hard about walking away. My one suggestion for bankruptcy guidance would be that the filer should be required to demonstrate that they had a reasonable expectation of being able to honor their contract when it was entered into. I don’t think we should allow folks who simply took out a put option on some property they could not afford to remain in that property merely because they found a big enough fool to lend them the money.

  8. Which most states are.

  9. True enough. I was speaking of the general US experience of non-recourse loans. But if it wasn’t a net benefit, I guess they would find a way to continue to make the payment. I just think that a non-recourse environment is very favorable to borrowers and if the “price” to keep non-recourse lending is to not allow cramdowns it is still good for the borrowers. I do believe that lenders will add some number of basis points to every loan if cramdowns are allowed. Maybe you could have more options: standard rate non-recourse without cramdown rights, standard rate + XX BP to have cramdown rights.

  10. Another pro-foreclosure vote here. Most of these people need to move into more affordable housing. Painful for them? Yes. Painful for the rest of society? Yes, but primarily in the short term only. Most of the mods just delay the problems – add another line to the bill for future taxpayers.

  11. My sentiments are exactly the same as Chris’s, except that Congress is at least equally to blame. Both branches of government have been so captured by the moneyed interests it’s legitimate to wonder if change is even possible.

    I have in front of me a letter from the Hope Now Partnership, a name that can only be understood by referring to George Orwell texts. My large bank servicer apparently is better paid by reaping delinquency fees from Freddie Mac than ensuring that the loan is repaid. Not to go on and on, but the details of my story are being repeated countless times across the country.

    The fallout from a broad loss of trust in the government will be there for generations.

  12. Lavrenti Beria

    Chris,

    ” … and to mistrust anything associated with the Federal Government.”

    And here the beginning of wisdom. We’ll see that you’re placed on one of the juries after the lobbyists and the filth that govern us are securely behind razor wire and the show trials have commenced. I have little doubt that you’ll find yourself enlarged watching rodents like Pelosi and Bonior being consigned to a ifetime of forced labor.

    At core, the problem we’re facing is less economic than political. Almost every heist can be assured of success when there is a willing collaborator on the inside. And ours is just one heck of an inside job, eh?

  13. I’m hardly an expert on MBS, but where the securitization agreements are unclear, I can see where the servicers would be legitimately hesitant to modify loans. It seems unlikely that “investors” as such would have to approve a modification on an underlying loan. (I am guessing this is the servicer trying to put the situation into terms the borrower can understand.) On the face, it would seem like the servicer would actually be exposing themselves to legal liability for not acting on a “win-win” modification. But I can see where there might not be such a thing, or it at least might not be very straightforward – depending on how payments are sliced among classes of investors, investors might be affected disproportionately depending on how the loans are modified.

  14. I agree Ben. No pain, no gain.

  15. Actually, Not.

  16. I believe this chart is specific to Orange County, reading the original post.

    However, I’m sure it’s broadly applicable to any areas where there was heavy building of McMansions between 2003-2007.

    Contrast areas such as SW Houston (pre-2000 builds) that have low foreclosures with NE Houston (2003 on) that have high numbers of foreclosures.

  17. Lavrenti Beria

    And, most remarkably, this from Obama via CBS News:

    “Though we lost 247,000 jobs in July, that was nearly 200,000 fewer jobs lost than in June, and far fewer than the nearly 700,000 jobs a month that we were losing at the beginning of the year,” he said in the White House Rose Garden.

    “Today, we’re pointed in the right direction,” the president continued. “We’re losing jobs at less than half the rate we were when I took office.”

    Now there’s one for you, taking credit for the loss of 247,000 jobs! What an utter schlemeil this disaster is! As he and his surrounding compliment of lice eat caviar and toast foreign heads of government, the rest of us prepare for residence in tent cities. Here’s a rather less rosy take on the jobs numbers from Zero Hedge:

    http://www.zerohedge.com/article/truth-behind-todays-bls-report

  18. Some degree of foreclosure/debt liquidation is necessary. The problem is if the speed of liquidation (largely driven now by unemployment, NOT loans that were initially bad) triggers debt-deflation…

    Here’s the crux of the matter:

    In October, we are presented with a Fait Accompli from the banks: save us, or your money supply implodes, and the entire world economy with it.

    As much as it sickens us, they are right. If they go under, there’s no credit, and consumption spirals inward. Cash-holders (rightly) anticipate massive price cuts and hold onto cash till they can buy assets for pennies on the dollar… deflationary expectations set in (if I can just wait to buy, it’ll be even cheaper), and the death spiral starts. The only ones who can’t cut expenses are debt-payers, who are slowly strangled in waves (in each wave, a progressively more-safe consumer goes bankrupt).

    So, we bail out banks (who made the bad loans) and bank bondholders (who loaned money to banks). The taxpayers shoulder the bill. We do nothing for debt-owners because “it’s their fault, they should pay”.

    (And to those who argue that the government “profited” from bailing out Goldman, I have three letters: AIG)

    The morality seems to be one sided.

    The real answer, btw, is to restore the long-run inflation target (than means moving to 4-5% for a few years to compensate for this year). Instead, we’re running a massive deficit while nominal incomes (and hence, nominal taxes) decline relative to debt levels, and we’re subsidizing credit to banks who in turn loan out money at ridiculously high spreads.

    I warned many months ago – it’s either restore long term inflation expectations, or face painful waves of liquidation. Welcome to liquidation. If we keep at this for 5-15 more years, we’ll have liquidation on the federal level.

    But maybe that will be a good thing… No one is more in debt than the US taxpayer.

  19. You could have rented, Chris. I did.

    You, along with millions of others made really stupid financial moves. I can relate, I did the same thing in 2000.

    But you know what, I didn’t blame the government for all the money I lost in the market that year. It was my mistake and I continue to pay for it. It would be nice if all these hardship cases had a moment of self-examination to add to their sob stories. Just a flicker of recognition that they bear some responsibility. It sure would make helping you alot easier.

  20. Lavrenti Beria

    Chris,

    And although it’s aimed mainly at the Fed, here’s something explanatory you’ll find interesting from Mike Whitney at Counterpunch today:

    “The Fed’s “mandate” is public relations claptrap. Bernanke hasn’t lifted a finger for homeowners, consumers or ordinary working stiffs. All the cash is flowing upwards…according to plan. The Fed is a social engineering agency designed to serve as the de facto government behind the smokescreen of democratic institutions. Does anyone [think} that a black, two year senator with no background in foreign policy or economics is calling the shots?

    “Obama is a public relations invention who’s used to cut ribbons, consoling the unemployed, and convincing Americans they live in a “post racial” society.”

    Mike is always concise and poignant, I’ve found. :-)

  21. Chris did take responsibility, Neil D. He could have walked, instead of turning to his family, and then you the taxpayer would have been on the hook for more bank bailouts.

    What I’m complaining about is that reckless lenders are being rewarded for their poor financial decisions. That’s a choice made by this administration as well as the last one.

  22. I value your opinions. But, as Jonathon already stated, this data is specific to Orange County CA. Calculated Risk failed to mentioned that in his posting as well, his sycophants failed to figure that out. I think it is well known that SoCal experienced the largest market bubble and is now experiencing the largest market burst. I don’t believe Orange County is even close to being representative of the National Market. Not to mention that I am skeptical that credible statistics on 90+ day lates are obtainable without a Court order.

  23. Really? I guess I lack enough info from the brief post to reach that conclusion. All I heard is “woe is me” and blame for others. Perhaps I overreacted. So sorry.

    Stuff happens. We long ago abandoned our fellow citizens to the whims of the market. It’s rather disingenuous, in my opinion, to complain now.

  24. 3 % growth – ha – what are they smokin’

    The last quarter was only negative 1% because government spending (30% of the economy) grew at an unsustainable 11% rate. Otherwise, private sector second quarter growth was big time negative with no bright spots.

    Consumer credit and consumer spending, ( 70% of the economy) are collapsing. Untold billions (trillions?) in foreclosures are being held back, because the banks don’t want them on their balance sheets. Many investors in real estate are getting hammered because people are not paying their rent. Part time employment is way up, masking the true unemployment picture. And the Fed is playing games with the 7% and longer treasuries.

    You can tell our dear President and his SEIU goons that we have not “turned the corner”.

  25. Earl Killian

    Instead of trying to shame lenders into mortgage modifications, the Federal government should simply offer 4%, 30-year fixed, mortgages of its own and let people refinance.

    If the government finances the mortgages with 10-year treasury sales, it would actually make a light profit until the increased sales of 10-year notes drove up rates (but since mortgage-backed securities would be paid off at the same time, those investors might have no choice but to buy treasuries as an alternative).

    If the banks won’t do their job, then let them get out of the way for someone who will do the job.

  26. Re Chris, I call this statement in his comment accepting responsibility:

    “Except for fundamentals I’m out of the economy for the next five years while I pay down debt incurred from the housing market bubble because I had to relocate for a job. Given my age and income I don’t ever expect to be able to afford a home again.”

    I always try to read thoroughly and understand fully the stuff I comment on. In his case, one requirement (job relo) forced him to take a cash haircut that he wouldn’t have had to take otherwise. He’s making the payments. Not his fault, totally, but he’s making the payments.

    Luck has a lot to do with our outcomes. Were you born rich or with an IQ of 170? Are you 6’5″, have a vertical leap of 30″ and the hand-to-eye coordination of a master juggler? Can you run 100 meters in less than 11 seconds or a mile in 4 minutes? If you’re Canadian and were born after April of your birth year, I sure hope you didn’t aspire to play hockey. Were you driving along minding your own business in your own lane when a drunk driver hit your car head on? Did your employer decide to withdraw all health care insurance due to a tough year? Shall I go on?

  27. If you don’t have the money, you can’t make the payment; when it comes to their residences, owners tend to sacrifice everything else possible to keep them. Non-recourse loans are favorable to borrowers only when lenders are profligate and don’t do their homework on the underlying assets. Recourse loans serve the purpose of providing additional support when the loan amount exceeds the value of the secured assets. This is lending 101.

    Lending 102 tells us that when the borrower suffers a temporary setback, the best option is to restructure the loan to meet the capacity of the borrower to repay until he can recover (this assumes that you have bothered to know and trust your borrower, part of lending 100, a prerequisite for 101). If the setback looks fatal, then, exercise your rights as expeditiously as possible and move on. This actually works for the borrower, too.

    Why do we leave common sense so far behind when discussing this topic? Contracts and minor financial benefits or costs are lousy behavioral incentives for individuals. When your family’s livelihood is in doubt, a few basis points just doesn’t matter. For lenders who hold the paper they originate, if you expect to make a lot of lousy loans or have a lot them go south (>2% of your portfolio), then cramdown vs. no-cramdown may affect your pricing, but the guys who make good credit decisions will kick your butt in the market by offering better deals and having fewer writedowns.

    Of course, if you aren’t holding the paper, you don’t care what happens to it. If you hold lots of it – $Bs – then, yeah, you’ll add those basis points to non-recourse loans because that’s all that matters to you. The loan goes south, you earn more fees, and some other guy takes the writedown or writeoff. Duh!

  28. As has been pointed out in CR loan modifications rarely succeed without reduction in the principle of the loan. That said, it’s futile to simply ask for a mod that extends the term of the loan. Lenders will cry sanctity of contract on principle reduction (not that we should believe that line).

    On the national scale, we have two real problems. The banks and the home-owners. If we simply go for principle reductions that could take a good chunk out of the poorly capitalised banks. Since the administration has been so concerned about the banks, it would be antithetical to really push for principle reductions.

    (A question for accountants: Does a principle reduction immediately show up on the balance sheet?)

    The real option, as cramdown may be infeasible presently, is ruthless default. Were I a home-owner, a cost-benefit analysis would be in order, because that’s the most forceful means, and I would not be holding my breath for a government program.

  29. I borrow

    I spend

    I repay

    Why do Americans have such a big problem with the last step?

  30. This is an interesting concept: protect the expert from his own bad judgment. This recommendation makes sense only if the borrower defrauded the lender.

  31. Well said. You must remember, though, that this administration inherited the circumstances that are driving this debt increase. I’m not apologizing for the administration’s approach. I’m simply pointing out that the economy isn’t the only aspect of life in these United States that needs fixing and that will cost money.

    The size of national budget deficit is only massive or otherwise relative to total output and income. It must be managed, but don’t let the nominal size of it drive your decisions.

  32. Why is the color the President’s skin germane to his capabilities in economics or foreign policy? Is there more to this post than what’s on the page, here?

  33. I’m sorry, but I don’t see how lying about the terms of one’s servicing contract is equivalent to “put[ting] the situation into terms the borrower can understand”. On the legal liability issue, they could be liable for lying, but what are the monetary damages and who do you believe unless the conversation is taped and you can afford discovery? And, there is usually language in the loan documents that indemnifies the lender and servicer against just the sort of liability to which you refer (usually near an occurrence of “sole discretion”).

    Reaching a “win-win” outcome is frequently (but not always) possible. There was a story on This American Life (about 3 months ago) about a servicer that created a software package that captured all of the information necessary and sufficient to a loan restructure investigation and is using it to great success, now (and for the last 18 months) in modifying loans efficiently and effectively (“efficiently” being the operative word, here). An interesting part of the story is the part where other servicers (large banks like Wells Fargo, for example), when discussing using them as to service loans for them, disclosed that they had been unable to or hadn’t even tried to develop the software capabilities of this servicer (I wish I could recall their name). This little company was, needless to say, surprised at this news.

    Yeah, it’s possible to restructure a lot of these loans sensibly. Unfortunately, most of the clowns who made them aren’t equipped to do it. So, as would any schoolyard bully who can’t see the alternatives, they bully the borrowers into handing over their lunch money. Make foolish loans and agree to collect them without having the tools to do it properly. Should I be surprised?

  34. Yes, but, how is important. If the provision for losses exceeds current losses, then it appears as a reduction in the provision on the B/S and a reduction in the total outstanding loan balance on the B/S (debit provision; credit loans – remember, loans are assets for lenders). If the provision is equal to or less than the current losses, then the “excess” shows up as an expense on the I/S and a reduction in loan balances on the balance sheet.

    This is key: If the provision is adequate (first case), neither income nor equity are impacted at all. If the provision is inadequate, income and equity are impacted (equity by a reduction in earnings or a loss). The current situation is the result of bad decisions (foolish loans or loan purchases) and the failure to recognize them as such (inadequate provisions for losses).

    The second problem lingers – inadequate loss provisions and inadequate capital reserves implies no flexibility to restructure or forgive debt.

  35. Stuff happens; things change. Some we can control; some we can’t.

  36. Ben: I agree. It’s about restructuring one’s balance sheet the only feasible way.

    Yakkis: crap; gain frequently happens without pain and pain frequently happens without gain.

    For the first case, witness Goldman Sachs and Merrill Lynch bonus recipients. For the second case, witness the survivors of life-saving surgeries where coverage was denied by their carriers and who can’t afford to pay for it.

  37. Sorry, I was a little vague there. When debt is issued, a trustee is selected to represent the interests of investors (the trustee is legally differentiated from the issuer of the securities). The legal documents related to the trust will spell out how the income from principal and interest payments on the various loans that will flow through to investors will be treated. What I meant is that when the servicer tells homeowners that “investors” will not allow them to do it, they probably are just saying that because it is easier than explaining the legal structure behind the security that is (in theory at least) restricting the servicer’s ability to modify the loan. This may or may not be true, depending on the actual language in the documents. Servicers may just be fee-happy or they may have legitimate concerns. I’m not defending the servicer at all, I’m just saying that it is impossible to know what motivates them without knowledge of the specific debt securities. Sometimes the documents are good at addressing unforeseen events and sometimes they aren’t. If you read the study that is cited, you’ll discover that sometimes the MBS documents do forbid modifications outright (which, frankly, seems idiotic to me), but they said this was only something like 9% of the (limited) number of securities they examined.

    If “the best interests of bondholders” is the determining factor, that can be anything and everything depending on how the p and i payments on the underlying loans are sliced. Depending on the tranche the investor owns, the specifics of how the loan is modified (principal reduction, reduced interest rate, extended maturity…) may have a different impact on different investors.

    I think calling this a “sanctity of contracts” issue kind of oversimplifies things. But the apparent lack of diligence in how these securities were produced never ceases to amaze me.

  38. Lavrenti Beria

    Charles,

    Whitney will have to speak for himself, but I think its a reasonably safe bet that his reference to “a black, two year senator” is commentary on the likelihood of the ruling class actually allowing a black man and one clearly short on credentials at that to serve in any high ranking government job without owning him lock, stock, and barrel. In my view, no statement respecting the intrinsic relevance of Obama’s skin color to his native capabilities is being made here at all, but rather an indictment of the suspected prejudices of those in charge of things. Whitney’s critique of Obama here is of Obama-as-tool, not of Obama-as-negro, and his point is all-too-well taken.

  39. “Stuff happens; things change. Some we can control; some we can’t.”

    Sounds like a real commitment to meeting one’s obligations:)

    As I say, Americans have a problem with repaying. But if “things change” means it’s OK not to repay, then you won’t mind if ownership of the things you bought is changed to the person whose money you used to buy them, and whom you didn’t repay.

    But I forget, that last little change can be controlled, with political muscle.

  40. The really incredible thing is that more holders (non-servicers) are not actually insisting on modifications. It’s obvious that the servicers can benefit from the additional fees associated with delinquencies, but, substantially, the holders do not benefit. All this non-modifications strategy does is to push out the problem to another day. Already, we are hearing that the bulk of the subprime, etc., loans will be in trouble in the NEXT two years. With unemployment likely to get to 11 or 12 percent by next year, this will only exascerbate this issue. But, sooner or later, the piper will have to be paid, and then is when the toxicity problem could very possibly or probably lead to the second of a double dip, and the taxpayers will be asked for more bailout. But then, though the other economic issues (states’ deficits, health care, etc.) will drown out the cries of the drowning, and collapse could easily occur. At this moment, treading water is okay, but sooner or later, with no action and no lifejacket, our economy will drown.

    It’s a shame, but by the time of the next election, almost every incumbent in either party will be in trouble, and most of the monied interests that support their reelection campaigns will be tapped out from supporting them in office. And who wants to run for office in such a situation. I would question that anyone wanting to must be nuts.

  41. Bayard,

    If the loans have been securitised, matters complicate considerably. Different tranches may win/lose from different servicer strategies, and the holder of part of any tranche can find a hungry lawyers . . .

    Tanta over at Calculated Risk was writing repeatedly about the problems of Tranche Warfare before her untimely demise.

  42. I echo JD’s complaint that neither CR nor BS pointed out that the graph represented only Orange County, CA

    It’s hard to believe that this fact escaped both very conscientious blogs.

    Ozajh reminds us about Tanta (Doris Dungey). Wonder if she’s related to this other Dungey who works with the Centre for Financial Analysis & Policy at the Cambridge Endowment for Research in Finance (CERF).

    http://www-cfap.jbs.cam.ac.uk/

    http://www.dungey.bigpondhosting.com/

    Prof. Dungey’s research seems to focus on financial crisis contagion. In this paper she references the earlier work of Kaminsky and Reinhardt on crises (see previous Naked Capitalism post on Early Warning Systems.

    http://economistsview.typepad.com/economistsview/2009/08/could-an-early-warning-system-have-predicted-the-crisis-.html#more (Read Bruce Wilder’s comments on the post too)

    Prof. Thoma’s post republishes a paper by two VoxEU people which “suggests” that we can’t predict crises like this one.

    http://www.voxeu.org/index.php?q=node/3834

    The title of their paper is “Could An Early Warning System Have Predicted This Crisis” Considering the title of their paper, it’s strange they don’t reference Kaminsky, Reinhart, and Morris Goldstein’s (Peterson Institute) paper titled “Assessing Financial Vulnerability: An Early Warning System for Emerging Markets”

    Nor do they reference Prof. Dungey’s work. Important enough for Cambridge University, but not enough for them? One of the authors works at the Fed, and the other teaches at Berkeley and is associated with CEPR.

    More curious — another interest of Prof. Dungey’s is US Treasuries and shocks thereto… but in her discussion of contagion she doesn’t mention the yield curve, one of the great indicators of brewing trouble?

    CERF is fascinating. Looks like it’s strongly associated with a company called RiskLab International, and with DeutscheBank. One would assume they know a thing or two about risk… and financial crises…

    http://www.cerf.cam.ac.uk/

    Until fairly recently they had a Centre For Real Estate Finance (dead link on the page above). Wonder if they just moved the page, or if they decided it would be better not to have the Centre anymore.

    Many, many problems that won’t go away.

  43. Where are you from? Apparently you are NOT american!

  44. Homeowner mortgage defaults were not the cause of the ‘Crisis'; they were the excuse for the bailout of Goldman via AIG. Mortgagors are no more important to the ruling powers than the ever increasing army of the unemployed. Homeowners get into trouble one by one and Servicers have no incentive to help them and holders of the CDOs are waiting to be bailed out by the Public Private Partnership, which amounts to giving selected hedge funds a chance to capitalize on a reinflation of the asset bubble with no downside risk since the government is on the hook for 93% of whatever the hedge funds pay for the zombie mortgages. These days Government and Wall Street are united in the policy of reinflating the bubble at any cost. Nothing can stop them except a sudden withdrawal of Chinese participation in the Treasury market, but China really has no alternative except to shut its own economy down. What can we expect from this process except a new round of inflation which will make the Seventies look mild by comparison. A small handful of intellectually honest citizens isn’t going to stop it. My only question is how does an individual play it? The French have an expression ‘sauve qui peut.’

  45. “I think what we need are people that are sufficiently motivated and sophisticated to beat financiers at their own game – produce complex, but realistic models, etc”

    It feels like there are many people whose careers rely on complexity. Sorry, you may be nice people, but part of what has happened is that folks with great talents for math and the manipulation of symbols have been recruited to work for the dark side. The best and the brightest are able to out-math the lessers and stay one step ahead of the game. It’s a priesthood, and it’s rotten. Make the system simple and you don’t need the thousands of “engineers” to maintain it. Sorry if that threatens your livelihood — maybe you should have directed your talents to a more socially acceptable outlet. (Not pointed at you personally, BG)

  46. (Posted on wrong thread. Please ignore.)

  47. In these posts I am not hearing any ire being directed at Mr. Bush and his colleagues. It was under Bush’s watch that this country was bankrupted…how else can the Medicare part D be explained together with tax cuts during a time of war. Furthermore it is even more egregious considering the positive financial affairs of the Federal Govt when Bush took office.

    At the preent time America is reaping the harvest of the “starve the beast” strategy propounded by the right wing.

    What I fail to understand is why the American people did not see through this in 2004 and why they blame Obama and the Dems now….No wonder I worry about this country..it is too dysfunctional for words.

    THE PEOPLE GET THE GOVERNMENT THEY DESERVE.

  48. Neil,

    yes you did over react……by ALOT.

    you’re reply is indicative of what’s wrong with america. Americans HATE americans.

    his complaint (since your hate clouds your thought process) his the banks are getting a free pass.

    and that my friend is what caused the problems in the first place.

  49. Nice but i think something is missing.