Thursday, February 26, 2009

See How The Taxpayer Got Screwed In The Front End, and Will be Screwed in the Back End Of The Credit Crunch

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

No doubt, this is a fun and entertaining visualization of the credit madness. There's no element about government bail outs, but it seems like a whole host of people who have been making goo-gobs of money for many years off the backs of the homeowner, and now going to be making goo-bobs of money off the taxpayers, and it inherently and patently seems unfair.

1 comment:

Anonymous said...

Close but no cigar

The collateralized mortgage problem is that sales were packaged and sold by payment tranches. All the first payments (say, first year payments) go into the golden tranch, all the second payments go into the silver tranch, and all subsequent payments go into catch-all tranches. Mortgage durations vary but are thought to average about seven years. Outlying payment trances older than seven years are not valuable. CDO buyers pay a premium for earlier tranches. What's happening with sub-prime mortgages is that homeowners are defaulting before they make the first payment. The whole system of collateralizing mortgages becomes untenable when trust is lost because bankers divorced themselves from risk.

Purchasing Credit Default Swaps (insurance on debt) couldn't replace trust because issurers of CDSs (AIG, etc.) were not themselves credit worthy. Issuers were just gambling that they could take the CDS premiums and mark them 'profits' because they thought the debt would never go bad.

The Financial Services Modernization Act (of 1999) [Gramm-Leach-Bliley Act] specifically exempted Wall Street from state gambling laws.

Sever the Gordian Knot

Rather than bailing out CDS issuers, such as AIG to the tune of $150b so far, Congress should have declared the these-are-big-boys-who-know-what-they're-doing--gambling-is-okay-for-Wall-Street provision of Gramm-Leach-Bliley null and void by saying that CDS premiums are bets, bets that created gambling debts, and gambling debts don't have to be repaid.