Well the idea was that housing prices would always increase as a hedge against that. ARMs tend to coincide rather disturbingly with predatory lending to say otherwise.
Variable Rate mortgages are pretty much the entire mortgage industry in Australia and make up a huge amount of Western Europe's mortgages. It's easy to jump on Variable Rates, but for decades they've done the job perfectly acceptably. General commercial sense indicates that it is in both parties best interests for the VR to have caps and checks on it, even in a time when you seemingly could guarentee house prices rising. The issue returns to HUD again... where groups were forced to give offers to people who couldn't afford a normal mortgage... which meant the usual caps didn't make economic sense. In those situations there was predatory lending no doubt... but there were also simple cases where no-one... from the consumer up... really bothered to read the paperwork.
A lot of investment banks were rather horribly leveraged. I'm not sure how you could say they were hedging their risks.
The hedging was to offset something else. Somewhere in their books they were part of a syndicate providing funding to say... a housing developer where they had limited security. Now, a downturn in the market would hit the developer hard and the bank would lose much of its lending. It hedged that by having CDS's on foreclosure's on its books... which would occur with the downturn on the market. That's a vastly simplified explanation... it would be a hugely complex analysis working out the risk profile of the bank at any given time.
The reason they ended up being so badly leveraged was that every CDO floating on the market contained subprime debt, whether they realised it or not. CDO's were a standard and effective way of doing buisness... but the glut of sub prime debt that corrupted them made them a poison pill. Here's where the institutions also failed... they began to buy and sell CDO's made of CDO's... CDS2/sup] and CDS's on the default of CDS's. They confused themselves and let short term greed overwhelm long term foresight... although, as I said before, in a world of Private Equity with 3-5 year exit dates and active shareholders a company is somewhat forced into being short term profit centred.
Allowing ARMs, negative amortization and effective zero leveraging had nothing to do it?
Variable Rates: No. Variable Rates are a perfectly legitimate type of mortgage. The misuse of them maybe, but most (even the predatory lending) had a certain amount of commercial sense behind them: very high risk so you demand high interest payments... with the cherry of foreclosure at the end. It went wrong... badly wrong, but Variable Rates themselves weren't to blame.
Negative Amortization: I'm no great fan of this, but it's also legitimate. Simply put, it's the objectively fairest way to deal with people missing payments: they agreed to a contract that dictated the terms on which they'd replay... they broke those terms, failed to pay back enough money and thus what they owe each payment should be added to the principle. Now, in examples where this (often combined with Variable Rates) was used to deliberately decieve consumers (as opposed to people simply not understanding what they were signing up for) then there should be hell to pay.
Zero Leveraging/Gearing: I'm not sure you mean zero (or even low) leveraging or gearing... as that would have avoided nearly everything. It's the high gearing that screwed up the system as companies sank under the debt they'd taken on due to the prospect of future profits. Now, I'm not sure if this should be banned as such... or simple commercial reality allowed to deal with it. You're highly leveraged and made huge profits? Great. You do the same and get bitten... deal with it. That's where the tension between allowing the market to correct itself and the bailouts to prevent suffering comes from. Another issue is that companies often didn't realise they were geared as highly as they were... mainly due to terrible accounting and a failure on the ratings agencies... which both should be stepped on, heavily.
Don't get me wrong, I don't argue that pushing subprime was a good idea.
Same here: I'm not trying to claim the financial industry was free from blame and apologise if it appears I have. As I said before they set up the dominoes to be pushed and didn't mitigate risk the way they should when confronted by HUD's inteference. Greed on their part was no doubt a contributing factor. But the starting point was HUD forcing more sub-prime onto the market and the point of no return was the prevention of an effective regulation of F&F... which would have given the industry a headstart on the issue as a whole.
But ideally we want a robust system where a single mistake - even on the administrative level - does not bring the entire house down. Literally in this case.
Agreed. But we're not talking a single mistake. We're talking a huge mistake on the administrative level where they tried to play politics, combined with a series of smaller (but just as bad) mistakes from the institutions themselves and another huge mistake from the adminstration. The market could have survived even with HUD's inteference and while sub-prime would have still been crippled, the rest would have been fine... but there were mistakes on every level. The market itself allowed sub-prime to spread throughout it and hopefully it learnt a lesson that won't be repeated.
I don't think they would have had any losses at all if they simply avoided home equity loans, which they are taking enormous writedowns to.
Sub-prime corrupted so much they'd have still taken losses. Syndicated lending on Projects and large construction jobs that have been canned, inter-bank lending, loans to car companies etc etc. They'd have mitigated their losses, but they were still going to be exposed... sub prime was the financial six degrees of Kevin Bacon for arounf 5 years... you simply couldn't escape it.
Well, the only way to do that would be mandating DTI ratios for loans. It wouldn't eliminate subprime but it would be err, a bit more sane.
It would also eliminate almost every entrepenour from ever doing anything...
The run was just the brick on the camel's back, really. Loss after loss, no end in site for the prospect of more and the FDIC only insured the first 100k.
Other banks have survived comparable losses due to government support. In the UK Northen Rock failed in a similar way... and near identical building societies survived. It's the arbitary hand of the government deciding who to help and who not to. Without the run Wumu could well still be here in a situation not that different to others who have accepted TARP money.
Escaping US regulations is not just a matter of moving to Singapore.
For a commodity trader? They couldn't move to Singapore (for the low taxes) and trade on SICOM, NCDEX, MCX, NMCE, MDEX, KANEX, TOCOM, TGE or IOB? Why would US regulations severely curtail their trading?
Would you be surprised if I considered that attitude the fault of the mass of nearsighted day traders more than HUD?
I'm not quite sure what you mean here. The attitude that a director has to work in the best interest of the company... and thus the shareholders? Or that commercial shareholders want the best returns they can get? Because if it's the second pension funds... not exactly considered the evil empire of the buisness world were getting just as antsy about lower returns as the private equity funds.
Bush and co were warned by the FBI during their first term - before Fannie and Freddy started serious buying - that a lot of shenanigans were going on in the mortgage arena. HUD may not have helped but it was far from the only instigator as you originally declared.
F&F were first compelled in roughly 1995 (based on law passed in 1992-3) to start buying subprime loans under HUD's oversight. The article you linked to also doesn't say exactly when they briefed Bush on the issue so it's hard to say how that corresponds with HUD's large push in 2004. There's also a clear difference between actual mortgage fraud (which the article is about) and simple mortgage failure and bad business. Even if not HUD specifically (which I still submit was the direct cause of the current crises) the article also shows all the other failures at the government level which allowed the situation to get as bad as it did... so it's still government incompetance which is my basic premise.
But it has a way of saying "Look! Over there!"
And is normally wrong...
I can't find the stats immediately at hand but within the US isn't there a much higher gun crime rate in states with
strict gun control than without... and it corresponds over to gun related assault/homicide rates. Does that automatically mean "gun control = higher gun crime"? No, there are far more factors.
Iron, coal and steel also depend on the price of gas. Iron prices are also in part prenegotiated and there were fears of shortages (why, I have no idea).
Everything depends on the price of gas. Nickel depends on the price of gas, is traded and speculated upon, and its prices fell...
Regardless, a speculation drive like this depends on the idea that the price of a commodity is always going to rise. Any commodity that risks falling in price is not something people would try to pull the same stunt with.
That's only if you believe speculation pre-empts the price rising or lowering on the market... evidence shows it doesn't... it follows the market. So while the price is rising there will be a drive... when it begins to fall it begins to slip off. The price of oil was never "always going to rise"... the market was aware of the political issues that shaped the price (notably trouble with Iran), which is why the sabre-rattling was always followed by a march up in prices. A cooling in the tension would always lead to a lowering in prices.
And again, nickel saw huge speculative interest... and the price fell... badly... yet there was still speculation.
Speculation on futures requires no such thing. "I'm going to buy a thousand barrels in June of 2009 for $63k" etc. does not magically increase my inventory, and I can later sell those futures off to someone else and make a few thousand, and so on. The circle jerk was going on behind closed doors until the loophole was closed.
Because speculators aren't the only people using futures. Airlines, trucking companies, the military, shipping companies, governments... all use futures to get certainty over the price they'll be paying. If speculation was the only thing driving the upwards surge in prices then all of these groups would have increased inventories as they took the futures they'd bought and stockpiled. They didn't. And the only explanation for that was that there wasn't enough oil on the market for them to be able to do that. Which makes it supply and demand.
Let's also be frank here: speculation can drive up the futures price of a commodity, but the spot price only follows this if that speculation somehow restricts the current supply to consumers. In this case there would be inventories forming as investors horde supplies for down the road and people who are dependant on oil stockpile. Inventories aren't forming and the spot price was rising. That's supply and demand causing it, not speculation.Edit: I'm enjoying this... thanks for the debate