Via Mint, comes this not quite perfect (some causation omissions) but close enough to be intriguing enough visualization of the credit crunch:
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Source:
A Visual Guide to the Financial Crisis
WallStats.com, 11/13/2008
http://blog.mint.com/blog/finance-core/a-visual-guide-to-the-financial-crisis/
While yesterday's US stock market close was poor, Asia and Europe didn't follow today as debt in Greece, Spain, Portugal, etc... rallied, their CDS narrowed and stocks bounced. The Greek finance minister said January tax revenues came in above expectations and that spending was below target for the month and said "that means the deficit reduction for January is well within what we have promised." The euro is rising in turn. Also helping is the story that Trichet is headed to the European Union leaders summit a day early in order to address Greece's problems even as the Greek finance...
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November 25th, 2008 at 8:35 am
Dont forget that another big input into the housing mania was the new tax law on sales proceeds. Where else in the world can you make a half-million tax-free without working? This was really a subsidy for house appreciation, and that is what the government got. It lead to appraisal fraud, money-laundering, and increased the rewards of flipping so much that many overlooked the downside. It also decreased the investment and energy that might have been put into productive investments that were fully taxed. A total waste for our society.
November 25th, 2008 at 10:19 am
Apparently I’m a “fool” for owning my house outright with no leverage and having all that money “sat there going to waste”. What a great opportunity I missed, I could have run up a HELOC, put the money in the market and seen is tank 50% — that would be a great way to put my house underwater, after all, keeping up with the neighbors is what it’s all about.
November 25th, 2008 at 12:07 pm
And it’s so heartening to know that we’re bailing out the very criminals that caused this mess…..
November 25th, 2008 at 12:19 pm
WOW, this really makes you sit back and wonder where we’ll [average US citizen] be at this time next year.
November 25th, 2008 at 1:39 pm
This process has quite a ways to go, as we have not yet see cities and states failing — and they will, just wait until the tax receipts fail to arrive, from losses wiping out taxable income — and we are just beginning to see smaller nations struggling to avoid economic collapse (with some failing to do so, like Iceland). Eventually we will see major nations sliding into the black hole of default, probably the United States leading the way, dragging in any who try to bail us out.
Just as with the Great Depression in the 1930’s, this will take a number of years to completely unfold.
You can see it coming, it’s even amusing, in a dark, twisted way, to see the borrowing to fund the bailouts becoming the anchor that sinks the country. In the end, the failure to allow the perps to reap the rewards of their crimes will smear those “rewards” over all of us.
We get the democracy that we vote for, and we voted for the last 8 years of malfeasance, so here comes the payoff.
November 25th, 2008 at 2:23 pm
Our nation’s malfeasance has gone on far longer than just the past eight years. You might say things really got going under Carter with the Trilateral boys he brought in. It’s been a fast slide downhill ever since. One city organized to take down the MBS marketplace and it will all be over…
November 25th, 2008 at 7:06 pm
Sure makes how to invest in real estate more complicated than it is ever explained to the average homebuyer. The residential real estate sector is in shambles and, some economists say, will not recover until the end of 2010, at the earliest. Now it looks like commercial real estate may be the next block to fall in our “Jenga economy.”
November 25th, 2008 at 11:45 pm
They forgot Bear Stearns…
November 26th, 2008 at 3:14 am
I’d like to see a prequel to this chart, complete with quotes taken directly from stenographer records of Federal Reserve / Commerce Dept / Treasury Board meetings wherein the top-down policies that incentivized these ‘predatory’ lending practices were drafted and approved.
Then perhaps, as an additional curiosity, the extended “after-math” version, festooned with more recent missives of the financial super elite, cataloging these self-same individuals candid responses as they magically breathed trillions of dollars in “bailout” paper into being… and firmly lashed the resulting debt onto our nations back.*
Is Mint.com up to the task? Has Mr. Ritholtz got any readers who might be?
*As I (a mere lay plebe) understand it, to lenders (of which the Fed is the biggest & scariest domestically) money is only valuable if it is being lent out, so that it generates interest as debt. The bailout money did not exist before the Fed said it did. At that moment, it became a giant… rubber band (Like debt capital: A mechanism that only generates force proportional to the extent that it is “leveraged”) that they stretched around lots of private sector entities.
You can almost hear the shouted command as we build their pyramid… “Heave! Heave!” (whip cracks)
The Bailout? No. It should be called The Strap-on.
November 26th, 2008 at 7:10 pm
From much happier days — Say, about two weeks ago? — You’ll recognize this from that Michael Lewis piece. Yes, I know Eisman didn’t really bat a thou, but I’m still laughing over this….
Both [Vincent] Daniel and [Danny] Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. “Steve’s fun to take to any Wall Street meeting,” Daniel says. “Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”
. . .
Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”
“Would you say that 5 percent is a probability or a possibility?” Eisman asked.
A probability, said the C.E.O., and he continued his speech.
Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.
“Yes?” the C.E.O. said, obviously irritated. “Is that another question?”
“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.
November 26th, 2008 at 8:26 pm
I see two glaring omissions:
1.
There’s not a single mention of the Community reinvestment act (CRA). It started the whole thing rolling, not the mania for home ownership.
Started in the Carter admin, but regs increased under Clinton. Acorn and Obama and Dems (and some republicans) worked to pressure banks to make more loans to the poor. the CRA regulations mandated that banks make loans to previously unqualified people in previously un-loanable areas. Regulators assigned CRA scores to institutions, and banks were penalized if they didn’t make enough loans to the right kind of people.
The net result of this pressure resulted in loan products which were too easy, and invitations to creative fibbing, for all.
Affirmative action for home loans is what it was, with penalties for banks.
That started the entire ball rolling. Banks needed to get rid of this lousy paper, Fannie and Freddie took it off their hands, and then they needed to get rid of this stuff, and kicked it down the line…
2.
Fannie and freddie were leveraged 40 to 1, which means that 2.5% failure of home loans would turn both upside down. Barney Frank and Chris Dodd, all democrats and a handful of PC republicans opposed sensible regs on these guys, even when accounting fraud and sloppiness were uncovered. Many attempts were made at addressing the precarious Fannie and Freddie problem, but all were thwarted.
Amazingly, these Govt Sponsored Entities were spending hundreds of thousands of dollars lobbying the representatives and senators who regulated them! Obama received $150k in contributions from fannie/freddie as this problem was rising in the background. Heads were in the sand.
So except for failing to mention either the root cause of the problem, or the failure of regulators (house and senate banking committee chairmen Dodd and Frank) to nip the problem when it was more managable, this is excellent (not!)
November 27th, 2008 at 9:29 am
While Drs is more true than the nice visual, it was not CRA and sub-prime loans to the poor that were such a huge problem, it was the real housing bubble and so many non-poor buyers, and sellers, were basing all the fancy risk models on the recent past.
Where house prices never failed.
That recent past, in the US, didn’t include Japan’s terrible 1989 (not that long ago!) property market bubble pop.
Given the S & L crisis of of the 80s, also a housing bubble, only an idiot really believed house prices would never fail — most thought their would be a pause in increase, not a crash, which would allow them to cash out calmly.
But the financial system can NOT be repaired until house prices are more stable, and not going down. The gov’t should be bidding up to 50% of prior mortgage price on houses to buy the houses.
Buy houses from banks, not bank paper.
Buy the house and do NOT create an MBS.
Let the bad banks fail — those that ask for gov’t cash.
Over lots of cheap gov’t cash to ALL the other banks, those w/o CDS, CDO, and not many MBS assets. Let the good banks make loans to real companies, and even reward them.
November 27th, 2008 at 4:39 pm
Hi Tom,
Housing bubbles have come and gone. I lived through a big one (barely held on) in the early 90’s. My house value (and similar real estate in LA) went from 650k to 400k. Yet the financial system wasn’t on the brink of collapse, because the credit-worthiness and loan ratios of the loans and re-fi’s kept the risk to the lenders much lower than it is today.
That’s why this correction is much more dangerous — because it results in a higher percentage of failed loans because of the weaker borrowers. And because of the overleverage of Fannie/Freddie, which guaranteed that a 2.5% loan failure rate means bankruptcy.
Also, this bubble was enhanced by the CRA forced (non-market driven) easy credit regime — more borrowers, at cheaper monthly payments (due to lax eligibility requirements), will in a free market push prices upward. So in addition to weakening the entire residential sector loan security, it pushed any bubble much higher, causing the more painful crash.
The systemic fixes needed are: No government mandates to require home loans to high-risk groups of people, sensible leverage on the part of what ever succeeds fannie/freddie, no conflict of interest in bond rating (Moody’s was paid by the sellers of the bonds!), and oversight / transparency on the part of bond rating agencies. Minimal, sensible changes that might prevent another disaster.