October 3rd, 2008

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European banks and the crisis

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.
from here

Some banks are bigger than governments: their assets are greater than their home countries’ economies.
See the chart

see also A timeline of bailouts, bayouts and takeovers
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Causes of the crisis

Let's clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

  • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?
  • What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?
  • How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?
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The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle.

If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed's part in supervising bank lending, allowing banks to give money to people who couldn't possibly pay it back.
See full text here

Experts are constantly telling investors what to buy. Sometimes they give us good advice and sometimes not.
...
Until very recently it was widely believed that all housing markets were local. If this were so, then assets constructed by pooling mortgages across different localities would consist of pooled independent assets.Collapse )
As long as experts were trusted and the market didn't know the difference between unbiased and biased estimates, the trick worked marvelously. The collapse followed suddenly as we have all come to understand that the ratings were miserably biased.
An Expert-Induced Bubble

Strategery is a unique hedge fund.
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