How the Government is Setting Us Up for a Second Subprime Crisis
By Shah Gilani Contributing Writer Money Morning
Is the government creating another subprime-mortgage bubble?
The first time around, the three-headed federal serpent – the Bush administration, the Treasury Department and the U.S. Federal Reserve – used Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to "legitimize" trillions of dollars worth of toxic financial waste known as subprime mortgages.
The result was the worst financial crisis since the Great Depression – a mess that was global in nature.
And we’re now headed for a repeat performance.
Some of the players may have changed since the first subprime-mortgage crisis, but the game apparently remains the same. With banks currently unwilling to lend, the new federal triumvirate of the Obama administration, the Treasury and the Fed are trying to inflate the moribund U.S. housing market. This time around, however, the FHA is the weapon of choice.
Obama & Co. are making an all-or-nothing bet that the U.S. economy will recover and bail out the housing market before the final bill for this ill-advised gambit comes due.
When this bubble bursts – and it will – U.S. taxpayers will be on the hook for more than $1 trillion in government-guaranteed debt.
Ginnie Mae: Fannie and Freddie’s Once-Quiet Cousin
As a direct result of the real-estate meltdown, U.S. banks have become reluctant lenders. And they’ve raised their loan standards considerably. Federal officials knew they had to keep the mortgage spigot open, especially to suspect borrowers, so they turned to their new "secret weapon" – the FHA.
The FHA has been cranking out new government-insured subprime loans, which it packages into government guaranteed securities for sale to banks. This frightening reflation of the subprime bubble is being engineered for two key reasons:
To put a floor under falling house prices.
And to let banks swap toxic Fannie and Freddie securities for new toxic debt that is 100% guaranteed by U.S. taxpayers.
The almost inevitable insolvency of the FHA could rapidly undermine the fragile recovery of the U.S. economy. And it could plunge stock prices and bank viability to new lows.
Why the FHA? That’s simple. In an era of increasingly stringent lending standards, the FHA’s standards are laughably lax.
Here’s a credit-crisis video retrospective from the Wall Street Journal. It is chapter one of a three part series. Notice the Wall Street meme that subprime borrowers caused the crisis which is patently false. It’s all about dodgy credits and Fannie and Freddie? Total rubbish.
Easy money, as the clip says, is the culprit. And this money went into credit cards, leveraged buy outs, residential housing, student loans, commercial property and on down the line. It’s not about subprime, my friends I like the rest of it, but remember the Wall Street Journal has a certain bias and it is reflected here.
Chapter One: In the first of this three-part series, WSJ reporters explain how the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street’s biggest financial institutions.
This is part two of the End of Wall Street series the Wall Street Journal is producing.
Chapter Two of A WSJ series: What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called "weapons of financial mass destruction."
You have to love how it starts off with Alan Murray saying “There’s plenty of blame to go around. I think in retrospect lots of people who were doing stupid things.” Then the famous NYSE opening bell goes off and they cut to a shot of Alan Greenspan.
I couldn’t help but think about Tim Iacono’s site when I saw this. Watch this video. They really takeoff the gloves here. Regulators and the rating agencies get a severe beat-down. Well-done.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Short-term, USD due for a breather and euro for a rally
Investment Implications of a USD Breakout
Should the USD break out from its 2005 to present bearish trend, we should see some significant developments in inter-market relationships. For starters, the relative performance of U.S. stocks to the MSCI World Stock Index Excluding the U.S. shows a strong correlation to the USD Index. Should t...
Two academic studies of the health dangers of hydraulic fracturing, or fracking, have produced different conclusions.
One, conducted by Yale University, said people living near fracking sites report increased health problems. The other, by Penn State University, says fracking water stays underground, far below the groundwater supplies that people use for drinking, and poses no threat.
Both studies were conducted in Pennsylvania, part of the Marcellus Shale formation in the sprawling Appalachian Basin in the eastern United States. It holds enormous reserves of gas and has been a focus of fracking activity and protests.
In the Yale study, former Yale medical professor Dr. Peter Rabinowitz reported in the...
If GOOGLE, the NSA, and Bill Gates all got together in a room with the task of building the most accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you… they never got around to building it, but my colleagues at Market Tamer did.
Although the stock market displayed weakness last week as I suggested it would, bulls aren’t going down easily. In fact, they’re going down swinging, absorbing most of the blows delivered by hesitant bears. Despite holding up admirably when weakness was both expected and warranted, and although I still see higher highs ahead, I am still not convinced that we have seen the ultimate lows for this pullback. A number of signs point to more weakness ahead.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-r...
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In a report published Monday, Compass Point analyst Michael Tarkan reiterated a Buy rating and $21.00 price target on Navient Corp (NASDAQ: NAVI).
In the report, Compass Point noted, “We reiterate our Buy rating on NAVI shares after analyzing updated credit data within the company's private student loan trusts, which indicate continued YOY improvement in delinquency and default rates. The data captures statistics for trusts originated from 2002 through 2014 for the three months ended August 31, 2014, providing a good leading indicator for 3Q14 credit trends. The ongoing improvement should give management flexibility to continue to lower provision expenses to drive earnings higher.”
The CBOE Vix Index is in positive territory on Friday morning as shares in the S&P 500 Index move slightly lower. Currently the VIX is up roughly 2.75% on the session at 13.16 as of 11:35 am ET. Earlier in the session big prints in October expiry call options caught our attention as one large options market participants appears to have purchased roughly 106,000 of the Oct 22.0 strike calls for a premium of around $0.45 each. The VIX has not topped 22.0 since the end of 2012, but it would not take such a dramatic move in the spot index in order to lift premium on the contracts. The far out-of-the-money calls would likely increase in value in the event that S&P500 Index stocks slip in the near term. The VIX traded up to a 52-week high of 21.48 back in February. Next week’s release of the FOMC meeting minutes f...
Despite the various opinions on Bitcoin, there is no question as to its ultimate value: its ability to bypass government restrictions, including economic embargoes and capital controls, to transmit quasi-anonymous money to anyone anywhere.
Opinions differ as to what constitutes "money."
The English word "money" derives from the Latin word "moneta," which means to "mint." Historically, "money" was minted in the form of precious metals, most notably gold and silver. Minted metal was considered "money" because it possessed luster, was scarce, and had perceive...
Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
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