A few comments about the debate *UPDATED*

I’ve watched almost all of the debate, but it’s bedtime now, and I’ll have to save the rest for later.  Three comments:

1.  The first, the most obvious, and the most pressing question:  How many botoxes did they kill to create that abnormally smooth, completely motionless forehead Biden was sporting?  That was creepy.

2.  Was I the only who noticed that Biden speaks in the language of class warfare, while Palin talks of American exceptionalism?

3.  Regarding the debacle on Wall Street, I wish someone would explain clearly the difference between deregulation, and the issue of oversight, which would have prevented this from happening.

The problem on Wall Street wasn’t deregulation.  Instead, it was a problem of too much regulation — that is, the government started telling banks how to loan money.  The instructions required loans that went against banks’ financial interests, so banks started doing funny-money stuff to protect themselves — and they did so with Fannie’s and Freddie’s active participation.  That was the Democratic side.

None of this would have happened if there had been oversight.  Oversight doesn’t mean telling Wall Street what to do, it means policing Wall Street to make sure that, when it makes business decisions, it does so honestly.

Obama/Biden want to increase how much government dictates to Wall Street, and we’ve seen what a disaster that is.  McCain/Palin want to get government out of bossing Wall Street around, and get government to do its more natural and appropriate role of policing Wall Street.

Those two concepts are hugely different from each other but, because nobody’s articulating this difference, including McCain and Palin, Obama and Biden are getting away with conflating the terms, muddying the waters, and besmirching McCain’s reputation and foresight.

Overall, Biden smirked but didn’t gaffe; Palin was a little nervous, but hit the high points.

UPDATE:  I see I was not the only one to notice Biden’s forehead shield.

UPDATE II:  I’m sure you’ve already read what the top bloggers have to say.  Here are links to what some of my friends (some of whom are coincidentally pretty top bloggers themselves) have to say:

The Anchoress (who has wonderful links)

Lorie Byrd at Wizbang

Steve Schippert at Wizbang

Cheat-Seeking Missiles

Brutally Honest

Flopping Aces

If you think someone wrote a particularly good debate post, please feel free to link in the comments.

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  • el gordo

    I think many people noticed the class warfare. They just take it for granted at this point.

  • Danny Lemieux

    Opportunities lost…

    “Well, doggone it, Joe, there you go again. If you keep trying to move forward by always looking at your rear, not only won’t you see the future but you’ll get smacked in the back of your head by all kinds of unpleasant realities”.

  • McLaren

    The problem on Wall Street wasn’t deregulation. Instead, it was a problem of too much regulation — that is, the government started telling banks how to loan money. The instructions required loans went against banks’ financial interests, so banks started doing funny-money stuff to protect themselves — and they did so with Fannie’s and Freddie’s active participation. That was the Democratic side.

    You knocked this one out of the park, BW. When politicians spend our money poorly, it sucks. When politicians spend lender’s money poorly, it kills.

    But, that’s what they do. All in the name of “fairness” and “doing something.” We need a revolution.

  • McLaren

    14 lies of Biden’s during the debate:

    http://www.townhallmail.com/xbriacre_xrccksb.html

  • BrianE

    It seemed to me that Palin was extremely nervous at the beginning of the debate and it affected her ability to react to the initial questions. As the debate progressed and the questions moved to her comfort zone, she certainly was more engaged.
    Her syntax is still a problem, but what I was struck with was Ifill’s butchering of sentence structure also. I attribute it to the difficulty of thinking on your feet and nevousness. Given the speed that government operates, this can’t be considered a liability to any candidate (or moderator for that matter).
    In spite of the drama of “West Wing”, events take weeks to develop, not the hour or two of a movie or TV show. The most famous confrontation, the Cuban Missle Crisis, played out over weeks and in the end it was the courage of Kennedy to take a stand that is remembered.
    Given today’s environment, what would have happened had intelligence missed the missile sites and ICBM’s were in place before our government realized they were there? Would we have preemptively acted and taken them out? I think so, even at the risk of turning the cold war into a hotter war. Today’s media would have gone ballistic, so to speak.
    She did miss an opportunity to nail the Democrats and Biden on the credit crisis, since the “deregulation” referred to has been defended by none other than Bill Clinton, who was as responsible as Republicans for the deregulation and threatened to veto the bill if the CRA provisions were weakened. The immediate culprit is still the GSE Fannie Mae.
    ABS, Asset Backed Securities where mortgages were bundled and sold as securities had been a problem as far back as 1994 and here is a NYT article where Democrat Markey asked the SEC to investigate the effect of mortgage derivitives on mutual funds.
    http://query.nytimes.com/gst/fullpage.html?res=9807E6DE173DF935A25755C0A962958260

    Her answers were for the most part general, but she hasn’t had 30 years to learn the art of obfuscation. And as has been noted, Biden misspoke about facts on numerous occasions.

  • BobK

    I was encouraged last night. Like you, Book, I’ve been out-of-sorts the past few days, mainly because I’m frustrated by Sen. McCain’s propensity to let his sense of personal honor hobble the ticket’s ability to effectively respond to the Obama-MSM axis. Last night we saw the Sarahcuda again, and to some minor extent that cheered me up. (a bit, I don’t want to sound too enthusiastic here…)

    My primary reaction to last night’s slug-fest (and that it was!) was that the Person outlasted the Politician to win on points. If Gov. Palin had ten or fifteen years more on the national stage, she probably could have responded to more of Sen. Biden’s obvious (ahem!) misstatements. But, if she had those additional years, she probably would not have connected to the core American in me as effectively. I like People, I am wary of Politicians.

    Case in point: Sen. Biden’s statements regarding the Constitutional role of the Vice President. I am a ‘recovering attorney’ – I haven’t practiced in over 15 years, but Sen. Biden brought me all the way back to law school. My primary survival method in Con Law, when called on, was to state whatever position I had with as much certitude as I could muster, because law profs can smell fear – and that’s what starts the socratic feeding frenzy. If I wasn’t open to discussion, I wasn’t suitable prey. Sen. Biden used the same tactic last night, but with the additional twist that he was COMPETELY WRONG about the VP’s authority and role, and even about the controlling Articles of the Constitution.

    Sen. Biden cited Article I as referring to the Presidency. Article I establishes and enables the Legislative branch. Article II establishes and enables the Presidency. And, guess what? The Vice President is mentioned in BOTH articles! The Vice President’s only enumerated duties are within the Legislative branch (he is the President of the Senate, and has the additional role of casting tie-breaking votes). In Article II, the Vice President is only mentioned as being the replacement for the President, in the event that he is not able to serve.

    The bare facts are that Vice President Cheney could legally step in today and preside over the Senate, controlling the debate within the rules established by the Senate. One would think that after three decades in the Senate, Sen. Biden would have read the Personnel Manual for his job and at least skimmed the job description and org chart. But Sen. Biden was so bold-faced in his assertion that the Vice President had no Constitutional authority in the Senate, aside from the tie-breaking role, that the Esteemed Objective Moderator didn’t call him on it. Then again, neither did Gov. Palin.

    It just reinforces what I learned and practiced in Con Law class – you avoid uncomfortable questions by acting like everything you say is absolutely unquestionable.

  • suek

    BobK…are you saying that according to the Constitution, the VP could step in and take over what Reid has been doing?

  • Allen

    What surprised me and many don’t appear to have said much about, is this one by Biden: “We, along with France, kicked Hezballah out of Lebanon…” Really, when did that happen?

  • Zhombre

    Allen, you’re not the only one mystified by that assertion:
    http://www.commentarymagazine.com/blogs/index.php/totten/35261

    It’s not as crazy as Gaffe Rocket Joe’s assertion that FDR went on TV after the 1929 stock market crash to reassure the American public. Of course, had he rambled on, he might have added it was the Man from UNCLE who was so instrumental in aiding the French.

  • Mike Devx

    Allen,

    It didn’t happen. There’s nothing even CLOSE to that having happened, where you could even say he misspoke. So Biden, Mr. Foreign Policy Expert, committed a major gaffe or just out-and-out lied. The mainstream media: [ sound of crickets chirping ]

    Can you imagine the outcry if Sarah Palin had made that statement? The roar of disbelief and disdain from the mainstream media today would be defeaning.

  • McLaren

    It most certainly DID happen. It was right after the Guatemalans kicked the separatists out of Portugal. I suppose you guys have never heard of the day when the Saxons helped take Okinawa. Hello!

  • Zhombre

    Wow. I always wondered how corn, tomatoes and satellite dish TV got to Portugal. Now I know. Thanks, McLaren.

  • McLaren

    LOL

  • Tiresias

    I’m beginning to think that if the McCain ticket wins this thing, it’ll be mostly because Sarah Palin managed to overcome his presence at the top of the ticket. At this point he’s a load on her, not vice-versa.

    The debate was a positive, despite that everyone in the room – including Palin – let Biden get away with at least ten statements that were just flat lies, especially with regard to McCain’s voting record, and economic record. (McCain tried two years ago, for example, to wise up the government to Fannie and Freddie problems, and in fact joined with the all-but-forgotten GW Bush in an attempt to rein them in, but that was blocked by the Congressional Black Democrat Caucus [y'all remember JD Watt, Republican black congressman? They wouldn't let him join the Congressional Black Caucus - it's apparently only for black Democrats], Bawney Fwank, and the idiot Dodd.)

    So Biden got away with that crap, for the moment. It was quickly corrected by Fred Thompson, Karl Rove, and Rudy on Fox News – CNN, NBC, CBS, ABC, and MSNBC have yet to correct – or even point out – his “factual errors.” (Normal people call them “lies.”)

    But she did very well, and took no crap from Ifill, either, I was pleased to see. (Hey lawyers, when you have a financial interest in the outcome, what do you do? We call that a “conflict,” do we not? What we do is recuse, do we not? Bow out gracefully. Apparently PBS “journalists” don’t.)

    But it was good, and she was very good. She has a happy knack of going right over the heads of the professional BS artists in which Washington specializes and speaking directly to the folks, and it’s going to stand her – and the so-far more or less worthless McCain – in good stead.

    She’s fine. He better start making an effort to get his head out, or he’ll still manage to blow it.

  • BobK

    suek,

    Traditionally, it’s not done, but that’s a matter of tradition, not Constitutional law. The Vice President is President of the Senate. Article I empowers the Senate to elect a President pro tem (short for pro tempore – for a time), who has the authority to preside in the absence of the President of the Senate. This position is traditionally held by the most senior senator (currently Sen. Byrd, D-WV). Actual presiding duties are most often delegated by the pro tem.

    Note that the pro tem is not the same as the majority leader (currently Sen. Reid, D-NV). In the Senate, it’s the party leaders, in particular the majority leader, who controls committee assignments and legislative agenda. In the House, the presiding officer (the Speaker of the House) is the prime political mover. Again, it’s tradition, not Constitutional mandate, that dictates the political responsibilities.

    That being said, it is the duty of the presiding officer to preside – control the flow of debate, determine who speaks, and generally enforce parliamentary rules. That is what Vice President Cheney could do, if he chose to. I think it would be interesting to see the apoplexy that would spread through the left if he chose to exercise his Constitutional authority!

    OK – civics lesson over. Class dismissed – and have a great weekend! ;-)

  • suek

    >>I think it would be interesting to see the apoplexy that would spread through the left if he chose to exercise his Constitutional authority!>>

    As you may have guessed, that is exactly what I was thinking. As well as the fact that that alone could provide a major tool to enact change!!

    Bush should have turned Cheney loose!

  • Mike Devx

    Book says,
    3. Regarding the debacle on Wall Street, I wish someone would explain clearly the difference between deregulation, and the issue of oversight, which would have prevented this from happening. The problem on Wall Street wasn’t deregulation. Instead, it was a problem of too much regulation [...] None of this would have happened if there had been oversight.

    I’m awfully interested in everyone’s take on this as well. And can you point out any mistakes I’m making below? Because I’m gonna make one more run at my family before the election, with facts and arguments, and I’d like to have good ones.

    1. I think we’re all in agreement about the incestuous relationship between Fannie Mae/Freddie Mac and the Democrats. I’m already assembling loads of supporting information here about this and the evidence is irrefultable. I’ll cut this part short.

    2. The mainstream media are refusing to report the Fannie Mae angle to the story.

    3. Was there enough regulation of Wall Street? How much of the blame for what happened lies with Wall Street? Here’s where I tend to part company with probably all of Book’s regular commenters here, and where I really need your comments to help me out.

    The investment firms had a decision to make about all the risky subprime loans they’d been forced to take on. Due to the speculative housing bubble, they were able to package the loans and resell them at a small profit (this is where MBS and CDS came in – mortgage backed securities and credit default swaps). They kept splitting and reselling them, for a little profit each time, creating a chain of such instruments from the initial mortgage all the way to the final holder.

    The accumulation of all the small profits from all such sales were declared – though the mortgages remained in effect. Effectively all such profits went onto the balance sheets as available money/capital, for loans and such. The dollar amounts are HUGE – 52 trillion dollars.

    At some point in the last fifteen years, investment firms were deregulated in the area of “leveraging their capital”. They’d been allowed to go as high as 12X, it was relaxed to 30X. Lehman was at 30X. Somehow AIG – too big to fail – was, I hear, leveraged at 70X. How? Why?

    And then the housing speculative bubble collapsed. The entire chain of resold instruments had to be revalued IMMEDIATELY due to mark to market. The apparently available capital/money on the balance sheets disappeared practically overnight, and thus began the credit crisis. Investment firms and banks had no real capital/money available, and thus loan activity and other capital-based activity began to grind to a halt. And that’s how we got to where we are today.

    How much of that $52 trillion is based on the housing mortgages, and how much on other debt assets? They’ve been playing this game of sell-resell-resell on the MDS and CDS with all kinds of assets, not just with subprime mortgages? How much of this is based on the mortgages, and how much on other assets?

    What’s to stop this from happening again, even were Fannie Mae and Freddie Mac abolished? Given the leveraging at 30X and 70X I mentioned, why should that be allowed? These firms can do that again, can’t they? And then under any economic downturn, won’t they lose their capital base again and come to us for another bailout? How bad will the next one be?

    And it would have absolutely nothing to do with Fannie Mae nor with Democrats. It would be entirely the fault of Wall Street, wouldn’t it? In that manner, wouldn’t the Democrats’ claims be right – that this is an issue of outrageous short-term greed, incompetence and even corruption, among Wall Street firms?

    On the other hand, it took a massive housing speculation bubble collapse, along with mark to market rules – both Clinton era problems that were kept rolling along by Democrats and only Democrats. It is likely that no other foreseeable economic situation could have as immediate and intense an effect as the housing speculation bubble collapse, so my concern about the investment banks simply overleveraging again and kicking us into another crisis, may not be based on anything.

    Finally, Book’s question: Wouldn’t effective oversight have prevented this? My answer would be, no, except in the case of AIG’s 70X of leveraged capital; I don’t see how that was able to occur. How can you have oversight on activities that were entirely legal if outrageously stupid? That would be a problem of either not enough regulation or stupid regulation…

    Classical theory would say, remove all the regulation and let them overleverage their capital to their heart’s content. Then, if they’re wrong, they fail, and fail catastrophically. Taking all the pension plans and 401Ks and everything else with them. Would this be acceptable; why or why not?

    Am I wrong about the overleveraged capital, via MBSs and CDSs, being a major culprit here?

    Any ideas?

  • Ymarsakar

    I’ve only watched 10 parts of the debate. That is around the point of the foreign policy on Afghanistan and Iran section.

    Sarah Palin is using a two prong strategy. She bolsters her own credibility by talking directly into the camera, while at the same time dismissing the old politics of Joe Biden and the corruption of DC. I haven’t watched Bill Clinton’s speeches during his election campaign, actually I haven’t watched any of them, but I tend to think if you have charisma and you are outside DC you can hit that reform note pretty hard. It’s really easy for a Bill Clinton to pick apart George H Bush’s “read my lips no new taxes” thing.

    Sarah’s other strategy was to stay focused. Focus means not talking about Bush at all. This is a side track issue that does nothing for you. It is the truth that Bush tried and failed to reign in Democrat corruption of Fannie May, but the truth never convinced anybody when their emotions and fear are in control. The constant need to defend yourself, your part, or your President is what the Democrats take advantage of. It is not a strategy for victory.

    The focus aspect also meant she had to defend John McCain against Biden lies and misrepresentations. She did surprisingly well on a charisma, direct interface, conviction, and confidence level there. That was my analysis of her tone and directness.

    Sarah lost some of that on foreign policy issues like Afghanistan and Iran. Foreign policy is naturally alien to most Americans but Sarah was obviously not a long time reader of Blackfive and fighter in the wars of 2002 to 2007. She knew the surface details of Petraeus and counter-insurgency, but not perhaps the details of them or of how Biden and the Dems tried to screw us five ways to sunday even before the Surge, not to mention during and after it.

    As a conclusion, I loved how Sarah winked at the camera when she was talking about government corruption and reforming things. Her charisma leaks through the camera in a way that George Bush’s never did. And if my ratios are correct, that means that if George Bush has 20 charisma points on camera and 100 points in person, then Sarah Palin has 100 points on camera and 500 points, presumably, in person.

  • Ymarsakar

    Any ideas?

    The trick with getting government out of the private sector is that you must also get the private sector out of the government.

    The more taxes charged against CEOs and what not, the more those corporations have an interest in corrupting government, using special interest, and basically balkanizing the way political bills and processes work in DC.

    What will stop a company from funneling billions of profits into government pockets when the government taxes them in the trillions? It’s a safe investment for the companies. Perhaps the only safe investment: buying politicians.

    This is where corruption starts people. When people have an interest and see a payoff greater than the risk, they’ll go and get it.

    The Dems like to pretend that corporations and special interests are 100% vulnerable to the government and what politicians like Biden and Obama tells them. But of course, we all know that it is rather the other way around. Power belongs to the people, not to Biden or Obama. If CEO and mega corporation money can give you a 25% point advantage in an election, which decides who gets power: what politician could refuse and still win? Aside from Sarah, few politicians are able to do that. And since votes in the House and Senate are based upon head counts, you can predict what will happen when people decide to vote on bills that impact special interests and companies.

    Counter-insurgency says that fighting terrorists and law breakers is necessary, but what is also necesssary is to get the people who don’t want to fight on your side. If you just indiscriminately oppose everyone in your enemy’s camp, then you create so much fear in the enemy of you that they will never switch to your side. They will do everything they can to kill you, simply because of self-survival not hate.

    The same counter-insurgency principles are true in fighting Democrats or corporations. If the American people actually buy the Dem line on class warfare and actually believe that this will put more power into the hands of the people, then they are counter-insurgency idiots and incompetents too boot. Then again, the fact that they couldn’t come up with a Surge, but required Petraeus to do it, spoke of their ignorance awhile ago. The fact that they still don’t get it speaks of their stupidity and incompetence.

    Most people are incompetent in fields other than their chosen specialty. We are ants in this respective. What better government for an ant than a hive mind?

  • Mike Devx

    Y,
    Thx for both your posts. I’ll ruminate over ‘em for a while today. Thanks!

    I like your point about “indiscriminately opposing everyone in your enemy’s camp” and how that is self-defeating. It reminds me of the principle known I think all the way back to Sun-Tzu – always give your battlefield enemy a way to retreat, because a cornered enemy is a vicious enemy that will fight to the end.

    A thought on both posts as they relate to the currrent struggles and current election. It seems to me that video is the way to go. The reason we should be able to win the argument on Fannie Mae/Democrats is because there’s so much damning video out there that is just devastating to Barney Frank, Maxine Waters, Franklin Raines, Jim Johnson, et al. If only McCain and the Repubs would effectively fight.

    McCain’s shocking refusal to fight back – making him appear both weak *and* by implication guilty – is part of the story.

    The other part of the story is that Bush’s repeated efforts at reform back in 2003 – back when intervention could have avoided this crisis, as opposed to 2005, when it was already probably too late – is that none of these reform efforts are captured in video in compelling two-minute to five-minute segments. If they had been, none of these Democrat attacks on Republicans would have worked.

    Video is the technology of the day and somehow we’ve got to get our political front men to start using it effectively to bolster their cases, I think. The moving image is better than the still image which is better than the word, though the last two have a compelling and necessary *supportive* effect.

    The mainstream media keeps winning partly because TV is a video medium and they’re still basically in complete control of the video message to Americans.

  • Tiresias

    Mike, just a couple of thoughts to toss into what you’re already ruminating.

    Keep in the forefront of your mind at all times: the part of the market in difficulties is precisely the part that has always been subject to government oversight/regulation. It isn’t “greedy guys on Wall Street” – and I really wish both McCain and Palin would get out of that boat. The mortgage market has always been government overseen, and that’s where the trouble lies. So much for government. (Great job – Bawney!)

    The apparently available money for credit hasn’t gone anywhere, either. There is no “credit crisis,” except in the case of people who never really deserved credit in the first place. You can very simply test this for yourself: Try calling banks in your town, and see if they’ll do you a mortgage. The only difference between now and six months ago is that now you might actually have to be a qualified buyer, able to put down the traditional 20% and pay the rest back. (Kind of like the old days.) If, for the sake of your test, you present yourself in that way: no problem, you’ll get the loan. The only thing that’s changed is that people who can’t afford and in fact don’t deserve (harsh, I know) loans will no longer get them. (Although now that the government has stepped in with this idiot bailout yesterday, that’s no longer true and we’re back to once again giving money to people who can’t afford to pay it back.)

    Another very simplistic test. Tried using your credit card lately? Has it been refused by anyone? Of course not. So… evidently there’s credit available – for those who are credit-worthy.

    This sounds oversimplified, but the basis of this problem is in fact pretty simple, and how we arrived int he current position is also fairly simple. I would say there isn’t so much a “credit crisis” as there is – or at least was until the government got involved to prop up the BS again – a return to some fiscal responsibility.

    Another small example: the bank is currently forcing Citibank to “buy” Wachovia. They organized the terms, and structured the deal as a “rescue.” But now along comes the old Pony Express bank, Wells Fargo, who’ve been in business for quite a while, and they seem to recognize a lot of value to Wachovia. They’re saying “hold it, not so damn fast, government; we want to buy Wachovia. ON the open market, with NO “help” from taxpayers, we’ll do it as an absolutely routine, standard, market deal with our own money. We’ll pay more than Citibank will under the terms of your deal, too.” Citibank, which was quietly grinning and licking their chops, is now fighting with Wells Fargo over this, according to the government, “failing” bank. Would they be doing so if it were in fact “failing?”

    Or….. has the government:
    1. Failed to recognize what they see in Wachovia
    2. Failed to recognize that Wachovia has value clear enough for the professionals at both Citibank and Wells Fargo to see
    3. Therefore set an absurdly low price for Wachovia
    4. Thereby damaging the shareholders of Wachovia in the course of arranging this apparently unecessary and transparently absurd “rescue.”

    We’d all be one whole hell of a lot better off if the government would stay the %$#! out of business they don’t understand.

  • Tiresias

    Oops – for “bank” read: “the GOVERNMENT is currently forcing Citibank to buy Wachovia.”

  • Mike Devx

    Tiresias,
    Thank you! That looks like compelling arguments and I’m gonna examine closely.

    When you wrote:
    > Another small example: the bank is currently forcing Citibank to “buy” Wachovia. They organized the terms, and structured the deal as a “rescue.”

    Did you mean to say “the government (not the bank) is currently forcing Citibank to…”

    About the credit crunch… I agree it’s not as serious on “Main Street” (sorry), meaning normal credit-worthy activities by individuals are fine. But it does appear that the business cycle of relying on short-term loans to smooth out fluctuating income (ie there are ten big projects in the pipeline coming due, and you’re staffing up for them, but current capital is too low), all those short-term loans that are standard for business procedures, are just not available.

    I am hearing more and more that pension funds are undercapitalized, which I think means, the money’s just not there to back them up.

    I still am looking for the effects of the “over-leveraging” of available capital. Certainly the Democrats/Fannie Mae and forced mortgages, coupled with the housing speculation boom, led to the over-leveraging… but then on the collapse of the speculation, isn’t it clear that the practices of the investment firms led to the over-leveraging? If I’ve got this wrong, and I certainly do in some way, I really want to understand the correct picture.

    Because over-leveraging can happen anytime, anywhere, and therefore it’s not really *just* a question of Fannie Mae and the Democrats. This time, it is, but not always going into the future, right?

  • JackCoupal

    Anyone else notice Joe Biden’s sigh?

    While listening to one of Sarah’s comments, Biden looked down, and there was a very audible sigh from him.

    Shades of Al Gore’s multiple sighs during his debate with Dubyah.

  • BrianE

    MikeD,
    http://www.letxa.com/articles/25

    This is a good analysis. I might quibble about ARM’s, since people were enticed with “teaser” rates that allowed them to buy more house than they could afford.
    As to MBS being the culprit, these are merely pools of mortgages put together in a security that is liquid, though not without risk. The risk, of course, is default and prepayment. If you were looking for income, and a relatively risk-free return, you might consider Treasuries. But historic low interest rates drove 10 year treasuries notes down to somewhere around 3.5%. Investors looking for more return were drawn to MBS, which paid more around 6% on a 30 year note.
    The problem is that the risk IMHO was under-stated. This was a failure of the rating agencies such as Moody’s and S&P, IMHO.
    The obvious corollary of risk and reward states that for the more risk I take the more return I should have.

  • BrianE

    As Fannie Mae expanded into subprime loans, the amount of risk in the loan was not properly accounted for or it was assumed that the government would make good on the defaulted loans.
    Here’s a NYT story from 1999 announcing Fannie Mae moving into subprime lending, though it wasn’t called that at the time.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

    ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

    Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

    Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

    >>http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1>>

    While Fannie Mae opened up this market, they weren’t the only ones moving into the subprime lending. The five major investment banks were heavily into subprime mortgages. With the exploding housing markets driven by these unrealistic terms, which pushed housing prices ever upwards, and thinking they were hedging their risk by the use of CDS, a total of abot $7 trillion dollars of MBS were issued by 2007. 2004 was the peak year, with about $2 trillion dollars issued, tapering off to just under $1 trillion dollars in 2006.

  • BrianE

    As Fannie Mae expanded into subprime loans, the amount of risk in the loan was not properly accounted for or it was assumed that the government would make good on the defaulted loans.
    Here’s a NYT story from 1999 announcing Fannie Mae moving into subprime lending, though it wasn’t called that at the time.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

    ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

    Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

    Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

  • BrianE

    While Fannie Mae opened up this market, they weren’t the only ones moving into the subprime lending. The five major investment banks were heavily into subprime mortgages. With the exploding housing markets driven by these unrealistic terms, which pushed housing prices ever upwards, and thinking they were hedging their risk by the use of CDS, a total of abot $7 trillion dollars of MBS were issued by 2007. 2004 was the peak year, with about $2 trillion dollars issued, tapering off to just under $1 trillion dollars in 2006.

    I think it may be overstating it to say that CRA and Fannie Mae were the only culprits in this overheated market.
    Here’s a NYT article about a west coast mortgage lender and its relationship to Lehman to give you a flavor of the other side.
    >>http://www.nytimes.com/2007/05/08/business/08lend.html?pagewanted=1&_r=2&ref=business>>

    As I understand CDS, they are not regulated, since they are considered a private contract between two parties. The problem with this is the issue of the CDS, may or may not have sufficient capital reserves to cover the CDS in the case of the default, and that is the case today.
    Cox recently went before Congress asked for authority to regulate CDS, but no action has been taken.
    Here’s a story about it. Read the comment section.
    >>http://dealbook.blogs.nytimes.com/2008/09/23/sec-chair-regulate-credit-default-swaps-now/>>

    What made CDS so dangerous to the market is the way they were used, not the instrument itself.
    An entity would purchase a CDS from some institution and then immediately naked short their stock. If the price of the stock dropped, the basis point spread of the CDS would rise, meaning it was worth more and could be traded at a profit.

    Just to make matters more complicated, the banking rules established in the late 1980’s, set the capital requirements for banks (amount of leverage) which is approximately 12:1. In 2004, the big five Wall Street investment banks went to the SEC and asked that they be given an exemption to increase their leverage, which went up to as high as 40:1.
    >>http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/>>
    This was before Cox became SEC chairman, but the criticism is he didn’t keep sufficient oversight.

    I think you can see that there is plenty of blame to go around. And don’t forget, the securities industry is self-regulated. How do you control greed? It doesn’t matter what rules are imposed, there are people that will circumvent them. We need to be realistic about how much government can protect us from ourselves.
    Combining banking and investments may not have been such a good idea, except it freed up capital.

    Hope this helps.

    Something that is often overlooked in all this is the unrealistic expectations about what constitutes an exceptable house today. I grew up in a 1000 square foot house with three siblings. We live in an 1800 square foot house and had three children. My oldest daughter lives in a 2500 square foot house with one child.
    These expectations alone have driven the cost of housing up, and we may need to rethink what is necessary for a fulfilled life, just as we will need to reconsider how big of a car we need to drive.

    Some friends from Sweden just stopped buy a couple of days ago. Tore was an exchange student in the 60’s that stayed with my wife’s family. He and his wife flew into San Diego to visit a relative, then drove to Washington to visit friends before flying to visit their son, who is studying forestry in Alberta, Canada.
    The had no idea of the distances, and I think it gave them more appreciation of the difficulties we face in terms of mass transit, etc. The rented a Buick LaSabre and liked the car very much. But they did comment that we needed to drive smaller cars, and we needed to live in smaller houses.

  • BrianE

    This is from a NYT article May, 2007

    Lenders in California say big investment banks encouraged and pushed them to make risky loans. On Wall Street, bank executives say mortgage lenders became sloppy and did not pay enough attention to fraud. Whatever the cause, Ownit provides a vivid example of what went wrong.

    William D. Dallas, the founder and chief executive of Ownit, acknowledges loosening lending standards but says he did so reluctantly and under pressure from his investors, particularly Merrill Lynch, which wanted more loans to package into lucrative securities.

    He recalls being asked to make more “stated income” loans, in which lenders do not verify the information provided by borrowers and brokers with tax returns, pay stubs or other documentation. The message, he said, was simple: You are leaving money on the table — do more of them.

    Mr. Dallas, a trim 51-year-old who has been in the mortgage business for more than 25 years, said he disagreed, but complied.

    “If I can sell it at a profit,” he said, “why would I not do it?”

    A spokesman for Merrill Lynch denied Mr. Dallas’s assertions, but declined to elaborate.

    Mortgage companies like Ownit grew quickly last year by making it easier for home buyers to take out loans without proving their incomes or making down payments.

    In retrospect, it was exactly the wrong time to ease credit: interest rates were rising and home prices were cresting after a sharp four-year rally. Many in the industry also suspected that speculation and fraud were rampant in many hot real estate markets on the coasts and in the Southwest.

    There is no doubt that the standards in the subprime market deteriorated sharply last year. More than 44 percent of all subprime loans in 2006 were based on limited documents or none at all, up from 38 percent in 2004, according to Lehman Brothers. More than 26 percent of borrowers took out a second mortgage, indicating that they did not have enough savings for a full down payment, up from 14 percent.

    But Tom Marano, who heads the mortgage business at Bear Stearns, disputed the contention that Wall Street pressure led to the loosening of credit standards. Investment banks, he said, do not directly make many loans.

    “If enough independent companies set standards, that becomes the market,” he said. “Wall Street’s role is largely one where we assess risk, we purchase loans.”

    Wall Street, however, is now wading more directly and deeply into the business. Big banks and hedge funds are buying up bankrupt or ailing mortgage companies that did not have enough capital to weather the downturn. These bigger financial players and more diversified lenders like Countrywide Financial may well inherit the subprime business.

    Officials at mortgage companies and Wall Street banks acknowledge that it may be too dangerous to allow borrowers with weak credit who are financing 100 percent of a home’s purchase price to borrow without documentation of their income. But they defend the practice as appropriate for buyers with better credit or those making a substantial down payment, arguing that it helps extend homeownership.

    The idea that the investment banks didn’t know the quality of the loans they were purchasing is absurb. And if I were a private mortgage broker, and a bank was going to buy my subprime loan why should I care how qualified the homebuyer is.
    In this case, Merril Lynch was suing Ownit Mortgage for the bad loans, but why didn’t they check the quality of the loans they were buying from Ownit?

    There is plenty of blame for the Wall St. investment banks and private mortgage brokers. What I don’t know is the precentage of subprime loans made because of CRA and brokers just looking to sell loans.

  • BrianE

    CDS are not regulated, since they are considered a private contract between two parties. The problem with this is the issue of the CDS, may or may not have sufficient capital reserves to cover the CDS in the case of the default, and that is the case today.
    Cox recently went before Congress asked for authority to regulate CDS, but no action has been taken.
    What made CDS so dangerous to the market is the way they were used, not the instrument itself.
    An entity would purchase a CDS from some institution and then immediately naked short their stock. If the price of the stock dropped, the basis point spread of the CDS would rise, meaning it was worth more and could be traded at a profit.

    Just to make matters more complicated, the banking rules established in the late 1980’s, set the capital requirements for banks (amount of leverage) which is approximately 12:1. In 2004, the big five Wall Street investment banks went to the SEC and asked that they be given an exemption to increase their leverage, which went up to as high as 40:1.

    This was before Cox became SEC chairman, but the criticism is he didn’t keep sufficient oversight.

    I think you can see that there is plenty of blame to go around. And don’t forget, the securities industry is self-regulated. How do you control greed? It doesn’t matter what rules are imposed, there are people that will circumvent them. We need to be realistic about how much government can protect us from ourselves.
    Combining banking and investments may not have been such a good idea, except it freed up capital.

    Hope this helps.

    Something that is often overlooked in all this is the unrealistic expectations about what constitutes an exceptable house today. I grew up in a 1000 square foot house with three siblings. We live in an 1800 square foot house and had three children. My oldest daughter lives in a 2500 square foot house with one child.
    These expectations alone have driven the cost of housing up, and we may need to rethink what is necessary for a fulfilled life, just as we will need to reconsider how big of a car we need to drive.

    Some friends from Sweden just stopped buy a couple of days ago. Tore was an exchange student in the 60’s that stayed with my wife’s family. He and his wife flew into San Diego to visit a relative, then drove to Washington to visit friends before flying to visit their son, who is studying forestry in Alberta, Canada.
    The had no idea of the distances, and I think it gave them more appreciation of the difficulties we face in terms of mass transit, etc. The rented a Buick LaSabre and liked the car very much. But they did comment that we needed to drive smaller cars, and we needed to live in smaller houses.

  • BrianE

    In post #28 Ownit was Ownit Mortgage Co, a California mortgage co.

    The company was a big lender of 40-year and 45-year mortgages, which Mr. Dallas says are a better way to put moderate- and low-income families into homes than adjustable-rate loans that start with low introductory rates but reset after a few years to much higher rates.

    His passion proved compelling. In 2005, Merrill Lynch bought a 20 percent stake in Ownit, whose majority owner was CIVC Partners, a private equity firm in Chicago.

    Merrill, along with JPMorgan Chase, also provided Ownit with billions of dollars in credit lines to make mortgages.

    But Mr. Dallas’s relationship with Merrill began to sour in 2006 after the bank announced in September that it was buying First Franklin and as defaults on loans Ownit made that year spiked.

    Merrill argued that Ownit was contractually obligated to buy back loans made to borrowers who had missed the first few payments. Mr. Dallas asserted his company would not do so because the borrowers made their payments to Ownit before the loans were sold. He further argued that Ownit was not responsible for missed payments after Merrill bought the loans.

  • BrianE

    This is about the AIG bailout earlier. Notice the reference to Phil Gramm? Gramm added an amendment to a 2000 budget authorization bill that included the Commodity Futures Modernization Act which apparently exempted CDS from regulation. The rational was sound, but like any financial device it morphed into a instrument which allowed “naked” cds where the purchaser doesn’t need to own the underlying security.

    As anybody who’s been paying attention to the situation will know, insurance policies and retirement plans have nothing to do with the bailout. AIG’s insurance and retirement plans are run through AIG subsidiaries, which everyone agrees are well capitalized and which, at least in the case of the insurance operations, are governed by strict regulations that severely limit the risk to people like you and me. Nothing I’ve read in the last couple of days suggests that these were ever in danger, even if AIG went into bankruptcy.

    Rather, the reason for the Fed bailout is, quite simply, the massive counterparty risk that an AIG failure would cause. As newspaper graphic designers across the globe are struggling to explain to their readers today, AIG is a huge player in the market for credit default swaps, which means that they effectively sell insurance to corporate bondholders against the possibility that the companies who issued the bonds will default. In other words, CDS help big financial players limit the risk of their fixed-income (i.e. bond) investments.

    CDS are not in and of themselves evil or duplicitous instruments; in fact they help shift risk to the people and companies who want to take it on and away from people who do not. But the major problem with CDS is that the market for them is completely opaque and unregulated, thanks in large part to the efforts of one of John McCain’s chief economic advisors, Phil Gramm. (A more minor problem–which reared its head earlier this year–is that CDS contracts don’t require initial ownership of the underlying bonds, thus the instruments can quite easily be used to speculate on a company’s demise.)

    The Fed bailed out AIG because the company could not raise the $14.5 billion in collateral it needed to avoid bankruptcy. And unlike the insurance plans or retirement portfolios, the CDS contracts would be at risk in the event of bankruptcy. If all of a sudden a huge swath of CDS contracts were effectively canceled, then you’d have a huge swath of the financial market holding all kinds of risk that it was trying to avoid in the first place. And as soon as that happened, that whole swath would likely start selling off those newly risky investments all at once, causing a huge seize-up in the credit markets. And the credit markets, remember, are how companies get short-, medium-, and long-term loans to fund their daily operations (read: things like payroll for their employees). And so if AIG went under, the negative effects would work their way very quickly from Wall Street down to Main Street.

    At least, I think that’s how it all goes. In any case, you can assure yourself that Henry Paulson and Ben Bernanke wouldn’t be doing this if it were at all avoidable. I mean, just think what this means: a Republican administration has effectively nationalized one of the world’s largest insurers. It’s funny how a little financial panic makes socialists of us all.

  • Mike Devx

    BrianE (#26)
    >The problem is that the risk IMHO was under-stated. This was a failure of the rating agencies such as Moody’s and S&P, IMHO.

    Hi Brian,
    Thanks for the info in the posts! I’ve been reading the posts from everyone (thank you all!) and this helps a great deal.

    I found a small summary on what the rating agencies did with the Fannie Mae subprime mortgages and other instruments:

    1. Moodys (and S&P and Fitch’s) labelled a bunch of horrific junk — RMBS, CDOs, CDS, and other stuff — high quality AAA.

    2. The banks and brokers all shoveled this crap to their clients around the world, many of whom then promptly blew up.

    3. Once the music stopped, these banks and brokers got caught holding loads of this AAA rated paper, leading to $130 billion — and counting — in write downs.

    4. The banks then saw their credit ratings get downgraded by the same companies that rated the original crappy paper AAA.

    There’s more to this, because I *do* remember that Fannie Mae executives were able, due to their close (incestuous!) ties with Democrats in Congress, to pressure Moody’s and the other agencies to rate the “Crap” as AAA. That made these high-risk loans able to packaged with other securities and instruments and sold off to investors in the opaque high-rated AAA packages. And resold and resold and resold… always at a profit. But no one knew what they were holding.

    That forced upgrading of instruments to the high-grade AAA level is corruption. Are you listening, you vicious ba$tard, Barney Frank??? How about you, Chris Dodd? Had those subprime mortgages been forced to remain at the correct grading level – without Fannie Mae and Democrat corruption – they could NEVER have been eligible to be traded the way they were. This entire crisis does seem to rest almost entirely on the twisted backs of Fannie Mae/Democrats.

    I had forgotten all about the Moody’s/rating agencies angles, and yet another connection to Fannie Mae and Our Dear Democrats.

  • Mike Devx

    This part, from above:

    3. Once the music stopped, these banks and brokers got caught holding loads of this AAA rated paper, leading to $130 billion — and counting — in write downs.

    4. The banks then saw their credit ratings get downgraded by the same companies that rated the original crappy paper AAA.

    I forgot to mention that this “crappy paper” was forced to be immediately declared at a loss, due to “mark to market” rules. Yep, a Clinton Presidency initiative! Mark to Market was instituted by Clinton in the early 1990’s I believe.

    Clinton did that, and Enron, by the way, immediately began making use of it, with their own highly aggressive energy-derivatives trading games. Eventually forcing California into rolling brownouts while their young-ish traders giggled in real time about it, over their phones, shocked that via their trades they could actually FORCE this to happen!

    If mark to market hadn’t been in effect during 2006-2008, the losses would not have had to be immediately declared, since the prior loss declarations were on a traditional, long-time standard depreciation schedule, to smooth out market bumps.

    Good luck explaining all this in campaign commercials, eh!?!?!

  • BrianE

    Mike,
    For a while, few cared that these weren’t AAA paper since everyone thought they had a “get out of jail free card”, the Credit Default Swaps that would hedge the risk.
    Funny thing about explaining risk to people. You can explain it, explain the consequences, but some people don’t realize what risk means until they get burned.

    When Palin invoked the populist notion that we weren’t going to let Wall St. greed get us in this situation again, my immediate reaction was why didn’t she lay it at the feet of the Democrats. But I think her approach is the only one that will resonate with the voters. There is enough failure across the board that the argument just turns into a food fight.
    All of these initiatives including the Mark to Market rules have a place and a reason, but what we need is the ability to adapt to changing conditions. Computer modelling that would trigger various restraints. Imagine what it would take to program that.
    Markets that would self-correct are being juiced by government intervention to the point they no longer act rationally, IMHO.
    The trick will be coming up with rules that allow the markets to act naturally. Democrats are likely to give us more Sarbannes-Oxley bills!

  • BrianE

    Uncovering the roots of the disastrous home mortgage bubble that popped last year will keep economic historians busy for decades. Yet, one factor has so far been largely overlooked: the bipartisan social engineering crusade to drive up the rate of homeownership by handing out more mortgages to minorities.

    More than a negligible amount of the blame for the mortgage meltdown can be traced back to multiculturalism: government-mandated affirmative-action lending, demographic change, illegal immigration, and the mind-numbing effects of political correctness.

    The chickens have finally come home to roost.

    About half of all mortgages for blacks and Hispanics are subprime, versus roughly one-sixth for whites. Not surprisingly, the biggest home price collapses have occurred in heavily Hispanic cities such as Las Vegas, Miami, Phoenix, and Los Angeles.

    The mortgage bubble was essentially a bet on the purportedly increased creditworthiness of the bottom half of the American population. After three decades of the home ownership rate stalling at around 64 percent, a series of federal initiatives to increase minority and low-income ownership helped push the rate up to just below 70 percent.

    Now here’s a big picture look, demonstrating what all conservatives now realize about Bush, that “compassionate” conservative is not a synonym for “fiscal” conservative.

    http://www.takimag.com/site/article/the_diversity_recession_or_how_affirmative_action_helped_cause_the_housing/

  • BrianE

    For those still looking for causes:

    An Open Letter to my Friends on the Left
    by Steven Horwitz
    Department of Economics
    St. Lawrence University

    One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree – now you know how I feel when you claim this mess is a failure of free markets – at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

    http://myslu.stlawu.edu/~shorwitz/open_letter.htm

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