Check out the new youtube sensation blaming Democrats for the financial meltdown.
I just got this in an email today, so we know the Republicans are trying to take it viral. It is filled with so many inaccuracies that my head nearly exploded.
I hastily typed up a response and did a reply-all. I'm including it here in my very first Kos Diary.
Since I just wrote it from the top of my head, I'm sure I made some mistakes. Any factual corrections or suggestions would be welcome.
I know that a lengthy response like this is not likely to fly in our soundbite culture so any tips for a quick response would help as well.
My response:
There is a lot of simplification going on...and this video is about the worst offender I have seen. I have a very long response below. It's wordy and not set to catchy music, but if you're interested in the topic it may make good reading.
There is a lot of blame to go around, but if I had to pick the main reason we are in this crisis it would be because financial institutions were able to leverage themselves at 40 to 1 via dubious financial instruments and now they have to pullback (and screw everyone in the process). They were able to do this because of something called the Credit Default Swap.
People like to talk about citizens getting over their heads in a house, buying a 300k house when they can only afford a 100k house. Some will lay the blame on stupid home buyers. Others, who desperately want a McCain presidency, will say Democrats MADE the homeowners buy and MADE banks lend this money, and Bill Ayers had Hamas fund Acorn to sue banks to ...blah blah blah.
But still, that's the equivalent of a 3 to 1 leverage. Not exactly smart, but not the end of the world, right?
Why not more outrage at WaMu at 40 to 1? In the scale of responsibility, isn't that much riskier? And it was made by people who are supposed to be good with numbers. The majority of their holdings weren't CRA loans. They just got in WAY over their heads by making an extremely risky bet. The equivalent of a college professor buying a 40 million dollar estate. How were they able to get so unbalanced?
They bought a type of insurance called a 'credit default swap' that insulated them on their loss. Except it's not really insurance. If they called it insurance, the sellers would have been regulated as an insurance company. By calling it a swap, they could sell it in an unregulated market. 40 to 1 price to earning looked OK, because they kept saying, 'we are hedged'. And because they believed that, they gave out more loans and more loans, and bought more mortgage backed securities. They had 'insurance' against loss, or so they thought.
The man who put together the legislation to create the Credit Default Swap is Phil Graham, McCain's former chief economic advisor. The reason AIG went under is they were selling this 'insurance' to everyone under the sun, even though they didn't have enough money in reserve to payout if anyone filed a claim. They didn't need to maintain those reserves because, after all, they weren't selling actual insurance.
So WaMU and others like them loaded up on mortgages and bought 'insurance' to hedge their bet. WaMU wasn't being 'forced' by Democrats to give out loans. They were giving out loans because they thought they could make a boat load of money RISK FREE because they bought 'insurance'. When the home values starting going down, they 'doubled down'. They had to give out even MORE loans so they could still show a good balance sheet, because the returns on their previous investments weren't as high. Which means they had to buy even more 'insurance'. The majority of their loans weren't sub prime or CRA loans. The Credit Default Swap created an unregulated market where it was profitable, nay, damn near an imperative to give money away.
But eventually people started defaulting. This wasn't because the CRA. Less than a quarter of sub prime loans were CRA anyway. And a majority of loans that defaulted weren't CRA OR sub prime!!
If it only stopped there, it wouldn't be such a bad thing. Because it would mean that some bank held some mortgages, some mortgages failed, and they couldn't get 'insurance' to cover their losses, so they failed. But the underlying assets were still reasonably good, so they could be bought up by other companies. But no one else had any money to buy up these mortgages and the banks didn't trust each other anymore. Because they knew that their was a good chance that everyones balance sheet was as screwed up as they knew their phony balance sheets were.
The problem is in the scale of the Credit Default Swap operation. Because it was unregulated, there was no common exchange, so they could be bought and sold by anybody, counter party to counter party, with no oversight at all.
The size of the US budget is something like 2 trillion dollars. The US GDP is like 10 trillion dollars. The total amount of Mortgage debt is around 13 trillion dollars. 13 trillion is a lot of money, but it is based on something real. In other words it is the value of all of our homes. Less than %10 of mortgages are in trouble, so lets say 2 trillion in bad mortgages. Note, the house is still there, so it's not like those mortgages are worthless, they just aren't worth as much.
Here's the kicker. The size of the Credit Default Swap market is 62 trillion dollars. Just for reference, that is larger than the combined GDP of the entire planet. It got that big because everyone could buy them (or sell them) and it was completely unregulated. Essentially I could buy a contract that was a 'bet' that you, Sally Homeowner would default on your loan. It would cost be a little bit of money, but not much, and the payout was the value of your house. I didn't get your house, just the cash value of it. So these big investment Banks have actually been bankrupt for 2 years or more, but their balance sheet looked good, because they show the credit default swap as INCOME, even though it is impossible for them to collect that money. It's impossible for these institutions to collect this money because there is not enough money in the entire world to effect a payout on their swaps. And when banks started to realize that, they all turned off the spigot and said 'no more money for anyone'.
So you had a vicious circle. Speculators liked to buy the swaps hoping you would default. Banks liked to buy them to give themselves a false sense of security and a better looking balance sheet to drive up their share price. Companies like AIG loved to sell them, because they were very profitable considering they could never payout. So they went round and round, essentially trading huge amounts of money between these three principle actors, like people buying and selling tulip bulbs amongst themselves.
But they couldn't feed this fire without Average Joe. They needed Average Joe to want to buy a home. Because they were dying to give money to him, at whatever the risks. These weren't Democrats, these were Wall Street Republicans. This was Bush saying we are 'an ownership society'. Trust me, they didn't need 'Libruls' to force them to give money to, ahem, 'minorities'. They were dying to give money away. If they didn't give him money, there was no mortgage to securitize . So there would be no security ( callled a CDO, also a republican invention) to buy and sell at a profit. There would be no reason to buy and sell credit default swaps. And that means they couldn't make a bazillion dollars in their sick financial circle jerk. So they sent out the mortgage brokers, and had banks advertising on TV 24x7. You think Democrats made, under the CRA, Countrywide Financial spam my TV every Sunday during football hocking low cost home equity loans? It was a business. A bad one, but a business. As the individual return on each mortgage fell, they didn't get out of the mortgage business, they just had to sell more of them. These were free market, Adam Smith loving Republicans at their finest!
What we're seeing now is that bazillion dollars made trading the same BS back and forth between each other evaporate and come back down to a sane level. Unitl itdoes, though, no one will give money to anyone else because no one trusts anyone else. So no home loans, no Coroporate paper debt for payroll, not small business loan...nada.
As you can see the CRA is entirely tangential to this issue.
CRA was meant to force banks that took deposits to give out loans in the same neighborhood as they operated. This is because it was impossible for some groups to get loans regardless of their credit. Banks just wouldn't give out loans to some individuals based on their skin color or based on what neighborhood the home was in. That is why some urban areas had zero renewal and investment, because it was impossible for people to get loans there. The institutions who were/are giving out the CRA loans are not the ones in trouble, and most loans under CRA aren't sub-prime.
This argument about the CRA really boils down to Bigotry. It is a classic Republican argument. The caricature is: 'Democrats get dark people to vote for them by promising welfare, cheap housing blah blah blah'. It's really a sick argument.
It's used to paper over the last 30 years of Republican economic theory. At every turn, they propose deregulation, less oversight, and trickle down tax policy, and now they want to blame Democrats? They fundamentally think government is the problem, that oversight burdens productive capitalists, and that markets regulate themselves. It's no wonder government doesn't work when they are in charge. It's their whole damn philosophy. Welcome to their self-fulfilling prophecy. Government, as implemented by Republicans, failed. Go Figure.
In 2004, after Bush's 'mandate' of an election, the first initiative he chose to pursue was Social Security reform. His solution, supported by McCain, was to privatize Social Security, to put the our SS fund in the stock market where people could have more control and get a better return on their dollars, and putting our SS trust fund into the hands of the 'geniuses on Wall Street'. Thank God the Democrats stopped him, or right now we would be in a (HARD TO IMAGINE ) much, much worse place. Although I'm sure if that had happened, it would somehow be the Democrats fault for 'pandering to Senior Citizens and buying their vote with free SS handouts'. Barack Obama and Bill Ayers probably had something to do with it.
If you got to the end of this rant, I owe you a small prize. I can pay you in Credit Default Swaps.