(Lack of) Connecting credit dots prolongs crisis

[UpInArms]

Source: Reuters

NEW YORK (Reuters) - The global credit downturn is unlikely to end any time soon given how slowly Wall Street banks have moved to connect the dots between themselves, bond insurers, credit indexes and other pieces of the credit puzzle.

Banks, including Citigroup (C.N: Quote, Profile, Research) and UBS (UBSN.VX: Quote, Profile, Research), have already absorbed about $150 billion of mortgage and corporate loan-related losses, but that may jump by almost 50 percent, according to brokerage Oppenheimer & Co. in New York. That is because the tottering bond insurance companies some banks used to guarantee their mortgage bets are facing their own troubles and may not deliver on policy claims.

If Wall Street banks suffer another wave of write-downs on assets like commercial property loans or repackaged subprime mortgages that were insured, they're likely to pull back even further on extending credit to companies and consumers, helping push the U.S. economy into a recession.

Consider banks' failed subprime mortgage investments. Apparently the banks did not realize that their insurers, which guarantee payments on almost $1 trillion of structured finance bonds, made the same mistake they did: Trusting the rose-tinted views of model-driven experts on repackaged mortgage securities called collateralized debt obligations, or CDOs.

<snip>

In a way, both this example and the bond insurer case suggest that the unfolding of the credit crisis is less a "contagion" spreading through markets than a gradual discovery by banks and investors that different pieces of credit markets were connected in the first place.

Read more: http://www.reuters.com/article/ousiv/idUSN1929055920080223?sp=true

[Joanne98]

1. Excellent point! K&R!

[Ghost Dog]

2. 'Investors' may vary but relevant personnel at banks

certainly knew what they were doing and have been guilty of, at best, lying to themselves as well as to everyone else. IMHO.

[Roland99]

3. If only they wore ruby slippers instead of rose-coloured glasses.

[flashl]

4. They knew

As early as the 2003 Annual Report issued by Fairfax Financial Holdings Limited, Prem Watsa was raising concerns about securitized products:

"We have been concerned for some time about the risks in asset-backed bonds, particularly bonds that are backed by home equity loans, automobile loans or credit card debt (we own no asset-backed bonds). It seems to us that securitization (or the creation of these asset-backed bonds) eliminates the incentive for the originator of the loan to be credit sensitive. Take the case of an automobile dealer. Prior to securitization, the dealer would be very concerned about who was given credit to buy an automobile. With securitization, the dealer (almost) does not care as these loans can be laid off through securitization. Thus, the loss experienced on these loans after securitization will no longer be comparable to that experienced prior to securitization (called a ‘‘moral’’ hazard)... This is not a small problem. There is $1.0 trillion in asset-backed bonds outstanding as of December 31, 2003 in the U.S.... Who is buying these bonds? Insurance companies, money managers and banks – in the main – all reaching for yield given the excellent ratings for these bonds. What happens if we hit an air pocket?"

[Vincardog]

5. What happens if we hit an air pocket? The neo-CONSTERS will run away with their loot

and the taxpayers will be stuck with the bill. The Bush Crime Family has a record of this action. Look up Neil Bush and the S& L fiasco. This is what they do. Remember that

[Karenina]

6. What happens when the hundreds of TRILLIONS

of "notational value" derivatives get examined for their "worth?"

[RuleOfNah]

7. I agree.

If a random person (like myself) knew years ago then professionals did too.

Our political representatives also knew.

Few have acted, most of those marginalized by the perpetrators.

Sound familiar?

[flashl]

8. Yeah, they have connected these dots ...

Lenders Fighting Mortgage Rewrite
Measure Targets Bankrupt Homeowners

The nation's largest lending institutions are lobbying hard to block a proposal in Congress that would give bankruptcy judges greater latitude to rewrite mortgages held by financially strapped homeowners.

The proposal, which could come to a vote in the Senate as early as next week, is being pushed by Democratic congressional leaders and a large coalition of groups that includes labor unions, consumer advocates, civil rights organizations and AARP, the powerful senior citizens' lobby.

The legislation would allow bankruptcy judges for the first time to alter the terms of mortgages for primary residences. Under the proposal, borrowers could declare bankruptcy, and a judge would be able to reduce the amount they owe as part of resolving their debts.

[RuleOfNah]

9. That could be powerful...

if it isn't marginalized. Next week is almost here...

:popcorn:

[UpInArms]

10. if my crystal ball reading is

wrong, forgive me, but I am going to go out on a limb here and say -

there will be no plan exposed on Monday or Tuesday for these things -

that was merely a smokescreen that they floated to pump the markets on Friday and they are hoping that the news will take the spotlight away from the lack of announcement.

If I'm wrong, I'll buy you a virtual :beer:

[RuleOfNah]

11. OK, it's a win/win for me.

I get real governance or a beer, both essentially virtual...

[UpInArms]

13. well, okay, win-win

come on over to the SMW on Tuesday after market close to gloat

:hi:

[NashVegas]

12. Let's Here It For Those MBAs!

Hip hip - yeah, whatever.