The Housing and Credit Crisis Explained

This presentation on the Housing and Credit crisis is the best I have seen. It explains everything from soup to nuts.

Each slide contains a graph that is well explained.

They say a picture is worth a thousand words.

Once you get through this, you will understanding the current credit crisis in housing, and what to expect in the years ahead.

If you take the time to view and read this you will be fully informed.

Hit the full screen button in the upper right hand corner of the panel below.

T2 Partners Presentation on the Mortgage Crisis

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Give Me Some of Dem Non-Recourse Loans--How the Toxic Asset Scheme Works

Duh, I want in. I want some of dem non-recourse loans.

You might be thinking what the heck? What is a non-recourse loan?

It is what you got when you took out a subprime mortgage. You put up a tiny down payment, zero. You purchased a $500,000 house (hopefully you did this in 2004, not 2006) for no money down and you now controlled $500,000 of real estate. If the value of the home went up, to say, $550,000 and you sold it, you made a gigantic return on your investment. Infinity, actually, since you put up nothing. What if the value of the home went down? Well this was the non-recourse part of your loan. You threw the keys on the table and walked away, and left the problem to your not so friendly neighborhood banker.

Now let's get to the non-recourse loan feature of the brand spanking new--Tim GeithnerToxic Asset Disposal Plan for Banks. These numbers are a bit bigger and the terms while fantastic are not quite as good as a zero down subprime loan.

Let's say you and your buddies decide to buy about $100 million of the sub prime crap that is laying around in your favorite neighborhood bank. The bank can't find buyers for this stuff at a real price, so your Uncle Sammy is going to give you the opportunity of a lifetime.

Now let's say you decide those $100 million of subprime loans are now worth $70 million (at this point your banker is out having a $600 lunch and thinking once again--there is a sucker born every minute). Little note here: I am going to round off the numbers to make this easy to understand.

To get control of those $70 million in subprime mortgages you will need to put up 5 million bucks. Uncle Sammy is going to put up 5 million bucks right along with you--you are now partners with Uncle Sammy (dig that).

Here is the good part--Uncle Sammy's little brother, the FDIC, is going to lend this partnership 60 million bucks. And guess what, if things don't work out, you throw the keys on the table, walk away, and tell the FDIC--eat a banana. Just like the subprime borrower. In other words, you don't have to pay back the loan which was non-recourse.

Now let's say those $70 million of subprime loans you bought actually go up in price. Walla. Windfall profit. Let's dream big and say they go all the way back up to $90 million. Here is what happens.

The little brother FDIC gets his $60 million back (and a tiny amount of interest so he doesn't feel like a complete fool). The remaining $20 million is split equally between you and Uncle Sammy. You got it. You risked $5 million and you made $10 million. A 200 percent return.

On the other hand--if those $70 million in sub prime loans you bought go to zero--the most you can lose is your original $5 million. In other words, Uncle Sammy losses $5 million, you lose $5 million, and the dumb banker, in this case the FDIC, losses $60 million.

I am going to stop here because I learned a long time ago that it is hard to get anyone on the Internet to read more than 600 words in one bite. But, I promise you there is more to this that I would like to discuss with you. So come back later for part two.

While you are at it, email this to someone you know that likes to make comments. We need some comments in here. And remember, Don't Fight the Tape.

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Nouriel Roubini and Matthew Richardson---Nationalize the Banks!

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

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Nationalize the Banks! We're all Swedes Now

Nationalize the Banks! We're all Swedes Now

By Matthew Richardson and Nouriel Roubini
Sunday, February 15, 2009; B03

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.

But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole.

Two important parts of Geithner's plan are "stress testing" banks by poring over their books to separate viable institutions from bankrupt ones and establishing an investment fund with private and public money to purchase bad assets. These are necessary steps toward a healthy financial sector.

But unfortunately, the plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.

Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.

Sweden's restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the cleanup to private bankers and managers hired by the government. The process was remarkably smooth.

Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.

Matthew Richardson and Nouriel Roubini, professors at New York University's Stern School of Business, contributed to the upcoming book "Restoring Financial Stability: How to Repair a Failed System."

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