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I don't buy it, tho. I heard Soderberg's 'explanation,' but it doesn't really wash with me... there's the experimental director, the art-house director, and the S. Soderberg who sometimes directs AAA titles. Triple-A SSoderberg knows he's not a Lucas or Spielberg; he can't do exactly as he likes, make just what he wants, however he wants. I'm reasonably sure the fix was put in so folks wouldn't take this too seriously; just look at the poster. Like the soothing music playing over the list of side effects in prescription commercials, it outweighs anything rational.

Anyway, tho I meant to post that weeks ago, that's not what this is about. Rather than derail another topic this was raised in, it goes here.
****

TAL recently aired "Return To The Giant Pool of Money," a recap/update to their award-winning May '08 original. I was too late to post the link to the free-for-a week podcast, and tho you can still, I think, get either for a buck from iTunes (& well worth it), you can also get a transcript of the original. I'll excerpt some of that that gets at an aspect of the fiscal meltdown I've never seen even alluded to in here. I find it slightly macabrely amusing how loud the uproar sometimes gets about the <$900B healthcare reform; tho a lot of money, the giant pool of money was/is just that; healthcare is just a pail's worth to the Giant Pool.
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05.09.2008               355: The Giant Pool of Money

A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

A shorter companion version of this story appeared on NPR's All Things Considered.

...

Alex Blumberg: To help explain out what happened, here's my partner for this
hour, Adam Davidson, the international business reporter for NPR. Hey Adam.

Adam Davidson: Hey Alex.

Alex Blumberg: So, I guess the first thing we have to talk about is the global pool
of money, right?

Adam Davidson: Right. The global pool of money. That's where our story begins.
Most people don’t think about it but there’s this huge pool of money out there, which
is basically all the money the world is saving now.  Insurance companies saving for a
catastrophe, pension funds saving money for retirement, the central bank of England
saving for whatever central banks save for. All the world’s savings.

Ceyla Pazarbasioglu: It's a lot of money. It's about 70 trillion. 


Adam Davidson: That is the head of capital market research at the International
Monetary Fund, the place to go if you want know how much money is in the world. 

Adam Davidson: How do we pronounce your name? 

Ceyla Pazarbasioglu: That will take two minutes at least. It's Pazarbasioglu.
Ceyla Pazarbasioglu. I'm very impressed. 

Adam Davidson: And, by the way, before you finance enthusiasts start writing any
letters, we do know that 70 trillion technically refers to that subset of global savings
called fixed-income securities. Everyone else can just ignore what I just said. Let’s
put 70 trillion dollars in perspective. Do this. Think about all the money that people
spend everywhere in the world. Everything you bought in the last year, all of it. Then
add everything Bill Gates bought. And all the rice sold in China and that fleet of
planes Boeing just sold to South Korea. All the money spent and earned in every
country on earth in a year: that is LESS than 70 trillion, less than this global pool of
money. 

Alex Blumberg: Wow, that is a lot of money.

Adam Davidson: It is a lot of money. And that money comes with an army of very
nervous men and women watching over the pool of money: investment managers. 
This army is nervous because they don't want to lose any of that money and they
also want to make it grow bigger.  But to make it grow, they have to find something
to invest in. So, for most of modern history, they bought really, really safe, really
boring investments: things called treasuries and municipal bonds. Boring things. But
then, right before our story starts, something changed, something happened to that
global pool of money. 

Ceyla Pazarbasioglu: This number doubled since 2000.  In 2000 this was
about 36 trillion dollars. 

Adam Davidson: So, it took several hundred years for the world to get to 36
trillion.  Then, in six years, to get another 36 trillion. 

Ceyla Pazarbasioglu: Yeah. There has been a very sharp increase. 

Adam Davidson: How's the world get twice as much money to invest?  Lots of
things happened, but the main headline is all sorts of poor countries became kind of
rich making TVs and selling us oil: China, India, Abu Dhabi, Saudi Arabia. Made a lot
of money and banked it. China, for example, has over a trillion dollars in its central
bank, and there are office buildings in Beijing filled with math geniuses-real math
geniuses-looking for a place to invest it.  And the world was not ready for all this
money. There's twice as much money looking for investments, but there are not
twice as many good investments. So, that global army of investment managers was
hungrier and twitchier than ever before. They all wanted the same thing: a nice low-
risk investment that paid some return.

But then something happened to make matters worse, at this precise moment, one
guy took one of that army's favorite investments and made it a lot less attractive. 

Alex Blumberg: So, this is where we have to talk about Alan Greenspan, right? 

Adam Davidson: We have to. 

Alex Blumberg: Alright. But I'm going to promise the people here that this is the
last time you're going to hear Alan Greenspan in this story. So bear with us.

Adam Davidson: Here is one of his speeches that really drove that army of
investment managers crazy.

Alan Greenspan: "The FOMC stands prepared to maintain a highly
accommodative stance of policy for as long as needed to promote satisfactory
economic performance."

Adam Davidson: You might not believe me, but that little statement: that is Central
Banker speak for “Hey, global pool of money - screw you.”

Alex Blumberg: Come on, that’s not what he said.

Adam Davidson: It is! I speak Central Banker and that’s what he’s saying.

What he’s technically saying is he’s going to keep the Fed Funds rate at the absurdly
low level of one percent. It tells every investor in the world: you are not going to
make any money at all on US treasury bonds for a very long time.  Go somewhere
else.  We can’t help you. 

And so the global pool of money looked around for some low-risk, high-return
investment.  And among the many things they put their money into, there was one
thing they fell in love with. To get it, they called Wall Street - a guy like this:

Mike Francis: My name is Mike Francis. During the beginning of the mortgage
implosion, I was an executive director at Morgan Stanley on the residential
mortgage trading desk. 

Adam Davidson: Mike was one link in a chain that connected the global pool of
money to its new favorite investment, these residential mortgages, the US housing
market, and guys like Clarence Nathan.

Think how attractive a mortgage loan is to that 70 trillion dollar pool of money. 
Remember, they're desperate to get any kind of interest return. They want to beat
that miserable 1 percent interest Greenspan is offering them.

And here are these homeowners, they're paying 5, 7, 9 percent to borrow money
from some bank. So what if the global pool could get in on that action?

There are problems. Individual mortgages are too big a hassle for the global pool of
money. They don't wanna get mixed up with actual people and their catastrophic
health problems or debilitating divorces, and all the reasons which might stop them
from paying their mortgages. 

So what Mike and his peers on Wall Street did, was to figure out how to give the
global pool of money all the benefits of a mortgage – basically higher yields -
without the hassle or the risk.

So picture the whole chain. You have Clarence. He gets a mortgage from a broker.
The broker sells the mortgage to a small bank, the small bank sells the mortgage to
a guy like Mike at a big investment firm on Wall Street.   

Then Mike takes a few thousand mortgages he’s bought this way, he puts them in
one big pile. Now he’s got thousands of mortgage checks coming to him every
month. It’s a huge monthly stream of money, which is expected to come in for the
next thirty years, the life of a mortgage.

And he then sells shares of that monthly income to investors.  Those shares are
called mortgage backed securities. And the 70 trillion dollar global pool of money
loved them.

Mike Francis: it was unbelievable.  We almost couldn’t produce enough to
keep the appetite of the investors happy. More people wanted bonds than we
could actually produce. That was our difficult task, was trying to produce
enough.  They would call and ask “Do you have any more fixed rate? What
have you got? What’s coming?” From our standpoint it's like, there's a guy
out there with a lot of money. We gotta find a way to be his sole provider of
bonds to fill his appetite. And his appetite’s massive.

Alex Blumberg: The problem was, to make a mortgage backed security, you
needed mortgages, lots of them. So for Mike Francis to satisfy his demand, and take
his quite hefty fee from the global pool of money, he needed to buy up as many
mortgage pools as possible.

And to do that, he called a guy one link below him, on the mortgage backed security
chain, a guy named Mike Garner, who worked at the largest private mortgage bank
in Nevada, called Silver State Mortgage. And to give you a sense of how fast this
business was growing, Mike got into the mortgage business straight from his
previous job as a bartender.   

Mike Garner: One of my regulars in the bar, he actually hired me from the
bar.  He said he needed some guys, and we started talking about how much I
made. He beat what I was making. I didn’t know anything about the
mortgage business. I was as green as you could be.

Alex Blumberg: Mike Garner’s job was to buy up individual mortgages, mainly from
brokers, bundle two or three hundred of them together, and sell them up the chain
to wall street, to guys like Mike Francis.

Adam Davidson: Too many Mikes here.

Alex Blumberg: So many Mikes. Actually just two. Mike Francis on Wall Street and
Mike Garner, the guy we’re talking about now.

Adam Davidson: He’s in Nevada.

Alex Blumberg: And in the beginning, he'd only buy mortgages that were pretty
standard and pretty safe. Mortgages where people had come up with a down
payment and proven they had a steady income and money in the bank.   

And they sold so many mortgages that there came a point in 2003 where just about
everybody who wanted a mortgage and was qualified to get one .... had gotten one. 

But the pool of money had just gotten started.  They wanted more mortgage backed
securities.   

So Wall Street had to find more people to take out mortgages. Which meant lending
to people who never would’ve qualified before.   

And so Mike noticed that every month, the guidelines were getting a little looser. 
Something called a stated income, verified asset loan came out, which meant you
didn't have to provide paycheck stubs and w-2 forms, as they had in the past. You
could simply state your income, as long as you showed that you had money in the
bank.

Mike Garner: The next guideline lower is just stated income, stated
assets. Then you state what you make and state what’s in your bank account. 
They call and make sure you work where you say you work. Then an
accountant has to say for your field it is possible to make what you said you
make. But they don’t say what you make, just say it’s possible that they
could make that.

Alex Blumberg: It’s just so funny that instead of just asking people to prove
what they make there’s this theater in place of you have to find an
accountant sitting right in front of me who could very easily provide a W2, but
we’re not asking for a W2 form, but we do want this accountant to say yeah,
what they’re saying is plausible in some universe.

Mike Garner: Yeah, and loan officers would have an accountant they could call
up and say “Can you write a statement saying a truck driver can make this
much money?” Then the next one, came along, and it was no income, verified
assets. So you don't have to tell the people what you do for a living. You don’t
have to tell the people what you do for work. All you have to do is state you
have a certain amount of money in your bank account. And then, the next
one, is just no income, no asset. You don't have to state anything.  Just have
to have a credit score and a pulse.

Alex Blumberg: Actually, that pulse thing? Also optional. Like the case in Ohio where
23 dead people were approved for mortgages.

Adam Davidson: An interesting fact, here.  Mike Garner's bank did not care how
risky these mortgages were.  This was the new era: banks didn't have to hold on to
these mortgages for 30 years. They didn’t have to wait and see if they’d be paid
back.  Bank's like Garner's just owned them for a month or two and then sold them
on to Wall Street. Wall Street would sell them on to the global pool of money. 

Alex Blumberg: Which is how we get half-million dollar, no income, no asset loans.   

Adam Davidson: And loans to dead people. So there's another thing going on:
housing prices were rising, fast.  Lots of people in the mortgage industry had this
faith that housing prices, in the US, simply never go down. So, from the bank's
perspective, even if the worst happens and someone defaults, the bank would then
own the house which is now worth even more than when they gave out the loan.     

So, all Mike cared about was whether or not his customers--the Wall Street
investment banks--would buy those mortgages from him. And he was under
pressure to approve more and more loans. Because other guys in his company--the
actual guys cruising strip malls all across Nevada buying mortgages from brokers,
their commission depended on selling more loans. And occasionally, those guys
would hear about some loan that some other mortgage company offered that they
weren’t allowed to offer. And they'd complain to Mike. 

Mike Garner: Three of them would show up at your door first thing in the
morning and say, I lost 10 deals last week to Meritius bank. They've got this
loan. Look at the guidelines for this loan. Is there any way we can do this? 
We're losing deals left and right. I'd get on the phone and start calling all
these street firms or Countrywide and say “Would you buy this loan?” Finally,
you’d find out who was buying them.

Alex Blumberg: So, Merrill Lynch would say no. And Goldman Sachs would
say no.  And you'd finally hit on somebody and they be like “Yeah, we’ll buy
that loan.”

Mike Garner: Yeah, and once I got a hit, I'd call back and say, “Hey, Bear
Stearns is buying this loan. I’d like to give you the opportunity to buy it too.”
Once one person buys them, all the rest of them follow suit.

Much more, but that, in a rather large nutshell, is basically how it happened. One vast pool of money (now reckoned to have been about $73Tr), a doubling of it in 6 years, the Fed holding rates at 1%, and an economy not really prepared for an army of money managers looking for ways to make it grow even larger. Newish investment/ debt instruments far from understood, competitive pressures. A money supply far outgrown good places to invest it, and too many bankers willing to buy into myths like mortgages, in bundles, were safe as... well, houses, and anyway they only held them a short time before selling them on to Wall Street. Not at all safe, really; in fact borderline crazy risky.

And it all came down like Humpty-Dumpty.

http://www.thisamericanlife.org/Radio_E … sched=1242

Or if your ok with sitting at your Mac and listening you can always go to http://www.thisamericanlife.org/ and stream all past shows for free.

Tallgeese wrote:

I rarely listen to TAL (can't stand Ira's ponderings and so-very-emotional background music) but The Giant Pool of Money was the best, most understandable, most straightforward assessment of the financial crisis I've ever heard.

They didn't, however, go into why Greenspan kept interest rates so low.

The answer can be found, though. Greenspan is a Randroid. This huge increase in global wealth which was just looking for safe investments was something Greenspan decided to steer away from U.S. treasury notes. He intentionally steered global money towards private investments based on personal philosophy of "the private market is always the best option". If you recall, after the banks collapsed, Greenspan issued a statement about how stunned he was that his Randian philosophy didn't keep everything in tip-top shape - he just plain couldn't fathom that the free market could fail like that.

And then we know the rest - there just weren't private investment opportunities with the stability of the U.S. Treasury, so the investment banks laundered numbers and sliced and diced until these mortgage-backed securities looked safe enough.

And then the banks, to meet the demand for these securities (which just wasn't possible - there just weren't that many good mortgages) made mortgages an unsafe investment.

In this case, however; the free market broke down because the knuckledraggers at the end failed to protect their interests with due diligence. Had these people done some research, any research, they would have realized what a house of cards the whole real-estate market had become. Thus, I don't have a lot of sympathy for them.

Unfortunately, the system that formed due to their lack of due diligence spread rapidly to other areas of the economy, and nuked us all. It's not clear how much regulation, and of what, would have prevented this mess. After all, how do you regulate stupid? Most of the transactions involved were legal, and while en-mass may have been stupid, individually some were probably legit.

Somehow, I'm reminded of my control system theory class...

Tallgeese wrote:

It's beyond due diligence. The true nature of mortgage securities was hidden by their creators, the investment banks, and the ratings entities. That was the heart of the problem. For one, mortgages are supposed to be safe. They've been safe for as long as there have been mortgages. "Everyone knows" that banks don't make money by lending to people who can't pay it back. Nobody in their right mind would assume differently. This illusion was maintained. Remember, this is global market we're talking about. Investors in India aren't going to be up-to-the minute aware that suddenly American banks are giving out home loans with no proof of income or asset.

So, you don't think they looked at the population of the US, figured what percentage would be able to make mortgage payments, and then wondered why the market was flooded with several times that number?

Seriously, there were a *LOT* of mortgages floating around in the market. Far more than a nation our size should be able to support. Maybe if the bundling included mortgages from other nations, which is possible - I wasn't in the market - I could see it. Even then, though; you had to know something was wrong. You might not know what, exactly, but the bad mojo was apparent to anyone paying attention. It was the classic "too good to be true" scenario.

JakeTheTall wrote:

What Mr. Tallgeese said.


The most delicious and terrifying piece to me is it appears the Fed actions in the past year are basically reinflating the bubble.  And while the previous financial CEOs are out, and many traders are unemployed;  the system remains and the asset bubble in the stock market is inflating, and the game continues. 

In addition, if an entity holds some bonds of a company teetering on the edge of bankruptcy, and also holds a large number of default swaps (potentially in excess of existing bonds), that entity profits from not trying to save the company.

Ban short sales of financial firms when they're in trouble, but for every other sector its fair game ?

Its good to be a robber baron, but Wall Street doesn't seem to realize they can't sustain this insane self-serving system they've created.

Yes, the fed is reinflating the bubble - which is dumb. However, it keeps rich people from ending up homeless, so they are doing it anyway.

We shouldn't ban short selling for any stock, financial or otherwise. Short selling only hammers financially unsound institutions that need to die. Short sellers are essentially the sharks in the pool, and they generally only strike when the smell blood in the water. They are an essential top predator.

Financially sound institutions may dip for a while, but the lower price will mean a buying spree for those who think the stock is solid - and is generally dangerous to the people shorting the stock. Instead, institute limits on how much leverage can be used to short a stock. This protects both the stock, and the investor, since it effectively limits the extent to which an investor can short, and how exposed their position can be.

Last edited by radarman (2009-10-14 3:10 pm)

Tallgeese wrote:

They didn't, however, go into why Greenspan kept interest rates so low.

The answer can be found, though. Greenspan is a Randroid. This huge increase in global wealth which was just looking for safe investments was something Greenspan decided to steer away from U.S. treasury notes. He intentionally steered global money towards private investments based on personal philosophy of "the private market is always the best option".

Rarely do you display such ignorance in a post. How exactly does an expansion of the money supply jive with a "Randroid" view of sound money? How do corporate welfare and the picking of winners (the very things Atlas Shrugged warns against most severely) reconcile with a free-market ideology?

The answer, which should be obvious, is that Greenspan abandoned whatever free-market or "Randroid" principles he had, most likely many years before he ever became the Fed Chairman. If you ever read his words (or were unfortunate enough to listen to them) it's not possible to figure what Greenspan really thought about anything. Every statement is qualified, every phrase contradicted by the next. The only explanation that makes a bit of sense is that he was simply a political actor trying to keep most people happy most of the time. That included Wall Street, K Street, Main Street, and Pennsylvania Avenue.

ShnickyShnack wrote:

freecat wrote:

Tallgeese wrote:

They didn't, however, go into why Greenspan kept interest rates so low.

The answer can be found, though. Greenspan is a Randroid. This huge increase in global wealth which was just looking for safe investments was something Greenspan decided to steer away from U.S. treasury notes. He intentionally steered global money towards private investments based on personal philosophy of "the private market is always the best option".

Rarely do you display such ignorance in a post. How exactly does an expansion of the money supply jive with a "Randroid" view of sound money? How do corporate welfare and the picking of winners (the very things Atlas Shrugged warns against most severely) reconcile with a free-market ideology?

The answer, which should be obvious, is that Greenspan abandoned whatever free-market or "Randroid" principles he had, most likely many years before he ever became the Fed Chairman. If you ever read his words (or were unfortunate enough to listen to them) it's not possible to figure what Greenspan really thought about anything. Every statement is qualified, every phrase contradicted by the next. The only explanation that makes a bit of sense is that he was simply a political actor trying to keep most people happy most of the time. That included Wall Street, K Street, Main Street, and Pennsylvania Avenue.

Odd, you didn't refute Tallgeese's post in any way. Though maybe that's just because you didn't choose to address the substance of what he said.

Tallgeese gave an opinion, not a documented fact.
Freecat gave his opinion that differed and the reasons behind that opinion.
Case closed.

ShnickyShnack wrote:

My, my, look at all those deleted posts.

No need for discussion, obviously.

Only spam is deleted.

No, they were moved.
The move can be temporary or permanent.
Now, back on topic.

:: "moves" Tallgeese's post with extreme prejudice ::

Why are posts being removed?

More than one mod has removed / edited-away posts.  And I don't know if they have unilateral decisions or they need their actions seconded.

With all the current un-removed content in MiniThink, hard to see what the point is.


Also, best topic title EVER for this to happen in.