About the only thing I would add is in response to this:

They were unable to proceed because some judge, in his infinite wisdom, decided that they did not own the mortgages; only the stream of income attached to the mortgages. That was a shocking revelation because the security for the debt was supposed to be real property.

I wouldn’t blame the judge for this. He can, after all, only rule on the law and the facts in front of him. Only the holder of the deed for a property can foreclose on that property. If the asset transfer agreement for those CMOs was written so that it didn’t include the deed, then the judge had no choice but to rule the way he did.

I also wonder if there were CMOs written in ways that split up the income stream from the mortgages: 1/2 to this buyer, 1/3 to that buyer, the remainder to a third buyer. If that was going on, then which part of the income stream should the deed go with? The majority buyer? What if three buyers all took 1/3 share of the income stream? If the majority shareholder holds the deed but a minority shareholder initiates foreclosure, should the foreclosure be allowed? If there is no majority shareholder, who has the power to foreclose?

These damn stupid CMOs raised a lot of questions that had no settled answers. But our business system and our legal system need those answers.

Many people do not understand what has been happening. Our economy is dominated by financial companies. Banks, investment banks, insurance companies, finance companies, mortgage brokers, auto lenders, leasing companies, credit card companies, pension funds, hedge funds, etc, etc.

Money and credit has become the lifeblood of our system. The so-called sub-prime crisis is actually a liquidity crisis that has been compounded by heavy duty, naked shorting of financial stocks by hedge funds and others.

Without ample liquidity in the system, the system becomes like a plugged pipe. The commerce which flows through the pipe quits flowing. This could lead to the same thing that caused the Depression – deflation, which, once it gets established, is much harder to stop than inflation.

As the value of CMOs, CDOs, and real property decline, billions in capital is erased from the books. Banks and lenders must have reserve capital to lend money. With no reserves there is no lending.

The problem as I see it is a structural issue. Many financial companies bought collateralized mortgage obligations (CMOs) or collateralized debt oblogations (CDOs). Normally these are bought as long term investments to be held for the income stream until the mortgages are paid off. The companies count these instruments as reserve capital.

What caused the problem? Two things. Some of the mortgages in these were sub-prime. Some of these started defaulting in 2006. Deutsche Bank (DB) tried to foreclose on 14 of these mortgages that were in a CMO they held. They were unable to proceed because some judge, in his infinite wisdom, decided that they did not own the mortgages; only the stream of income attached to the mortgages. That was a shocking revelation because the security for the debt was supposed to be real property. Suddenly the security of CMOs, which were AAA rated debt, was called into question. Also the value was called into question. Most companies carried these things on their books at cost until some solid proof arose that they were worth more or less. However, two years ago the SEC and FASB decided they had to mark them to market. IMO a very stupid ruling. There has never been, and is not presently, an auction market for these securities. So, a few companies tried to “test the market” by selling some. They found the well had been poisoned because no one wanted to buy an income stream that might be filled with an unknown number of sub-primes and no property as security. The best offers were around 20 cents on the dollar.

This led to all firms that held these instruments having to estimate some very low value for their CMOs and CDOs. They had to take huge write downs, which then necessitated their having to raise more capital by selling stock or debt. This became more difficult and as the shorts pounced it became even more difficult.

That resulted in a near lock up of the financial system. Enter the Fed and Treasury. Something had to be done to reliquify these companies. Otherwise 25% of our economy goes away. The jobless rate goes through the roof, tax receipts drop, and the USA would be a country deep in trouble. The value of everything except money falls. Except that the dollar won’t buy as much from China as it did, unless……China follows us down. Anyway, it’s not a pretty picture.

I don’t like the rescue plan, but, as they say, it is better than nothing. What I would like to see is a suspension of the mark to market rule for CMOs/CDOs for a period of up to two years. I would also like to see a ruling that the CMO owners also own the mortgages. Allow companies to value them at cost until a true value is established. During that period all the holders would have to work through the instruments to determine, as near as possible, their real value. This would require government supervision and frequent reports to insure openness and prevent cooking the books. IMO it is probable that 80-90% of the mortgages in these CMOs are performing and well supported. Write downs would only come on a rational valuation not the wild-ass guesses that prevail now. Doing this would allow a workout without the tax payer being put at risk. In addition, I would allow a FED line of short term credit to these firms for temporary shoring up of their balance sheets as needed during this period. Doing all this would reliquify the markets overnight. Some companies might fail, but they could be merged into other sound companies to preserve the remaining assets.

The Dems want to punish the CEOs of the companies but I think the Congress along with the SEC and FASB should share the blame. Time for that after the reliquification plan is in place.

Anyway, that’s MHO.

Past ten years? The stupid decisions surrounding the mortgage crisis have been going on longer than that. It started with a law passed by the Carter administration, and was ramped up in 1995 by the Clinton administration, and has only gotten worse since then. Although FWIW, I agree, something has to be done to right the ship. To do otherwise would cost far more in the long run.

Jim C

Right now, a lot of big banks won’t loan money because they’re scared of getting hit with any more bad debts. If banks won’t loan, then companies and people can’t borrow. If companies and people can’t borrow, even for short terms, then they can’t buy the kind of things you can only buy with loans. Things like houses, cars, business supplies, new equipment, raw materials …

So until the mortgage crisis is fixed, the financial system is nearly paralyzed. Without the financial system, American business can’t operate. That just can’t be allowed to happen. So, we all wind up paying the price for the stupid political decisions and stupid financial decisions of the past ten years.