http://www.crashsurvivalzone.com/the-crisis-of-credit-visualized/ Surviving the Economic Crisis Tue, 22 May 2012 06:40:01 +0000 http://wordpress.org/?v=2.6.5 http://www.crashsurvivalzone.com/the-crisis-of-credit-visualized/#comment-36 rogergeary Mon, 23 Feb 2009 15:16:17 +0000 http://www.crashsurvivalzone.com/?p=1120#comment-36 Sorry, but this is plain wrong on a number of levels. For a start banks didn't just buy T bills before 9/11. Securitization has been around for decades - since the early 80s at least - and that includes mortgage-backed securitization, by the way. It just got crazy in the aftermath of 9/11 as credit got cheaper. Next, let me ask you how many people have walked away from their houses because they're underwater? Precious few (although that may change, and Obama's plan clearly indicates that he thinks that number may rise - still there's no clear indication that it will.) The CDO part of this is really irritating because it is inaccurate and misleading. The investment banker who manages the CDO has ALREADY sold all the risk at the point that the mortgage holders start to default. The people who are stuck and can't sell are the ones who bought the mortgage-backed bonds when the CDO was first put together. The investment banker who arranged the CDO probably only holds equity at this point, and probably not much of that either. If he used leverage and he can't pay it back, well, that's the LENDER's problem, not his - he already made his money. Whatever, you say, the point is that the market for CDO paper is frozen. OK, but that doesn't explain why the CREDIT MARKETS are frozen, in other words, why big banks won't lend to each other - there's a big leap here that is not explained. This is pretty criminal, given this entire presentation is supposed to be an explanation of the credit crisis. The reason, of course, is that the banks were big buyers of CDOs, many of which are now worthless . But no-one knows how much worthless crap the big banks have. The central part of the credit market is the overnight lending business, where big banks lend billions to each other overnight. But if bank X doesn't know how much CDO exposure bank Y has, it won't lend bank Y money, because it won't be sure that bank Y will be solvent enough to pay it back. And if bank Y can't borrow from bank X, it can't lend to other banks and they can' lend to you and me. THAT's the credit crisis. A word of advice for Jonathan Jarvis - read more of the WSJ, or listen to marketplace (some great videos on that site spelling this out). Or watch CNBC (David Faber has it nailed). Sorry, but this is plain wrong on a number of levels. For a start banks didn’t just buy T bills before 9/11. Securitization has been around for decades - since the early 80s at least - and that includes mortgage-backed securitization, by the way. It just got crazy in the aftermath of 9/11 as credit got cheaper. Next, let me ask you how many people have walked away from their houses because they’re underwater? Precious few (although that may change, and Obama’s plan clearly indicates that he thinks that number may rise - still there’s no clear indication that it will.) The CDO part of this is really irritating because it is inaccurate and misleading. The investment banker who manages the CDO has ALREADY sold all the risk at the point that the mortgage holders start to default. The people who are stuck and can’t sell are the ones who bought the mortgage-backed bonds when the CDO was first put together. The investment banker who arranged the CDO probably only holds equity at this point, and probably not much of that either. If he used leverage and he can’t pay it back, well, that’s the LENDER’s problem, not his - he already made his money.
Whatever, you say, the point is that the market for CDO paper is frozen. OK, but that doesn’t explain why the CREDIT MARKETS are frozen, in other words, why big banks won’t lend to each other - there’s a big leap here that is not explained. This is pretty criminal, given this entire presentation is supposed to be an explanation of the credit crisis. The reason, of course, is that the banks were big buyers of CDOs, many of which are now worthless . But no-one knows how much worthless crap the big banks have. The central part of the credit market is the overnight lending business, where big banks lend billions to each other overnight. But if bank X doesn’t know how much CDO exposure bank Y has, it won’t lend bank Y money, because it won’t be sure that bank Y will be solvent enough to pay it back. And if bank Y can’t borrow from bank X, it can’t lend to other banks and they can’ lend to you and me. THAT’s the credit crisis.
A word of advice for Jonathan Jarvis - read more of the WSJ, or listen to marketplace (some great videos on that site spelling this out). Or watch CNBC (David Faber has it nailed).

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