“The Big Short”, A Highly Didactic Movie Explains Why Americans Can Never Trust Our USG and Wall Street Banks!
The Subprime Mortgage Scandal was Never Really Fixed and Will Occur Again. “The Big Short” produced by Brad Pitt [who has a small part in the film] and Arnon Milchan [a full-fledged Israeli operative who has produced over 130 films] have brought to the forefront a very interesting, quirky small film which tries hard to explain the rise of the 2007 financial crash on Wall Street which completely eliminated two major Jewish banking firms—Solomon Brothers and Bear Stearns.
The film used every conceivable trick in screenwriting [written by Director Adam McKay] in an attempt to describe such esoteric financial instruments as Collateralized Debt Obligations [CDOs] and Derivative Swaps to short the CDOs. Some of the explanatory devices were quite creative; employing a beauty in a bubble bath, Selena Gomez and Anthony Bourdain.
Needless to say, financial bubbles like the subprime mortgage crisis are a combination of extreme greed and criminal activities of the major bankers [JP Morgan Chase, Morgan Stanley, Wachovia] and the rating agencies like Moody and Standard & Poor. Everyone up and down the financial trough made money somehow, someway. In a very funny scene where Steve Carell plays a brilliant, Orthodox Jewish money manager based on the real life of Steve Eisman whose FrontPoint Partners LLC, a unit of Morgan Stanley, uncovers the fact that a Miami-based stripper had bought five houses with no money down and no credit rating. Carell realizes that the whole subprime mortgage backed securities pyramid was a complete fraud based on everyone’s greed, arrogance and stupidity.
Alongside of Carell, is the equally talented Christian Bale, who delivers a compelling performance as Dr Michael Burry, a one-eyed, ex-neurologist, founder of Scion Capital LLC hedge fund, who after countless hours of financial detective work uncovers the basic truth of the highly valued AAA credited Mortgage Bonds: they are all junk and worthless. After some dramatic twists and turns, he shorts all of the subprime mortgages in several banks [Deutsch, Goldman Sachs, etc.] to make an absolute fortune approaching billions of dollars in risk capital.
Now, I can’t recommend this film unless the viewer is interested in understanding the complete stupidity and avarice of our SEC, Fannie Mae, Treasury, President’s Council on Economics and other financial/ regulatory institutions. The so-called ‘bail out’ principals really were the source of the subprime mortgage crisis: Hank Paulson, Goldman Sach’s Investment Banker and Ben Bernanke, the Fed Chairman; as well as his incredibly arrogant, insipid mentor, Alan Greenspan.
The film reminds us that it was Bill Clinton’s need to curry favor with his minority voters that released trillions of dollars of liquidity into the housing markets so that everyone without a credit or financial history could obtain a mortgage loan for a house they could not pay for.
Next, George W. Bush Jr follows in the miscreant footsteps of his corrupt, moronic brothers, Neil and Marvin, as he continued to encourage the false notion that there was no housing bubble and brought in so-called ‘experts’ who knew absolutely nothing about financial instruments [Paulson, Bernanke].
The “Big Short” indicts us all for having lived in a world where truth is not valued; and the easy buck becomes the paramount tenet of our faith and lifestyle. This movie is worth seeing if you are at all interested in how Wall Street in concert with the rating agencies and our Federal Government can continue to screw our lives with impunity.
Go long on the “Big Short” !
The minute I saw the offer from the Account Executive from New American Century Mortgage Lenders I saw the stated income loans for what they were: fraught with potential fraud, and bowed out so as not to complicate my law school experience, had I wished to continue on, to taking the bar.
ReplyDeleteRight at the then peak of the housing market, just before the crash I decided to use my university credits to sit for the California real estate broker's exam, (includes mortgage lending capabilities), and to my surprise, passed the exam. I was encouraged by the success I had in my personal real estate transactions (not deluded by the fact that my success was by no real skill of my own, (other than enjoying contract law), but by external market factors, artificially driving home prices upwards, including my recent purchases at the time.
What's wrong with selling five houses to a stripper with no money down? I don't get it. As long as she has tenants who allow her to make her mortgage payments then what's the problem? Okay so the lenders went back to requiring verifiable incomes and high downpaymenst...what the fuck did that accomplish? Nothing.
DeleteThe problem wasn't that people were falsifying their stated income to qualify. The problem was that they weren't able to make their payments when the mortgages escalated their monthly payments. The problem was that the structure of the loans permitted people to pay almost nothing at the beginning, and then the payments grew suddenly. Those were loans packaged WITH THE PURPOSE OF CAUSING A FORCLOSURE SO THAT THEY COULD TAKE THE HOUSE BACK.
This is an old and crooked trick of lenders. Whether it's a used car dealer or even a apartment complex management company. They get you into a commitment and then look for a way to trip you up so they can keep your payments, downpayment, deposit,but then throw you out and take back the security!
The public never learned what really happened. The problem wasn't that the mortgages were "bad" because the borrowers didn't meet the high income standard of fat cat bankers....no. The problem was that the sub prime market was rigged to fail. The mortgages were supposed to go into default. The only problem was that they sold too many of them and they all went into default at the same time LOL.
It was a clusterfuck.
I know more about the crooked side of finance and banking than anyone alive. After my government work I spent twenty years tracing plundered funds through banks and examining lender fraud. It's a jungle.
DeleteOne of the biggest areas of bad behavior is so called "Venture Capital." Now I've just started a tech company and I've charted out a way to fund it without any VC participation. These guys are sharks, just like the Shark Tank name implies.
These guys typically take a starting company but to fund the first million or less they require the company to hire a full team of professionals at the outset, get an expensive office, etc. to "prove" that the company has a "team" which merits investment.
The little company sells some equity to get the first million, but they burn through over a hundred grand a month on their "team," which wasn't even necessary at that early stage, and the expensive office and secretary....
So the little company has to go back for five million or so to get to any revenue stream, and that's what the VC investor wants....now he has the company by the balls. To get the five million to reach a revenue stream and sales they must give up majority equity to the VC shark, and then it's all over. After the company reaches a revenue stream and sales the VC company sells it to a competitor or a "strategic partner," and the founders are out in the cold.
Sort of like Steve Jobs when he was tossed out of Apple by all the stupid investors he had to bring in to even sell his first computer.
The way the VC people want you to do things places so much cost at the beginning that in order to sell your first unit you have to operate a huge company for months or years....
And then they have you by the balls.
And it's not even their money!!! The VC company borrowed it all on credit or talked some sucker into giving it to them LOL.
What Allen Greenspan did was revolutionize the finance world forever. The entire world of finance is BG, or Before Greenspan, and AG, or After Greeenspan.
DeleteWhat Greenspan did is realize that you can print as much money as you want and it won't cause inflation as long as the excess money doesn't reach consumers.
As long as consumers never have use of the excess money you can print as much as you want and loan it out to your friends so that they can speculate with it. That's how the world of speculation, hedge funds and so forth exploded with trillions and trillions of dollars of new money. None of that money ever reaches the public...it's only traded among billionaires who borrow it so they can purchase equity in things that they trade, buy and sell for a profit.
But to do this Greenspan had to convince the Federal Reserve to stop publishing how much money they were creating and how much money was in circulation. When they stopped publishing the M2 number and made it secret...that's the moment at which this new world began.
And any billionaire or Gordon Gekko with access to a bank with a channell to the Fed Window can access the money with no security, just on their name.
But you and I can't even get a mortgage anymore.
Please have no doubt what I'm telling you about security is true. Large American banks DO NOT ACCEPT COLLATERAL. Billion dollar loans like all commercial loans are made based on CASH FLOW and not SECURITY. Banks WILL NOT ACCEPT COLLATERAL. They only make loans today based on the prior revenues of the borrower.
DeleteI tried to get a bank recently to make me a personal loan of ten thousand dollars and I would put up ten thousand in cash for security, or purchase a bond for ten thousand or whatever...
DeleteThey said no.
Bank do not accept collateral.
Unless of course it's collateral they want to foreclose on and sell for full value after you've paid for half of it....
DeleteThen they are happy to accept the collateral, which they will seek to steal.
What's wrong with selling a stripper five houses with no money down so she can rent them out when billion dollar property companies are doing exactly the same thing on a much larger scale? When a property company buys a rental complex for fifty million dollars do you think they pay any downpayment? Nope. The lender just wants to see the cash flow on the property. They will loan one hundred percent if they know what they are doing. The new buyer may or may not have to pay closing costs, or that too might be folded into the loan.
DeleteSteve Jobs' VC investors on Apple's board insisted that he bring in an "experienced tech executive" so they brought in some dumbass and paid him millions and stock options and a golden parachut in case he fucked up and they had to fire him....
DeleteAnyway that guy was formerly a President of another large company, I think they sold soda pop or something, but he was a "President"....oooooooo so impressive.
Anyway he was just another dumbfuck manager and after they got rid of Jobs he ran the company into to ground.
So much for an "experienced manager like a President of something."
Just because someone has done a job before doesn't mean that they did it well. They could have done a terrible job. To find competence forget about experience and look to IQ and other factors. Find someone who knows how to think and solve problems, not just someone who held that office before somewhere else.
Hey Dr.P....
DeleteWhy don't you make a film about the REAL "BIG SHORT?"
The real big short was the billions made by insiders who shorted the stocks affected by the 9-11 attack on the World Trade Center.
Do a film on those guys and you will find your destiny, instead of these "Op Center" things.
You meant when the mortgagee accelerated their monthly mortgage payments I believe. Yes the dreaded acceleration clause.
DeleteYour points are well made as usual MIT.
Along with everyone else's real estate investments as well. I took a few things away from the experience which I will share for what it is worth.
ReplyDeleteGreenspan, replete with his hard to decipher rhetoric (insert doublespeak), called this period (speculation fueled and brought on, by supposedly cheap money and rising home prices before the realty market crash), a period of "irrational exuberance", (insert: another credit bubble about to burst which America is good at making btw) and later (post crash),stated his fundamental error in his calculation, was that "he didn't take into consideration that home prices would go down" if you can believe it. Which had the effect of tightening credit just at a time when most homeowners needed to refinance their adjustable rate mortgages, (low interest ARMs to start), but now found themselves locked out of the game and unable to afford their newly adjusted higher rates and mortgages. All of a sudden Greenspan went from genius (maven) hero, to zero with that one "miscalculation". The Fed doesn't always get it right and will not, out of consideration, include you in the loop when things are about to go south. (Read: potential future ramifications as our deficit approaches 20 trillion dollars). And, It wouldn't be good for their Wall Street buddies, because their game of deception would end, and prevent them (the Goldman Sachs et al), from selling this "shit" as Goldman called it, to other unsuspecting Countries' retirees' , for billions of dollars.
Home values go up and down as we all know, but in the last 50 years in the USA, according to the National Association of Realtors economists, the price of homes has always surpassed (reached a new high from) the previous highest price, even after a price drop. The people that seem to win most often (except as of late with home flippers), at Real Estate investing, are usually the ones who are able to stay in it long term, they often buy in a downturn, hold on, and may sell during the next economic boom, or may just continue to hold it and rent it out, in which case, get an expert to screen your tenants for you, that's critically important.
Also homes nearest major cities like for example Los Angeles, seem to hold their value more than others and usually depreciate less in a downturn. One reason, they are closer to the job marketplace.
Not everybody should buy a home, (which is counter previous generations rationale), again for the aforementioned reason, many people today will rent knowing they have strategically placed themselves closer to the job market, and can easily give a 30 day notice on a leased apartment for example, so as to take advantage of a promotion and/or job relocation. They are more nimble this way.
People who buy near a Whole Foods Market find higher home prices generally. They used to say that about Starbucks, but not as good as Whole Foods .
A friend and realtor in Beverly Hills said it best imo when he stated "In the end, a home is where you make memories", and if there is any certainty in the real estate marketplace anymore, this may be the best reason to buy and own a home. And the unique advantages of not having to answer to a landlord. And that you can choose your children's school and which neighbors you want to have, at least when you move in, puts a bit of a positive spin on want seems like another once solid investment strategy that has morphed into another risky Government manipulated, casino game.
Irrational exhuberance was when he referred to the rise in the stock market, particularly tech and internet companies which had no prospect for profitability in their prospectus.
DeletePeople were bidding up the value of stocks of new companies which had no prospect of ever being profitable. That's what he was referring to.
I stand corrected on that reference, memory is 2nd thing to go lol.
DeleteWhat I like about San Antonio is that in the poorer neighborhoods everybody owns there own home. It might be worth only 30,000 but they own it, and that means a lot.
DeleteHere in Austin the cheapest house is out of reach of working people so we have the lowest rate of home ownership of any city in America, and all these dual income non-college educated people are living in apartments or maybe a duplex in the hinterlands. A few buy mobile homes.
It's the reason why the "new economy" cities like Austin are a portent of the distopia of America's future....dual income professionals have all the income and property and working class wage earners or single income professional families eat dirt.
Today you have to have two incomes, both over 150,000 to have the living my father had with no college degree but living well.
The economists have given us this world. It's the fault of the academics. They are the only ones to blame...not the rich or the Republicans or the corporations. None of them could have gotten away with anything if it were not for the academics behind them agreeing with everything they wanted.
As i get older i see the really serious problems with academics in virtually all diciplines and how they've arrogantly claimed that they knew what they were doing when they were simply making up false doctins and dogmas without any empirical backing.
DeleteEven my hero Noam Chomsky is guilty of this. For every courageous thing he did in the Vietnam era he has adopted doctines about the suppression of women or the suppression of minorities or the suppression of this or that...and there's no empirical evidence of this. It's just that he wants everyone to be exactly the same, and he doesn't have enough life experience to understand that they are not the same and never will be. He dreams that everyone is the same but there is no evidence for it. That's the way it is with all these doctrins in science and economics....no empirical evidence just wishful thinking and utopian ideas.
Economics is a pseudoscience. So it women's studies, ethnic studies, sociology, physics, and on and on....
DeleteNote that up to the last real estate market crash, addressed in Dr P's article here, that 50 year record of home prices bouncing back to new highs, has withstood the test of time. Is the past a precursor to the future? Only time will tell. Good luck America on reaching new highs!
ReplyDeleteEvery time there's a real estate crash it lasts very shortly and the smart money buys everything up quickly and then before you know it the prices are right back to where they were or higher...
DeleteThe same with stocks.
Understanding this and timing it is where fortunes are made.
But the psychology runs counter to this and thus the smart money prevails where the emotional people are the "sheep that get slaughtered" as Gordon Gekko says.
As far as investors seeing the bigger picture, and taking advantage of a unique opportunity, ( a rare event being equated to seeing a Black Swan), a book entitled The Black Swan chronicles one hedge fund manager, who made billions on these aforementioned events, and is an interesting read.
ReplyDeleteAnother Black Swan event occurred when women no longer needed a co-signor in this Country to get a home loan, this increased the demand for homes, and drove prices up significantly. Too bad my crystal ball hadn't been delivered yet.
ReplyDeleteThe reason why home prices have skyrocketed in California and Texas and such places is because of two things....
Delete1.Dual income professionals
2.Mortgage companies increasing the amount of net income they permit borrowers to commit to their payments.
When mortgages were invented in the 1920s lenders would loan so monthly payments were no more than TEN PERCENT of gross income...there were no income taxes then so gross income and net income were the same.
Then after WWII to spur home ownership they increased it to TWENTY PERCENT of net income.
Then in the 1980s it went to THIRTY PERCENT of net income.
Then recently it went to FOURTY PERCENT of net income...
And now you have young professionals marrying each other after their educations, and together they combine their income to make one big net income, and the realtor tells them FOURTY PERCENT of their monthly income is what they qualify for.... A SIX HUNDRED THOUSAND DOLLAR HOUSE !!!!! based on a 3.6 percent mortgage.
So suddenly because mortgages are so low and because the realtor qualifies these couples for FOURTY PERCENT of their monthly income they qualify for 600,000 DOLLARS...
So they make bidding wars for the homes they want, and offer 600,000 for a house that ten years ago sold for 200,000 !!!!!!
Just because they qualify for it and they want that particular house.
That's whey homes that sold for 139,000 twenty years ago now go for 700,000.
It's insane.
Here is why I find Greenspan's "ignorance" about housing bubbles bursting, hard to believe (from Wiki);
ReplyDeleteIn 1977, Greenspan obtained a PhD in economics from New York University. His dissertation is not available from the university[16] since it was removed at Greenspan's request in 1987, when he became Chairman of the Federal Reserve Board. In April 2008, however, Barron's obtained a copy, and notes that it includes "a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble".[17]
There is no hard asset backing the dollar, therefore the dollar which is the debt instrument of the corporation of the United States is, and has been, operating in bankruptcy - now in its third cycle.
DeleteEvery mortgage is a fraudulent transaction as every bank that creates a mortgage (out of thin air) zero's out its balance sheet at the end of every business day.
Because Uncle Sam's bankruptcy is never discussed, taught, or legitimately debated in the public realm, the dollar will continue to be the tool of the brood of vipers and thieves.
And now you understand why Jesus is banned from operating in the public... the money changers are still scared shitless of him!!!
"Hard asst backing the dollar?"
DeleteLike what? Some stupid metal used only for ornamentation? A stupid metal that some countries have in abundance in their soil and others have none?
Having currency tied to an asset is folly. How about oil? Look at the market value of that and tell me you want your currency tied to it.
The ONLY thing that works is FIAT currency, in which only the state can make it, and control it's amount. It's scarcity and the fact that everyone must use it determines it's value.
It works because it's scarce and it's quantity can be controlled.
Try controlling the quantity of a metal or other commodity...it's a clusterfuck.
Of course, MIT is right about the utility of fiat currency.
DeleteBut he didn't take the chance to explain how fiat money works or how the Germans do it smarter.
Prof. Dr. Werner does this in his article published in the International Review of Financial Analysis.
http://www.sciencedirect.com/science/article/pii/S1057521914001070
And Roger, maybe think more in terms of local vs central control as discussed in the conclusion of this paper rather than focusing on hard assets.
This explains a lot. I remember reading a book on holiday by a bloke called Bob Allen and he explained how to buy properties in the US with nothing down. Apparently he was dropped into SF without his usual lines of credit and by Monday owned three houses, then to prove he could he took a guy of the unemployment line and made him a property millionaire. The rules are a bit tighter here, in fact I do not know how youngsters will get on the property ladder as an average house in the London area is now 500k.
ReplyDeleteWhat you describe isn't possible now. The underwriting guidelines of the mortgage lenders change from era to era depending on conditions. There are times when they verify nothing and ask for nothing down, and then things change and they ask for huge downpayments and verify and check every detail of income.
DeleteBill is talking about a prospective buyer assuming the sellers mortgage loan, unbeknownst, and without permission, from the lenders. It can be done today however if the lender finds out, they can "call the loan", and you would then have to get and qualify for a new mortgage.
ReplyDeleteLFH, My youngest is trying to get the 'Law school experience' dropped him off yesterday at Cambridge Law School, in about an hour he will have his interview then a Law test. I have prepared him with questions and a 70's show 'The Paper Chase' which I liked. He watches 'Suits' and likes arguing so it should be interesting, if it works out, He can look after me when I am an old bloke!
DeleteGreat, I wish him good luck with his endeavor, and you, with your "retirement plan"! Studying law is empowering. Remember this; the "A" students do research, the "B" students work for the "A" students, and the "C" students become millionaires.
ReplyDeleteThe Paper Chase was a fun movie to watch, one of my favorites, staring the late John Houseman, who played in another of my favorite movies: " Three Days of the Condor".
However, when I watch Houseman grill those law students, I get a knot in my gut, and again when they are studying for their final exams, I empathize with those stressed out students, and the effect it had on some of them. Good movie.
ReplyDeleteHe came back yesterday and said the interview and paper were really difficult. I said of course it is fucking difficult it is the alleged second best school after Harvard for law, what did you expect! I liked all the old actors in '3 days' often watch snippets on Youtube. 'I read books, I am not a field agent' When the Russians saw the Movie they set up a section with loads of people to just read because they thought the CIA had one, but it was total fiction.
DeleteEverything the puppeteers who control the POTUSES do they learned from the COSTA NOSTRA.
ReplyDeleteTHE MAFIA CONTROLLED THE JFK CONTRACT KILLING & TRAINED THEIR EMPLOYER , THE CIA WELL, TO CONTINUE IN THEIR FOOTSTEPS.
THE CIA MUST BE SHUT DOWN.