Great article from CreditLoan blog can be found at: http://www.creditloan.com/blog/4-alarming-foreclosure-facts/

It’s important to note that it is NOT subprime loans that are the problem anymore – its fixed rate borrowers who are experiencing economic collapse due to business downturn or loss of job or simply poor planning. That’s the scary part – it’s not the inexperienced and unqualified borrower anymore – it’s the average American who has been paying on their home loans for years and now finds themselves unable to keep up with their payments. They are losing their homes in record numbers.

Regardless - it’s going to be an interesting 2010.

Recovery and Healing Overwhelming Stress – Is Taking a Holiday Important?

When in Serious or Overwhelming Stress Is Taking A Holiday Important?

The above is a question one of my readers asked. My first answer is that the efficacity of a holiday is related to the circumstances and the mind set. I’ll explain.

There are several stressful events in life. First day at school. Taking an important exam or interview. Working up to the point of chatting to a girl or boy you really fancy. Getting married. Buying a house. Moving house. Taking a holiday. There are many others and these I have mentioned are the most important on average.

One source of evidence of a holiday being stressful is in the ‘Holiday back pain syndrome.’ This is very common and where mostly husbands are struck down with terrible back pain on the first or second day of their annual family holiday. Despite all and any treatment these sufferers only get better a day or two before they are due to return to work. This holiday pain syndrome is now well recognised as an emotional stress relief strategy. This is how their body/mind gets them out of a stressful situation they do not want. So holidays are not always an anti stress remedy

Having said that, Yes, if you feel that a holiday is appropriate, you can afford the cost and the time and there will be no additional stress in organizing and doing it, that is great.

I have a friend who hates the approaching holiday time because his wife drives him crazy with unacceptable costs and constantly changing the venue or date when everything seems to be settled. For him the holiday may be enjoyable and relaxing but organizing it is a nightmare he would love to do without.

To touch the question of, is taking a holiday important, a little more closely I am reminded of a personal experience of taking a holiday before my own burnout. I went to see my doctor about some pains that appeared for no apparent reason. He examined me and asked many and varied questions. “You are experiencing the psychosomatic fallout of severe stress”, he told me. I want you to take a holiday immediately. “Yes doctor”, I said. Three weeks later I bumped into the doctor in the street. “Hi, how was your holiday”, he said “ better I hope”. “Well I have not actually done anything about it yet but I will.” I said confidently but slightly ashamed.  “OK,” said the doctor smiling, “can you pop into my surgery this afternoon I would like to give you something to help the stress.” “Certainly” I said. 

I entered my doctor’s office and he indicated for me to sit down on the chair in front of him. The doctor stood up as I sat down and immediately launched into what was no less than a ten minute verbal thrashing about burning the candle at both ends for years and never bothering to care for myself insofar as taking holidays and having fun. This finished with “if you are not out of this country for at least 2 weeks by Friday I will cross you off my patients list and will never speak to you again. Now get out of my sight.”

OUCH!! OK, I got the message this time and went straight to a travel agent, called a girlfriend and we were on a plane to Greece the next morning. As I got to the end of the second week I began to realize how stressed I really had been also how stressed I still was despite the considerable reduction of my stress level during the holiday.

I knew then that to really make a difference I needed another week or two to really achieve what I desperately needed to do. About 18 months later I hit the wall of total and utter burnout.

So what had gone wrong and why had the holiday no lasting benefit? Well here is the answer. Because at that time I did not understand what stress was, how the mind and body/mind works or anything else about it, I did what just about everyone else does. That’s right, I went back after my holiday to doing all the things that got me into high stress in the first place. I recommend you read my two weblog articles on the 7^th Sense intelligence. I can remember now some 10 or 12 years later, thinking what a waste that holiday was.  This thought came as I realized a week later I was right back to being as stressed as before the holiday. What did I do? What everyone does of course, I just struggled on blindly doing everything necessary to wreck my life and companies until I hit the burnout wall.

Therefore, here is the next part of my answer. If a holiday is appropriate and there are no attached stressors in arranging it, paying for it or partaking of it, then that is a good start. On its own it may or may not help. The message of my own experience is that it is vitally important to analyse how you got into high or overwhelming stress and change those stressors of thinking patterns. For your holiday to have any lasting benefit at all you have to change your life. But wait a moment. Whatever you choose to change please do not throw the baby out with the bathwater.  There are some good things and bad things, it is only the bad that need to be changed or ditched. The bad? Well the bad are all those self limiting beliefs, values, behaviours and warnings you have simply taken for granted or ignored even though you keep falling over them.

Hold on, that’s not all, – there are many  limiting thinking patterns also, which keep you locked into running those limiting believable beliefs, values and behaviours over and over again even though you might realize they are not doing you any good.

The options are two. Take years of studying yourself, re-inventing the wheel and learning how the mind works or follow a simple course that takes you straight to your goal and new future. As you learn these lessons in a structured way you will also learn how the mind works via experience rather than just the printed word.

Analysing stressors is not a ‘do it yourself’ thing unless you are trained in that field. Next, if you have no knowledge of how to change thinking patterns and limiting behaviours the chances of success are limited indeed. I’m sorry to be brutal, that is how the mind works and to successfully change it is important to change in the way the mind works best and most easily.

To support and guide you I have built a training and coaching program called;

The Phoenix Solution.

I have made The Phoenix Solution easy to follow, just a few minutes of your time each week day. Otherwise you can save the short tutorials until the weekend.

The Phoenix Solution continues for almost a year. Why a year. This is because if you are not used to understanding how the mind works it is easy to slip back to what I mentioned above. Yes, the risk of slipping back to your old stressors is extremely high. I kid you not. This is not a sales pitch, it is well established fact. Do you remember your last New Year’s Resolution? How long did it or they last? A week, 2 weeks, 3 weeks at the most. If your New Year Resolutions are anything like mine used to be before I got to understand the mind, I need say no more. This duration will keep you on track like your own guidance system. Have you ever watched one of those action videos showing an air to ground missile hitting a bunker or other target.  You will have noticed how the missile weaves up and down also side to side. On observation it is quite easy to see the missile is being pulled back on course every time it veers away from its target. Well you are like the missile with a target in mind, my job is to keep you on track.

Now here is the best part, though my friends think I am totally crazy. You get 225 week day tutorials and coaching by e-mail for about $2 US per lesson. You can pay all up front in which case you also get a free copy of my book Activating Spontaneous Healing worth $30 US sent by post or in a pdf e-book format. Alternatively, you can pay monthly. Can you imagine 5 tutorials and coaching a week. 16 tutorials and coaching per month for about $32 US per month, I must be out of my head but that is the deal. I am doing this because I care and I know there are thousands of people who need this help. This give away price is simply to make a difference for as many people as possible.

I have been training people for 40 years and coaching for ten, albeit I had been coaching for many years before training as a life and sports/mind coach. I did not know it as life coaching though that is what I had been doing all along. You will also get a free pdf copy of my new book, ‘The Neuro Science of Stress management’, due out soon.

For further details of The Phoenix Solution to stress management contact me  Robert Denton at robertdenton@rdcoaching-power.com this is because our website is currently being upgraded and is off line at present.

N.B.  You will not find any testimonials here.

First of all I personally do not trust them. Actually I know they are mostly complete marketing fabrications to convince people to buy.

Secondly, all my clients are totally confidential. I may use some results in my reports, books or marketing but certainly there are no names and absolutely nothing in any way to implicate any client.

Yes there is the occasional exception and that is usually because the client is so marked by their positive change they volunteer and ask that I publish their story. Such charitable acts are little different from the above offer. It is a desire to point others to solutions that work at a price that surely anyone who wants to can afford.

For me honesty and total confidentiality are vitally important and something I honour with great care.

Come and join The Phoenix Solution. High stress is a very lonely place to be, it is also a dreadful  confidence sapping condition. In the Phoenix Solution you will be guided and supported all the way.

In a recent WSJ piece, Edward Pinto links the housing bubble to liberal advocacy groups like Acorn.  The argument goes something like this: government polices aimed at increasing home ownership forced entities like Freddie Mac to lower lending standards and acquire large amounts of risky mortgages.

“The flood of CRA and affordable-housing loans with loosened underwriting standards, combined with declining mortgage interest rates—to 5% in 2003 from 10% in early 1991—resulted in a massive increase in borrowing capacity and fueled a house price bubble of unprecedented magnitude over the period 1997-2006.”

Groups like Acorn lobbied for “innovative and flexible” lending practices and helped “ignite” the housing bubble. Acorn is a large political advocacy group that pushes issues for low-income earners.  Pinto links Acorn’s efforts to increase homeownership to the recent housing bubble and financial crisis.

Does he have a case? First we should recognize his bias.  Mr. Pinto was chief credit officer at Fannie Mae from 1987-1989. Not surprising then that he would defend his former professional affiliation.  However, a massive increase in loans made without due diligence over the past 15 years is an undeniable cause for collapse.  As Pinto points out, loans made with less than 5 percent down increased from 9 percent in 1991, to 29 percent in 2007.  Default rates also increased.  Government-sponsored enterprises’ high-risk loans faced a 10.3 percent default rate.

Bankers and regulators should have known better.  Barney Frank, Chairman of the Financial Services Committee, argued to switch the focus from home ownership to rental properties.  This would have isolated the mortgage industry from reckless lending practices.  He made his argument back in 2002.

Lack of due diligence is the real crime here.  Why did the nation’s largest mortgage lenders ignore a fundamental principle of finance?   The answer to that question will help us avoid another meltdown.  You cannot blame a poverty-advocacy group for a banker’s lack of competence.  Yes, policies aimed at increasing homeownership failed.  But that is only part of the puzzle.  Financial innovation, de-regulation, derivatives, Glass-Steagall, China and Fed policy where other factors.

Though I agree with Pinto’s analysis, blaming community groups for advocating loose lending standards is a bit harsh.  Bankers need to take some responsibility.

Tom Powell

I bought my current house 11 years ago.  The area where it is located was then in the middle of a long drought.  There was never any rain during the summer.  Spring rains were slight and winter snow in the mountains that fed the local rivers was well below normal for a number of years in a row.  The newspapers started to print stories about the levels of the reservoirs – showing that the water was slightly lower at the end of each succeeding summer.  One year they even outlawed watering the lawns and everyone’s grass turned brown.

Then, for no reason that was ever explained, the drought ended.  Rainy days in the spring became common and one week it rained for six days straight.

Every system has a capacity.  When the capacity of a system is exceeded, there will be a breakdown of the system of some type.  The breakdown will be a non-linearity of performance of the system.

For example, the ground around my house has a capacity for absorbing and running off water.  When it rained for six days straight,  that capacity was exceeded, some of the water showed up in my basement.   The first time that happened, I was shocked and surprised.  I had lived in the house for 5 years and there had never been a hint of water in the basement. I cleaned up the effects of the water and promptly forgot about it. I put it down to a 1 in 100 year rainstorm.  In other parts of town, streets had been flooded.  It really was an unusual situation.

When it happened again the very next spring, this time after just 3 days of very, very heavy rain.  The flooding in the local area was extreme.  People were driven from their homes and they turned the high school gymnasium into a shelter for a week or two.

It appeared that we all had to recalibrate our models of rainfall possibilities.  We had to realize that the system we had for dealing with rainfall was being exceeded regularly and that these wetter springs were going to continue to exceed the system.  During the years of drought, we had built more and more in low lying areas and in ways that we might not have understood at the time, we altered to overall capacity of the system by paving over ground that would have absorbed the water.

For me, I added a drainage system to my basement.  The following spring, I went into my basement during the heaviest rains and listened to the pump taking the water away.

I had increased the capacity of that system.  Hopefully the capacity is now higher than the amount of rain that we will experience in the next 20 years while I live here.

Financial firms have capacities.  Management generally tries to make sure that the capacity of the firm to absorb losses is not exceeded by losses during their tenure.  But just like I underestimated the amount of rain that might fall in my home town, it seems to be common that managers underestimate the severity of the losses that they might experience.

Writers of liability insurance in the US underestimated the degree to which the courts would assign blame for use of a substance that was thought to be largely benign at one time that turned out to be highly dangerous.

In other cases, though it was the system capacity that was misunderstood.  Investors miss-estimated the capacity of internet firms to productively absorb new cash from the investors.  Just a few years earlier, the capacity of Asian economies to absorb investors cash was over-estimated as well.

Understanding the capacity of large sectors or entire financial systems to absorb additional money and put it to work productively is particularly difficult.  There are no rules of thumb to tell what the capacity of a system is in the first place.  Then to make it even more difficult, the addition of cash to a system changes the capacity.

Think of it this way, there is a neighborhood in a city where there are very few stores.  Given the income and spending of the people living there, an urban planner estimates that there is capacity for 20 stores in that area.  So with encouragement of the city government and private investors, a 20 store shopping center is built in an underused property in that neighborhood.  What happens next is that those 20 stores employ 150 people and for most of those people, the new job is a substantial increase in income.  In addition, everyone in the neighborhood is saving money by not having to travel to do all of their shopping.  Some just save money and all save time.  A few use that extra time to work longer hours, increasing their income.  A new survey by the urban planner a year after the stores open shows that the capacity for stores in the neighborhood is now 22.  However, entrepreneurs see the success of the 20 stores and they convert other properties into 10 more stores.  The capacity temporarily grows to 25, but eventually, half of the now 30 stores in the neighborhood go out of business.

This sort of simple micro economic story is told every year in university classes.

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It clearly applies to macroeconomics as well – to large systems as well as small.  Another word for these situations where system capacity is exceeded is systemic risk.  The term is misleading.  Systemic risk is not a particular type of risk, like market or credit risk.  Systemic risk is the risk that the system will become overloaded and start to behave in severely non-linear manner.  One severe non-linear behavior is shutting down.  That is what the interbank lending did in 2008.

In 2008, many knew that the capacity of the banking system had been exceeded.  They knew that because they knew that their own bank’s capacity had been exceeded.  And they knew that the other banks had been involved in the same sort of business as them.  There is a name for the risks that hit everyone who is in a market – systematic risks.  Systemic risks are usually Systematic risks that grow so large that they exceed the capacity of the system.  The third broad category of risk, specific risks, are not an issue, unless a firm with a large amount of specific risk that exceeds their capacity is “too big to fail”.  Then suddenly specific risk can become systemic risk.

So everyone just watched when the sub prime systematic risk became a systemic risk to the banking sector.  And watch the specific risk to AIG lead to the largest single firm bailout in history.

Many have proposed the establishment of a systemic risk regulator.  What that person would be in charge of doing would be to identify growing systematic risks that could become large enough to become systemic problems.  THen they are responsible to taking or urging actions that are intended to diffuse the systematic risk before it becomes a systemic risk.

A good risk manager has a systemic risk job as well.  THe good risk manager needs to pay attention to the exact same things – to watch out for systematic risks that are growing to a level that might overwhelm the capacity of the system.  The risk manager’s responsibility is then to urge their firm to withdraw from holding any of the systematic risk.   Stories tell us that happened at JP Morgan and at Goldman.  Other stories tell us that didn’t happen at Bear or Lehman.

So the moral of this is that you need to watch not just your own capacity but everyone else’s capacity as well if you do not want stories told about you.

The Art of Healing Stress, Overwhelm and Burnout

Burnout healing is all to do with the cause and the degree of burnout. First it is important to know that burnout is not an illness like depression. Burnout is a state of SELF-PROTECTION. It is an  internal healing of damage to the brain and body, largely as a result of prolonged and excessive amounts of cortisol known as the stress hormone.

By a state of self-protection and internal healing ’ I mean that it  appears from various research programs that an inner body intelligence has shut down the ability to work or in severe cases even to think,  until sufficient healing and recovery has taken place. Therefore it is important to understand that recovery or a better word is healing, your healing strategy is key to what happens next.  Ancient sages and  philosophers from the east knew this 5 thousand years ago. Now we have the technology to prove them right.

What is the difference between ‘recovery’ and ‘healing’?

Medically because the same two words are used simultaneously for the same meaning, there is probably little difference. The great difference in the psychological meaning of the two words. The psychological meaning makes all the difference in the world because they touch our emotional centre, beliefs and values. Emotions, beliefs and values trigger our choices and behaviours both at the conscious and unconscious level. Below I explain how that affects your health.

Recover means to get back to where your were before the crisis, everyone knows that.

Healing means to restore to full health.

Just a quick thought, which I will enlarge in the next weblog. Long suppressed anger (a negative emotion) has a lot to do with underlying stressful issues. I really came to understand this limiting aspect of anger the most limiting of all emotions. It was not until entering my 60s that I came to realise that although I loved and idealised my father I actually had an anger because he had not been there to guide me. Do not misunderstand this, I discovered it was not an anger against my father, I just had an anger that it had happened that way. I had an anger that I made so many mistakes in my life that caused me a lot of pain due to limiting thinking patterns of which I had created mostly for myself because my father was not there to guide me. I had an anger with myself because I had spent so much of my time and energy reinventing the wheel of life.

I would just like to say right here, when you have read this article of post do read (Recovery from overwhelming stress and burnout – Is taking a holiday important?) One of my readers asked the question. A very important question. In this article I give my answers and more important insights into managing stress. Please do read it.

My father was away most of the time due to his job as a diplomatic officer after the II World War, then he died of lung cancer when I was only nine years old. It was only when I was in the middle of my mind research program 50 years later that I discovered the anger. The anger came in the form of all the mistakes I made in my life because my father had not been there to teach me so many unwritten rules and guidelines of life. From this came one of several burning desires I now have to make available vital information about how the mind works.  How to choose the most appropriate thinking patterns and beliefs to build a happy, healthy and prosperous life. How to understand the principles of the mind and making change. How to avoid making the wrong choices. How to evolve and stay on top in a world environment that is changing at break neck speed never seen before without building unnecessary stress. How to avoid reinventing the world. To achieve these objectives I have now put in place a special course program called the Phoenix Solution in my effort to make this knowledge available to anyone.

Now to return to the question of healing stress. The catch and the paradox is that recovery takes you back to where you were before the crisis. That means you are trying to be in a place and a state to do the stress and burnout strategy all over again. Putting your thoughts and energy into recovery is nonetheless fruitless and ultimately adding to frustration and stress because to do so is trying to go backward in time. As we all know that is impossible and certainly not a smart move. This is why overwhelming stress and burnout takes so long to heal using all the wrong techniques. Thus, the only way to heal stress and burnout effectively is to move forward with new supportive thinking patterns.

Healing means to heal the thinking patterns that got you into high stress or burnout and choosing a new way of managing your life and your affairs. Once you heal the underlying cause, the symptoms heal themselves. It is in this process that hidden emotions like anger, resentment and others of a similar limiting nature can come to the surface. The healing process brings them to the surface of your conscious awareness so they can be healed as well in your unconscious.

The importance of understanding the psychological or emotional meaning is vital because it has more meaning to the unconscious or inner intelligence than to the conscious mind. The conscious mind is just the tip of the iceberg. When we begin to communicate with our inner or super intelligence that is when change happens and usually happens quickly.

 A great deal of research has been undertaken over many years to understand how we make change easily also why frequently we find change extremely difficult. Two answers to this question emerged above all others.

1. When we really want something with a passion that comes from somewhere in our deeper being we make change easily almost immediately.
2. When someone else wants us to change something for their own sake even if it is intended as a good guidance, we may find the change difficult or we continually forget because the idea and the desire is not imbedded in our deeper sense of need, desire, vision and focus. Another way of saying this is not having a sense of owning the idea to change.

Therefore, paradoxically trying to recover or get better is perhaps the worst thing to do. Recovery to where you were when you started the stress. Getting better at doing the stress thinking that got you into overwhelming stress or burnout?

SEND ME YOUR E-MAIL ADDRESS AND I WILL SEND YOU A FREE REPORT ON HOW CERTAIN BEHAVIOURS ACTUALLY BLOCK THE INNATE HEALER FROM DOING ITS JOB.

Certainly in the beginning the most important yet most difficult thing to do is first let go of everything. Next to focus whatever capability to think you have left at your disposition, on the pursuit of rest, relaxation, enjoyment and most of all having as much fun and laughter as possible. Why fun and laughter? Well these behaviours reduce performance, competition and other stress thinking activities that produce cortisol. Your main objective is to keep cortisol production to absolute normal levels. When you have laughter and fun in your life the body releases all sorts of chemicals and hormones that support good health in supporting the body’s inner healer. Theses substances also feed good feelings and creative thinking amongst other benefits.

When in extremely severe stress and certainly if in burnout the things to avoid and protect yourself from at any cost are additional responsibility, duty, working, performance, competition and anything that is disagreeable. This includes, perceptions, assumptions, limiting beliefs and all the values and expectations that drove you to your stress disaster in the first place. Learning the ability to say NO! is in such times crucial to healing.

There are many levels of stress, overwhelm and burnout. So speeding the healing of whatever level does depend very much on understanding what is happening at the emotional, psychological and medical or physical levels.

The catch is that if you go for recovery the journey is long, frustrating and you feel out of control. As I noted above, if you do manage to recover you are likely to start the whole process again. If not then very easily and quickly you recognise the stress symptoms and block your own progress. The longer you take to heal your stress condition the further you fall back while the world around you is speeding forward. The consequences are; more stress.

What is happening? Recovery leaves a void where the stress condition had been. The brain and mind cannot live with voids or vacuums so it fills the void with whatever is to hand. Guess what?  The nearest thing to hand is the stress creating strategy you thought you had recovered from.

After over 10 years of studying these problems I have put together a solution that I have called the Phoenix solution. From the ashes of despair and massive stress a new more beautiful life emerges. How does the Phoenix solution do that? It provides you with successful thinking patterns also beliefs, values and thinking behaviours that have been proved to be successful for thousands of years. Some of these are thinking patterns or programs that remain vital and pertinent no matter how much time passes. These are based in the principles of how the mind works. Then there are the thinking patterns that are appropriate to the moment and this time space no matter what the subject. These are the thinking patterns that must change with the changing world.

Send me your e-mail address to robertdenton@rdcoaching-power.com and I will send you a report FREE  that explains inner intelligence systems that control the body’s inner or innate healing.

One of the problems is filling the void with the most appropriate thinking that serves your dreams, objectives. This is what the Phoenix Solution does.  At the end of this article you will find more about the Phoenix solution.  

High stress, overwhelm and burnout can hit anyone but these states tend to happen more frequently to people who are high achievers or aim to be high achievers. People who are caring about giving a quality service, who want things in their control to be as perfect and effective as possible. Therefore, they tend to put great effort and long hours of hard work into pleasing and putting others and other matters before themselves or their own needs. Another group are the people who have a beliefs system of the victim, life is not just and their misery is everyone else’s fault.

The people in these groups can also be extremely self-critical and thus self demanding. That does not necessarily mean they are hard or thick-skinned. These people may give an external appearance of being tough and highly capable and underneath they are emotionally sensitive and extremely giving by nature. Learning to be thicker skinned and demanding that others take more of their own responsibility and personal leadership is certainly something to work on for the victim group.

High stress people can be very intelligent also sensitive to others people’s perceptions, comments and criticisms if those are not worded carefully.  Thus, in their sensitivity to the meaning of words there in lies their vulnerability to high stress and burnout.

My own experience of going through the most severe burnout has taught me an incredible amount about my own psychology and about how the body, the mind and body/mind works. Burnout victims invariably take upon themselves responsibility for peripheral issues far beyond reasonable standards. They take matters concerning their work or duties very seriously. Externally it may not appear so, however, internally there is an enormous amount going on constantly. It is this aspect that there is never really any rest or time for complete relaxation and simply having fun. Consequently their life is virtually 24/7 focusing on their work or responsibilities.

The reader will now I hope begin to understand that the most powerful and destructive essence of high stress, overwhelm and burnout are their beliefs, values and behaviours. Also how these factors interact with their environment. Other important associated psychological issues are perceptions, assumptions and expectations.

The subject and therefore a truly effective healing process is consequently complex. There is no one cure-all like taking a spoon of medicine, morning, noon and evening. Healing is in understanding one’s own beliefs, values, identity, function, perceptions, assumptions and expectations.

A burnout healing process is like few others where the objective is to get back to work as quickly as is reasonable. No quite the opposite. Burnout healing is about change and not doing what you did that got you in such trouble. Burnout recovery is to re-learn, re-program, learning to do your life in a different way with different beliefs, values, perceptions, assumptions and expectations and very possibly it all starts with examining beliefs about identity and function.

This issue of learning to do things in a different way is far more important that might be apparent. In my book ‘Activating Spontaneous Healing’ currently  obtainable in e-book or printed format from info@asr-key.ch   In the book I talk a great deal about the body’s inner intelligence and it is something that I found dominant in my own burnout healing. Inner intelligence is like a self-protection process or unconscious control that is perhaps more easily recognised as an internal guardian angel. In reality it is a complex mixture of emotions, muscle memory and hormones production triggered by those other factors. Hormones act like instruction manuals or performance programs. In this case they work like knee jerk reactions. Do the wrong thing, i.e. try to think or worse to work and you will be slapped down and knocked back in your burnout or overwhelm recovery by an instant and relentless crushing feeling of unbelievable mental and physical fatigue. The message is very clear. It simply and crudely says: don’t do that. The more you persist the more you will be slapped down until the day you learn to change and think about your life and future quite differently.

The problem is that you have never been taught how to think about how you think, let alone the effectiveness of your thinking patterns or indeed where you got them from.

Like the Pavlov conditioned reflexes, where under certain conditions or stimulants you automatically behave in a certain way. The inner intelligence protection mechanism is guiding or training you with a big stick to wipe out the old automatic behaviour patterns that trigger your reactions to do what you did before. This is an evolutionary process that can take as long or short a time as you choose. It is this simple. The faster you learn to change the beliefs, values, behaviours, perceptions, expectations that lead to your burnout, the faster your healing. Once the penny has dropped and you begin to realise exactly what is happening, because you are likely quite intelligent you may be able to work out the next steps for yourself. However, if you like reinventing the wheel and everything that came after as a result then so be it. In which case I suggest you consider taking four or more years in your healing and the next 0 to 40 years to work out what would work better. Whereas, by taking a little help and guidance from someone who knows can save you a great deal of time and pain.

While I talk a lot about the power of the body’s inner healer system being the most powerful of all healing arts, one of the paradoxes is that it is not always capable of activating itself. Therefore, for more complex problems such as high stress, overwhelm and burnout, you do really require help from someone with practical and real experience rather than someone with a head full of theory and often old-fashioned and redundant theory at that. For those wishing to have positive support I would recommend you contact me Robert Denton for more details.

I promise you there is no pressure with endless e-mails filling your daily inbox. If you are interested I will tell you all you need to know. If you are not interested, that is your choice and I shall not bother you with further information or news.

Now I might be crazy offering such a deal but my goal is to make a difference in this world by sharing this knowledge. So I am making it affordable to everyone. So I am asking you to afford just over $2 US  or for each of 225 coaching days over the training and coaching course that last  almost one year.

Each day of the week you will receive a lesson that can change your life from struggle to abundance. Each lesson lasts just a few minutes. That is all you have to do, just a few minutes every day. With each lesson there is a task for you to complete so you integrate the lesson and the learning. The Phoenix Solution course in thinking patterns continues for a year because making changes can be easy and also tough with resistances because you do not understand or you are full of doubt or fear.

Why not take the first tentative step to changing something you have but don’t want for the future you do want.

Contact me Robert P. Denton at robertdenton@rdcoaching-power.com and I will send you all the information to participate in this fabulous offer. The Phoenix Solution.

Credit Crunch Time for the Gingerbread Man
By Ahmed Olayinka Sule, CFA

Since the bursting of the housing bubble, which started in August 2007, the impact of the economic downturn continues to worsen by the day.  So far, financial institutions and other investors have lost billions of dollars, a number of financial institutions have gone into liquidation, and many thousands of jobs have been lost. It is possible to draw parallels between the circumstance surrounding the credit crunch and that of the English fairy tale of the Gingerbread Man.

The fairy tale begins with a hungry, elderly couple shaping gingerbread dough into the shape of a man, which they then bake for their dinner. Later, the couple opens the oven to eat the Gingerbread Man however much to their surprise it comes alive and runs away from them, teasing them as he runs to “run, run run as fast as you can, you can’t catch me I’m the Gingerbread Man!”  After outpacing his creators, the Gingerbread Man runs into the woods, running past a pig, cow and horse as he does so.  He is able to use his blistering pace to stay ahead of all of his pursuers, which now include the three animals. When the Gingerbread Man approaches a river he requests the assistance of a fox to take him across to the other side in order to escape. The fox suggests that the Gingerbread Man jumps on its tail and then takes him across the river. Sensing a kill, the fox recommends that the Gingerbread Man sits on its nose and after a few meters swimming, it tosses the Gingerbread Man into the air and swallows him.

This fairy tale is in many respects a fitting metaphor to describe the unfolding financial crisis, in particular with regard to developments in structured finance that triggered the crisis, the under-estimation of the risks attached to the use of these structured products and the immediate impact and subsequent effects of the implosion of these products that have exacerbated the crisis.

In the last 20 years, a great deal of progress has been made by financial institutions in the use of securitization techniques to group and repackage cash flows from pools of fixed-income assets and then distribute these to a broad range of investors. Prior to the wide spread use of securitization and credit derivatives, banks would create mortgage loans and then retain the credit risk of these loans on their balance sheets until the loans matured or were paid off. As securitization became more widely used, banks were able to offload the credit risks of these Asset Backed Securities to other investors. This process freed up the banks’ capital, thus enabling banks to restructure and redistribute further pools of mortgage and other loans. At the heart of this securitization were the Mortgage Backed Securities (MBS), whose cash flows are backed by the principal and interest payments of a set of mortgage loans. The majority of these mortgage loans were subprime mortgages, which are granted to borrowers with poor credit profiles. Through the use of the securitization model, banks were able to generate high fees and profits as the MBS were packaged into higher rated tranches and distributed internationally to investors at a higher price than the underlying assets.

In many ways the Gingerbread Man, who ended up becoming too complex and quick for his creators to manage, reflects these products, which also quickly became too complex and opaque even for the issuers of these MBS.  The opacity of these products ensured that the issuers under-priced the risk of the subprime loans, which led to high-risk borrowers gaining further access to subprime loans. In addition, lending standards on these subprime loans became less stringent as the credit risks were no longer borne by the issuer of the MBS. Moreover, it became difficult to identify were the credit risk lay. Well respected investors such as Warren Buffet, who warned against the impending disaster from the use of these highly complex financial instruments, were regarded as old fashioned and were criticized for not keeping up with the pace of modern day finance.

Credit rating agencies, regulators and investors were outmaneuvered by the complex structured products issued by these financial institutions, in a way which mirrors the Gingerbread Man outmaneuvering and outpacing the pig, the cow and the horse. Credit rating agencies (CRA) play an important role in structured finance, as they issue independent opinions regarding the likelihood that the cash flows from the underlying pool of assets will be sufficient to service the claims associated with particular tranches. However, partly because of the opacity of these instruments, the CRA failed to identify the risk inherent in these toxic MBS. As a result, the CRA understated the risk in these instruments. For example, as at the end of September 2008, Standard & Poor downgraded 67% of its original investment grade U.S. MBS subprime issuance ratings. Critics argue that CRA’s were influenced by issuers of MBS to issue favorable ratings so as to improve the marketability of the debt instrument for the issuers.  It is worth noting here that CRA’s are paid by the issuers of the MBS securities, which they are supposed to rate.

The financial regulators, which work to ensure that the activities of financial institutions do not threaten financial stability, were also outmaneuvered by the complexity of the toxic MBS issued by the financial institutions, as were the central banks.  . In the US, the Federal Reserve and the Securities and Exchange Commission (SEC) who have responsibility for the oversight of the financial institutions failed to identify the risk inherent in the prevalent use of these structured debt instruments. In addition, financial institutions were able to escape capital regulatory constraints through the use of off-balance sheet vehicles, which encouraged banks to use leverage to generate huge profits. Moreover, the regulators failed to identify the predatory lending practices of financial institutions outlined earlier.

Due to the complexity of these instruments, there appears to have been a knowledge gap between the issuers of these MBS securities and the regulators who were supposed to supervise the issuers. For example, BOE admitted that the growing sophistication of the financial market made it difficult to manage monetary policy and that it needed to improve its understanding of the financial market. Furthermore, the Financial Services Authority (FSA) admitted that it failed to monitor Northern Rock prior to the credit crisis and that it needed to improve its supervisory practices.

Apart from regulators and CRAs, investors were also outrun by the structured products which they bought from financial institutions. Investors such as pension funds, insurance companies, hedge funds and foreign central banks bought these MBS partly because the low interest rate environment of the last decade motivated investors to search for higher yields. These investors were unable to understand the risk of these toxic debt instruments due to their complexity and opacity. As a result, once the underlying subprime loan asset supporting the structured products began to deteriorate due to rising defaults, foreclosures and falling house prices, investors exposed to the related MBS incurred significant losses running to billions of dollars.

After outwitting everyone, the Gingerbread Man reached a dead end, which ultimately impaired his ability to run faster. A similar moment occurred in the financial sector from August 2007, when the excesses created by mortgage securitization began to unwind. Prior to August 2007, subprime borrowers began defaulting on their loans thereby resulting in a rise in foreclosures. With rising US mortgage defaults on the underlying subprime loans impacting the value of the MBS, it became apparent that financial institutions and other investors around the world were holding these toxic assets. From August 2007, financial institutions began to aggressively mark down the value of its collaterized debt holdings. As at September 2008, the value written down since the bursting of the housing bubble in August 2007 amounted to approximately $600 billion. The scale of the losses depleted the capital base of a number of financial institutions, thereby resulting in a curtailment of lending activities. This led to an increase in the cost of credit resulting from credit curtailment, which subsequently resulted in further defaults by borrowers and eventually further write-downs by the financial institutions of their MBS holdings.

Due to poor risk management, financial institutions inaccurately measured the tail risk, which includes events with catastrophic consequences which rarely occur. As a result, financial institutions, as with the Gingerbread Man who took a ride on the fox’s tail, underestimated the tail risk of its super-senior tranche MBS exposure.

At the conclusion to the Gingerbread Man fairy tale the cunning fox tosses up the Gingerbread Man and eats him. In a similar way, since 2007 a number of financial institutions have ceased to exist as independent entities. Of the five independent US investment banks that existed before the crisis, only two remain independent. Furthermore, of the ten independent UK building societies that demutualised between 1989 and 2000 none exists as an independent institution as of today.  Moreover, a number of financial institutions such Lehman Brothers, Indy Mac, New Century and dozens of US regional and mortgage banks have failed. Institutions like Northern Rock, AIG, Fannie Mae, Freddie Mac, and Bradford & Bingley have been taken over by government. In addition, others such as Bear Sterns, HBOS, Washington Mutual, Wachovia, and Countrywide Financial have been taken over by bigger rivals.

After all the dust has settled from this credit crunch, what does the future hold for the surviving financial institutions? In the computer animated Shrek version of the Gingerbread Man fairy tale, Lord Farquaad, the ruler of the castle of Duloc, breaks both legs of the Gingerbread Man, thereby preventing him from running. Unfortunately for the Gingerbread Man, one of his broken legs is crushed into pieces. Similarly, in the real world, government and regulators are under growing pressure to tightly regulate financial institutions in order to reduce the risk these institutions could pose to financial stability. For example, the European Union is now proposing to increase and strengthen the supervision of cross-border banking groups, in addition to requiring banks to face tougher capital requirements. Furthermore, the bonus culture, which fuelled excessive risk taking in most of these financial institutions, is now under review with the FSA suggesting that plans are underway to curb bonuses based on short term deals that have no relationship to long term performance. Also, with the signing of the Emergency Economic Stabilization Act into law a few days ago, the US Congress is now preparing to legislate for a regulatory overhaul that could give the Federal Reserve additional regulatory powers.

Once the credit crisis is over and financial institutions become more tightly monitored and controlled, it will be essential for government and regulators to avoid complacency. If complacency does occur, there is a risk that the situation could be compared to the sequel of the Shrek movie in which the Gingerbread Man re-grows part of his missing leg and also gets a younger brother, who is several times larger than he is.

Many, many good questions and good ideas at the RISK USA conference in New York.  Here is a brief sampling:

• Risk managers are spending more time showing different constituencies that they really are managing risk.
• May want to change the name to “Enterprise Uncertainty Management”
• Two risk managers explained how their firms did withdraw from the mortgage market prior to the crisis and what sort of thinking by their top management supported that strategy
• Now is the moment for risk management – we are being asked for our opinion on a wide range of things – we need to have good answers
• Availability of risk management talent is an issue.  At both the operational level and the board level. 
• Risk managers need to move to doing more explaining after better automating the calculating
• Group think is one of the major barriers of good risk management
• Regulators tend to want to save too many firms.  Need to have a middle path that allows a different sort of resolution of a troubled firm than bankrupcy.
• Collateral will not be a sufficient solution to risks of derivatives.  Collateral covers only 30 – 50% of risk
• No one has ever come up with a theory for the level of capital for financial firms.  Basel II is based upon the idea of keeping capital at about the same level as Basel I. 
• Disclosure of Stress tests of major banks last Spring was a new level of transparency. 
• Banking is risky. 
• Systemic Risk Regulation is impossibly complicated and doomed to failure. 
• Systemic Risk Regulation can be done.  (Two different speakers)
• In Q2 2007, the Fed said that the sub-prime crisis is contained.  (let’s put them in charge)
• Having a very good system for communicating was key to surviving the crisis.  Risk committees met 3 times per day 7 days per week in fall 2008. 
• Should have worked out in advance what do do after environmental changes shifted exposures over limits
• One firm used ratings plus 8 additional metrics to model their credit risk
• Need to look through holdings in financial firms to their underlying risk exposures – one firm got red of all direct exposure to sub prime but retained a large exposure to banks with large sub prime exposure
• Active management of counterparties and information flow to decision makers of the interactions with counter parties provided early warning to problems
• Several speakers said that largest risk right now is regulatory changes
• One speaker said that the largest Black Swan was another major terrorist attack
• Next major systemic risk problem will be driven primarily by regulators/exchanges
• Some of structured markets will never come back (CDO squareds)
• Regret is needed to learn from mistakes
• No one from major firms actually went physically to the hottest real estate markets to get an on the ground sense of what was happening there – it would have made a big difference – Instead of relying solely on models. 

Discussions of these and other ideas from the conference will appear here in the near future.

Expectations are low for the new homeowner assistance program launched last month by the Federal Housing Administration. The program promised to assist some 45,000 FHA borrowers, a far cry from the 850,000 who are behind or facing foreclosure.

The program will target borrowers who did not qualify for other government-backed loan modification plans. Experts believe, however, that the decision to help fewer borrowers reflects the agency’s need to curb its spending and set more realistic goals.

The FHA takes a different approach from other loan modification plans. Under the program, the FHA will reserve up to 30% of the loan balance without interest; that is, a homeowner with a $200,000 mortgage will only get charged on $140,000.

The FHA had announced earlier this month that its financial reserves had reached below-mandatory levels, a first in the agency’s 75-year history. FHA officials say they won’t need government assistance any time soon, even as defaults continue to mount.

According to the Mortgage Bankers Association, about 17% of homeowners with FHA loans are in foreclosure or have missed at least one payment. By contrast, the default rate for other loan types is about 13%.

The FHA has said it will tighten controls on major lenders and target companies suspected of mortgage fraud. However, a large majority of FHA borrowers live in Ohio and Michigan, where the unemployment is a bigger problem than sub-prime lending.

Experts agree that the move shows how the FHA’s increasing dominance has also affected its vulnerability to the sub-prime boom. The FHA insures about 20% of new loans today, whereas it only handled 2% before the housing crisis.

If debt financed consumption has shown us one of the worst economic downturns of our times then what debt financed production can have for us in the pack, another major downturn for the economy which has just begun to recover?

Chinese economy is heavily dependent upon exports as they form a big chunk of its GDP. Just before financial meltdown the ratio of exports to GDP for China was as high as 40%. After the meltdown last September the exports as a percentage of GDP fell down considerably by around 30%. This means that the Chinese GDP must have suffered big time. But still we come to know that Chinese economy has grown by 8.9% in real terms. How did this happen?

China is presently continuing with its fiscal stimulus plan which if seen as a percentage of GDP is much higher than the one which is the US has provided for its economy. However, till now only a small part of that plan is actually executed in China. Then from where the Chinese miracle growth came?

One argument could be that fall in exports is more than made up by the increase in the domestic consumption. However, this is not the case. To understand the Chinese growth really will have to dig deeper to understand how the numbers are calculated in China. In China, unlike other countries, GDP numbers are measured in terms of production and not in terms of consumption, i.e. manufacturing of goods is counted in GDP but not the sales.

In the last year, there was a significant increase in bank credit in China. In fact, it increased by as much as 28%. There is also significant evidence about increase in purchase of raw materials by China. This means that the credit liquidated by the banking system is used to increase production. In normal conditions, this cannot sustain for long as soon the producer would run out of money. However, if bank is willing to lend to the producer he can produce goods for inventory.

In a situation when demand for the goods produced by these manufacturers has decreased, increasing production would essentially mean that the finished goods are rotting in the warehouses. Ultimately this cannot continue for long as one of the bank, manufacturer or channel partner would have to book losses. No economy can sustain for long if it produces goods for which there is no market. This would also have serious repercussions for the Chinese as well as the world economy which is still suffering with the pain of sub-prime crisis led financial meltdown.

Year 2008 has shown us that economic model based on debt financed consumption is not so good then Chinese idea of debt financed production looks more absurd. China, however, can continue this conundrum for a little loner than the expected owing to huge reserves, of the order of $2 trillion, but ultimately this will have to come to an end. “When” is the question and what will be the impact of that? The answer depends on the way of ending. Let’s wait and see.

http://urlet.com/schedule.anything

http://www.rgemonitor.com/emergingmarkets-monitor/257856/chinas_september_data_suggest_that_the_long-term_overcapacity_problem_is_only_intensifying

By Greg Morcroft, MarketWatch

NEW YORK (MarketWatch) — Seven more banks failed Friday, pushing the 2009 total to 106 and marking the first year since 1992 that at least 100 have gone under

Experts suggest we could be no more than 10% of the way through this cycle of bank collapses, which is sure to be the worst run of closures since the Great Depression.

http://urlet.com/len.man

http://www.marketwatch.com/story/bank-failures-hit-100-for-year-2009-10-23

Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.

The new president for whom we all had such high hopes went and hired Michael Froman, a Citigroup executive who accepted a $2.2 million bonus after he joined the White House, to serve on his economic transition team — at the same time the government was giving Citigroup a massive bailout. Then, after promising to curb the influence of lobbyists, Obama hired a former Goldman Sachs lobbyist, Mark Patterson, as chief of staff at the Treasury. He hired another Goldmanite, Gary Gensler, to police the commodities markets. He handed control of the Treasury and Federal Reserve over to Geithner and Bernanke, a pair of stooges who spent their whole careers being bellhops for New York bankers. And on the first anniversary of the collapse of Lehman Brothers, when he finally came to Wall Street to promote “serious financial reform,” his plan proved to be so completely absent of balls that the share prices of the major banks soared at the news.

http://urlet.com/go.caught

http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle

I thought that I must be just woefully old fashioned. 

In my mind the real reason for the financial crisis was that bankers lost sight of what it takes to operating a lending business. 

There are really only two simple factors that MUST be the first level of screen of borrowers:

1.  Coverage

2.  Collateral

And banks stopped looking at both.  No surprise that their loan books are going sour.  There is no theory on earth that will change those two fundamentals of lending. 

The amount of coverage, which means the amount of income available to make the loan payments, is the primary factor in creditworthiness.  Someone must have the ability to make the loan payments. 

The amount of collateral, which means the assets that the lender can take to offset any loan loss upon failure to repay, is a risk management technique that insulates the lender from “expected” losses. 

Thinking has changed over the last 10 – 15  years with the idea that there was no need for collateral, instead the lender could securitize the loan, atomize the risk, thereby spreading the specific risk to many, many parties, thereby making it inconsequential to each party.  Instead of collateral, the borrower would be charged for the cost of that securitization process. 

Funny thing about accounting.  If the lender does something very conservative (in terms of current standards) and requires collateral that would take up the first layer of loss then there will be no impact on P&L of this prudence. 

If the lender does not require collateral, then this charge that the borrower pays will be reported as profits!  The Banks has taken on more risk and therefore can show more profit! 

EXCEPT, in the year(s) when the losses hit! 

What this shows is that there is a HUGE problem with how accounting systems treat risks that have a frequency that is longer than the accounting period!  In all cases of such risks, the accounting system allows this up and down accounting.  Profits are recorded for all periods except when the loss actually hits.  This account treatment actually STRONGLY ENCOURAGES taking on risks with a longer frequency. 

What I mean by longer frequency risks, is risks that expect to show a loss, say once every 5 years.  These risks will all show profits in four years and a loss in the others.  Let’s say that the loss every 5 years is expected to be 10% of the loan, then the charge might be 3% per year in place of collateral.  So the banks collect the 3% and show results of 3%, 3%, 3%, 3%, (7%).  The bank pays out bonuses of about 50% of gains, so they pay 1.5%, 1.5%, 1.5%, 1.5%, 0.  The net result to the bank is 1.5%, 1.5%, 1.5%, 1.5%, (7%) for a cumulative result of (1%).  And that is when everything goes exactly as planned! 

Who is looking out for the shareholders here?  Clearly the deck is stacked very well in favor of the employees! 

What it took to make this look o.k. was an assumption of independence for the loans.  If the losses are atomized and spread around eliminating specific risk, then there would be a small amount of these losses every year, the negative net result that is shown above would NOT happen because every year, the losses would be netted against the gains and the cumulative result would be positive. 

Note however, that twice above it says that the SPECIFIC risk is eliminated.  That leaves the systematic risk.  And the systematic risk has exactly the characteristic shown by the example above.  Systematic risk is the underlying correlation of the loans in an adverse economy. 

So at the very least, collateral should be resurected and required to the tune of the systematic losses. 

Coverage… well that seems so obvious it doed not need discussion.  But if you need some, try this.

Análisis del Rescate Financiero del corazón del Sistema Financiero Mundial

Por Dr. Juan Chamero, Universidad Caece

En su artículo editorial Timeline: Credit crunch to downturn, Cronograma de la Desaparición Estrepitosa del Crédito Bancario, del 7 de Agosto del año 2009, la BBC de Londres analiza en profundidad la historia completa …….

Hace dos años, comienza diciendo al artículo, poca gente conocía el término “credit crunch” un neologismo que ya se ha incorporado en casi todos los idiomas por “severa escasez – corte- de dinero o crédito”. Todo habría comenzado el 9 de Agosto del año 2007 cuando malas noticias provenientes del Banco BNP Paribas de Francia dispararon la suba de los costos del crédito. No obstante las raíces del fenómeno comenzaron bastante antes.

El artículo procede luego amostrar en detalle un cronograma de la crisis a partir del año 2004. No vamos a entrar con mayor detalle en el análisis de las causas de ésta crisis pues ya lo hemos hecho en otras entradas de éste Blog. Lo que sí presentamos traducido es la infografía seriada que explica con claridad en 10pasos el proceso de “Ayuda” o “Rescate” o “Salvataje” del corazón del Sistema Financiero Mundial.

Diapositiva 1

La mayor parte de los analistas relacionan la actual crisis financiera mundial, de la que algunos pocos países dicen estar saliendo, a las hipotecas “sub prime”, mediante las cuales los bancos de Estados Unidos otorgaron préstamos de alto riesgo a gente de pobres historias crediticias. Estos préstamos y otros vienen empaquetados en “porfolios”, fondos o carteras denominados CDOs, por Obligaciones Colateralizadas, las que a su vez fueron vendidas globalmente

deuda tóxica 1

 Diapositiva 2

La caída de precios inmobiliarios y las altas tasas de interés condujeron a que mucha gente no pudiera amortizar sus hipotecas. Los inversores sufrieron pérdidas, provocando en ellos una actitud negativa a aceptar más CDOs. Los mercados de crédito se fueron congelando a medida que los propios bancos se iban negando a prestarse entre si, por ignorar cuánto de “incobrable” había realmente en los “libros reales” de sus competidores.

deuda tóxica 2

Diapostiva 3

El impacto de las hipotecas de baja calidad se difundió rápidamente en el resto del mundo. Las pérdidas fueron consideradas por bancos inversores de países tan “distantes” como  Australia. Las empresas cancelaron ventas de bonos valoradas en billones de dólares, alegando condiciones excepcionalmente negativas del mercado.

deuda tóxica 3

 Diapositiva 4

 La Reserva Federal de Estados Unidos y el Banco Central de Europa trataron de alentar a los mercados financieros poniendo fondos extraordinarios a disposición de los bancos para que a su vez estos presten en términos mas favorables. Las tasas de interés fueron también cortadas para animar este proceso de recuperación, a la larga, de “credibilidad del sistema financiero”.

deuda tóxica 4

 Diapositiva 5

Pero esta ayuda de corto plazo no resolvió la crisis de liquidez del sistema – o disponibilidad de dinero corriente- porque los bancos seguían siendo extremadamente cautos en prestarse entre sí. La falta de crédito a bancos, empresas e individuos, trajo aparejada la amenaza de la recesión, pérdidas de puestos de trabajo, quiebras y alzas en los costos de vida globales.

deuda tóxica 5

 Diapositiva 6

El banco Northern Rock del Reino Unido busco un préstamo de emergencia para permanecer a flote, a causa de una “corrida” en la que sus clientes retiraron depósitos por 2 billones de libras esterlinas. El banco fue luego nacionalizado. En Estados Unidos el Bear Stearns condujo a una crisis de confianza en el sector financiero y al colapso de los bancos de inversiones.

deuda tóxica 6

 Diapositiva 7

En búsqueda de una solución de largo plazo, el gobierno de Estados Unidos aprobó una ayuda financiera de 700 billones de dólares para, a la larga, adquirir las deudas de dudoso recupero de Wall Street, a cambio de una participación importante en los activos bursátiles del sistema bancario. El gobierno de Estados Unidos pensó en obtener el dinero de los mercados financieros mundiales en la esperanza de poder luego devolverlos, una vez que se restableciera el mercado inmobiliario. Ver en la figura la adquisición de los denominados “activos tóxicos” (“Toxic Assets”).

deuda tóxica 7

 Diapositiva 8

El gobierno del Reino Unido lanza a su vez su plan de rescate, poniéndolo a disponibilidad de ocho principales bancos e inmobiliarias a cambio de paquetes de acciones preferidas. Como retorno a su inversión-rescate, el gobierno espera una participación activa en el sistema bancario del Reino Unido, aunque hasta ahora no está en claro el “quantum” de esa participación.

deuda tóxica 8

 Diapositiva 9

Las economías alrededor del mundo se han visto afectadas por esta restricción del crédito. Los gobiernos mueven a sus bancas nacionales, desde Islandia a Francia. Los bancos centrales de Estados Unidos, Canadá y de algunos países europeos, tomaron la increíble y sin precedentes decisión de coordinar un corte de medio puntos en las tasas de interés en un esfuerzo para aliviar la crisis. 

deuda tóxica 9

Diapositiva 10

Las acciones en los mercados bursátiles han experimentado bajas y subas, proliferando noticias de fallas, recuperaciones y más ayudas. Mientras las acciones de los bancos han sido afectadas por las deudas irrecuperables, los comerciantes minoristas se han visto golpeados por la desesperanza de los consumidores golpeados por las bajas en los precios inmobiliarios y el aumento de la inseguridad laboral.

deuda tóxica 10

 Reflexión: ¿se pudo o se puede hacer algo mejor?

Ante este salvataje de los más ricos resulta lógico que nos preguntemos si en el mundo no se toman medidas más radicales y menos egoístas porque los gobiernos están al servicio de los más poderosos  o simplemente  porque no estamos -nosotros y nuestros gobiernos- preparados para tomarlas. Los actuales sistemas políticos, sociales y económicos de prácticamente todos los países del mundo están preparado para concretar este tipo de rescates en forma muy expeditiva, digamos en cuestión de días. Pero combatir el desempleo mediante ayudas a la industria y creando puestos de trabajo, aún con disponibilidad de ingentes recursos y con poder político, implica la toma de medidas complejas, revolucionarias y de resultados imprevisibles. Recordemos que uno de los objetivos de la China de Mao era que cada familia china poseyera un chancho por año y muchos años después y sin haberlo logrado, entra a competir para ser potencia mundial, con mucho menos esfuerzo y en forma menos traumática. Hoy no todas las familias chinas pueden disponer de un chaancho por año. Similarmente la India, posible aliada de China en el super complejo Chindia, es hoy considerada una nación desarrollada pero como hace siglos sin haber aún podido erradicar la pobreza extrema.  

Esto ocurre con las ayudas de todo tipo, incluso las ayudas para emergencias vitales: por ejemplo el país o bloque económico X decide dar ayuda humanitaria a países de la región Y. Lo ideal sería que la ayuda fuera directamente del país o bloque X a la gente de los países de la región Y, cosa que muchas veces se ha intentado hacer con mayoría de fracasos y muy contados éxitos. Por ello, los países ricos optan por quedar en paz con sus conciencias entregando las ayudas a entidades internacionales del tipo ONG supuestamente eficientes y solidarias, las que hacen lo que saben y pueden abasteciendo sospechosamente corruptas cadenas de distribución de las ayudas que se van progresivamente adelgazando hasta desaparecer, y las más de las veces sin llegar a quien lo necesita.   Es de esperar que el ser humano reaccione antes que sea demasiado tarde y que el rescate sea imposible aún para los más poderosos.

Source: http://www.changethis.com/63.01.7Lessons

In the summer of 2008, Lehman Brothers and AIG were renowned power-players and titans of finance.

They were innovative, profitable… nearly untouchable. Now, they are insolvent.

These are just two in a long line of now-clichéd Wall Street stories: successful company—under pressure to earn bigger profits faster—succumbs to appeal of short-term gains, makes bad bets, and goes bust.

Negligent and cavalier investment strategies created overly-leveraged balance sheets, causing these companies, and many others, to place incredible strain on investors, the financial system, the U.S. government, and American taxpayers. Their collapse was monumental and the aftershocks are continuing; worldwide, no one has been unaffected by the ramifications of this collective short-term profit seeking.

Where were the CEOs with plans for the long-term viability of these companies? Where were the board members who were supposed to be minding the store? Where were the shareholders with the knowledge and foresight to shout “STOP?”

The truth is, the “should-be” supervisors allowed greed to engross their attention and distract them from leadership responsibilities. As I’ve asserted before, the economic collapse of 2008-2009 was not caused by subprime mortgages, credit-default swaps, or even excessive greed.

These are only symptoms of the real problem. The root cause of the problem was failed leadership.

And the shared mentality that created an atmosphere where leadership was so easily seduced? “Short-termism,” the act of seeking quick profit at the expense of strategic growth and sustainable profits.

Short-termism is the bane of long-term economic prosperity. It has put innumerable corporations in danger by derailing growth strategies, hindering long-term gains, and sowing the seeds of the high-risk tactics that put the American economy into a tailspin a year ago this month. This phenomenon continues to encapsulate the American financial system and threaten hopes for sustainable reform.

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What happened to all those people?

Millions lost their homes in the sub-prime crash. It was inevitable that such a thing would happen.
But this is the question I keep wondering about. Where did they all go? No matter what everyone needs a place to live, shelter from the elements. So where did all those people go and where are they now?

I’m hoping a lot of them got their house back, for pennies on the dollar. I know it was at least possible in a few places, like Detroit for example, where people could have bought their house back for a third or less. There was a segment about a year ago on Nightline, it featured this fellow who worked from his front porch, or his fishing boat, with a cell phone and a laptop. he bought houses in blocks of 100 from Fannie and Freddy I think it was. One of those blocks was in Detroit, older, ordinary, smaller, houses that had sold for $150,000 or more the previous year. He paid just $1,000 each for the block of 100. And he sold them for $50,000 each. He said the first if you had good credit, a job, and $1,000 down he would sell you a house, he dropped the terms for each week it didn’t sell until it was gone. The object was to get his initial cost back upfront, the rest was pure profit, a 20 or 30 year mortgage would yield triple or more depending on the interest rate.

But I keep wondering, those millions of families that lost a home, where did they all go? Some moved in with friends and relatives, slept in their cars, lived in a cheap motel. But those were short term solutions. Eventually the greatest bulk of them would get a place to live, rent or buy. Was there even enough vacancies to house them all? That I think is the biggest questions. And where are they today? How many didn’t get a place of their own by now? And why didn’t they get one? Was it because there weren’t any, or just not any they could afford, or had they also lost their jobs and couldn’t afford anything at any price? Where are they now I keep wondering.

Are you as sick and tired as I am of hearing about the so called Health Care issue, it should really be called the Health care insurance issue. Look, there is only one way to figure it out, the cost, you add up the total medical costs for the entire country, for each of the last 5 to 10 years, you divide by the number of people, add in some for those that never went but might now if they could, and that’s the cost per person, period. Now the only question becomes; how to collect the money to cover the share of those that can’t pay? I figure there are three possible solutions. Number one, People simply donate the required money. Number two, a new tax to collect the money needed each year. Number three; start a business that will earn the money needed. It will probably require more than once business, but isn’t that a better concept? Not only could everyone participate, by buying something,. They get something in return, instant return no their investment in a healthy population. The insurance companies should all pool their money, pay their costs out of the pool, and profits would be based on how much you put in, minus how much you spent against what was left over on December 31st at Midnight.
I was appalled the other day to see that one plan would actually penalize anyone that refused to be a part of it like $1,500, what nerve I thought; but I seem to always be thing from the poor persons position. Playing the get filthy rich money game just never really appealed to me, I just felt it was morally wrong in too many places, what you had to do to get to the top, yet alone stay there. Sure the toys and luxury looked appealing, but what did you do after the novelty of it all wore off and glitter became ordinary? That was the bigger question. What I really keep wondering is what would happen if ALL of the HMO’s just disappeared over night? If people went to the Doctor when something was wrong, bought pills only when they really needed one. How would the market place react to having to sell their product to everyone on a cash basis? Would the old home remedies have a sudden revival? Would high tech test increase, decrease or stay at the same level? Would country Doctors find themselves once again accepting a chicken or goat or a cow or some other benefit in trade from the family farm? If medicine once again became a calling not a way to riches, how would that affect the whole thing? There are I think a lot of things we are not hearing about. A lot of things just not being considered. I think the only big question is about the money first and what you get for it is second at best. If they want to regulate health care insurance, the HMO crowd, then set the price in say two or three levels, from basic to unlimited, and price accordingly. And never mind if it’s a company with thousands of employee’s or just a single person or family, everyone pays the same for the same thing. That is the only real solution. The only real concern of the HMO should be what is my total,. Number of customers and money received. And we need to back out the Lawyers and the rest of the insurance companies that have driven the costs sky high. No I don’t know how we should deal with the damage caused, it will happen now and then, IF people don’t pay attention. There is no real fix for that, People make mistakes, that’s why we have a word for it. If we demanded the problems be weeded out it would take a while but the numbers would drop. I mean it’s not that hard to pay attention. And if you don’t or can’t you’re out and no getting back in, PERIOD! Draw a line and the world will adjust.
I’m thinking of those ads like the ones about what if Loggers ran things, you would get simple fast equitable common sense decisions. Anyway I get a real kick out of those commercials.
Common sense has to make a come back in this country. And Corporate Rule needs to end. Not everything needs to be about making the most money possible. There is nothing wrong with having a flat line profit year after year, or just breaking even. This idea that it must be more all the time is insane. Like the old story about putting a fain of rice or a penny on the first square of a checker/chess board and doubling it for each of the rest of the squares, it gets to be an insane number/amount by the last row. Things don’t need to go that far, get that big, it’s hurtful and we can well do without it. Words like Reasonable, moderation, responsibility, honor, integrity, freedom, Liberty and many more all need to make a come back, push out words, sayings like Politically incorrect, Greed is Good, consumerism, planned obsolescence, all the ones that demand always more. There isn’t enough of anything to keep always supplying more, plus we don’t need to expend so much time and energy promoting the idea that it must always be more, on demand in specific amounts of time. There should be only a reasonable demand that requires a reasonable supply of materials, reasonable meaning that we use what we have in such a way that the demand meets the ability of the supply to renew or be recycled. There is only so much metal in the planet we can use, only so much timber that can grow in a year, we NEED enough vegetation to replenish the air we breathe, there is a limit to the amount of land in any one place we can clear all the vegetation from, there is only so much fresh water available at any one time. We need to learn that we must live within the planets limits. And we NEED to STOP Poisoning everything that gets in our path, or that we draw a path through.

So where are all the people now that lost their Home to a Sub-Prime gamble?

Wall Street Lies Blame Victims to Avoid Responsibility for Financial Meltdown

By Nomi Prins, Wiley Press
Posted on September 29, 2009

Editor’s note: The following is an excerpt from Nomi Prins’ new book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.

The Second Great Bank Depression has spawned so many lies, it’s hard to keep track of which is the biggest. Possibly the most irksome class of lies, usually spouted by Wall Street hacks and conservative pundits, is that we’re all victims to a bunch of poor people who bought McMansions, or at least homes they had no business living in. If that was really what this crisis was all about, we could have solved it much more cheaply in a couple of days in late 2008, by simply providing borrowers with additional capital to reduce their loan principals. It would have cost about 3 percent of what the entire bailout wound up costing, with comparatively similar risk.

Just as great oaks from little acorns grow, so, too, can a Second Great Bank Depression from a tiny loan grow.  But so you know, it wasn’t the tiny loan’s fault. It was everyone and everything that piled on top. That’s how a small loan in Stockton, California, can be linked to a worldwide economic collapse all the way to Iceland, through a plethora of shady financial techniques and overzealous sales pitches.

Here are some numbers for you. There were approximately $1.4 trillion worth of subprime loans outstanding in the United States by the end of 2007. By May 2009, there were foreclosure filings against approximately 5.1 million properties. If it was only the subprime market’s fault, 1.4 trillion would have covered the entire problem, right?

Yet the Federal Reserve, the Treasury, and the FDIC forked out more than $13 trillion to fix the “housing correction,” as Hank Paulson steadfastly referred to the Second Great Bank Depression as late as November 20, 2008, while he was treasury secretary. With that money, the government could have bought up every residential mortgage in the country — there were about $11.9 trillion worth at the end of December 2008 — and still have had a trillion left over to buy homes for every single American who couldn’t afford them, and pay their health care to boot.

But there was much more to it than that: Wall Street was engaged in a very dangerous practice called leverage. Leverage is when you borrow a lot of money in order to place a big bet. It makes the payoff that much bigger. You may not be able to cover the bet if you’re wrong — you may even have to put down a bit of collateral in order to place that bet — but that doesn’t matter when you’re sure you’re going to win. It is a high-risk, high-reward way to make money, as long as you’re not wrong. Or as long as you make the rules. Or as long as the government has your back.

The Second Great Bank Depression wouldn’t have been as tragic without a thirty-to-one leverage ratio for investment banks, and, according to the

New York Times

, a ratio that ranged from eleven to one to fifteen-to-one for the major commercial banks. Actually, it’s unclear what kind of leverage the commercial banks really had, because so many of their products were off-book, or not evaluated according to what the market would pay for them. Banks would have taken a hit on their mortgage and consumer credit portfolios, but the systemic credit crisis and the bailout bonanza would have been avoided. Leverage included, we’re looking at a possible $140 trillion problem. That’s right — $140 trillion! Imagine if the financial firms all over the globe actually exposed their piece of that leverage.

But for $1.4 trillion in subprime loans to become $140 trillion in potential losses, you need two steps in between. The most significant is a healthy dose of leverage, but leverage would not have had a platform without the help of a wondrous financial feat called securitization. Financial firms run economic models that select and package loans into new securities according to criteria such as geographic diversity, the size of the loans, and the length of the mortgages. A bunch of loans are then repackaged into an asset-backed security (ABS). This new security is backed, or collateralized, by a small number of original home loans related to the size of the security. Some securities, for example, might be 10 percent real loans and 90 percent bonds backed by those loans. Some might be 5 percent real loans. Whatever the proportion, the money the mortgage holders pay to lenders on their loans is used to make payments on new assets or securities. Those securities, in turn, pay out to their investors.

During the lead-up to the Second Great Bank Depression, the securities themselves were a much bigger problem than the loans. Between 2002 and 2007, banks in the United States created nearly 80 percent of the approximately $14 trillion worth of total global ABSs, collateralized debt obligations (CDOs), and other alphabetic concoctions or “structured” assets. Structured assets were created at triple what the rate had been from 1998 to 2002. Bankers from the rest of the world created, or “issued,” the other 20 percent, around $3 trillion worth. Everyone was paid handsomely. In total, issuers raked in a combined $300 billion in fees. Fees can be made for all types of securitized assets, but the more convoluted they are, the riskier and more lucrative they become. Fees ranged from .1 percent to 0.5 percent on standard ABS deals and up to 0.3 percent for mortgage-backed securities (MBSs) and whole business securitization (WBS) deals. Fees were better for CDOs—between 1.5 and 1.75 percent for each deal, and higher for the riskier slices. All told, the $2 trillion CDO market alone netted Wall Street around $30 billion before CDO values headed south. Because U.S. investment banks were making huge profits from packaging churning loans and leveraging them, mortgage-and asset-backed security volume skyrocketed.

Investment banks, hedge funds, and other financial firms could use the $14 trillion of new securities as collateral against which to borrow money and incur more debt (leverage them). There is no way of knowing exactly how much was leveraged, because the players operated in an opaque system — that is, a system without proper regulatory oversight or enforcement to detect or curtail leverage. But a conservative estimate of the average amount of leverage is about ten to one, considering the roughly eleven-to-one leverage of the major commercial banks and the thirty-to-one leverage of investment banks. So, we’re talking about a system that ultimately took on $140 trillion in debt on the back of $1.4 trillion of subprime loans. How insane is that? And, it happened so fast.

In 2005, the mortgage on some little home in Stockton provided the capital for two or three ill-advised loans that soon disappeared into an ABS. But it was the global banks, the insurance companies, and the pension funds — particularly in Europe — that purchased the related ABSs. Like their U.S. counterparts, European financiers bought boatloads of ABSs with borrowed money. 13 They also shoved them off-book into structured investment vehicles (SIVs) that required no capital charge and little reporting.

By the fall of 2008 those ABSs, CDOs, and all their permutations would be known as “toxic assets.” They were considered by many to be the major cause of Big Finance’s failures and losses. The push for TARP centered on ridding banks of these poisonous creatures. But make no mistake: toxic assets are not the same as defaulted subprime mortgage loans; loans are merely one of the ingredients that make up the assets. All the subprime loans in existence could have defaulted and the homes attached to them could have been devalued to zero (which didn’t happen), but without the feat of securitization, the banks wouldn’t have become nearly insolvent. Toxic assets became devoid of value, not because all the subprime loans stuffed inside them tanked, but because there was no longer demand from investors. If no one wants your Aunt Mary’s antique gold-plated, diamond-encrusted starfish, for all intents and purposes, it has no monetary value at the moment. This basic supply-and-demand concept is something our government apparently didn’t understand when it offered to take the toxic assets off the banks’ books. And the Fed, as we’ll see, doesn’t seem to care that it took on trillions of dollars’ worth of these assets.

Lazy Lending Legislation

The greedy predatory lending that fueled the Second Great Bank Depression could have been avoided. Back in 1994, there was actually enough popular pressure to introduce legislation that would have ushered in controls on lending and other banking activities. As is par for the course, a handful of consumer-oriented congresspeople and watchdog groups initially faced an uphill battle against a band of well-funded, well-placed politicians such as Florida’s Bill McCollum, Texas’s Phil Gramm, and Iowa’s James Leach and Charles Grassley, who were carrying Wall Street’s torch toward deregulation.

But a burgeoning predatory lending crisis reached a very public head in 1994 amid allegations that Fleet Finance Group had gouged hundreds of low-income and minority consumers. Busloads of irate anti-loan-shark-T-shirt-sporting citizens rallied through the halls of Congress to chronicle lending abuses.

In response, just before Newt Gingrich assumed power as Speaker of the House under Democrat president Bill Clinton, the House battled for the Home Ownership and Equity Protection Act of 1994 (HOEPA) to cap the most outrageous predatory loans. 37 It was the last piece of legislation that attempted to regulate appalling lending practices. Perhaps if lending had been better regulated, subprime loans wouldn’t have been the fodder for the Second Great Bank Depression. Maybe something else would have been. But that wasn’t the case.

HOEPA contained several provisions that curbed “reverse redlining,” in which nonbank lenders target low-income and minority borrowers. But it didn’t reinstate full interest rate caps, which had been deregulated during the previous two decades, or limit fees or tighten requirements to determine the ability of borrowers to repay their loans. As you can imagine, the industry and certain Republicans bitterly opposed the original House bill.

“Why can’t the lenders police themselves?” Senator Richard C. Shelby (R-AL) asked. Sure, and while we’re at it, why not let power companies determine what’s pollution and what isn’t? Why not let agribusiness make the rules about what farms can do? Why not put lions in charge of your gazelle sanctuary or hire a fox to guard the henhouse? Shelby, as you may reca ll, later sprouted an activist streak in 2009 and took the Treasury Department to task for lying to Congress about TARP.

Even with the best intentions, HOEPA’s passage had dire consequences. First, it left a huge gap between the first and second tier of rates and fees a lender could charge. If lenders didn’t want to hit the new caps, they had plenty of fertile ground to play on by extending loans with rates and fees just beneath the HOEPA triggers. Because lenders would make less money from each loan, due to the reduced rates and fees, they’d have to find more borrowers to make the same profits. Voil à , the quiet birth of predatory subprime lending.

During those early and middle years of the Gingrich revolution, there was no talk of regulation. The market zoomed, and even though a spate of corporate fraud was percolating, it didn’t look broke, so no one in Congress fixed it.

As the late 1990s stock market boom headed into the new millennium, there were renewed legislative attempts to rein in the lending industry. Notably, in April 2000, the dynamic duo of Representative John LaFalce (D-NY) and Senator Paul Sarbanes (D-MD) introduced the Predatory Lending Consumer Protection Act of 2000 (PLCPA) to strengthen the Truth-in-Lending Act.

PLCPA would have brought down the HOEPA triggers and cut origination fees so that profit from home mortgages had to come from payments, ensuring that everyone in the chain had an interest in homeowners’ ability to repay loans. Sarbanes and Senate staffer Jonathan Miller worked feverishly to line up cosponsors.

The industry attacked the bill and won, with help from McCollum and Connie Mack III (R-FL). What did pass, however, was Phil Gramm’s Commodity Futures Modernization Act of 2000 (CFMA). That act ushered in tremendous growth of unregulated commodity trades through its “Enron Loophole,” which allowed companies to trade energy and other commodity futures on unregulated exchanges.

It also sparked growth in the unregulated credit derivative trades that bet on defaults of corporations or loans, which became the main ingredient in the hot new Wall Street financial gumbo. Credit derivatives were a type of insurance contract written against not just one corporation or loan but on investments that scarfed up bunches of subprime loans and stuffed them into the unregulated CDOs that imploded and hastened the greater lending crisis. The problem was that they weren’t regulated (even half-heartedly) like insurance policies were.

Meanwhile, the quixotic Sarbanes and LaFalce soldiered on, trying to avert lending disaster through appropriate regulation. They reintroduced their bill as the Predatory Lending Consumer Protection Act of 2001, but the mortgage industry and its mouthpieces were relentless. In July 2001, Stephen W. Prough, chairman of Ameriquest Mortgage Company, said at the Senate’s Banking Committee hearings, “‘Predatory’ is really a high-profile word with no definition.” In August 2001, Senate Banking Committee chairman Gramm concurred, “Some people look at subprime lending and see evil,” he said. “I look at subprime lending and I see the American dream in action.” The 2001 version of PLCPA also died.

Down and nearly out, Sarbanes and LaFalce tried to pass their act again in May 2002. It failed again and then again, for the final time, on November 21, 2003. Bush’s ownership society ideology was in full swing by then, and the country was at war. Any hope for regulation or transparency in the lending or banking sector was basically dead.

The culmination of years of minor and significant acts of deregulation coalesced with mortgage industry sycophants beating back solid attempts at regulation or transparency. Loans that lenders pushed on homeowners were the perfect fodder for Wall Street, which eagerly packaged the loans and profited. House prices, in turn, skyrocketed.

How Lenders Created a Risk-Free Business

Meanwhile, lending practices had gotten really wild. Alan Greenspan had chopped rates dramatically to bolster the economy following the stock market plunge in 2001 and 2002. Lower rates meant that it was cheaper for banks to borrow more money from the Fed and from one another. It also meant that lenders had more funds to play with. Because prime loan rates fell in tandem, these loans weren’t funneling as much profit to lenders. To make up for it, lenders extended riskier (nonprime) loans at higher rates to more borrowers.

With cheaper money, lenders were able to fund more mortgages for those riskier borrowers. If some loans didn’t go well, it wouldn’t matter. Lenders bet that they could either sell the underlying homes for higher prices, which would more than cover the defaulted loans, or convince the borrowers to take out equity loans backed by the homes’ presumably rising value.

That increased the risk of default and, more so, the potential loss to the lender: the same house could now back two loans instead of one, so if its value fell and the borrower couldn’t pay up, both loans were screwed. Super-low teaser interest rates lasted for two or three years and begged to be refinanced (for which lenders got extra fees) before they zoomed up. This added more risk to the system: loans couldn’t be refinanced, and borrowers couldn’t make the high rate payments. But as long as home prices kept rising as they had since at least the early 1960s, systemic loan defaults weren’t a huge concern.

While rates remained fairly low, there was always more cash for lenders to dole out. Lenders pushed an ongoing cycle of refinancing and new home purchases, both of which could be classified as new mortgages on their books, which was good for stock prices. Between 2002 and 2005, the stock price of the once-largest independent mortgage lender, Countrywide Financial, had tripled — well before Bank of America agreed on January 11, 2008, to buy its remains. The firm created $434 billion in new loans in 2003, a 75 percent increase over 2002, securing a post in Forbes America’s top twenty-five fastest-growing big companies for 2003. The number-three home lender, Washington Mutual, issued $384 billion in loans that year. (Emulating Countrywide’s rapid descent later in the decade, Washington Mutual lost a combined $4.44 billion in the first and second quarters of 2008, before JPMorgan Chase swooped in to buy it, with the government’s help, on September 25, 2008.) Wells Fargo, which hung on to buy Wachovia in October 2008, topped the charts in 2003 with $470 billion in new loans. That’s a combined $1.3 trillion in new home loans created by the big three mortgage lenders in 2003.

As home prices spiked amid low rates, demand increased for securitized loans, and more loans were offered. In 2003, the securitization rate of subprime loans matched that of prime loans in the mid-1990s. From 2002 to 2006, subprime loan originations went from 8.6 percent of all mortgages to 20.1 percent.

The more subprime loans there were in the market, the more the securities piled on top of them became exposed to the risk that a larger number of loans than expected might default. Of course, this risk was hidden until home prices started to fall and defaults started to rise. Subprime defaults decreased to 5.37 percent in 2005 (nearly half of what they’d been during the 2001 recession), right before those seeds of risk between lenders and borrowers began to sprout like Audrey II, the alien plant in Little Shop of Horrors.

Consumer protections were simultaneously chucked. On April 20, 2005, President George W. Bush signed the 2005 Bankruptcy Abuse and Consumer Protection Act, sponsored by Senator Charles Grassley (R-IA), which worsened the quietly growing housing crisis for consumers. 55 Borrowers facing bankruptcy could no longer negotiate down the principal of their mortgages with their creditors if the market declined, meaning that they had no way to avoid foreclosure, even if they wanted to.

On September 1, 2005, two years after the final Sarbanes-LaFalce bill failed to gain traction, Office of Federal Housing Enterprise Oversight (OFHEO) chief economist Patrick Lawler said, “There is no evidence here of prices topping out. On the contrary, house price inflation continues to accelerate, as some areas that have experienced relatively slow appreciation are picking up steam.”

Markets weren’t yet constrained for credit. Because lenders were assured money through securitizations on Wall Street, they didn’t have to worry about guidelines on individual loans. If rating agencies would certify trillions of dollars worth of collateralized packages of loans with the highest possible rating, AAA, Wall Street investment banks could sell them to a wider pool of investors, which included pension funds, university endowments, and municipalities. High-interest loan volume, which includes most subprime loans, soared to a combined $1.5 trillion between 2004 and 2006, representing 29 percent of home loans made in 2006.  Home equity loans bulged simultaneously. It was a loan-lending fest until adjustable rates ultimately kicked in, and prices topped out. At the same time that housing values were faltering, borrower mortgage payments jumped by 25 to 30 percent as adjustment periods began. Then the foreclosures ramped up to levels last seen during the Great Depression.

The Cruelest Lie of All

There are those who blame lending, and certainly subprime lending was terribly predatory. Conservatives, however, toward the end of 2008, began to blame the people getting the subprime loans and the Democrats for pushing through the Community Reinvestment Act (CRA) in 1977, which sought to end discriminatory home-lending practices.

CRA “led to tremendous pressure on Fannie Mae and Freddie Mac — which in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That’s called subprime lending. It lies at the root of our current calamity,” the conservative columnist Charles Krauthammer wrote on September 26, 2008, in his nationally syndicated column. Translation: the Democrats allowed Poor People to do this. And innocent Wall Street paid the price.

Krauthammer continued, “Were there some predatory lenders? Of course. But only a fool or a demagogue — i.e., a presidential candidate — would suggest that this is a major part of the problem.” 95 (Of course, maybe Krauthammer is just always reactionary. At the beginning of the Iraq War, he wrote, “Hans Blix had five months to find weapons. He found nothing. We’ve had five weeks. Come back to me in five months. If we haven’t found any, we will have a credibility problem.” 96 Credibility problem indeed.)

Since late 2008, plenty of fools and demagogues have argued and, in fact, proved Krauthammer wrong. But for a while, conservative stalwarts such as Fox News’s Neil Cavuto and newspaper columnist George Will echoed the idea that it wasn’t greed but a 1977 regulatory law that brought down the economy. 97 Given that the value of subprime loans in the market is overwhelmed by the amount of the full federal bailout by a factor of ten to one, that’s not anywhere near reality.

The finance community’s theory is one of selective Darwinism: Little people who take bad risks deserve the consequences. Companies that take bad risks are a welcome addition to the fallen competitor list. Banks that survive the chaos can reposition themselves at the top of the financial piles, and deserve all the federal bailout money, and assistance in growing even bigger, that they can get.

Indeed, after the Bear Stearns bailout, then treasury secretary Paulson said of his former competitor, “When we talk about moral hazard, I would say, ‘Look at the Bear Stearns shareholder.’” 98 Blaming the bad apple and delivering some well-chosen words about America’s destiny will usually mute the need for regulation. That’s why current congressional packages tend to offer cosmetic financial solutions to long-term regulatory dilemmas.

No matter where the blame lies, as housing prices kept dropping and foreclosures kept rising, the feds jumped into gear late and indicted several hundred mortgage players, including former Bear Stearns credit hedge fund stars and current scapegoats Ralph Cioffe and Matt Tannin, and many lesser-known characters. The FBI and the Department of Justice targeted a slew of small and big firms after the fact, from Puerto Rico – based Doral Financial Corporation, unknown to most households, to more prominent names: AIG, Countrywide Financial, Washington Mutual, Bear Stearns, Lehman Brothers, UBS AG, New Century Financial, Freddie Mac, and Fannie Mae.

When all is forgotten and we’ve moved on to our next financial crisis, there will be certain fingers frozen in time pointing at the subprime loans as the cause of the calamity. Big Finance would prefer that. But the truth is that the subprime loan tragedy was merely the catalyst that exposed the mega-tiered securitizations of securitizations, the massive leverage chain derivatives attached to nothing concrete, and the ineffective regulatory restraints. All of which led us down the rabbit hole of the Second Great Bank Depression.

Nomi Prins is a senior fellow at the public policy center Demos and author of It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.

© 2009 Wiley Press All rights reserved.
View this story online at: http://www.alternet.org/story/142944/

On April 7 2009, the Financial Times published an article written by Nassim Taleb called Ten Principles for a Black Swan Free World. Let’s look at them one at a time…

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

Since I cannot claim to have completely clean hands, I will simply point to the writings of Hyman Minsky.  His Financial Instability Hypothesis describes how a financial system goes to the extremes of leverage that creates a crash like what we just experienced.  He wrote this in the 1980’s and early 1990’s and then did not feel that there was much chance of the extreme part of that cycle happening any time soon.  He thought that the Fed had enough of a handle on the financial system to keep things from getting to a blow up state.

However, he did mention that with the advent of sources of debt and leverage and money outside of the traditional financial system, that if those elements grew enough then they could be the source of a severe problem.

How prescient.

In addition to reading what Minsky wrote, we should also be studying the thinking of those who totally avoided the sub prime securities that caused so much problems for so many very large financial institutions or who were in but got out in time to avoid fatal damages.

Those are often the people with the common sense that we should be using as the basis for the way forward.

Risk management programs need to have a deliberate risk learning function, where insights are developed from the firm’s losses and near misses as well as from others losses and near misses.

In this crisis, we should all seek to learn from those who were not enticed into the web of false knowledge about the riskiness of the sub prime securities.   One of the most interesting that I hear at the time when the markets were seizing up was that those who had escaped were too unsophisticated to have gotten into that market.

I spoke to one of those severely unsophisticated people on the buy side and he said that he never did spend too much time looking into the CDOs.  He said that he knew what the spreads were on straight mortgage backed securities.  And he had some idea of how many additional people were getting a slice in the creation of the CDOs.  And then he knew that the CDOs were promising higher yields for the same credit rating as the straight mortgage backed securities.   At that point, he was sure that something did not add up and he moved on to look at other things where the numbers did add up.  I guess he was just too unsophisticated to understand the stochastic calculus needed to explain how 2-1-1-1 = 3.

We need to learn that kind of unsophistication.

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