Subprime Mortgage Market vs. Credit Default Swaps

To expand upon the exchange below, here is the size of the subprime mortgage market (from bloomberg.com) versus the credit default swap (CDS) market which expanded, thanks to chief McCain advisor Phil Gramm's 2001 legislation, from a 1 trillion dollar market ten years ago to more than 62 trillion dollars (from Yahoo):



Now look at that chart, and ask yourself: which of the two slices would have banks scared shitless that if they lend to other banks, those banks might lose everything? It's those kinds of numbers (and the reality that AIG almost folded because of CDSs) that are at the root of the credit crunch. And a further point: mortgage brokers have been talking about the huge demand for "paper" that came filtering down from on high, the pressure to generate mortgages. This pressure came from speculators (domestic and foreign) who wanted more fuel for Ponzi schemes like the CDS market. It's a situation where an instrument intended to mitigate mortgage risk far outstripped its object and magnified the risk -- not only did the cart get before the horse, it picked the horse up carried it off a cliff.

And in case you think part of the credit problem is all the plastic we've been burning (and which the "culture of responsibility" pablum keeps bringing up), chew on this: total consumer credit card debt was 2.55 trillion in 2007 (from creditcards.com). That's less than 5% of the CDS market. And this is why Matt Taibbi gets pissed at Byron York below -- blaming minorities and consumers*** is standard Republican bullshit.

The worst thing about this bullshit (as I suspect most of what comes from the G.O.P.) is that most of them believe it, because they don't understand what they're talking about. Byron York is only a lead contributor to The National Review -- perhaps the foremost conservative rag in the U.S. Why should he bother to do research that took me 20 minutes? Of course, the guy from fucking Rolling Stone had the time -- but I guess covering Kanye West and Tool leaves you with more free time to do market research than, say, professional policy commentary.

It has to be rare for an entire half of the political spectrum to be so completely, so unabashedly out of their fucking minds. But, you know, it takes a village...


*** And don't get me started on the plastic safety net that consumers turn to when their real wages decline over seven years of Republican (non)-domestic policy.

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Byron York Butchered

Matt Taibbi, writer for Rolling Stone, IMs with Byron York of the National Review and brings the hatchet. There must have been blood on the keys when he finished:

M.T.: Oh, come on. Tell me you're not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm's Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That's like five times the size of the holdings in the NYSE. And it's all speculation by Wall Street traders. It's a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.

B.Y.: I was struck by the recent Senate testimony of James Lockhart, who is head of the Federal Housing Finance Agency, about the sheer recklessness of Fannie in recent years. Despite "repeated warnings about credit risk," Lockhart testified, Fannie became more reckless in 2006 and 2007 than they had been in the scandal-ridden tenure of Franklin Raines (who departed in 2004). In 2005, Lockhart said, 14 percent of Fannie's new business was in risky loans. In the first half of 2007, it was 33 percent. So something terribly wrong was going on there, and it became a significant part of the present problem.

M.T.: What a surprise that you mention Franklin Raines. Do you even know how a CDS works? Can you explain your conception of how these derivatives work? Because I get the feeling you don't understand. Or do you actually think that it was a few tiny homeowner defaults that sank gigantic companies like AIG and Lehman and Bear Stearns? Explain to me how these default swaps work, I'm interested to hear.

Because what we're talking about here is the difference between one homeowner defaulting and forty, four hundred, four thousand traders betting back and forth on the viability of his loan. Which do you think has a bigger effect on the economy?

B.Y.: Are you suggesting that critics of Fannie and Freddie are talking about the default of a single homeowner?

M.T.: No. That is what you call a figure of speech. I'm saying that you're talking about individual homeowners defaulting. But these massive companies aren't going under because of individual homeowner defaults. They're going under because of the myriad derivatives trades that go on in connection with each piece of debt, whether it be a homeowner loan or a corporate bond. I'm still waiting to hear what your idea is of how these trades work. I'm guessing you've never even heard of them.

I mean really. You honestly think a company like AIG tanks because a bunch of minorities couldn't pay off their mortgages?

B.Y.: When you refer to "Phil Gramm's Commodities Future Modernization Act," are you referring to S.3283, co-sponsored by Gramm, along with Senators Tom Harkin and Tim Johnson?

M.T.: In point of fact I'm talking about the 262-page amendment Gramm tacked on to that bill that deregulated the trade of credit default swaps.

Tick tick tick. Hilarious sitting here while you frantically search the Internet to learn about the cause of the financial crisis — in the middle of a live chat interview.

B.Y.: Look, you can keep trying to make this a specifically partisan and specifically Gramm-McCain thing, but it simply isn't. We've gone on for fifteen minutes longer than scheduled, and that's enough. Thanks.

It's like that scene from Apocalypse Now -- in which they slaughter the yak. It's head is almost severed with the first blow, but it just keeps standing for a few moments, and you can't look away.

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