Susan Barnes on subprime stresses being contained (2007)

Due to minor home price declines in 2007, we expect losses and negative rating actions to keep increasing in the near term relative to previous years.  However, as long as interest rates and unemployment remain at historical lows and income growth continues to be positive, we believe there is sufficient protection for the majority of investment grade bonds.  As of April 12, 2007, only 0.3 percent of the outstanding subprime ratings issued in 2006 have been downgraded or placed on Creditwatch.

[...]

Let me conclude by stating S&P does not anticipate pervasive negative rating actions on financial institutions due to rising credit stresses in the subprime mortgage sector since the majority of rated financial institutions have diversified assets and mortgage lending and servicing operations aligned with strong interest rate and credit risk management oversight. Specialty finance companies that focus solely on the subprime market, however, do not enjoy the same protection and have felt the effects of the current subprime credit stresses.

~ Susan Barnes, managing director, Standard & Poor's Ratings Services, hearing before the Committee on Banking, Housing, and Urban Affairs, United States Senate, April 17, 2007

Frederic Mishkin: exposure of banks to subprime losses minimal (2007)

Moreover, because most sub-prime mortgages are securitized, the risks associated with these loans are spread widely.  Bank and thrift institutions that hold these mortgages are well-capitalized and exposure of individual banks to possible sub-prime losses do not appear to be large.

~ Frederic Mishkin, Fed vice-chair, April 20, 2007

Jim Chanos compares Chinese LGFV's to US subprime

China apparently can't hide its LGFV [local government funding vehicles] problem any more. The fact that these LGFV loans are already going bad in a 'booming' economy makes them analogous to our subprime mortgages in late 2006, only worse.

At Rmb 9 trillion at the end of 2010, LGFV loans equaled 30% of China's GDP. In early 2007, U.S. subprime mortgage debt totaled $1.3 trillion, or 8% to 9% of U.S. GDP. In fact, the Rmb 2 trillion to Rmb 3 trillion that's already been identified as needing to be restructured is close to the U.S.' entire subprime exposure, realtive to GDP.

~ Jim Chanos, founder, Kynikos Associates, May 31st, 2011

A China bear speaks out on the crowded China growth story trade

They're down to condo-flippers and subprime lenders in China. And remember, the news that you get out of China is delayed probably 6 to 9 months. So, the reality is the most successful emerging market in history was the United States of America, it grew 9% compounded annually for a hundred years between 1800 and 1900 with 15 recessions, 4 depressions and a civil war at halftime.

The Chinese haven't cleaned their system since the late '90s. They're in the process of hitting the "overbuilding wall", the urge to be prideful and make it look like they're still growing and what's happening is they're setting up a terrible market in everything from emerging markets to commodities, debt attached to countries like Australia and Canada. There are so many trades crowded into this phenomena, and we've traveled all around the country in the last year and a half, whether it's financial advisers, registered investment advisers or institutions, they're all crowded into this trade together and the reason they're performing poorly is there's just no one left to go in.

~Bill Smead, CEO & CIO, Smead Capital Management, CNBC's "Squawk on the Street", May 16, 2011

WSJ cites subprime as US credit markets "heal"

Subprime and other residential mortgage bonds that helped trigger the financial crisis are back in vogue with long-term investors, in the latest sign that American credit markets are healing.

~Wall Street Journal editorial staff, story lede, "Subprime Bonds Return", March 31, 2011

"Bond King" Jeff Gundlach says the muni market is the new subprime

You’ve got a history of low defaults, which is comforting. But that kind of sounds like what subprime sounded like back in 2006. You had a triple-A market that had never traded below par, the fundamentals were getting worse and it was owned for a technical reason. In the case of subprime, it was that triple-A rating that had such good treatment from the bank regulators, and the funds with their prospectuses could buy the triple-A rating and all of that.

And the muni market has never really had defaults and it's always had good recovery rates but the fundamentals are bad and its own for a technical reason, which is the tax benefit! People own it for the tax benefit.

I don't think you need to know what the default rates will be or how low 'low' is, munis are going to go down. There are going to be other shoes to drop. There might be so many that it looks like Imelda Marcos's closet when all of those shoes drop because all the states have to deal with this stuff.

Between here and the end game, lies the valley. And the valley is full of fear. I think the muni market is going to go down by at least, on the long end, something like 15 and 20 percent.

~Jeffrey Gundlach, CEO and "Bond King", DoubleLine Capital, CNBC interview, March 9, 2011 

Larry Summers on FinReg not being a cause for uncertainty in the markets

If you're worried about uncertainty, the people who decided to make 10s, if not hundreds of billions of dollars of subprime loans, and they're saying the uncertainty is about what the government is going to do? People have off-balance sheet SIVs where they can't even calculate what the total extent of their liabilities are, their uncertainty wasn't caused by the government. Their uncertainty was protected by what the government did, by the fact that those institutions were facing, in many cases, catastrophe.

And the government, NOT to help them, but to protect the system, did what was necessary to take what was a tale, of literally a depression, out of the market. That's the important thing that's happened about uncertainty.

~ Larry Summers, director, National Economic Council, CNBC's Closing Bell, July 21st, 2010

Legg Mason analyst on Countrywide Financial (2007)

The fallout among smaller subprime lenders will give survivors like Countrywide even more market share. We liked the stock when it was trading at $44 a share and we see even more value now.

~ Legg Mason analyst Mitchel Penn, "Top Funds Stand by Subprime Stocks," Fortune, March 9, 2007

(Countrywide, which gets only 10 percent of its revenues from subprime lending, continues to deliver solid growth, he pointed out.)

Barney Frank on how nobody foresaw the credit crisis

In 2003, nobody that I knew of foresaw the crisis of subprime lending, and that is what caused this problem.

~ Rep. Barney Frank, chairman of the House Financial Services Committee, "Barney Frank feeling heat in crisis," BostonHerald.com, September 30, 2008

Alexander Rekeda (structured finance expert) on the 2007 vintage of RMBS

The 2007 vintage of residential mortgage-backed securities is looking to be one of the best vintages in 10 years.

~ Alexander Rekeda, Mizuho Financial Group, interview with Dow Jones Newswires, April 2007

(Quote was cited in WSJ article, "How Mizuho Loved and Lost in CDOs," May 14, 2008, p. C1. "Looking to charge into the red-hot business of subprime debt two years ago, Mizuho Financial Group Inc.'s brokerage poached 11 bankers, traders and salespeople, headed by structured finance ace Alexander Rekeda, from investment bank Calyon.)

HUD's role in the drive to homeownership

Federal policies designed to ensure mortgage loans were affordable for risky borrowers helped push the U.S. mortgage industry toward crisis, analysts said.

Since 1992, when the Department of Housing and Urban Development became the regulator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., the federally chartered companies have been obligated to help expand the availability of mortgages, The Washington Post reported Tuesday.

But, as consumer groups warned banks were offering mortgages with low initial payments -- called "teaser" rates -- to unqualified buyers, HUD neglected to assess the risks, The Post reported.

"For HUD to be indifferent as to whether these loans were hurting people or helping them is really an abject failure to regulate," Michael Barr, a University of Michigan law professor, told the newspaper.

Between 2004 and 2006, Freddie Mac and Fannie Mae helped set lending trends by purchasing $434 billion in securities backed by risky, subprime loans. Now, with 3 million to 4 million mortgage foreclosures expected, Congress is considering a move to find a stronger regulator to oversee the Freddie Mac and Fannie Mae, and may do so before the July 4 recess, the report said.

~ "HUD fails to assess risks", UPI, June 10, 2008

Raymond McKewon: "The nonprime lending industry is... acyclical" (2004)

The nonprime lending industry is to a large degree acyclical - not cyclical or countercyclical.

~ Raymond McKewon, executive vice president and co-founder, Accredited Home Lenders, "Subprime Time," Institutional Investor, December 2004, by Steven Brull

Maria Bartiromo on Angelo Mozilo

Angelo Mozilo wants to make one thing perfectly clear: Countrywide Financial, whose stock is down more than 20% for the year, should not be lumped in with the subprime outfits that are getting hammered.

~ Maria Bartiromo, "Inside the Mortgage Crisis," BW, March 26, 2007

Ben Bernanke: Subprime problems should not spill over (2007)

We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

~ Ben Bernanke, Federal Reserve Chairman, May 17, 2007

Lew Rockwell on subprime loans

The incredible fact is that these loans are an expected result of 15 years of government propaganda about mortgage loan "discrimination." Some genius noticed that the loan markets tend to favor people with good credit histories and some savings built up over time. And then some other genius noticed the demographic fact that these credit histories, in general, parallel racial demographics. Hot button! And so the pressure was on to lend as if the prospect for repayment didn't matter.

The loans in this category were only viable if we presume that housing equity would rise forever. Then it works like magic. It's like an economic perpetual motion machine. You borrow and borrow and the loan pays itself off. Crazy? Yes, it is, but such is the craziness of any inflationary environment. It leads people who should know better to believe that the impossible is happening.

It was not just the subprime market but the entire housing market that has been wildly distorted through intervention. The money lent has had no economic justification, and the low interest rates are unsustainable.

~ Lew Rockwell, "The Mirage of the Mortgage Fix," LewRockwell.com, December 12, 2007

Edward Ketz on proposed bills to prevent subprime foreclosures

It punishes those who have acted prudently and rewards bad decisions by homeowners who bought what they could not afford. It gives incentives for future homebuyers to act rashly, because they may believe Washington will rescue them from error and greed.

~ Edward Ketz, accounting professor, Penn State University, "Freezing Teasers," Mortgage Meltdown blog, December 17, 2007

WSJ on another mortgage bailout plan

Among the bailout ideas is a plan that would ask lenders to take a small, 10%-15%, haircut on these subprime loans but then bring in the Federal Housing Administration to insure the rest. This idea has backers on Capitol Hill, and we're told it even has takers at Hank Paulson's Treasury.

But if Mr. Paulson embraces it, he'll be putting taxpayers at risk if housing values decline further. He'll also be sending a terrible signal to lenders, borrowers and investors -- to wit, that Congress will save them from bad decisions. Treasury has spent years warning about the risk to taxpayers from expanding Freddie Mac and Fannie Mae. If it now embraces a larger role for their federal housing cousin, the FHA, Treasury's credibility on Fan and Fred will be zero.

All of these plans reflect the political imperative, or should we say panic, to rescue individuals from bad mortgage decisions. But you can't bail out borrowers without also bailing out lenders and investors -- and down that route lies endless taxpayer liability. Before embracing a radical restructuring of the relationships between American homeowners and mortgage companies, it's worth reviewing the facts: Roughly 35% of homeowners have no mortgage debt remaining on their homes. Of those homeowners still paying a mortgage, 95% are paying on time. And even in the risky category of subprime adjustable-rate loans, more than 83% are still paying on time.

~ The Wall Street Journal, "Review & Outlook: Mortgage Meltdown," October 24, 2007

Paul Krugman blaming the subprime mess on greed and a lack of corporate governance

'What were they smoking?" asks the cover of the current issue of Fortune magazine. Underneath the headline are photos of recently deposed Wall Street titans, captioned with the staggering sums they managed to lose.

The answer, of course, is that they were high on the usual drug - greed. And they were encouraged to make socially destructive decisions by a system of executive compensation that should have been reformed after the Enron and WorldCom scandals, but wasn't.

The point is that the subprime crisis and the credit crunch are, in an important sense, the result of our failure to effectively reform corporate governance after the last set of scandals.

~ Paul Krugman, "Banks Gone Wild," International Herald Tribune, November 23, 2007

Thomas DiLorenzo on Paul Krugman blaming the mortgage mess on the free market

In [Paul] Krugman's article blaming the "subprime" mortgage mess on the free market, he claims that the Comptroller of the Currency should have been regulating the lending business more stringently. If so, this all might have been avoided, he says. As usual, he hasn't the foggiest idea of what he's talking about.

The fact is, the Comptroller of the Currency and the Fed itself have been busy enforcing the "Community Reinvestment Act" of 1977 for the past 30 years, which pressures banks to make uneconomical loans to uncreditworthy borrowers, euphemistically called "sub-prime" borrowers. They're not financial deadbeats, or people who never pay their bills on time. They're just a tiny, tiny bit below "prime" borrowers, in Governmentspeak.

Once again, Krugman gets everything ass backwards: Government regulation of the credit markets is a major CAUSE of the "subprime" mortgage debacle, not the solution. (Of course, the Greenspan Fed itself is the cause of the now-burst housing bubble).

~ Thomas DiLorenzo, "Crazed Keynesianism (and stupid, too)," LewRockwell.com blog post, December 21, 2007

Henry Paulson: Subprime troubles "largely contained" (2007)

I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained.

~ Henry Paulson, U.S. Treasury Secretary, Reuters, April 20, 2007

(Quote provided by Kevin Depew, "Five Things You Need to Know: Housing Slump Well Contained; Well Contained to Existing Home Sales; Well Contained to Largest Cement Producer in U.S.; Well Contained to Spain; Well Contained to Auto Sales," Minyanville, April 24, 2007)