April 18, 2010 9:13 AM
By Buz Livingston, Just Plain Talk
www.waltonsun.com
Unfortunately, foreclosure has become an endemic facet of the American real estate story. If an alien landed in South Walton they might report to the planet Ork that the state flower of Florida is a “For Sale” sign festooned with a foreclosure decoration. According to Realty Trac, the good news is foreclosure rates increased nationwide last February by the lowest amount in four years (6 percent).The number of borrowers nationwide who have missed a payment or face foreclosure is a staggering 15 percent.
The foreclosure tsunami initially began primarily with homeowners who could only qualify with sub-prime mortgages. The blame for the next wave of foreclosures could be placed on economic woes that gripped the nation, as unemployed workers could not afford their mortgage payments. Currently the fastest rising group of foreclosures can be found with borrowers who have good credit and who took out conventional mortgages.
How did we get here?
This American Life (Home | This American Life) recently profiled a seven-month investigation into a hedge fund named Magnetar by Planet Money’s Alex Blumberg and two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger. Magnetar chiefs Alec Litowitz and David Synderman used investors’ money to create collateralized debt obligations (CDOs) funded with mortgage bonds. The company then added credit default swaps as a type of insurance if the CDO failed. Credit default swaps are the completely unregulated brainchild of Georgia graduate and former Texas Senator Phil Gramm. Glory, glory.
Often what is legal can be more shocking that what is illegal.
In Magnetar’s case they pushed bankers like UBS, Merrill Lynch and Citigroup to include only the most risky type of mortgage bonds in their CDOs. In essence, Magnetar created an unusual money-making machine. Magnetar received a fee for putting the CDO together, they collected income while the mortgages were being paid. Then when the CDOs went bust, Magnetar collected on their credit default swaps.
And it was all completely legal. Tony Soprano, eat your heart out.
Hedge funds are not subject to disclosure requirements. It appears that Magnetar closed deals on between 25 to 30 CDOs — and according to the report, only one of the Magnetar CDOs has not collapsed. It is estimated that investors lost up to $40 billion while Magnetar executives pocketed hundreds of millions.
Yves Smith, author of Econned, chides Magnetar: “If the world had been spared their cunning, the insanity of 2006-2007 would have been less extreme and the unwinding milder.”
Hedge funds like Magnetar created gushers of cash that cascaded through the real estate markets causing dislocations that will take years to rebalance. Remember the zero-down, interest-only loans for vacant lots banks were pushing a few years ago. The money had to come from somewhere. But the taxpayers ultimately ended up holding the bag.
Collateralized debt obligations provide needed liquidity for the banking system. However, steps must be taken to regulate collateralized debt obligations and credit default swaps. The lack of supervision led to and exacerbated the worst fiscal crisis since the Great Depression.
Senator Gramm has been employed by UBS as a vice-president since he left the Senate. Investment banks like UBS made from $10-$20 million from each CDO. The full story can be found at www.propublica.org.
Correction: Last week I overzealously edited my column. Praising the committee that wrote “Choosing the Nation’s Fiscal Future,” it should have read, “They are not paying lip service to the problem or rounding up the usual talking points.”
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net.
By Buz Livingston, Just Plain Talk
www.waltonsun.com
Unfortunately, foreclosure has become an endemic facet of the American real estate story. If an alien landed in South Walton they might report to the planet Ork that the state flower of Florida is a “For Sale” sign festooned with a foreclosure decoration. According to Realty Trac, the good news is foreclosure rates increased nationwide last February by the lowest amount in four years (6 percent).The number of borrowers nationwide who have missed a payment or face foreclosure is a staggering 15 percent.
The foreclosure tsunami initially began primarily with homeowners who could only qualify with sub-prime mortgages. The blame for the next wave of foreclosures could be placed on economic woes that gripped the nation, as unemployed workers could not afford their mortgage payments. Currently the fastest rising group of foreclosures can be found with borrowers who have good credit and who took out conventional mortgages.
How did we get here?
This American Life (Home | This American Life) recently profiled a seven-month investigation into a hedge fund named Magnetar by Planet Money’s Alex Blumberg and two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger. Magnetar chiefs Alec Litowitz and David Synderman used investors’ money to create collateralized debt obligations (CDOs) funded with mortgage bonds. The company then added credit default swaps as a type of insurance if the CDO failed. Credit default swaps are the completely unregulated brainchild of Georgia graduate and former Texas Senator Phil Gramm. Glory, glory.
Often what is legal can be more shocking that what is illegal.
In Magnetar’s case they pushed bankers like UBS, Merrill Lynch and Citigroup to include only the most risky type of mortgage bonds in their CDOs. In essence, Magnetar created an unusual money-making machine. Magnetar received a fee for putting the CDO together, they collected income while the mortgages were being paid. Then when the CDOs went bust, Magnetar collected on their credit default swaps.
And it was all completely legal. Tony Soprano, eat your heart out.
Hedge funds are not subject to disclosure requirements. It appears that Magnetar closed deals on between 25 to 30 CDOs — and according to the report, only one of the Magnetar CDOs has not collapsed. It is estimated that investors lost up to $40 billion while Magnetar executives pocketed hundreds of millions.
Yves Smith, author of Econned, chides Magnetar: “If the world had been spared their cunning, the insanity of 2006-2007 would have been less extreme and the unwinding milder.”
Hedge funds like Magnetar created gushers of cash that cascaded through the real estate markets causing dislocations that will take years to rebalance. Remember the zero-down, interest-only loans for vacant lots banks were pushing a few years ago. The money had to come from somewhere. But the taxpayers ultimately ended up holding the bag.
Collateralized debt obligations provide needed liquidity for the banking system. However, steps must be taken to regulate collateralized debt obligations and credit default swaps. The lack of supervision led to and exacerbated the worst fiscal crisis since the Great Depression.
Senator Gramm has been employed by UBS as a vice-president since he left the Senate. Investment banks like UBS made from $10-$20 million from each CDO. The full story can be found at www.propublica.org.
Correction: Last week I overzealously edited my column. Praising the committee that wrote “Choosing the Nation’s Fiscal Future,” it should have read, “They are not paying lip service to the problem or rounding up the usual talking points.”
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net.
