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as of yesterday, america is no longer a nation of states, but rather,  a nation hedge fund.

or more precisely, the world’s single largest real estate company, with an initial portfolio of US$700 billion.

while tree hugging hippies are busy throwing rotten eggs ( most probably organic) at wall street, condemning the “bail out” of the very fat cats that caused this mess,….

and while rightwing neocon-nazis throw tree hugging hippies at egg on their face wall street denouncing the “nationalisation” of the country,….

the powers that be have managed to create something that would never ever have otherwise been possible.

america is now the proud owner of its very own real estate sovereign wealthy fund.

the worlds largest.

and its actually no different from other SWF’s out there,…

while the middle east’s SWF’s capitalised on cheap slave(ish) labour and no infrastructure investment, thereby keeping their oil production costs low relative to current market prices,….

and while singapore capitalised on the insanely long slave(ish) working hours of their citizens,……

america has managed to capitalise on its most abundant resource:

land,… in one of the largest and safest economies in the world.

sure,… if you’re a trader, or if your retirement fund just took a massive hit then you would be right to argue that point,….

but, as sordid and as historic as this little episode might be in america’s economic history, there is still nowhere else on earth people would rather put their money,… which explains why everyone and their grandmothers is piling into US treasuries and why the dollar is getting stronger at what would seem to be the shakiest period since the great depression of ’29.

the government now, effectively owns US$700 billion of real estate. how much of the country that is i cant say, but i’m betting that is a bit more than a couple of mouldy retirement condos in florida.

the point to remember is that while wall street is in a rush to dump these “toxic” mortgage backed securities, and while foreclosures may be at a record high,…. a large majority of homeowners are still paying their bills and have yet to default.

so the government is actually getting a pretty good deal. they’re getting a whole boat load of property in the form of securities which is essentially the same thing, and they have the ability to renegotiate the terms. which means that dude A who might be about to lose his house, will probably get his mortgage term extended, thereby making it easier for him to not default.

when things look good for dude A, things will look even better for the government’s portfolio.

should they have bailed out wall street?

shouldnt they have helped out main street instead?

its not for me to argue, and its kind of pointless right now.

besides, wall street couldnt have done what it did without the willingness of main street, but thats an argument of another time.

this is what i find interesting, and if i havent bored you to death already,…

heres something that no one is talking about right now:

had everything gone according to plan, this subprime thing wouldnt have happened.

had everything in the rearview mirror happened infront of us,…. this whole subprime thing wouldnt have happened.

but something changed.

had everything remained more or less constant, predatory lending aside, the homeowners would have been able to meet their mortgage payments.

one basic fundamental component to the worlds whole economy, changed which i believe sparked this whole thing.

oil.

even the most moronic person who cant keep track of his dollars and cents, will have an idea of how much he can pay a month. no matter how bad with money you are, you have an idea of a) how much your rent is and b) how much extra if any you have left over.

and when it comes to the point that buying is cheaper than renting, even at the new rate in a few years time, then you know buying will always make more sense.

so they did.

but while america was busy enjoying her new plumbing, the whole world decided to have a series of panic attacks, one of which was and still is over india and china getting it on too often and producing too many people.

what alot of people didnt add into their calculation was the possible volatility of gas prices.

and when gas prices go up, you have a choice to make:

skip a mortgage payment so you can pay for gas and go to work so you can get paid and then pay your mortgage?

or pay your mortgage, not have enough gas to go to work and maybe get fired, in which case you cant pay your mortgage and will get kicked out?

its a nobrainer.

so payments got late, and later and later as the gas price went higher and higher, until you get to where we are today, with banks having over invested while thinking they were geniusseses. and when it all went blrrrrp they looked at their guys and ask ” how come we didnt see this? arent we meant to be the smartest guys on the street?”

” wait, if we’re the smartest and we fuckered up, then what about those guys? or them? or them?”

hence your crisis of confidence.

anyway, the point of this is:

assuming the government knows that gas is one of the reasons they got into this mess.

then surely whoever the next president will be, their administration will be just as oil-centric as this one.

actually, with the government now holding US$700 bill that could double over time, if they could just keep the oil prices down,….

i would argue that whoever gets in come november, will make george bush look like a tree hugging hippie.

you see, if oil has now become even more important as a result of this rescue package:

then there is no way in hell obama will pull troops out of iraq at even the slightest risk of sectarian fighting which would stop iraq’s 2 million barrels a day flowing out.

in addition, many many more troops will head to afghanistan to secure it once and for all as the final piece in the big central asian pipeline.

offshore drilling? done and doner.

alasakan reserve drilling? certainly done.

hmmm,…

alaska,….

palin,….

conspiracy theorey buffs!

on your marks,….

get set,…

GO!

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7 Comments

  1. Maybe you can help me understand something or even just comment on this. See, I read an article that explained the crisis but it gave a different set of conditions that put everything into spiral mode; the most important of which is the interest rate not being fixed. Here’s what I understood:

    Joe has a crap salary and no one is willing to finance his purchase of a home. Suddenly he hears that Bank Doofus is willing to finance his purchase of a home. He does the dance of joy and gets financing to purchase a home. However he doesn’t notice (or doesn’t care about) three conditions for the mortgage:
    1) Interest rate is not fixed and could rise.
    2) If you don’t pay your interest rate on time you have to pay a punishment of three times the interest fee for each time you miss payment.
    3) You spend the first THREE years of your mortgage paying interest so for all intents and purposes you don’t have any ownership until after year 3.

    So Joe is all excited about paying what he used to pay in rent towards actual ownership now. Some time after he hears that “his” property has now risen in value. He does the dance of joy again and somehow manages to convince Bank Dingbat to finance his kid’s college education and a family vacation based on his owning a home and so it’s an asset backed loan.

    Everything is all hunky dory until interest rate rises. But Joe is stretched pretty thin so he can’t really meet this new payment with the higher interest! He says it’s ok I won’t make it this month, next month I’ll pay. BOOM the bank charges him THREE times the fee. He can’t make the payment AGAIN. And this keeps going on until Joe has to choose between feeding his family and paying mortgage fees. Ultimately he is kicked out of the home.

    But what about Bank Dingbat? It thought that it could tap into Joe’s house but it can’t. See at some point in time there was this ridiculous conflict where Joe thought he had ownership, Bank Doofus though they have ownership, Bank Dingbat thought it could take the house or part of it if Joe didn’t pay AND ALL THREE PARTIES involved used this shabby little house to get access to even more debt. And voila!

    Ok sorry I rambled on & on. But this is how I understood the mortgage crisis to have occurred. Little to do with oil prices although I am sure it didn’t help to having living expenses rise. What do you think?

  2. your understanding is right.

    what joe does or did is what everyone does and always did in the past.

    what the banks did and think or thought has also always happened.

    interest rates have always changed and adjustable rate mrtgages, rates that change over time have been around for quite a while too.

    but, the stupid this time around were the investment banks who stoped assessing risk,… which is technically what they get paid to do.

    let me break it down like this:

    joe buys a house from fred.
    joe doesnt have $250,000 cash, so he heads to the bank.
    the bank checks out joe and sees that he’s got a decent steady job, isnt a “loser” and no criminal record and says ok joe, give us a 10% deposit, and we’ll pay the rest to fred and charge you interest.
    the bank then technically owns the house until joe pays off his loan from the bank.

    up until this point, nothing changed from the past.

    what did change is this:

    some bright spark at the bank, or on wall street comes up with the idea of bundling 100’s of loans together into what we call a “product”. ie a piece of paper that says these 100 mortgages are bundled together.

    why?

    so he can sell these products to investors as a fund of sorts. NBK and Global were pushing these products quite hard a few years ago.

    so heres the deal,…. bright spark says ” buy this mortgage backed security” which is backed by real estate, not bonds or shares or any other type of paper,.. this is backed by a real thing.

    and everyone knows real estate goes up over time, so alot of investors fell for it,…. especially when big houses like meryll lynch and hsbc were selling them.

    so far its all good.

    until it starts getting messy.

    bright spark manages to sell all the contracts he has in the first 100 homes. made a bundle of money, and thinks he can do it again. by this time everyone else also knows about it. so they start doing it, and pretty soon everyone is lining up with cash to put into these things. so more of them get started, more homes get bundled etc,…

    and this is all based on the certainty that the homebuyer will not fail to pay his monthly mortgage payment. and if he does fail, well never mind we can always sell it off, since property doesnt go down.

    sounds sweet doesnt it? and it was for a while.

    even more money cued up behind everyone else, and you started getting predatory lending where agents got paid huge commissions just to make a sale, who cares if the buyer cant make payments, thats his problem not mine, and i’m gonna get 10,000 just to make him sign.

    anyway, tied to all these loans was one safety net which is also a standard practice,… insurance. if the guy doesnt pay then the insurance companies will pay up and the banks are safe. again, these policies were based on the assumption that joe doesnt get fired.

    so what you have is a set up which so far works ok and is makeing alot of people very wealthy,…. including joes, who by now have sold their first house, made some cash and bought bigger one thinking he will make more on it again later since all of this was pushing house prices up.

    until joe has to make a decision between his gas and his mortgage and at his new interest rate.

    he fails, his neighbour fails, etc, etc,…
    he failed so insurance kicks in for the banks.
    him and his neighbours fail leaving empty properties which bring down valuations, so some sell while others start to fail as gas gets higher and rates go up as they did.
    insurance pays more, some investment funds start to unload some contracts, and more and more and more,…. until they panic and start selling them at 1/5th of the price they paid.

    hence your downward spiral.

    amazingly, the success of this whole thing hinged on the ability of joe to pay his mortgage.

    and you gotta remember, gas is not just to get to work,…. food, clothes, heating cooling, everything is affected.

    even here where the government is subsidising soooo much we’re feeling a pinch,… just imagine mutton, rice, gas, electric, water etc wasnt subsidised,…. and you had to pay the real cost for all of that on top of all the loans for cars, holidays etc.

    there is alot of similiarties between here and there, but thats a post for another time.

  3. So the main two reasons are lack of risk assessment and the very notion or business ides of selling debt (mortgage backed securities)? That makes sense.

    I’d like to read what similarities you can draw between this and the Kuwaiti economy and financial products we have here. 🙂

  4. well yes, but more so the lack of risk assessment on the part of joe, the investment banks and their clients, and less so to do with the concept of selling debt.

    selling debt is normal, but its normally a thing that companies and countries do by selling corporate or government bonds, the idea being that the company will use the funds to expand and make more money, and nations will stabilise their economy and honor their debt payments.

    so you have companies and countries that are rated by fitch and moodys etc,… and the better the company/country’s prospects the lower the return cos less risk is implied.

    so crappy banana republic, and crappy company A will have to offer something like 10-15% returns such as one or two not so famous real estate companies here, and countries like iraq,….

    while better companies/countries pay out only a couple of percent since they are less risky.

    i’m hardly an expert on the financial products we have here, since i dont work in a bank or have any myself, but they are a part of my work in the sense that i’m on the other side, not lending to people, but rather lending to banks in the form of deposits etc. haha that sounds like i’m alot bigger than i really am 😛 anyway, heres my take on it:

    the similarities in structure are the same except mortgage backed securities dont exist here, and i hope they never do. but the lending and borrowing environment is similar. . there are a couple of differences which actually arent that different:

    A) the risk that yousef here who has a govt job will get fired doesnt exist since jobs are pretty much guaranteed. youd have to fuck up big time to get fired from the ministry. so a good thing.

    B) yousef doesnt really put the money into something like real estate since his actual house is off limits to banks and backed by the government. again a good thing.

    Bi) not so much his furniture and the stuff he puts in it. so its not purely a real estate thing here, unless yousef starts speculating on real estate, like he has been over the past few years, hence rents are crazy, and the CBK started to clamp down on bank lending. youve probably heard about credit card limits being brought down or people being refused loans, or higher requirements of collateral. something has been bubbleing under the surface here. the massive profits from oil sales have led to too much money on the market, a parallel to the investment banks in the us piling money into the subprime thing. so the banks here have had too much money to put to work so lending got a bit out of control

    C) there is no credit rating agency here so yousef can jump from one bank to another to get loan after loan.

    D)the biggest problem is that most of the loans yousef gets are for cars, holidays, and other luxury items, and he doesnt just get a toyota to go to work. dude gets a lexus so he can go work as a government clerk. unlike the US where the property would retain its value over time, yousefs lexus lost half its value the second he drove it out the shop.

    E) yousef has become tapped out, he’s got loans from all the major banks so they cant lend to him anymore. so the banks go after expat joseph’s to the point that i now see expats running around in brand new jags and mercs to go to work at a bank as a teller.

    F) institutions are getting more creative, in a parallel to the predatory lending,…. instead of loaning the money to broke yousef or broke jospeh directly cos they no longer qualify,… they now lend to car companies who hold the debt under their name while yousef and joseph make payments. so even without a residence permit, you can actually still buy a car here which is something you could never do before.

    again all this is backed by insurance, theyre all paying about 10% interest, and most are feeling the pinch of food prices going up. and joseph could get fired at any moment, while yousef simply cant be seen to be running around in a 5 year old car.

    the upside, is that there is enough govt support here if things do get sour,… food subsidies can increase, salaries, allowances etc. so i’m hoping that if anything goes wrong here, it wont be too bad.

    well fingers crossed.

  5. “even the most moronic person who cant keep track of his dollars and cents, will have an idea of how much he can pay a month. no matter how bad with money you are, you have an idea of a) how much your rent is and b) how much extra if any you have left over.”

    Skunk, you are the expert, and I am not, so I am taking a great risk disagreeing with you IN YOUR AREA OF EXPERTISE! but here goes – I disagree.

    ARMs have been around forever. People have lost houses by bad risk assessment and bad planning, but not in such large numbers.

    This crisis started when people were given loans for which they were not qualified. The loan originators were making money on every loan, the jobs were not checked, the income was not checked. And people who couldn’t afford to get into the housing market, who were one car breakdown and one paycheck away from insolvency were buying houses. Not just the barely employed; the middle class was encouraged to stretch and buy houses they couldn’t afford on the (we don’t guarantee that houses will rise in value, but historically they always have) principle that the houses would increase in value.

    It wasn’t gas/oil. At least, that was not the sole factor, but a factor nonetheless.

    It was a cascading of the defaults (by the way, I understand 97% of mortgage holders are making their monthly payments) and the GREED of those making money on the bad loans. You got it right when you said “bad risk assessment” but it is not like people haven’t been saying this for five years, and more recently the last two years, if you listen!

    Oil was just one more inflationary factor, a straw on the proverbial camel’s back, or so I see it, and it drove other inflationary factors. (as I see it)

    The people I pity are the ones who panic and sell out now, while their investments are fallen. Those who can hang on stand to do very well – the pits are great opportunities. (as I know you also believe). Buying the right real estate now is a real opportunity. Buying the right stocks now – another opportunity.

    I believe the secret is in diversity of investments.

    One of the other factors is the great boomer generation going into retirement – wanting smaller houses, or maybe no house at all. Whether they have prepared adequately for retirement will be a big issue – especially the spiraling cost of health care.

    I think a great part of this debacle is based on panic and perceptions. I think it will even out, and the great shudder will abate.

    I just hope we learn a lesson from all this, one which you have stated over and over – live within your means, live UNDER your means and invest the rest (wisely 😉 )

    1001 When will you start blogging again???

  6. youre right xpatr predatory lending was the prime culprit in this perfect storm as people are calling it, but i think the inflationary pressures stemming from oil is being greatly under estimated. which is actually understandable cos even CPI numbers discount food and energy because of their volatility, which i think is just silly.

    some of the stories i’ve read on predatory lending are just shocking,… especially on the refinancing side,… 100K houses valued at 300K and then refinanced for 250K,…. i cant wait to see originators in handcuffs.

    but yeah great deals are already out there if you can spot them and if you have a long enough time horizon,…. which is why i want the kse to stay open, i’m spotting soem great deals that might get irresistable 😛

    i’m sure you’re finding real estate youre finding hard to resist too 😀

    and if any tells you youre nuts, then just check out warren buffett, he hasnt been this busy in years, and i’m sure he’s not just being a nice guy. 😛

  7. Glad we agree, Skunk. The world keeps on turning. 😉


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