Rocking the subprime house of cards

[donsu]

http://www.atimes.com/atimes/Global_Economy/IC06Dj01.html

(this is a 3 pg. article of explanation)

Some stories, such as corpse custody battles between sleazy lawyers and semi-literate Texas trailer trash et al, the US news media handle really well. On others, such as goings-on in the world's financial markets, they don't have a clue.

Thus the media saw the big February 27 decline in the Chinese stock market followed by a big decline in the US and in other world financial markets that same day, and decided that being coincident equaling being causative was a concept that the Us public could get its mind around pretty easily. Suddenly it's all China's fault.

-snip-

What's a lot worse is a 100% loss on your investments. Total wipeout - you don't recover from that. A lot of investors who thought they were making canny and sharp investments over the past few years are now facing this prospect, and the possibility of a cascading stream of successive defaults and bankruptcies is hanging over the financial markets like a specter.

In the US, it's called "subprime lending".

-snip-

Just about the time that soaring real-estate prices were replacing celebrity sex as the central obsession in the US psyche, something funny happened. Price rises slowed or stopped; in some of the hottest markets, home prices actually began to decline. Between June 2004 and June 2006, the US Federal Reserve raised short-term loan rates 17 times. Starting at 1.25%, the Fed eventually drove them up to today's 5.25%.

Floating rate mortgages had their rates tied to these Fed rates. For those mortgage borrowers who only got into their homes by being able to handle a floating rate payment that started with the low payment implied by a 1.25% Fed rate, this meant a big mortgage-payment increase. These borrowers could barely qualify for loans and then handle the payments calculated with the low rates; when the mortgage payments were recalculated to reflect the higher rates (were "reset" in mortgage jargon), they would be unable to pay the mortgage. The rise in mortgage interest rates, along with the fact that in the areas where the price appreciations had been the craziest, prospective buyers soon realized that everybody in the household up to and including the family pet would have to work two or three jobs to generate enough income to afford the payments inherent in the $700,000 selling price of a two-bedroom rambler, finally broke the back of US housing's wild ride.

-snip-

Is it over? Not necessarily. Two little-known indicators that more investors should be cognizant of are what are called the VIX and VXN indicators. (Put these letters in the stock symbol line of your quote website; they should come up - watch how their values move inversely to stock prices.) Technically, what these two indices measure is what is called stock-option volatility (stock "beta", in jargon), but what they really tell smart investors is just how much fear there is in the markets. When these levels get very high (roughly above 30 in both indices; after the selling caused by the Enron corporate-management scandals of 2002, the VXN actually topped out over 70), it indicates that the market has seen so much fear-driven panic selling that, by the rules of what is called contrarian investment philosophy, stocks are due for a turnaround. As of the first weekend in March, neither index had reached those extreme levels.

So it's not China. It's not Nancy Pelosi, it's not the Easter Bunny, nor is it the War on Easter. It has been said that all market psychology, all market movement, is a continuous oscillation between the mental polar opposites of optimism and pessimism, between greed and fear, between Pollyanna and Cassandra. Since at least the market rally that started in early 2003, optimistic Pollyanna has ruled the markets, and greed has run rampant. As the markets wait for Fed chairman Ben Bernanke to put on his best Donna Reed mask to bail out the subprime lenders with the Bailey family's honeymoon money, Cassandra and her fear are ruling the day.
-------------------


and on the same subject

http://onlinejournal.com/artman/publish/article_1811.shtml

Juicing the stock market; the secret maneuverings of the Plunge Protection Team


The Working Group on Financial Markets, also know as the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the SEC and the chairman of the Commodity Futures Trading Commission.

Recently, the team has been on high alert given the increased volatility of the markets and what Treasury Secretary Henry Paulson calls “the systemic risk posed by hedge funds and derivatives.”

Last Tuesday’s 416-point drop in the stock market has sent tremors through global systems. An 8 percent freefall on the Chinese stock exchange triggered a massive equities sell-off which continued sporadically throughout the week. The sudden shift in sentiment, from bull to bear, has drawn more attention to deeply rooted “systemic” problems in the US economy. US manufacturing is already in recession, the dollar continues to weaken, consumer spending is flat, and the sub-prime market in real estate has begun to nosedive. These have all contributed to the markets’ erratic behavior and created the likelihood that the Plunge Protection Team may be stealthily intervening behind the scenes.

According to John Crudele of the New York Post, the Plunge Protection Team’s (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used.

-snip-

This suggests that the PPT may have been deeply involved in last Wednesday’s “miraculous” stock market rebound from Tuesday’s losses. There was no apparent reason for the market to suddenly “go positive” following a ruinous day that shook investor confidence around the world. The editors of the New York Times summarized the feelings of many market-watchers who were baffled by this odd recovery: “The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years . . . Manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernanke’s words as a ‘buy’ signal?”

How indeed, unless other forces were operating secretly behind the scenes?

Market rigging

“Gaming” the system may be easier than many people believe. Robert McHugh, Ph.D., has provided a description of how it works which seems consistent with the comments of Robert Heller.

- long snip of explanation -

We are reaping the rewards of a lawless, deregulated system which has removed all the safeguards for protecting the small investor. There is no government oversight; it’s a joke. The stock market is a crapshoot that serves the sole interests of establishment elites, corporate plutocrats, and banking giants. The small investor is trapped beneath the wheel and getting squeezed more and more every day. He has no way to fix the markets like the big guys and no lobby to promote his interests. He must arrive at his decisions by researching publicly available information and then plunking down his money. That’s it. He’d be better off in a casino; the odds are about the same.
------------------------------


america, the country that tortures, is also is the country that scams

[phantom power]

1. Heh. "is it over?" They're funny. They make me laugh.

[stillcool]

2. I'm beginning to sense a pattern...

regarding catastrophic circumstances, or the on-going rape of a society. Unless...all people are affected equally and simultaneously, it is no big deal. If just one person can be found, that benefited, or at the very least did not suffer from said catastrophe, it did not really happen. Of course the reverse is true as well. In some cases, one person's perceived suffering can abolish the protections against a future catastrophic circumstance, and put society in a prime position to get fucked.

[wicket]

3. K & R

:kick:

[Karenina]

4. Donsu! I need a link

for the second article. Pretty please!

[donsu]

5. sorry - forgot to put it in

nt

[Morgana LaFey]

6. This MIGHT make some sense IF I understood what

the "subprime" market is. Could anyone give me a one-line explanation? Thanks in advance.

[bentley]

7. subprime loan

Typically, subprime customers are those who do not qualify for prime market rates because of blemished or limited credit. Consequently, subprime customers are charged a higher interest rate to compensate for the increased risk.

A subprime loan also is more likely to have a prepayment penalty, a balloon payment, or both. A prepayment penalty is a fee assessed against the borrower for paying off the loan early -- either because the borrower sells the house or refinances the high-rate loan. A mortgage with a balloon payment requires the borrower to pay off the entire outstanding amount in a lump sum after a certain period has passed, often five years. If the borrower can't pay the entire amount when the balloon payment is due, he/she has to refinance the loan or sell the house.

[Morgana LaFey]

8. Thank you, thank you, thank you. Now one more question

what happens to someone with such a mortgage if their lender goes belly up?

[John Q. Citizen]

10. Nothing, Because the lender has already lent the money to the person who got the

mortgage. The mortgage holder pays back the loan usually monthy.

If the lender goes out of business the loan would usually be sold to another mortgage servicing company who then accepts the payments until the loan (mortgage) is paid off.

Unfortunatly, they can't just go away and quit accepting your money every month.

[John Q. Citizen]

9. Down on the Boulevard, they take it hard

For Human life, there's disregard

They say it can't be won,
the way the game is run.
But if you choose to stay
You wind up playing anyway. -Jackson Brown "On the Boulevard"