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Tags: financial | crisis

Debt Bomb Is Exploding

By    |   Wednesday, 24 September 2008 08:30 AM

Wanna buy a tranche? There are lots of them around, and if Congress approves the $700 billion bailout, the taxpayers are going to own all of them.  

In case you didn't know, tranche is a French word that means slice, as in slice of pizza. The Ivy League elitists who run Wall Street and the banking industry — the ones Pat Buchanan calls "crooks, thieves, and stupid people" love French words — they could never bring themselves to use a pedestrian word like slice to describe a bundle of mortgage-backed securities.  

Actually, scam would be a better term in the case of Residential Mortgage Backed Securities (RMBS), the lavish use of which got us into the gigantic mess we're in. 

As I've already written after the Clinton administration forced banks to make so-called subprime mortgages to people who would never qualify for a home loan and were highly likely to default, lenders found themselves holding a lot of dubious paper they desperately wanted to get off their books.

So they palmed them off to Fannie Mae and Freddie Mac, which eagerly bought them along with the good loans the lenders made. 

To hedge against having loads of toxic loans standing alone and befouling their portfolios, Fannie Mae and Freddie Mac bundled them with good paper as RMBS and called anywhere from five to 15 slices of bad and good paper a tranche. Allegedly the good paper would pay off well enough to  cover the losses of the bad. The bundles were in effect, no longer mortgages, but had been magically transformed in securities like stocks and bonds.  

It's like adding a little water to your car's gas tank on the theory that the gas will be able to offset the dilution. 

This is not investment strategy — it's sheer and unforgivable stupidity. 

The bad loans were not without value; they are backed with real assets, in this case the collateral for the loans were the houses that would be foreclosed in the case of default, becoming the property of the lender. 

The problem with this asset is the possibly that the value of the foreclosed property will not equal the amount of the loan. That eventuality was factored into assigning value of the tranche by assessing what was called the estimated  severity.  

As John Mauldin wrote in his newsletter "Betting on Financial Armageddon" (on which most of the data in this column are based), "a mortgage where the home was originally appraised for $400,000 and there is a $300,000 mortgage on the home. Let's assume a default and the bank takes back the home. If they sell the home and recover $240,000 that means they lose $60,000. This is called a 20% severity. If they sold and recovered $150,000 it would be said to have a 50% severity." 

It seems that the geniuses who created this Rube Goldberg-like scheme covered all the bases, but somehow failed to understand that they had sired a structure built on a fatally weakened flimsy foundation bound to collapse  at the slightest blow to its integrity.

Fannie Mae and Freddie Mac were staggering under the load of this garbage. And they stumbled under its weight. 

That's the good news. 

Still to come: the looming  crisis of the unfunded liabilities of the Social Security and Medicare and Medicaid systems, and the drastic effect the advent of the new little (or big) ice age the world is now about to endure. 

As I have written, according to Dallas Federal Reserve Bank President Richard W. Fisher in a speech on May 28, 2008, " the unfunded liabilities from Medicare and Social Security comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent, and Social Security the remaining 14 percent."  

The debt bomb is exploding. Even without the current Wall Street crisis, this debt-ridden economy is heading for a collapse. The greater the amount of public debt, the lower the value of the dollar. The lower the value of the dollar, the less oil or any other foreign product it will buy. Once the world's  premier currency, today's dollar is now approaching the value of monopoly game money. 

Then there’s the climate. Despite the now almost comical hysteria promoted by the global warming fanatics, the world is getting colder. 

As  geophysicist Philip Chapman, a former NASA astronaut-scientist and former president of the National Space Society, warns,  “It is time to put aside the global warming dogma, at least to begin contingency planning about what to do if we are moving into another little ice age.”  

The sun has lost its spots. As of now, all of them. By this point in the solar cycle, sunspots would ordinarily have been present in goodly numbers. Lots off sun spots mean warmth on earth; no sunspots spell drastic cooling. 

The speculation in the scientific community is that we could be entering a new epoch that few would welcome. Several renowned scientists have been predicting for some time that the world could enter a period of cooling right around now, with consequences that could be dire.  

“The next little ice age would be much worse than the previous one and much more harmful than anything warming may do,” says Dr. Chapman. “There are many more people now and we have become dependent on a few temperate agricultural areas, especially in the U.S. and Canada. Global warming would increase agricultural output, but global cooling will decrease it.”  

As I keep stressing, for millions of years the earth has experienced an ice age every 100,000 years without fail — 90,000 years of glaciation, 10,000 to 12,000 years of temperate interglacial climate. The last ice age ended 12,000 years ago. A new one is overdue. 

And the record shows that the transition period between interglacials and glaciation is a mere 20 years, a period of increasing violence, like what we're beginning to see now. If you doubt that's where we are now, wait until this winter sets in. In all probability it will be the worst  and most violent winter we've ever seen. 

Have a good day.

Phil Brennan is a veteran journalist and World War II Marine who writes for Newsmax.com. He is editor and publisher of Wednesday on the Web (http://www.pvbr.com) and was Washington columnist (Cato) for National Review magazine in the 1960s.

He also served as a staff aide for the House Republican Policy Committee and helped handle the Washington public relations operation for the Alaska Statehood Committee which won statehood for Alaska. He is also a trustee of the Lincoln Heritage Institute and a member of the Association For Intelligence Officers.

He can be reached at pvb@pvbr.com.

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Wanna buy a tranche? There are lots of them around, and if Congress approves the $700 billion bailout, the taxpayers are going to own all of them.  In case you didn't know, tranche is a French word that means slice, as in slice of pizza. The Ivy League elitists who run Wall...
Wednesday, 24 September 2008 08:30 AM
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