DISQUS

Kyle wasn't just ahead of nearly everyone on the problem, days into the credit crisis he was proposing roughly the solution that is being tried now (way too late).
http://housingdoom.com/2007/08/25/k-bass-proposal/

Haven't yet watched the interview (my bad) but promise to **real soon now**. Meanwhile would like to assert (for the upteenth ...) that what we are experiencing is balance sheet consolidation and the number of the beast is "140," the FASB rule (now being retired) that let company hide risk in off-balance-sheet vehicles like Enron's (and Fannie's) beloved QSPEs. But the biggest off-balance-sheet deal ever was when Johnson privatized Fannie in 1968. At a deep level, what's happening is America taking the expenses of the Vietnam (and subsequent) wars back on its sovereign balance sheet. The markets first collectively heard the rumblings of this on July 7, 2008, and that's why the present phase of the avalanche started on that day.

Looking forward to how close Black gets to this trope.

I have noted today with some surprise that Mike Whitney is very positive about recent developments, especially Gordon Brown's intervention.

I think the present problem began in 1968 / 72 when Presidents Johnson and Nixon first privatized Fannie, then created the quasi-competitor Freddie. Then the key development was the badly constructed accounting rule SFAS 140, that has resulted in the Enronization of nearly the entire financial services industry.

After Nixon closed the gold window on 15 Aug 1971, asset backed paper replaced gold as the underlying money in most of finance. Nobody looked too hard at what was in this "canned" value for many years, but when subprime MBS blew up on, say 20 June 2007, and ABCP completely seized in mid-August of that year, it was just like when the tainted tuna destroyed consumer confidence in StarKist's plant in New Brunswick a generation ago.

The whole money system is now broken, and all the central banks, finance ministries and advanced governments are trying to put things back together again.

Heaven knows what they will come up with (Breton Woods II?) but whatever it is, if it works it will be our world for the rest of our lives. We are about to learn that money is just a social contract, and that central banks are constrained not to break it.

Over at our web site we're calling this exercise "Riders to The Splurge" (abject apologies to John Millington Synge, who is blameless in this mess) and our favorite is SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN (hat tip Calculated Risk blog), which must be the replacement for the oversight in the old infamous SEC. 8.

I suggest you start with Fannie Mae whistle-blower and genuine hero in the piece Roger Barnes:
http://housingdoom.com/2006/07/24/fannie-mae-fr...

In retrospect, the construction of QSPEs during the Tim Howard era might serve as a proxy for a lot of what went wrong, but it's unlikely the FBI would ever find additional wrongdoing there.

The big problem was that FASB's formulation of their Rule 140 for qualifying vehicles for "sales treatment," and therefore going off-balance-sheet, was plastic enough so that greed led to another thousand Enrons. They've admitted enough themselves, deciding to do away with QSPEs altogether. But the prospect of some ludicrous number like $10 trillion of balance sheet consolidation has everyone running around in panic.

Don't forget that what touched off the present avalanche was that on July 7th a (former?) Lehman analyst quietly remarked that said accounting rule change was going to require Fannie and Freddie to raise more capital.
http://housingdoom.com/2008/07/07/crack-of-doom...

Off balance sheet deals yielded juicy profits during the boom but hid huge amounts of risk that weren't generally obvious even to insiders until what I called at the time the "Black Thursday" events of Feb 8, 2007, when HSBC and New Century reported the first significant bad news on subprime from companies of a significant size.
http://housingdoom.com/2007/02/15/black-thursda...

... so to answer the question of who's to blame, it's just a case of the super-accountants at FASB botching the construction of a key risk-management tool.
http://housingdoom.com/2006/08/07/gse-risks-2/

The basic problem is that the US cannot afford the present wars. In fact, that has always been the problem -- Fannie was privatized in 1968 to finance the Vietnam War.

Afghanistan & Iraq were financed by foreign buyers and central banks making huge net purchases of US official debt, but especially of "agencies," which is to say mortgages backed by Fannie & Freddie. The central banks' holdings went from about $50 billion in 2000 to about $950 billion now, but in the last two months they have started to sell these off consistently. We've documented this historic trend reversal using Federal Reserve data at our web site (Housing Doom).

The fleeing of the central banks is what obviously precipitated "The Splurge" (that's what we call Paulson's plan). Other bloggers and reporters have noted that "Section 8" gives the Secretary power to do whatever he pleases with the $700 billion with no judicial oversite. This is clearly a constitutional crisis of historic proportion.

"... the benefit of private parties, so long [as] the land confication served ..."

Small typo in that sentence.