Wednesday, July 31, 2013

MOPE, Blythe and a Derivatives Dreams

Ok so let's get this straight, the dirtbags in Washington don't like the way the economic numbers are coming in so they revise the way the numbers are calculated (all the way back to 1929!) to make them stink less and so they can claim that the (non-existent) recovery is even better than the last batch of lies they told about it.

Have we reached the point that all this MOPE (management of perception economics, i.e "the new normal") has finally over estimated the stupidity and naïveté of the American public?  Sadly I think not, as there is a scarily large number of people who will believe whatever garbage the government puts out because the implications of questioning the validity of it are just too scary, or they want to believe it because "their guys" are in charge.  Neither of these forms of intellectual laziness or the governments deliberate miscalculations will change the reality of the looming disaster.

So what evidence do I have that we're looking at another disastrous bubble bursting crash?   Well for anyone with the courage to shed the dangerous combination of politically partisan horse blinders and the heavily tinted rose colored glasses it will be as plain as the nose on your face.

The so-called powers that be have not learned a single thing from the last crash, not a single damn thing! 

It is widely acknowledged that the 2007-2008 disaster was brought about by the collapse of that segment of the Derivatives market (thanks Blythe Masters of J.P. Morgan) known as CDOs, collateralized debt obligations, and more specifically the bundling of sub-prime mortgages into RMBSs (Retail Mortgage Backed Securities), that were sold to the public and institutions as "prime" investments.  Well the weren't so "prime" after all and that led to Lehman Brothers, AIG, and Morgan Stanley going into the toilet, (and onto the taxpayers back) and ushering in the that other "new normal", the Too Big to Fail financial institution.

So what then are these TBTF geniuses up to now that would evidence either they haven't learned anything from the recent past (or they are just to damn arrogant to care)?  Let's look at the evidence. 
A recent study showed that home ownership is at an 18 year low and that residential rental rates are at an all time high.  (Don't worry the FED says there is no inflation!)  The so called "recovery" in housing construction is being driven by the building of more rental property.  The so-called "reduction" in available homes for sale is being driven by foreclosed properties being either withdrawn from the market or being put into the rental market. 

So now in order to respond to this "new normal" in the housing market banking and financial friends have decided to reduce their risk in holding all this previously foreclosed and newly constructed rental property by coming up with, you guessed it, a new Derivative instrument!

I give you the Rent Backed Security!  What could possibly go wrong?!?!  Isn't terribly hard to figure out. Lot's of individuals and families either lost their jobs or got downsized to lower paying jobs, so they ended up in default on home loans they couldn't really afford in the first place.  So now with some income or cash freed up from those mortgage payments, and not being able to re-qualify for a downsized home and mortgage they have no choice but to rent. 

Many of these families are of course either still unemployed or underemployed and are scavenging from what savings they have left to make ends meet.  When that money runs out and they can't increase their income if they have any, they will be forced to either go onto public assistance of some sort or will move in with other family members or friends.  They will default again, this time on their rental contracts. 

I doesn't take a genius to figure out what will then happen to these Rent Backed Securities? Their value will fall to absolutely zero, any institutions or individuals stupid enough to have bought them will get wiped out and our friends (We are "richer than you are") like Blythe Masters and Jamie Dimon at J.P. Morgan will still own the real estate and will still get their multi-million dollar year end bonuses, and they will kick bake a few hundred thousand in campaign contributions to the politicians that let them set this mess up in the first place.  The banks themselves might face a few million or a billion dollars in fines for their manipulations but the criminals that set up and personally profit from the fraud will walk away scott free, or at the very worst will retreat to some non-extradition treaty county and set themselves up in new digs that would make The Great Gatsby blush. 

Oh yeah and they will figure out a way to stick the taxpayer with the bill!

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