Tuesday, October 16, 2007

Bailout IV: "Washington Worries"

It's official: The New York Times informs us that Washington is worried about the mortgage crisis.

Gee, do ya think so? At the epicenter of the crisis, (you guessed it) Southern California, home sales have declined by 48% and the state is in recession. Median house prices, which in today's two-tier America understate the problem, are falling. The Los Angeles Times, which like newspapers all over the country is ever willing to serve its real estate advertisers, blames this on "motivated sellers." Builder confidence is at a record low, even lower than during the 1991 recession. Oil is trading above $86.

A key index of sub-prime mortgage sentiment
is falling through the floorboards. And that's not the half of it. Check out this truly astonishing article, which is appropriately titled, "The Eve of Destruction." Don't let its appearance on a California real estate blog fool you: What they're talking about is a nationwide tidal wave that will make the current troubles look easy by comparison. Unless the federal government bails out the banks in the next three or four months, that tsunami is going to hit nationwide, starting next spring and continuing for at least a year. Welcome to the White House, Mrs. Clinton!

The money quote:


The foreclosures and REOs* we are seeing today were caused by people who started defaulting in 2006. Now that prices are clearly off the peak, most of the people needing to refinance will not be able to get it. In short, many of the homeowners represented on this chart are going to default and become REOs.

Vicious cycle, anyone? As I noted in Bailout II and Bailout III, the question of the hour is not, not, NOT whether the federal government is going to try to rescue the banks and insurance companies. A bailout is baked in the cake. As if we needed any more confirmation, there was this from the Idiot-in-Chief's addled corporate waterboy, also known as his Treasury Secretary:

I have no interest in bailing out lenders or property speculators, Mr. Paulson said today [Oct. 16]. Still, we must recognize the very real harm to families affected by the housing downturn.

Nope, he's got no interest in bailing out lenders or speculators. But he'll try anyway. The question is whether it will succeed. Here's a hint:

The fourth issue that has garnered attention is whether greater liability should be imposed on securitizers and investors. In my view, this is not the answer to the problem. Imposing broad liability provisions on investors and securitizers would very likely generate significant unintended consequences. It would potentially paralyze securitization, a process that has been extremely valuable in extending the availability of credit to millions of homeowners nationwide and lowering the cost of financing. Again, balance is critically important. Congress should proceed with extreme caution so as to avoid cutting off investment inflows to the housing market.

Now tell me, does a confident government urge that reckless criminals be set free on the grounds that we need their money?

By the way, Democrats, where have you been hiding?
Right now: Get out of your offices and go stand in the sun. See that shadow? It isn't going to bite you. Especially you, Hillary. If you wait until you get into office before you speak up, you're going to look like just another buck-passer. Your biggest risk is that the current administration will do just enough to make themselves look like they're trying, as they wait to drop this 3 million-degree potato in your lap, right there next to the defeat in Iraq and soon in Afghanistan.

---------------

* REO = Real Estate Owned by a lender after foreclosure.

Saturday, October 13, 2007

Bailout III: O! The Complexity!

You just knew the fix was in when the Idiot-in-Chief and his banker made the following statements on August 31:

A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford. - Bush

It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. - Bernanke

Now the shoes are dropping. The biggest bank, Citigroup, is conniving with other banks and the U.S. Treasury to invent a $75 billion bailout. I especially like the $75 billion part, because if you read through the "Bailout II" essay on this blog, you'll see that before this thing was announced I had guesstimated the banks' immediate exposure to bad mortgages at $75 billion.

There's no word yet on how much the federal government will kick in, but you can bet it will be involved. How? We don't really know yet, but watch your wallet. And don't even bother objecting. The choice is between a bailout and a full-scale depression. Even if a bailout won't work, they're going to try. They don't have any other choice.

More moving parts than a reticulated python

The federal government has done plenty of financial bailouts. There was the so-called "Plunge Protection Team" that, on Tuesday, Oct. 20, 1987, intervened in the Major Market Index in Chicago. That bailout was led by Alan Greenspan, who used the Federal Reserve to buy stock index futures. It stopped the stock crash dead cold. Greenspan was proclaimed the new Wizard of Oz. The munchkins agreed not to look behind the curtain.

Shortly thereafter, Congress and the Fed bailed out banks, thrifts, and insurance companies to cover up their losses in Latin America and the U.S. commercial real estate market. Iraq was successfully invaded and oil prices fell below $20 a barrel, which helped quite a bit. Later in the '90s, the Fed bailed out the stock market by rescuing a big hedge fund, the hilariously misnamed Long-Term Capital Management. After 9/11, it propped up the U.S. economy with a big influx of new money.

Moral hazard abounded in those bailouts, yet they were relatively simple compared to what's ahead. Although the numbers on this one are just starting to take shape in the mist, I think the earlier rescues will wind up being smaller than what we're facing now. The necessary recipients of bailout money were easier to identify than they will be this time. All of us, including me, are going to be learning some lessons, and paying some prices.

Who holds $9 trillion in mortgages? We do!

Recall some basics from "Bailout II":

  • $6 trillion in residential mortgage bonds outstanding, and another $3 trillion in bank-held residential mortgages, secured by about 60 million mortgaged dwelling units that house 150 million or so people.
  • One-quarter of the mortgages -- 15 million units with about 40 million people -- are "non-prime," meaning that the loans were made to borrowers who didn't prove their income or who had bad credit.
  • In an "optimistic disaster scenario," 20% of the non-prime loans go bad, forcing 3 million foreclosures that displace about 7.5 million people. Mortgage bondholders lose $150 billion, and banks will lose $75 billion. Homeowners lose a few trillion. There's an inflationary recession, and state and local governments have a new round of hard choices to make.

Why not just let the banks and bondholders eat the losses? After all, they're the ones who made the stupid loans, right? My inner populist wants to do exactly that, but my outer realist knows it won't happen. Why? Because banks and bondholders aren't aliens from outer space. There are us, whether we know it or not. In a future essay, I'll be hanging more specific numbers out there, but I can say this much: Most bonds, mortgage or otherwise, are owned by pension funds, mutual funds, insurance companies, and banks. And that's where our money is.

If those bonds go bad in a massive way, you'll see retirement funds go bust. You'll see insurance companies unable to pay claims, and raising rates in a major way. You'll see banks failing, which will mean that Federal Deposit Insurance Corp. -- guaranteed by the government -- will have to step in to pay off their depositors.

And that's only the beginning. When banks fail, businesses fail. When insurance companies close, people's hospital bills don't get paid and the hospitals close. Colleges pay a lot of their expenses from endowment funds that -- you guessed it -- hold mortgage bonds. It goes on and on and on. I really wish it was just a bunch of rich people in New York, Boston, Dallas, L.A., and San Francisco who were at risk. Unfortunately, the truth is very different.

Pretty much anyone or anything
that has any money at all has mortgage investments, whether they know it or not. Mostly not, for now. Let them fail in a major way, and a whole lot of ordinary people are going to find out just how exposed they are and just how bad things can look. If the federal government can't contain this situation, "I love a surprise" will become an entire country's famous last words.

How do you bail out a whole country?

With great difficulty. If the federal government and the big banks can limit the losses to a few hundred billion dollars, I think they'll be able to pull it off. However, if the hatches aren't as watertight as we've been told, it's another story. It's a bit like the Titanic: As long as the gash wasn't too big, it really was unsinkable. And there was the matter of the watertight compartments, whose barriers stopped well below the deck.

When it comes to the mortgage crisis, the barriers are those loan classifications: prime, alt-a, and sub-prime. For now, we are told that they are entirely separate categories. But are they? As I noted in Bailout II, if things get dicey enough, some of those prime borrowers might start acting like alt-a and sub-prime borrowers. If enough of them do so, the game's over.

Even if a bailout works -- and I certainly have my doubts about that -- there is still the injustice of it all. Yes, we are all the holders of mortgages, but very few of us made the big bucks from writing fraudulent loans and using them to sell phony bonds. Even in an "optimistic disaster scenario" in which the bailout keeps the economy from falling off a cliff, millions of people will lose their houses and millions more will have paid too much to get in and will lose money getting out.

Jobs will be lost, services will be cut, dreams (and more than a few people) will die, lives will be changed for the worse. Even in an optimistic scenario, there's going to be plenty of pain. I think it ought to be spread around, especially to those at the top who concocted and profited from the fraud and irresponsibility that caused it. I'll be writing more about that in the months and years to come.

Thursday, October 11, 2007

Bailout II: How Big A Problem?

I think the federal government will try to bail out the mortgage lenders. Notice that I wrote try. Here's the question of the hour: Could the problem be too big for even the feds to sweep under the rug?

The spreadsheets in this posting come from Calculated Risk, a superb website that does an outstanding job of collecting and analyzing the details. In short, they establish the following facts:
  • There are $5.8 trillion worth of dollar-denominated mortgage bonds outstanding
  • $1.4 trillion worth of mortgage bonds are less than prime grade: about half of them are "sub-prime" and about half are "alt-A," which are supposedly between prime and sub-prime in terms of their default risk
  • $3.9 trillion worth of mortgage bonds are "agency" bonds, 90% of which are issued by Fannie Mae or Freddie Mac, with the other 10% issued by Ginnie Mae.




Historically speaking, home mortgages are some of the most secure loans around. Not only do people bend over backwards to pay their mortgages, but houses are usually pretty good collateral. Consequently, mortgage default rates have run well under 0.5% of the total. Investors have been willing to pay high prices for mortgage bonds, resulting in interest rates close to those of U.S. Treasury securities.

It helps that two "agencies" -- Fannie Mae and Freddie Mac -- are federally chartered corporations that issue a huge amount of debt and, as a result, enjoy a status among investors as quasi-government entities. The feds don't actually promise to repay Freddie and Fannie investors if the bonds go bad and the companies can't come up with the cash, but investors think that, if push came to shove, the feds would step in.

This is called the "implicit guarantee" behind Freddie and Fannie bonds, and most studies say it reduces mortgage rates by at least a half-point below what they'd otherwise be. (Note: Ginnie Mae is different. Ginnies are
backed by FHA and VA mortgages and formally guaranteed by the U.S. government. They comprise less than 10% of the "agency" total.)

What are "trillions?"


There are nearly $6 trillion of mortgage bonds outstanding, and banks hold another $3 trillion or so worth of mortgages. In 2007, the federal government collected $2.5 trillion in taxes, and the U.S. economy will produce about $13.5 trillion worth of goods and services. Mortgage bonds outstanding are 2.5 times annual federal tax collections, and about 43% of the U.S. economy's output. If we add bank-held mortgages to the mix, housing loans outstanding are 3.6 times annual tax collections, and 67% of a year's output.

Let's look at it from a different angle. There are 120 million dwelling units in the U.S., two-thirds of which are owner-occupied. Of the 90 million owner-occupied units, one-third are actually owned: there isn't a mortgage. Of the 60 million owner-occupied, mortgaged dwellings, about 15 million are financed by risky "alt-a" and "sub-prime" loans, while the other 45 million are financed by "prime" loans.

U.S.D.A. Prime, Choice & Standard Loans?

Not quite. Let's look a bit deeper. There are three levels of mortgage debt, judged by riskiness: prime, alt-a, and sub-prime. "Agency" debt is considered prime, on account of lending standards that (we hope) are imposed by Freddie and Fannie as a condition of buying debt. The same goes for so-called "jumbo" loans, which exceed Freddie and Fannie's size limits but (supposedly) go to only creditworthy borrowers.




What does "prime" really mean? Recall that I mentioned the historic low default rates for mortgages. There are a bunch of reasons for that, one being that lending standards used to be high. Until very recently, most borrowers needed to come up with a 20% downpayment. If they couldn't do so, they had to show solid income and take out private mortgage insurance -- at considerable expense -- to further collateralize their loan.

There were some exceptions, notably VA and FHA loans. But those are a small share of the total, and they are directly guaranteed by the government. For everyone else, the rule was 20% down, or high income plus "PMI." I bought my first house with a 10% downpayment, and PMI added about $150 a month to the mortgage. Needless to say, I made extra principal payments in short order so I could remove the PMI.

Starting in the mid-1990s, lenders inaugurated two new categories of loan. One was "alt-a," for borrowers who were unable to document their income yet had sufficiently high credit scores to otherwise be considered a "prime" borrower. The other was "sub-prime," for borrowers who had bad credit histories, including prior bankruptcies and repayment problems. Included in the sub-prime category are so-called "interest-only" and "negative amortization" loans.

In 1995, alt-A and sub-prime were only 6% of the total made that year. In 2006, they were 42% of the total. Last summer, The Wall Street Journal reported that 16% of sub-prime loans were in default or approaching default. This compares to historic mortgage default rates of less than 0.5%. In recent days, I've been reading that default rates are rising.

The Optimistic Disaster Scenario

There are $1.5 trillion in outstanding bonds backed by sub-prime and alt-a loans, and another three-quarters of a trillion in such loans that were held by banks and never turned into bonds. They are secured by 15 million houses and condos that house about 40 to 45 million people. If the current late-payment numbers are a sign of things to come, in the next few years we'll see 3 million of those houses foreclosed, and their 7.5 million or so occupants told to find other digs.

The houses will then be sold at auction, fetching maybe half of their prior value on average. Bondholders will lose $150 billion, and banks will lose $75 billion. Oops, scratch that. Uncle Sucker (meaning you and me) will pay out $225 billion to keep bondholders and banks from going under. How can we afford it, you might ask. The answer is that, in the early 1990s, the federal government spent about the same amount (maybe a little more) to bail out the banks from the crappy commercial real estate loans they made in the 1980s.

The public won't stand for it, you might exclaim. Oh, really? This is the same American public that thinks Saddam Hussein planned the 9/11 attacks. We believe in magic. If the feds can keep this problem at roughly the level I've just laid out, we'll coast on through with nary a ripple.

It Might Not Be That Easy

Imagine that you borrowed to buy a brand new $500,000 house a year ago. You wake up one day to find that a place across the street, nearly identical to yours, is on the market for $350,000. Scuttlebutt is that, next month, another half a dozen houses are going on the market at the same price. Word is that, by the time it's all over, people will be getting them for $250,000.

It seems that your neighbors weren't as prudent with their financial lives as you had been been with yours. Like good Americans they believed in magic, and look where it got you. What to do?

If you had only been a reckless fool like everyone else! Had you taken out one of those interest-only, no-downpayment loans because you'd gone bankrupt before, it'd be a no-brainer: You'd call the lender and tell them the keys will be under the front doormat. But you? You're a prime borrower. Do you call your lender and say, "You can keep my 50 grand. Come get the keys"?

I'd say the answer depends on a bunch of factors. First off, were you really a prime borrower or did you and your "mortgage broker" -- you know, that guy who sold cellphones out of his trunk in the 1980s, Internet stocks and Mercedes cars in the 1990s, and maybe some meth on the side -- phony up the loan documents? Is your house one of four that you "bought," hoping to do a quick flip during the real estate bubble?

There are 45 million houses carrying "prime" mortgages. Historically, those loans hardly ever default. But there has been rampant fraud -- oops, "moral hazard" -- in the mortgage business. And if things get weird enough, even honest people will act in ways that wouldn't normally be expected. You, for instance. You've always paid your bills. It's a point of pride. But that mortgage is killing you. The second job is a pain, and you're not sure that the first job is going to last. And you've noticed that the neighborhood is looking pretty scruffy these days, what with all those empty, bank-owned houses sitting there with untended lawns and even a broken window here and there. And here you sit, with a $450,000 loan on a $250,000 house. Hmm.

The Pessimistic Disaster Scenario

This is the nightmare scenario for bondholders and the federal government: That the non-prime mortgage crisis will spread to the so-called prime loans. Dump 3 million foreclosed dwellings on the market, and it just might happen.

And we haven't talked about the spinoff effects. Already, the problems in the non-prime sphere have begun to hurt the economy. Falling real estate values have made it impossible for many borrowers (and not just the irresponsible ones) to tap into their home equity to finance their spending. Retail sales are down, and Christmas is looking bleak. New home construction is falling sharply, and people are canceling new homes in developments all around the country.

This is causing layoffs and putting even more on downward pressure on retail sales, as do layoffs by the retailers themselves.
California is already in recession. Home repair and remodeling is down, and there have been big layoffs and income reductions among real estate agents and bankers. Soon enough, state and local governments are going to feel the pinch. Those responsible prime borrowers are going to look at their falling property values and demand that their assessments be reduced. The next set of headlines is likely to be about falling state and local tax receipts, and the cutbacks they'll force. Which will add further downward pressure on the economy, as public employees are laid off.

Even in normal recessions, default rates rise on prime mortgages. In a real estate-led recession characterized by widespread imprudence among borrowers and lenders, it could be much worse. Sub-prime defaults could easily be catalyst for what eventually turns into a tidal wave of default: 20% default rates turn into 50% in the bad-credit category, and 0.5% default rates rocket past 10% in the prime category. Foreclosed property swamps the market, and property values collapse by 75% or more in some areas. A $225 billion problem becomes a multi-trillion dollar problem, its tentacles extending everywhere you look.

You think I'm crazy, don't you?

Fine, but chew on this: Between 1969 and 1974, the U.S. stock market lost 70% of its value. How did that Internet bubble work for you? Tell the truth! The NASDAQ is currently at half the peak reached in March 2000. As a participant in the financial sector during the period, I saw stocks lose 95% or more of their value in less than two years. But you can't live in your stocks, you answer. Houses are different. They are special.

My answer is that, whether you're buying your favorite stock, a tube of toothpaste, or a new house, there are two decisions to make: Know what you like, and know what to pay. Yes, a house is special, but it's not any different. Special can get cheaper. A whole lot cheaper.

Monday, October 1, 2007

Bailout I: How Did We Get Here?

The Irvine Housing Blog, a website tracking the real estate crash in Irvine, California, offers an intriguing explanation for what caused the meltdown. This posting is my spin on what they've written.

The Irvine blogger points his finger at the transformation of housing finance from a business of transactions between banks and their local customers into an industry involving a series of faceless entities and the international bond market. The Fed's monetary ease after the 9/11 attacks was merely the spark that fell onto a dry, tinder-strewn forest floor.

To understand what happened, we have to take a look at the mortgage banking system and how it changed over the past 30 years. Prior to 1980, most people got their mortgages from a savings and loan association, also known as a "thrift." These local institutions gathered deposits at a regulated rate, and lent the money out at a higher rate. The difference, or the spread, paid for costs, profits, and the occasional default. No one ever called it exciting, but the livin' was easy. "Take it in at 3%, lend it out at 6%, be on the golf course by 3 o'clock." As an icon of the easy-livin' 1960s, the so-called 3-6-3 rule was right up there with Dean Martin, the '66 Mustang, and the three-martini lunch.

The end of the good old days

Then it all changed. In 1971, the U.S. abandoned the gold standard and allowed the dollar to "float" against other currencies. Money could now flow freely around the world, seeking the highest rates of return. In the background, inflation was heating up. And then then it really took off after 1974, when the Arabs cut off the flow of oil and quintupled the price. That, along with the floating of the dollar, drove a silver stake through the heart of the banking system as we once knew it.

By the mid-'70s, ordinary people started abandoning banks and thrifts for other investments that paid more. Why stick your money into East Nowhere Savings & Loan at 3% when you could buy a Treasury bill for 5%? Worse yet, East Nowhere's great assets -- those solid home mortgages written in the '50s and '60s that hardly ever defaulted -- were now a lead weight around its neck. Somewhere between the second and the third martini, it dawned on East Nowhere's bankers that if their mortgages were paying 6% while they had to offer 6.5% to keep deposits, there'd be no more Cadillacs and no more country clubs.

Regulators and politicians were also behind the 8-ball. If you told East Nowhere S&L that it couldn't pay more than 3% on savings when any common fool could get 5% somewhere else, it would run out of money to lend. Then construction would stop, and the economy would go into the tank. If you allowed East Nowhere to pay whatever they wanted for deposits, there was still the matter of all those old mortgages on the books that weren't yielding enough to pay the S&L's light bill, let alone the president's club dues.

Facing death, the S&Ls reach out to Wall Street

It didn't take long for bankers to switch to iced tea for lunch and brush up on Finance 101, namely the need to pay close attention to the duration of your assets relative to the duration of your liabilities. If the average mortgage lasts for seven years but your average savings deposit sits for six months, and all the regulations keeping things stable have been blown away, you've got a big alligator swimming in your pool just waiting for the right moment to strike.

Some of the S&Ls crossed over to the dark side and made stupid, risky loans in their search for better returns. Remember the commercial real estate bubble of the 1980s and the S&L bailout of the early 1990s? Other S&Ls took the high road and hopped on a bandwagon called "securitization." Oh, they'd still make loans just as they always did. But instead of holding them, they'd turn them into bonds and sell the bonds.

Voila! Duration matching could be someone else's problem. The customer would keep sending mortgage payments to East Nowhere Savings & Loan, blissfully unaware that the money was being passed through to the holders of bonds based on his and other mortgages. East Nowhere would be the"originator" of the loan, taking a fee for finding the borrower, checking his references, and handling the paperwork. It would also be the "servicer" of the loan, taking another fee for collecting the payments and managing the escrow accounts, along with the occasional foreclosure.

But someone else would be the "holder" of the loan. That someone else could be anyone from an insurance company in Portland, Oregon to a Saudi prince looking for a place to park his petrodollars. There was no need for the lender to know the borrower. The bond indenture would suffice, thank you.

That, in essence is what happened to mortgages after 1980. A couple more wrinkles that matter: It's not East Nowhere S&L that actually issues the mortgage bonds I just mentioned. Instead, East Nowhere sells its mortgages to Fannie Mae or Freddie Mac, two gigantic corporations created by the federal government to turn mortgages into bonds. Freddie and Fannie create the bonds. Oh, and East Nowhere competes for originations and servicing rights with "mortgage banks" like Countrywide Financial and Ditech.com (owned by General Motors, which cut its teeth by having financed car loans). Maybe you've noticed that just about all of the S&Ls have gone away? They've been outgunned by the big boys.

Mortgage bonds: Theory vs. practice

From essentially 0% of the market in 1980, the "securitized" share of mortgages has grown to about two-thirds of the pool today. On the surface, it's a great idea. Holding mortgages is a financial activity. Originating mortgages is a sales activity. Servicing mortgages is a matter of computers and data processing. Capitalism is all about specialization, and it only stands to reason that a salesman left to sell is going to be a better salesman than one who also has to worry about duration mismatch and escrow accounts. Everybody's happy! Why, it's a classic win-win-win-win solution!

Yeah, right. The more wins, the more losses. They never tell you about the risks until it's too late.

What's missing from this picture? Checks and balances. In days gone by, the East Nowhere S&Ls of the world had good reason to lend carefully. If you hold onto a 6% mortgage and the borrower defaults, you'll lose at least two or three good loans' worth of profits by the time it's all over. Not to mention being the evil banker who took some poor guy's house away. Your shareholders won't like it very much, and neither will the regulators. And you know what? In days gone by, some of the S&L bankers actually lost sleep over debtors who fell behind. Don't tell anyone, but some of them had a heart.

But what if a payment stream stops going into a mortgage bond? Phone calls get made and wheels turn. But it's not the same. The guy who wrote the loan has long since been paid. The servicer makes even more money off the foreclosure. The poor busted debtor gets evicted by some corporation with nothing but letters in its name and a calculator in its chest. As for whoever got left holding the bag for those bonds, well, what's risk all about, right?

On Main Street they call this "irresponsibility." On Wall Street, the financial geeks call it "moral hazard." I call it "magical thinking" or "not giving a shit." Call it what you will, but in today's securitized mortgage business this mentality is everywhere you look.

Naturally, everyone will tell you they're honest. What are personal delusions and corporate P.R. departments for, anyway? Borrowers will haul out the usual excuses, some of them good and most of them embarrassing. The originators will claim to have followed the rules, checked the references, and so on. The securitizers will tell you they've got their eye out for fraud. The bond buyers? Ah, the bond buyers. They're my favorite, because if anyone should have known better, and in fact did know better, they're the ones.

The bond buyers will sing a song of prudence, advising you to look at historical data showing miniscule mortgage default rates. Catch one of them on their second after-dinner drink (the three-martini lunch being a relic of more carefree days), and they'll tell you something else: Fannie and Freddy are too big to fail. The bond buyers could afford to ignore credit quality. By and large, they work for big pension funds, mutual funds, and insurance companies. Their job was to pretend that the mortgage bonds were solid. Given that Uncle Sucker is there to bail them out, were they wrong?

There's no welfare queen like a corporate welfare queen

In other words, if the shit really hits the fan, the federal government will rescue the bondholders. The alternative is to see the whole financial structure collapse, and trust me, no one wants that. We have no choice; they've got us over a barrel. We bail them out, or there's a second depression. Really. The Federal Reserve refers to this as the "implicit government guarantee" on Freddy and Fannie's securitized mortgage bonds. All $5+ trillion worth, no matter how crappy the collateral. You see, the securitization business might be efficient, but it's more efficient in more ways than one. It is a remarkably efficient buck-passing mechanism, and it's a remarkable efficient vehicle for fraudulent dealing.

The bottom line is this: The bag holder is the same dude who got stuck with the bill for the S&L "crisis" of the 1980s. He is Uncle Sucker. And don't kid yourselves, every penny that Uncle Sucker pays out comes from you and me. No matter how careful we were with our money. That is what "moral hazard" is all about: the ability to stick it to millions of faceless suckers who you'll never meet and who'll never meet you. If you managed your personal finances in a responsible manner, you'll wake up with someone else's hangover. The people who threw the party? Worry not. They've been paid.