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Jandre002 on 30 September 2008
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Jackson50 said:
fkusumot said:

CDO's were not a result of of the Fed's mismanagement. The management of CDO's is handled by, surprise, no one. They are not regulated. Bad practices by the rating agencies are just a fact. Supposedly a bunch of B-Paper turned into a CDO magically got an investment grade rating. Are you saying they are regulated by the Fed? Are you prepared to discuss credit default swaps or credit derivatives that use CDOs as their reference entity?

This started about this time LAST YEAR. That's when the housing bubble started popping and banks were taking big hits, and people were getting fired. There was plenty of time (compared to the 4-5 days Paulson has given us now) to do something. All of the major players understood that this debt was toxic. I'm pretty sure that all the B-Paper companies went out of business at that time. But all those loans are linked together by those CDOs. Which are in turn supposedly insured by the credit default swaps.

The underlying capital in the CDOs are the sub-prime assets. Without the sub-prime assets, you do not have the sub-prime CDOs. The cause of the boom in sub-prime loans was the Fed's fault. Without its shockingly low interest rates, we would not have the toxic sub-prime debt. The Federal Reserve should be ashamed of the mess it has caused. I am not certain if actions can be taken against Bernanke and Greenspan, but they need to be held accountable for this.

 

In a sense that's true, but if CDO's regulated at all from the get go this never would have happened. It was when people discovered the actual worth of CDO's that companies started to crash. Sub-prime mortgages on their own aren't the major cause IMO. People investing in CDO's that are composed 50% of subprime loans is the problem.

Low interest rates alone or subprime lending alone would never have caused this whole issue if banks weren't overestimating their reliability and overvaluing them. CDO's created a huge market for subprime loans the the market just adjusted. It was a win-win for EVERYONE at the time, but you should always prepare for the worst case scenario. Subprime backed security is contradictory in itself. 

What the fed set out to do was expand the market and allow for more American home owners. The goal was achieved just as they planned, but the government didn't have enoug control over it. I mean, lets say subprime loans and fed rates were never cut, where do you tihnk we would be right now? I highly doubt we would all be enjoying laptops, HDTVs, wireless internet, etc if America wasn't allowed to prosper as quickly as it was. The housing market drove everything for over 10 years, we just didn't prepare for the peak well enough.