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Edited on Thu Nov-13-08 10:35 AM by HamdenRice
Since the liberal blogosphere is all a twitter about Hank "Uncle Fester" Paulson's appallingly opaque and nervous performance yesterday and his hint that bailout money will be used for "credit card companies" and "student loan companies" I've started writing an analytical piece about what he was trying to get across.
The message, folks, is grim.
But my take on the full meaning of what happened yesterday will have to wait till this afternoon. In the meantime, though, here's an excerpt from it that pertains to those of you who need student loans to get through the next semester or two:
As the first wave of the mortgage backed security crisis swept the country, the general public learned what mostly only people in finance knew: that for the last several decades, when consumers bought houses and took out loans from banks or mortgage companies, those banks or mortgage companies almost always sold those loans to Wall Street investment firms, which in turn, pooled and sold those mortgages to giant trusts, which in turn sold “shares” of those pools of mortgages to the public, but mostly to other financial firms, banks, pension funds and institutional investors. Those “shares” weren’t shares, however, because they weren’t like stocks; they were more like bonds – that is they were debt instruments. They were called “mortgage backed securities.”
Now that there is a crisis in the consumer market we have to learn that lesson all over again: When you get a credit card and use it, and maintain a balance of debt to a Mastercard affiliate, that company does not keep your debt. As with mortgages, your debt, which is called a “credit card receivable,” is sold to Wall Street, pooled and sold to a giant trust, which sells debt instruments to the same market it sells mortgage backed securities to. These securities are called “credit card receivable backed securities.”
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And when you take out a student loan, that loan is also packaged and sold, and “student loan backed securities” are issued to the same market.
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What all of this means to us as consumers, is that the companies that you think have money to lend you – for credit cards, car loans and student loans – don’t. They are basically borrowing it themselves through the asset backed security market, although “they” are not liable for the debt because they’ve offloaded that debt to an independent trust.
Which also means that if car lenders, credit card companies and student loan lenders cannot “borrow” from the asset backed securities market, then they can’t make car loans, can’t make student loans, and can’t issue credit cards or let you increase the amount of your credit card debt.
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This summary by the Washington Post actually made me nauseous this morning and I thought I was going to throw up my coffee on my keyboard:
“The market that provides private student loans is in particularly bad shape. Since late last year, no lender has been able to raise money for loans by selling them to investors. Instead, these lenders have relied on traditional sources of finance, such as banks. But in the past few months, those wells dried up, too.”
Let’s repeat that and let it sink in: Not a single student loan company was able to sell student loan securities since late last year. As a result, they are running out of money. There will be no money for student loans.
Combine this with a paragraph from the dire email message that the richest university in the country, Harvard, sent out yesterday to all faculty, staff, students and alumni:
“But given the breadth and the depth of the present downturn, even well-diversified portfolios are experiencing major losses. Moody's, a leading financial research and ratings service, recently projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.”
Now I realize that communications coming out of Cambridge are about as straightforward as communications that came out of the Kremlin during the Brezhnev era, but I have to wonder whether Harvard is talking about those other folks' colleges losing 30 percent of their endowment? Or could they be hinting that Harvard, one of the biggest investors in hedge funds in the country -- including hedge funds that have taken massive hits -- might be getting ready to "majorly" take a hit.
And nationwide, if Harvard is right, and endowments shrink by 30 percent while student loans for Junior and Sissy dry up completely, while Mom and Dad’s college investment fund has been ravaged by the 30-40 percent stock market drop – well, all I can say is there are going to be a lot of bearded guys in a community near you holding signs that say: “Will Deconstruct White Male Patriarchy for Food.”
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