In this issue

Jonathan Tobin: Defending the Right to a Jewish State

Heather Hale: Compliment your kids without giving them big heads

Megan Shauri: 10 ways you are ruining your own happiness

Carolyn Bigda: 8 Best Dividend Stocks for 2015

Kiplinger's Personal Finance editors: 7 Things You Didn't Know About Paying Off Student Loans

Samantha Olson: The Crucial Mistake 55% Of Parents Are Making At Their Baby's Bedtime

Densie Well, Ph.D., R.D. Open your eyes to yellow vegetables

The Kosher Gourmet by Megan Gordon With its colorful cache of purples and oranges and reds, COLLARD GREEN SLAW is a marvelous mood booster --- not to mention just downright delish
April 18, 2014

Rabbi Yonason Goldson: Clarifying one of the greatest philosophical conundrums in theology

Caroline B. Glick: The disappearance of US will

Megan Wallgren: 10 things I've learned from my teenagers

Lizette Borreli: Green Tea Boosts Brain Power, May Help Treat Dementia

John Ericson: Trying hard to be 'positive' but never succeeding? Blame Your Brain

The Kosher Gourmet by Julie Rothman Almondy, flourless torta del re (Italian king's cake), has royal roots, is simple to make, . . . but devour it because it's simply delicious

April 14, 2014

Rabbi Dr Naftali Brawer: Passover frees us from the tyranny of time

Greg Crosby: Passing Over Religion

Eric Schulzke: First degree: How America really recovered from a murder epidemic

Georgia Lee: When love is not enough: Teaching your kids about the realities of adult relationships

Cameron Huddleston: Freebies for Your Lawn and Garden

Gordon Pape: How you can tell if your financial adviser is setting you up for potential ruin

Dana Dovey: Up to 500,000 people die each year from hepatitis C-related liver disease. New Treatment Has Over 90% Success Rate

Justin Caba: Eating Watermelon Can Help Control High Blood Pressure

The Kosher Gourmet by Joshua E. London and Lou Marmon Don't dare pass over these Pesach picks for Manischewitz!

April 11, 2014

Rabbi Hillel Goldberg: Silence is much more than golden

Caroline B. Glick: Forgetting freedom at Passover

Susan Swann: How to value a child for who he is, not just what he does

Cameron Huddleston: 7 Financial Tasks You Should Tackle Right Now

Sandra Block and Lisa Gerstner: How to Profit From Your Passion

Susan Scutti: A Simple Blood Test Might Soon Diagnose Cancer

Chris Weller: Have A Slow Metabolism? Let Science Speed It Up For You

The Kosher Gourmet by Diane Rossen Worthington Whitefish Terrine: A French take on gefilte fish

April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review May 3, 2010 /19 Iyar 5770

Congress' Role in the Financial Crisis

By Mort Zuckerman

Mort Zuckerman

http://www.JewishWorldReview.com | Derivatives—the new bad word—used to be called "futures." They've existed since the Civil War, invented basically to protect farmers, traders, and merchandisers from ruin when they could not sell a crop to cover their costs because a bumper harvest created a glut, or, conversely, to protect buyers when a bad harvest led to price inflation. Hence the creation of contracts with third parties who agreed to buy or sell at a certain price, whatever the future might bring. This stabilized the market and freed farmers from looking around for a buyer in what might be a frantic market.

The original futures markets in commodities functioned virtually without incident throughout our recent roller-coaster financial crisis. Put simply, this was largely because the markets had evolved a guarantee system following periodic defaults on futures deals by one party or another. Middlemen stepped in to assume that risk for a price, provided the parties posted collateral. In this way, clearinghouses minimized both the risks and the interconnections brought about by derivatives transactions.

In the evolution of these necessary instruments furthering stable trade, financial traders came to bid on the value of the paper guarantees: Bid offers went up if the risks seemed high, and down if they seemed safe.

We have come a long way from the original trading in futures contracts for corn and hogs, first standardized in Chicago in 1865. A huge market also emerged in mortgage bonds. Today the new derivatives account for trillions of dollars in face amounts, and were a significant factor in the financial panic that swept the world in 2008.

These are mortgage-backed securities fundamentally transacted between "shorts" and "longs." The "shorts" judge that the price of the security will go down, so they promise to buy it at some price lower than current. If they judge wrongly—if it goes up, or goes down more than they assumed—they suffer, since they have to deliver the security at a loss. The "longs" judge that mortgage bonds will strengthen in price, so they stand to earn more for the security than they paid. A perfect illustration is the now-famous case involving Goldman Sachs and a buyer and seller. One was betting that the housing market would collapse, another that it would continue to rise.

Synthetic CDOs (collateralized debt obligations), of which we have heard a lot, are really instruments for betting on the housing market; their value is linked to a series of mortgage bonds. Again, if the price of those bonds declines, one set of investors will win, whereas if the mortgage bonds strengthen, the other side wins. This is the way in which a player bets on the success or failure of other people's investments—a financial version of high-stakes poker.

These securities also reduce the costs of the loans that lubricate our economy. They make them more affordable and available by enabling lenders to offload risks to other investors with steadier nerves—in short, to hedge their bets.

When the U.S. housing market collapsed, so too did the value of investments in residential mortgage-based securities, especially those tied to subprime mortgages of borrowers who could not meet their payments.

Not so long ago, these mortgage-based securities were viewed as among the safest investments in the market. Before the housing bubble burst, the overwhelming view of investors, rating agencies, and economists was that the housing market was strong and would continue to strengthen. Average housing prices rose by double-digit percentages in every year from 2002 to 2006. Investment-grade, mortgage-backed securities between 2005 and 2007 were considered almost as safe as U.S. Treasury securities but paid a higher interest rate. Defaults on these investment-grade securities, most of which were rated AAA, were virtually nonexistent.

Letter from JWR publisher

There was enormous global demand for these products. Experts estimated that for every $1 invested in going "short"—anticipating a decline in the market—other investors were willing to put up $5 in anticipation of growth. Many sophisticated and educated investors were eager to bet that the value of mortgage-based securities would continue to increase. They were gambling on the solidity of the bonds that actually owned mortgages. But after the crash, virtually every mortgage investment created in 2006 and 2007 got crushed.

The markets in the fancier new derivatives didn't have the instruments that the original futures markets for corn and hogs had developed with the clearinghouses. They didn't have rules for transparency. The original clearinghouses compiled and released data on volume and prices so investors could see, with some degree of clarity, what was happening by watching trades over time, or by comparing related instruments, like oil and gas futures.

What we have learned from the financial crisis is that we not only had institutions that became too big to fail, but also some that became too interconnected to fail. Today, roughly 90 percent of over-the-counter trading in derivatives is between two financial entities, including banks, finance companies, pension plans, insurers, and hedge funds. The danger is the domino effect—that one entity's failure can mean a run on the other, which is interconnected through their derivatives. This poses difficult decisions for public officials.

What we now need is to greatly reduce the risks of a domino effect (and a government bailout) by imposing standards for over-the-counter derivatives so they can be cleared by central clearinghouses.

But we also need to understand how the housing market got as hot as it did. Why did it keep rising, generating more and more derivatives geared to a rising market? It turns out that Fannie Mae, Freddie Mac, and the Federal Housing Administration had financed a lot more subprime and Alt-A (alternative documentation) loans than anyone realized, mostly as a result of congressional mandates. Indeed, of their total outstanding mortgage portfolios of $10.6 trillion, roughly half turned out to be of low quality. Had this been known, it would have been clear that the American public's capacity to assume this amount of housing debt was at great risk.

That is at the heart of the now-famous Goldman-Paulson saga. Hedge fund manager John Paulson judged that the housing market was a bubble, so he shorted the securities through Goldman Sachs and an insurer called ACA, which sold the package to a German bank. The buyers judged that it was safe to count on housing prices continuing to rise. They chose which mortgage securities would be bundled by Goldman. And they have paid a heavy price for their judgment.

The American public has hereby had a peek into the bewildering complexities of the world of finance. The natural instinct is for the public to blame the housing decline on those who shorted. But it is the other way around. They should be blaming those who let the market get pumped up, inviting a dramatic and painful correction that took most people by surprise.

This is one thing that must be reformed. Derivatives should be on exchanges and, to a large degree, in standard contracts, so they would be more fully disclosed and transparent. Companies that rate these securities should be given stronger incentives to provide independent and accurate analyses—and remove the suspicion that high ratings can be bought. Lenders that bundle loans secured by mortgages or other financial assets for Wall Street to sell should be made to have a stake in the performance of such loans. As it is, they offload every risky penny onto other investors.

Many of the reforms touched on here are included in the financial overhaul bill moving through Congress. There could have been a sensible and constructive review, especially now that the Republicans seem to have given up their unhelpful negativism. The problem is that the Obama administration is eager to blame the economic decline on a bunch of "fat-cat," "greedy bankers" from Wall Street who were bailed out by the government. The president himself stated to the bankers, "You guys caused the problem." They did not. These particular problems were caused by the bubble in the housing market created in large part by Congress. Democrats who seek to cast Wall Street as the villain forget the congressional mandate they placed on Fannie Mae and Freddie Mac to put 55 percent of their funding into mortgages for people at or below the median income. This SEC civil fraud charge against Goldman conveniently fits into their political agenda.

As the administration tries to assess blame for the economic decline, let's not forget the role of Congress and the acceptance by members of millions of dollars a year in lobbyist contributions to support Fannie Mae and Freddie Mac. Had the housing market soared for a couple of more years, as many believed it would, Goldman and Paulson could have lost billions. But in this case, their purchase virtually coincided with the housing collapse. Within five months after the securities were sold, 83 percent of the bonds in the packaged securities were downgraded by rating agencies. The plunge in prices brought a fortune to those who sold them short and great losses to those who bought them long. The investors acted, in both cases, in what they judged would be best for their interests.

The oversimplification of these issues in hostile congressional hearings is a disservice to the public.

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Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report.


© 2009, Mortimer Zuckerman