Category Archive 'Mortgage Mess'
25 Feb 2012
Conservatives (really more accurately referred to as “liberals”) argue that the free market produces superior allocations of resources because of its natural access to superior information on supply and demand provided by the voluntary input of enormously large numbers of individual human beings. The free market consequently inevitably operates on the basis of better information than any possible small group of political leaders or experts can ever hope to possess. Beyond mere utility, the free market additionally has morality on its side. Human beings are morally entitled to exchange what is their own, whether goods, services, or currency, as they desire and think best. The alternative to freedom is always coercive force, and freedom is intrinsically morally better than coercion.
Progressives reject the free market, noting that it fails to make the idle prosperous, the incompetent and the unlucky successful, and the improvident and intoxicated equal in security and material success to the responsible and provident.
Since the free market never actually seems able to deliver heaven on earth, progressives proposed that government should intervene to establish a safety net to assure that no one, no matter how unlucky or ill-behaved, should be left without the necessities of human existence.
Progressives demand that we should all surrender some significant portion of our economic liberty and deliver control over the free market to government specifically because they believe that the rule of credentialed experts will deliver superior results.
The Progressive experiment, which has gone on for many decades now, has survived this long because of the capacity of capitalist enterprise to deliver prosperity and economic growth despite being shackled by ever-increasing levels of regulation and despite the diversion of substantial percentages of economic output to entitlements.
Our expert rulers, in reality, merely exchanged an ever-increasing slice of the entire economy for more political support. Their calculations were fraudulent and completely risible, burying information unfavorable to their ends, achieving balanced budgets by phony bookkeeping, and invariably relying on wildly optimistic projections to cause their plans’ mathematics to add up.
In good times, progressive experts have always spent more, added new programs, and constructed new bureaucratic empires, piling the promises for the future up to the stars. When the budget didn’t really add up, they simply placed their trust in the ability of the capitalist system to deliver enough growth, soon enough, to save them, and simply kicked the can of fiscal responsibility down the road to be dealt with later.
Now, of course, in both Europe and America, the music has finally stopped, the game is over. There is no more road to kick the can down. America and Europe have hit the point where the costs of government are dramatically impairing the free market’s ability to deliver prosperity and growth. The capitalist goose has been shaken and squeezed and strangled, but there is no increase in egg production occurring.
It seems perfectly evident to me that, if what the progressives believe, that the rule of scientifically trained experts can improve upon the results of the free market, those experts would have, in the course of all their training and elite education, encountered Chapter 41 of the Book of Genesis in which Joseph successfully interprets Pharaoh’s dream to mean that seven fat years will be followed in turn by seven lean years, and counsels Pharaoh to set aside a portion of his government’s revenues to cover future shortfalls during the seven lean year recession.
The current international economic crisis demonstrates vividly that contemporary progressive economic planning is not only inferior to free market results, it is decidedly inferior to Bronze Age Middle Eastern economic administration.
Essentially what has happened is that progressive establishment elites, those who claim the right to rule over all the rest of us on the basis of their superior wisdom, training, and credentials, have flown the Entitlement State airplane right into the ground. They wrecked the economies of a large number of nations by creating a crisis through market interference and mismanagement. They have issued too many promises and threaten to bankrupt their nation’s economies far into the future.
The current recession proves, once and for all, that the wise men of progressivism were never very wise at all, and that their claim of a right to overrule liberty and the free market on the basis of superior wisdom and morality is not well-founded.
When you steer the cart off the road, you don’t get to take the wheel again and continue driving. It is time for a change of driver.
22 Aug 2011
Bloomberg News is getting lots of attention this morning with its headline shouting Wall Street Aristocracy Got $1.2 Trillion in Secret Loans.
Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.
By 2008, the housing marketâ€™s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.
Fed Chairman Ben S. Bernankeâ€™s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.
â€œThese are all whopping numbers,â€ said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. â€œYouâ€™re talking about the aristocracy of American finance going down the tubes without the federal money.â€
Doctor Housing Bubble today looks at a home in the Bel-Air section of LA, whose declining price he describes as “chasing the market into the bottom.”
Why is this poor house’s market value tanking so horrifically? Doctor HB notes that the same trillions of federal loans to “a very familiar list of lenders… WaMu, IndyMac, JP Morgan, Wells Fargo, and Bank of America” have allowed a shadow market of 56 homes in the unprocessed foreclosure pipeline to loom over the 23 homes actually offered for sale on the local MLS. Your tax dollars at work.
Last week the California unemployment rate shot back up to 12 percent. Couple this with the underperformance of revenue for the state and we have heavy headwinds ahead. It will be a herculean effort for home prices to remain inflated in bubble markets as the economy and incomes slump. Part of what has held up the housing market in many areas is the building up of shadow inventory to control supply and try to increase home prices. This has been a dramatic failure and has cost the U.S. taxpayer trillions of dollars simply to keep the too big to fail banks afloat with financial swindles. There is no reason for this policy to continue unless we want to have another lost decade for our economy (this seems to be the path we are embarking on). Even prime locations are having a tougher time in this market. Today we will take a look at a home in the Bel-Air neighborhood of Los Angeles that is chasing the market into the bottom. …
Of the 23 homes listed on the MLS for Bel-Air 3 are short sales and one home is listed as a foreclosure. Yet this does not tell us the entire story and this is the continuing saga of problems that we will be facing for years to come.
56 homes are in the shadow inventory for Bel-Air yet only 1 foreclosure has made it to the MLS! What is even more disturbing is that many of these homes in the shadow inventory were purchased right at the peak.
Ah yes, a very familiar list of lenders we see here. WaMu, IndyMac, JP Morgan, Wells Fargo, and Bank of America. Look at when the loan was recorded. Many of these shadow inventory properties were purchased during the mania in 2006 and 2007. This is only a sample of the 56 homes in the foreclosure pipeline. The shadow inventory is a big issue although the media wants to make it seem that it is only occurring in poor neighborhoods. Of course they donâ€™t want to focus on neighborhoods where many of their executives live.
Why is the recession continuing? A large part of the answer is that failed mortgage loans have not been liquidated and resolved, the real estate market has been artificially kept in an unconstructive state of stasis by federal assistance. The large lenders received massive federal loan subsidies, allowing both them and their unfortunate insolvent borrowers to continue to reside in a financially comatose condition essentially on federal life support.
But the housing market and the economy cannot recover until the loans destined to die are really dead, the houses destined to be foreclosed are really foreclosed and resold, until the bad inventory is all sold at distress prices and the whole mess cleared off the national books.
In essence, the dÃ©gringolade produced by federal interventions in the home mortgage industry was so painful that government, Wall Street, and many home mortgage borrowers have all preferred to drag out the agony rather than take their medicine. That preference on every part is natural and understandable, but it is a major economic policy mistake, and the whole country is paying for it in both the literal and the figurative sense.
Hat tip to Glenn Reynolds for the Doctor HB story.
11 Nov 2010
Peter J. Wallison, at AEI, debunks the Baily-Eliott thesis, which attempts to deflect the responsibility for the housing market bubble from government social policies by dispersing shares of the responsibility to financial institutions for failing to manage risk, to insufficient regulatory oversight, to reckless and naive consumers, and even to the actions and inactions of “many outside the United States.”
Exculpating social engineering policies emplaced by the Clinton Administration was vital for the defense of the Progressive political agenda, and it was the Baily-Elliott interpretation of events that led to passage of the Dodd-Franks Act.
Last November, two highly respected Brookings Institution scholars, Martin Neil Baily and Douglas J. Elliott, published a paper entitled â€œTelling the Narrative of the Financial Crisis: Not Just a Housing Bubble.â€
Baily and Elliott make a strong case for explaining the financial crisis as the result of a general decline in risk aversion because of the effect of the great moderationâ€”the period from 1982 to 2007 when it seemed that we understood the causes of financial crises and had found a way to avoid or mitigate them. The evidence for a general weakening in risk aversion coming out of this period is plausible. But the Baily-Elliott narrative assumes that the 1997â€“2007 housing bubble was also caused by this factor, and that seems implausible. The extraordinary lengths to which the government went to force private-sector lending that would not otherwise have occurredâ€”through affordable-housing requirements for Fannie and Freddie as well as demands on FHA and on the banks under CRAâ€”shows that the housing bubble that ended in 2007 was not a natural occurrence or the result of mere risk aversion. If it had been, there would have been no need for these government programs.
The housing bubble that finally burst in 2007 was driven by a U.S. government social policy that was intended to increase homeownership in the United States and was thus not subject to the usual limits on the length and size of asset bubbles. As such, it was far larger and lasted far longer than any other bubble in modern times, and, when it deflated, the vast number of poor-quality mortgages it contained defaulted at unprecedented rates. This drove down U.S. housing values and caused the weakening of financial institutions around the world that we know as the financial crisis.
Market participants were certainly taking risks as the bubble grew, and it may well be, as Baily and Elliott posit, that this private risk taking was greater than in the past. But the facts show that the bubble was inflated by a government social policy that created a vast number of subprime and Alt-A mortgages that would not otherwise have existed. And the risks associated with this policyâ€”which could produce losses of more than $400 billion at Fannie and Freddie aloneâ€”were being taken by only one unwitting group: the taxpayers.
Read the whole thing.
Hat tip to Scott Drum.
23 Aug 2010
Edward J. Pinto at AEI has a paper providing a thorough history and analysis of exactly how federal housing policies created the current financial crisis.
The major cause of the financial crisis in the U.S. was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky Non-Traditional Mortgages (NTMs). These NTMs began to default en mass beginning in 2006, triggering the collapse of the worldwide market for mortgage backed securities (MBS) and in turn triggering the instability and insolvency of financial institutions that we call the financial crisis. Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of overleveraged
loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUDâ€™s policy of continually and disproportionately increasing the GSEsâ€™ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.
16 Jul 2010
The New York Times rejoiced in the passage of the massive and occult 2300-page Financial Reform Bill with its customary propagandistic progressive nonsense.
Congress approved a sweeping expansion of federal financial regulation on Thursday, reflecting a renewed mistrust of financial markets after decades in which Washington stood back from Wall Street with wide-eyed admiration.
The bill, heavily promoted by President Obama and Congressional Democrats as a response to the 2008 financial crisis, cleared the Senate by a vote of 60 to 39, largely along party lines, after weeks of wrangling that allowed Democrats to pick up the three Republican votes to ensure passage.
The vote was the culmination of nearly two years of fierce lobbying and intense debate over the appropriate response to the financial excesses that dragged the nation into the worst recession since the Great Depression.
The result is a catalog of repairs and additions to the rusted infrastructure of a regulatory system that has failed to keep up with the expanding scope and complexity of modern finance.
Over the last half-century, as traders and lenders increasingly drove the nationâ€™s economic growth, politicians of both parties scrambled to get out of the way, passing a series of landmark bills that allowed financial companies to become larger, less transparent and more profitable.
Usury laws were set aside. Banks were allowed to expand across state lines, sell insurance, trade securities. The government watched and did nothing as the bulk of financial activity moved into a parallel universe of private investment funds, unregulated lenders and black markets like derivatives trading.
That era of hands-off optimism was gaveled to an end on Thursday as the Senate gave final approval to a bill that reasserts the importance of federal supervision of financial transactions.
The financial crisis, of course, had absolutely nothing to do with usury, banks expanding across state lines, selling insurance, or trading securities. The crisis had everything to do with mortgage lenders who, rather than being unregulated, were specifically federally required to make more risky loans to persons with dubious credit. At the center of the current financial crisis are the federally-created mortgage corporations and they are completely overlooked by the new legislation.
As the Wall Street Journal explains our saviours are now going to protect us with a bevy of new agencies and a blizzard of yet-to-be-defined regulations, to be worked out later behind closed doors.
The bill, to be signed into law soon by President Barack Obama, marks a potential sea change for the financial-services industry. Financial titans such as J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp. may be forced to make changes in most parts of their business, from debit cards to the ability to invest in hedge funds.
Congress approved a sweeping rewrite of rules that touch every corner of finance in the biggest expansion of government power over banking and markets since the Great Depression.
The Senate passed the bill 60-39 Thursday, following House passage last month. Earlier in the day, three northeastern Republicans joined with Democrats to block a filibuster, allowing the bill to squeak through.
Now, the legislation hands off to 10 regulatory agencies the discretion to write hundreds of new rules governing finance. Rather than the bill itself, it will be this processâ€”accompanied by a lobbying blitz from banksâ€”that will determine the precise contours of this new landscape, how strict the new regulations will be and whether they succeed in their purpose. The decisions will be made by officials from new agencies, obscure agencies and, in some cases, agencies like the Federal Reserve that faced criticism in the run-up to the crisis. …
The legislation creates a council of regulators to monitor economic risks; establishes a new agency to police consumer financial products; and sets new standards for the way derivatives are traded. â€œThese reforms will benefit the prudent and constrain the imprudent,â€ Treasury Secretary Timothy Geithner said in a press conference. â€œStrong banks, the well-managed financial innovators, will adapt and thrive under the new rules of the road.â€
Republicans said the bill could jeopardize the recovery by constraining credit and crimping the banking industry, and chided the expansion of government power it envisions.
The bill â€œis a 2,300-page legislative monsterâ€¦that expands the scope and the powers of ineffective bureaucracies,â€ said Sen. Richard Shelby (R., Ala.).
Itâ€™s all a farce, of course. The professional political class is simply taking advantage of the financial crisis it created itself to ride to the supposed rescue and carve itself out another huge chuck of power over the economy.
Well-connected people with the right kinds of background and education will regulate in collusion with the wealthiest and most influential financial industry players, friends of the system in Washington will get favors, their less-well-connected competitors will get the shaft, higher entry barriers will be put into place, and regulators when they leave office will move on to more lucrative positions and consultancies. The powers that be will prosper and the public will pay.
Still the financial system will survive:
Kate Sullivan: One day weâ€™ll smarten up and pass some laws and put you out of business.
Lawrence Garfield: They can pass all the laws they want. All they can do is change the rules. They can never stop the game. I donâ€™t go away. I adapt.
â€”Other Peopleâ€™s Money (1991)
09 Jul 2010
The most affluent Americans are “less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest” and are with increasing frequency ceasing to make mortgage payments.
One in seven mortgages of over a million dollars is currently in default. NYT. The overall default rate is 9.2%.
26 Apr 2010
Arnold Kling on the democrats’ “financial reform” bill. Let’s hope they can’t get any Republican votes.
My instinct is to call the proposed legislation a “blame deflection bill” rather than financial reform. But I admit that I have not read the whole bill. Has anyone?…
I have to rant about the notion of a consumer financial protection agency. I know that it’s axiomatic that poor people are helpless victims. But in the case of these mortgages, that is a really hard sell. The banks did not take from poor people. They gave to poor people. If you were lucky enough to get one of these exotic mortgages when house prices were still going up, then you got to reap a nice profit on your house. If you were not so lucky, you lost…close to nothing. I’m sorry, but if you borrowed up to 100 percent of the value of the house or more, then all you really lost were your moving expenses.
What about predatory lending? As I understand it, the idea of predatory lending is to saddle the borrower with an expensive mortgage so that you can foreclose on the property and sell it at a profit. How many times did that happen? Have you read of a single instance in the past three years where the bank made a profit on a foreclosure?
I am always ready to feel sorry for poor people because of their poverty. But I cannot feel sorry for somebody who was given a basically free option on a house and the option didn’t happen to come into the money.
The reason that those of us on the right are left somewhat speechless by the financial reform bill is that it seems to us to be based on premises that strike us as preposterous.
Hat tip to the News Junkie.
21 Apr 2010
In a party line 3-2 vote SEC commissioners voted to sue Goldman Sachs. The SEC charges that Goldman fraudulently represented to investors that the mortgages underlying one of its residential mortgage-backed securities were being selected by an independent third-party. The mortgages, however, were selected by Paulson & Co., a hedge fund that also took a $15 million credit default swap position betting against the same residential mortgage-backed security.
The Epicurean Dealmaker puts the whole fuss wittily into perspective.
I have been reliably informed that something scandalous has recently been unearthed which involves a recurring target of Your Formerly Diligent Blogosopher’s ruminations. I even believe the word “fraud” has been bandied about liberally.
Given that a) I have been occupied elsewhere, and b) I really couldn’t give a flying fuck in a rolling donut whether the Great Vampire Squid of West Street (new digs, natch) vanishes into the singularity or not, I frankly have not paid much attention to the scandal beyond a cursory perusal of the headlines and a couple of blog posts. Honestly, life is just too short.
However, in the spirit of duty which compels Your Humble Servant to satisfy every bloggy whim my Peremptory Audience demands of me (and also because Natasha has temporarily left the hotel room to get more caviar and ice cubes), I will make the following brief observations:
The parties which Goldman supposedly defrauded were large and supposedly sophisticated financial institutions. The managers of these institutions were or should have been paid quite large sums of money to, among other things, protect their stakeholders from fraud, unethical sales practices, and general office supply stealing. I have no sympathy whatsoever for the knuckleheads at ACA or IKB. And, frankly, neither should you.
Whether the alleged fraud rises to the level of an actionable civil claim or simply represents unethical behavior is a question for a court of law. I am not qualified to judge, but the criteria which ultimately determine the nature of Goldman’s alleged offense will be legalistic ones, akin to judging exactly how many mortgage CDO investors’ brains can be fitted onto the head of a pin. While the answer may be definitive, it will not be particularly revealing to the vast majority of us who live outside the cloistered halls of Americus Litigalis.
I must agree with Felix Salmon and others, who claim that the real damage to Goldman Sachs has already been done, with its formerly venerated name being dragged publicly through the mud with an accusation of fraud. While this may have little effect on the majority of Goldman’s business on the sales and trading side of the houseâ€”where counterparties are generally too smart to raise a stink about the 800 pound gorilla of the global financial markets (and often too unprincipled themselves to care) â€” it should and will have an effect on Goldman’s extensive investment banking business with governments, corporations, and other entities.
The Squid has been living for years off the simple fact that, like the fabled IBM of yore, no-one ever got fired (or sued) for picking Goldman Sachs. That calculus has been changed, and I and every one of my red-blooded peers in the industry who is not currently drawing a paycheck signed by David Viniar are making damn sure that CEOs, CFOs, government officials, and Boards of Directors know it. For those of you who were wondering, this is the real reason why Goldman’s market capitalization has taken the vapors to the tune of more than ten billion dollars in response to an action likely to cost it no more than a tiny fraction of that amount: its reputation premium is quietly and rapidly evaporating. There is no shortage of competent investment banks and adequate investment bankers available to conduct the financing and M&A business of the global corporate and government economy. No longer can Goldman rest assured that it will win mandates simply because it is Goldman Sachs.
Hat tip to Walter Olson.
12 Jun 2009
Household Net Worth as Percentage of GNP
Well, we’ve recently on the average lost the last decade’s growth of personal assets.
Household Net Worth, according to the Fed, is down $14 trillion from its peak in 2007, and as the chart above illustrates, is down to levels very much like those of the 1990s when we were just beginning to emerge from a painful recession.
All over the country, current bad times have forced families to dip into savings, to sell equities at drastically reduced values, and to liquidate real estate in a very unfavorable market.
The impact of Barack Obama’s spending binge, of course, and the new regime of government regulation, intrusion, and control over the economy is really still yet to be felt.
Arthur Laffer, in the Wall Street Journal, contemplates what government has done so far, and shudders at the consequences yet to come.
It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.
03 Jun 2009
50 states’ changes in GDP, jobs, and home prices in 2008
The Atlantic links a WSJ chart which it then graphs (above), showing the varied impact of the recession on all 50 states.
North Dakota, Wyoming, Alaska, Texas, Hawaii, and South Dakota all managed modest increases (1.9-.2%) in home prices, while California real estate insanity exacted a ferocious toll not only within its own borders (-25.5%), but also in the neighboring California refugee destinations of Nevada (-28.2%) and Arizona (-20.6). Florida, of course, traditionally always jumps on board any real estate collapse and also came in the top ranks of disaster (-24%).
09 May 2009
When I was a small child, my parents, member of the WWII generation, were buying ordinary working class houses in prosperous places like California for $10 or $12 thousand dollars. An executive’s house might cost $25 thousand. In provincial low income locations like the small Pennsylvania town I lived in, you could buy a house for $5 or $6 thousand dollars.
Recently, when I was living in the Bay Area in California, I was appalled to find 1500 sq. ft. two bedroom, one bathroom, ranch houses on postage stamp lots, needing complete renovations, selling for half a million. In some fashionable communities out there, the worst house in town was selling for well over a million dollars.
How did this happen?
In the old days, mortgages did not grown on trees. Banks lent money grudgingly and only successful people with very stable jobs could obtain long-term financing. Ordinary people had to save the money to pay all cash or find a motivated seller willing to hold a mortgage for a few years. Of course, that meant you might get a five year mortgage if you were very lucky. More likely, you’d get three years. Nobody was going to give you 30 years financing.
Then along came the government. The federal government supplied the leverage which allowed idiots all over America to bid up prices of houses, offering to pay major chunks of their income for 30 years. And Voila! people a bit older than me who bought nice homes in booming areas for a few tens of thousands found the value of their investment multiplied astonishingly over a couple of decades. I know one executive couple from Bedford, NY, who often told me ruefully that, though they had worked hard and saved and invested all their lives, the only thing that ever earned them serious money was the decision to buy their house.
Of course, the windfall avalanche of gold that came to the lucky homeowner who purchased in the old days was really just a wealth transfer from members of a younger generation facilitated by our obliging uncle.
Younger people didn’t really mind backing up the pickup trucks full of dollars in the driveways of that older generation and pitchforking out the money, because they all believed the party would continue. Real estate prices would just keep on growing to the sky, and their own turn would come. Some fine day, members of a generation still younger would come along, this time with box car loads of dollars.
Pity that the music recently stopped. No more growth to the sky. No generational wealth transfer for you.
Steven Malanga, of City Journal, says that government-sponsored housing booms have happened several times before, always followed by busts. We’ve just forgotten, and you know what Santayana said: Those who fail to learn from history are condemned to repeat it.
I don’t think that it is only a belief that home ownership inspires the bourgeois virtues that causes government to subsidize housing. Housing subsidies serve large, deeply interested constituencies and are inevitably popular.
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