The government already offers you, the consumer, all kinds of bailouts, including several recent amendments to FHA secured refinance programs for subprime borrowers in danger.
What is your take on those? I hate, hate, hate the fact that people who were being idiots and got into horrible loans that they couldn't afford are now able to refinance and get loans at sometimes a full percentage point under what I, a person with solid cash flow and good credit, could possibly hope to qualify for.
The sad thing is that lending programs to provide affordable housing for people with low incomes sounds like a good thing.
It is, you just have to make sure that the terms meet up with the reality of the person who's applying. The problem is, they're being risky investments it tends to require more fees and higher percentages which undercuts meeting their reality in the first place. Particularly since you can't buy a house via micro-credit. I wonder if longer term, lower monthly payments would have any potential benefits. Rather than the usual 30 year mortgage, have it be for 50 so the individual payments are that much less; even though they'd be paying more in total.
The sad thing is that lending programs to provide affordable housing for people with low incomes sounds like a good thing.
It is, you just have to make sure that the terms meet up with the reality of the person who's applying. The problem is, they're being risky investments it tends to require more fees and higher percentages which undercuts meeting their reality in the first place. Particularly since you can't buy a house via micro-credit. I wonder if longer term, lower monthly payments would have any potential benefits. Rather than the usual 30 year mortgage, have it be for 50 so the individual payments are that much less; even though they'd be paying more in total.
Its just not good business, because in year 35 they could suddenly need massive surgery and have to opt out of the last fifteen years of the loan, whereas in a 30 year mortgage they're out of your hair. Heck, even if they're forced to jump ship 10 years into the loan they've still paid you much more in a 30 year mortgage than in a 50 year mortgage.
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MrMisterJesus dying on the cross in pain? Morally better than us. One has to go "all in".Registered Userregular
As for "getting off light," they're going out of business, losing billions, and so forth. You think Countrywide, Wachovia, or Bear Sterns got off easy?
The stockholders might have taken it in the shorts, but did any of the executives running the company actually get hit with the cost of the subprime failure, or was it just time to take the golden parachute and move on to greener pastures?
so what happens now? I've read that ~90 banks are close to failure.
I believe that 1 major (Indy) and 4 smaller banks have been taken over by the FDIC this year.
During the SNL crisis, the FDIC was taking over 225 a year. Things could be worse.
On Glass Steagal - the banks had been finding ways for years to go around it via mechanisms like holdco structures and other clever manuevering. The repeal of the act was primarily an acknowldgement of an existing market reality.
As some have pointed out, the answer on who is to blame for this mess is - everyone. Anyone who has benefited from low low interest rates going back to 2001 benefited from the primary policy that fueled the massive housing bubble. The fed, govt, CRA, etc. all played a role in this bubble. Likewise, greedy investors, Ibanks printing money off of securitization fees, real estate agents, moronic homeowners who thought putting no money down (or in some case doing negative amort loans), bank managers approving loans, etc. also fueled this massive real-estate bubble are also to blame.
We are all to blame in one way or another and there is plenty of blame to go around. Instead of finger pointing, let's instead look at what we do now. People who advocate sitting back and watching the financial system burn to the ground are moronic. This attitude of "let them reap what they sow" regardless of the disasterous economic consequences is very akin to how the Hoover administration handled the beginning of the depression. Hoover didn't want to meddle and instead let the system correct itself, with great success! Bernake is a scholar of the depression, he understands that when the stakes are high enough, the govt needs to step in to calm the markets and ensure a run-on-the-banks / financial melt-down doesn't occur.
I do understand the sentiment that people who got rich off the bubble should be the ones paying. For the most part, those who made investments in these sectors and the banks that made the loans have been taking it in the ass. Real-estate agents are going out of business left and right. If you really want to get that last 10-20% of punishment, the price is probably going to be a massive financial crisis, the impact of which will be felt by every single person in the country. I mean, does anyone believe that letting the GSE's that hold over half the mortgages in the country go under is not going to massively fuck up the economy and the average American? And even if you have a "belief" that this won't happen, is it worth the risk when the price of a bailout is a paltry 0.8% (assuming $25 billion)of the federal budget (if the funds are even used)? I call that a very cheap insurance policy to ensure the economy doesn't suffer hundreds of billions (or even trillions) of damage.
Trying to dole out punishment (and don't forget real-estate brokers and homeowners who defaulted, everyone responsible should pay) in a mess this large is an exceedingly difficult and potentially expensive proposition. We should instead be focusing on the most effecient ways to stabilize the markets and prevent a repeat of what we have been experiencing over the past year (which of course we will fail to do - there is always another bubble). Burning down your house when your children are in it to kill some rats is excessive and so is torching the financial system and the economy to get that last pound of flesh out of the greedy Wall St types.
EDIT: Also, most of the people clammering to let the banks fail in the financial world are the rich hedge fund / vulture investors and wealthy individuals who will make out like thieves in a melt-down. They will be picking up assets on the cheap and will eventually make a pile of money. They can afford to take this view because their wealth essentially insulates them from a financial crisis. Weird that people on these boards are espousing the views on individuals they probably violently disagree with on every other policy
The stockholders might have taken it in the shorts, but did any of the executives running the company actually get hit with the cost of the subprime failure, or was it just time to take the golden parachute and move on to greener pastures?
Well, that's a lot messier to calculate. Exactly how much did they benefit from it to begin with? Shareholders were the ones benefitting from the profits, so yeah, they are the ones eating it now. Executives would have their same salary and benefits and golden parachute regardless of whether or not they played a role in this.
But think about this realistically. If an executive at one mortgage firm said "nope, not for us" and stuck firm to conservative lending practices, not only would his business likely have been shut down by CRA empowered community action groups or government examiners for not lending enough to the poor, but also since all his competitors generated huge profits for shareholders by participating in this bubble, his butt would be fired pronto and replaced by someone willing to take the same risks to get all that green money. That's why they have golden parachutes to begin with, because it's really easy to get stuck in a no-win situation when you are at a sufficiently high level of authority. Hell, that's why we have corporations to begin with, to protect business and individuals from the emotional response of "hang the captain" every time the market turns.
Assuming the executive isn't a major shareholder (which is often not the case), they are still probably taking a general economic hit due to the poor performance of their company just like anyone employed in that business, but otherwise it's not like they were the ones making all the money to begin with.
EDIT: Also, perfunctory statement of agreement with Roanth.
What is your take on those? I hate, hate, hate the fact that people who were being idiots and got into horrible loans that they couldn't afford are now able to refinance and get loans at sometimes a full percentage point under what I, a person with solid cash flow and good credit, could possibly hope to qualify for.
Honestly? Well, I took out one of those bad loans myself, and I'm still in it, and now I'm looking to see if I can score myself a sweet deal on an FHA secured fixed like I did with my first home. Granted I'll be fine regardless because I took a calculated risk and knew exactly what I was getting into and was prepared for even worse than what's going on now. But if I can find yet another way to benefit in these bad times, then yea for me.
But looking at it ethically and not selfishly, I still think it isn't really much different than any other "bailout." The program is pretty strict, it doesn't allow people to default or skip payments or get a free mortgage or anything like that. It just promises insurance, much like existing PMI, which like most "bailouts" going on right now, it is more of a "don't worry I got your back" than it is a "BAIL, BAIL!" I mean, I hate the fact that people who bought their home a month after me got a full percentage point less than me just based on rate movement. That isn't exactly "fair" either.
I do understand the sentiment that people who got rich off the bubble should be the ones paying. For the most part, those who made investments in these sectors and the banks that made the loans have been taking it in the ass. Real-estate agents are going out of business left and right. If you really want to get that last 10-20% of punishment, the price is probably going to be a massive financial crisis, the impact of which will be felt by every single person in the country. I mean, does anyone believe that letting the GSE's that hold over half the mortgages in the country go under is not going to massively fuck up the economy and the average American? And even if you have a "belief" that this won't happen, is it worth the risk when the price of a bailout is a paltry 0.8% (assuming $25 billion)of the federal budget (if the funds are even used)? I call that a very cheap insurance policy to ensure the economy doesn't suffer hundreds of billions (or even trillions) of damage.
You say that, and to ignorant me it seems reasonable. But then I read something like this and
I’ll address one more time why that $25 billion cost estimate for the Fannie Mae and Freddie Mac bail-out is such a bogus number, and why it’s so insane that it will be used in Washington.
...
No company, not a single one, that is leveraged over 60 times, is fundamentally sound.
...
Please note that of F&F’s $5.2 trillion portfolio, $1.5 trillion are mortgage securities and home loans they own, and $3.7 trillion are securities that they guarantee, held by other investors.
...
But what about that $3.7 trillion in third party securities? Those are not real assets, and never have been; when you peel off the skin, they are bets. When the underlying assets lose value, they can quickly become worthless.
...
That fair estimate would state that potential losses to the US taxpayer from the GSE bail-out would be between $25 billion and $2.5 trillion. And still add that the number could be much higher.
Is that just fear mongering or being needlessly pessimistic?
on another note - where do you go for the financial saga summary? any good blogs?
Ugh, well I'm currently working as an employment lawyer and all I can say is that it seems the rate of redundancies is shooting up here in the UK. If it isn't sales collapsing it is banks shutting off credit to even healthy, profitable companies. Depressing for all involved really
It's going to be extra fun when all the new environmental regulations requiring massive equipment purchases start causing loan applications to come in... and get rejected because of the extra risk. :P
Its just not good business, because in year 35 they could suddenly need massive surgery and have to opt out of the last fifteen years of the loan, whereas in a 30 year mortgage they're out of your hair. Heck, even if they're forced to jump ship 10 years into the loan they've still paid you much more in a 30 year mortgage than in a 50 year mortgage.
Sorry to seem anti-capitalist, but sometimes to help people out you may have to do things that don't seem like good business in the short term on the off-chance that it ends up being better in the balance in the long term. It is high-risk, and it is not profitable at all. But, if someone never has a chance or if they're kept in the poor house by crazy-as-fuck interest and cost-of-living, they're guaranteed to never turn you a profit.
I don't pretend know how to accomplish the right balance, though, or how to make it seem appealing to anyone in the business of turning a profit.
Is that just fear mongering or being needlessly pessimistic?
on another note - where do you go for the financial saga summary? any good blogs?
I think its a little of both. Things are bad right now (though they do seem better than a couple weeks ago). Saying that insuring loans is just a gamble is misleading. All insurance companies take this 'gamble'. When an insurance company insures the value of the house it takes a similar risk. A house could become worthless, if its destroyed. All insurance companies play percentages games, and usually win.
That's true in this case too. Some of those securities may end up being worthless, but I its unlikely that all of them will.
Its just not good business, because in year 35 they could suddenly need massive surgery and have to opt out of the last fifteen years of the loan, whereas in a 30 year mortgage they're out of your hair. Heck, even if they're forced to jump ship 10 years into the loan they've still paid you much more in a 30 year mortgage than in a 50 year mortgage.
Sorry to seem anti-capitalist, but sometimes to help people out you may have to do things that don't seem like good business in the short term on the off-chance that it ends up being better in the balance in the long term. It is high-risk, and it is not profitable at all. But, if someone never has a chance or if they're kept in the poor house by crazy-as-fuck interest and cost-of-living, they're guaranteed to never turn you a profit.
I don't pretend know how to accomplish the right balance, though, or how to make it seem appealing to anyone in the business of turning a profit.
I think America does a good job of balancing this. It just seems part of our culture that people should be owning instead of renting (not that I disagree with this ideal). Our home ownership rate is much higher than other countries. One of the big things we do that other countries don't, is we allow interest on mortgages to be tax deductible. That's a big deal.
Yeah the mortgage interest deduction is HUGE. I didn't even mention that.
Generally home ownership is a correlation (and in many cases shown to be cause) of a lot of good things for families. So our government pushes it hard, including into the hands of those who can't afford it.
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MrMonroepassed outon the floor nowRegistered Userregular
But think about this realistically. If an executive at one mortgage firm said "nope, not for us" and stuck firm to conservative lending practices, not only would his business likely have been shut down by CRA empowered community action groups or government examiners for not lending enough to the poor, but also since all his competitors generated huge profits for shareholders by participating in this bubble, his butt would be fired pronto and replaced by someone willing to take the same risks to get all that green money.
What about the hundreds of banks that did exactly this and rode straight through without any major management upsets? There's still plenty of safe money out there, and plenty of brokerages that refused to deal in sub-primes. As was said earlier, not all banks are bound by the CRA and there was obviously a huge number of banks not covered that engaged in risky behavior buying debt. If you want to show that CRA actually did contribute meaningfully to this mess, you have to show that the banks operating under it did noticeably worse than banks who were not. I'm not convinced that's been done yet.
Sharia-Compliant "mortgage" houses, incidentally, have weathered this better than anyone.
But think about this realistically. If an executive at one mortgage firm said "nope, not for us" and stuck firm to conservative lending practices, not only would his business likely have been shut down by CRA empowered community action groups or government examiners for not lending enough to the poor, but also since all his competitors generated huge profits for shareholders by participating in this bubble, his butt would be fired pronto and replaced by someone willing to take the same risks to get all that green money.
What about the hundreds of banks that did exactly this and rode straight through without any major management upsets? There's still plenty of safe money out there, and plenty of brokerages that refused to deal in sub-primes. As was said earlier, not all banks are covered by the CRA and there was obviously a huge number of banks not covered that engaged in risky behavior buying debt. If you want to show that CRA actually did contribute meaningfully to this mess, you have to show that the banks operating under it did noticeably worse than bank who were not. I'm not convinced that's been done yet.
Sharia-Compliant "mortgage" houses, incidentally, have weathered this better than anyone.
I was going to agree with MrMonroe on this. The bank I work at has extremely minimal exposure to subprime mortgages, but is one of the bigger banks in the country.
Right, that's true. Many of them stuck it out without going nuts on subprimes. Particularly small banks who don't have to answer to shareholders and aren't governed by CRA, but also some large ones too.
But I already explained that 1) the requirements of CRA are pretty much word-for-word what we now accuse lenders of doing wrong, so it's kind of hard to claim it isn't related, and 2) CRA helped to fuel the bubble and provide the basis for the business model, but other lenders all came along long before the bubble popped, so no, you wouldn't necessarily expect CRA banks to do worse.
The government already offers you, the consumer, all kinds of bailouts, including several recent amendments to FHA secured refinance programs for subprime borrowers in danger.
What is your take on those? I hate, hate, hate the fact that people who were being idiots and got into horrible loans that they couldn't afford are now able to refinance and get loans at sometimes a full percentage point under what I, a person with solid cash flow and good credit, could possibly hope to qualify for.
You and me both. I've been renting for the last three years because I had no intention of staying here after I graduate, even though theoretically I could probably have afforded to buy something. And all the while, everybody was pushing me to buy, because "hey, you can just re-sell it in a couple years for a huge profit!" As if it was a no-brainer.
Some of those same people are now stuck in houses that they can barely afford but can't manage (or afford) to resell.
You can't live in a tent made out of corporate stocks, and if you can't afford the house now (in 2003) how are you going to afford it next year when the price inexorably goes up as it had for 2 decades prior? Sitting it out and renting is just throwing money down a hole expecting the market to eventually correct. Well, that's a great idea in principle, but if you did that in 1993 you'd only just now be starting to look for a home. That's beyond unrealistic.
Besides, the actual cost of of materials and construction are very minimal in terms of the value a home will or should fetch. Location and local amenities are the chief driving factor, because you live in a neighborhood, not in your bedroom.
Tied into the above, of course. The point is that for at least some of the borrowers involved here, they could easily have either A) waited a couple years until their financial situation improved (this does happen...either changing careers, finishing school, whatever or more likely bought something cheaper. Again, at least from what I saw among some people I know (mostly early 20-somethings who either were finishing or had just finished school) it was a matter of buying something you like and hope to re-fi or sell before the rate on your mortgage adjusted...because you sure as shit couldn't actually afford it.
Granted, I'm not entirely screwed here. On the one hand, I get to pay a smidge more in taxes to bail some fuckers out, but on the other I'm not tied into a mortgage and hopefully I'll be able to find some property for less when we finally do buy (once I finish school). And with a VA home loan, even a tightening of the mortgage market shouldn't screw me too hard. But at the end of the day a significant portion of borrowers simply should have known better. And while my quasi-socialist side generally has little problem extending a little help to those that have been screwed over, as I get older (and start to actually pay taxes) a more crotchety side wonders why my money should be given to those that screwed themselves over. And laughed at silly old me, the renter, as they did it.
EDIT: Also, I realize that in this case my money should be given to them because not doing so could tank the entire economy, which would most definitely fuck me over as well. But seriously, it's annoying, and I'd like to see the government take some steps to try and ensure that this is a one-time thing.
so, basically the local economy is that of frogstar b, but with home building and remodeling rather than shoes. 85% of people you meet in a bar, theoretically work in some form of homebuilding.
Sitting around the smoking table and chatting with people about homes was always interesting. Aside from reality tv and lost, everything was insane finance methods or pimping houses with the intent of sale. People who's income is based on the housing boom, getting loans at retarded housing boom terms.
We are spetacularly fucked, but my business sells to the whole country, so oil and stuff makes it rough, but we aren't exactly tied to the local ecconomy. I get to sit back and watch the inertia run out. I can't help but think of heat death.
I think there is a massive amount of blame to go around. In terms of national stuff, we can't really afford to have the major banks fail, so I guess I'm alright with the 'bailout', or whatever. I rent, so I don't feel particularly hypocritical wagging my finger at any of the parties involved.
i'd lime all that stuff that yar posted, but it might be a little much. It's a pretty good thread, I think.
I do understand the sentiment that people who got rich off the bubble should be the ones paying. For the most part, those who made investments in these sectors and the banks that made the loans have been taking it in the ass. Real-estate agents are going out of business left and right. If you really want to get that last 10-20% of punishment, the price is probably going to be a massive financial crisis, the impact of which will be felt by every single person in the country. I mean, does anyone believe that letting the GSE's that hold over half the mortgages in the country go under is not going to massively fuck up the economy and the average American? And even if you have a "belief" that this won't happen, is it worth the risk when the price of a bailout is a paltry 0.8% (assuming $25 billion)of the federal budget (if the funds are even used)? I call that a very cheap insurance policy to ensure the economy doesn't suffer hundreds of billions (or even trillions) of damage.
You say that, and to ignorant me it seems reasonable. But then I read something like this and
I’ll address one more time why that $25 billion cost estimate for the Fannie Mae and Freddie Mac bail-out is such a bogus number, and why it’s so insane that it will be used in Washington.
...
No company, not a single one, that is leveraged over 60 times, is fundamentally sound.
...
Please note that of F&F’s $5.2 trillion portfolio, $1.5 trillion are mortgage securities and home loans they own, and $3.7 trillion are securities that they guarantee, held by other investors.
...
But what about that $3.7 trillion in third party securities? Those are not real assets, and never have been; when you peel off the skin, they are bets. When the underlying assets lose value, they can quickly become worthless.
...
That fair estimate would state that potential losses to the US taxpayer from the GSE bail-out would be between $25 billion and $2.5 trillion. And still add that the number could be much higher.
Is that just fear mongering or being needlessly pessimistic?
on another note - where do you go for the financial saga summary? any good blogs?
Ugh, that woman is pretty ignorant. For banks, comparing the amount of equity capital to balance sheet liabilities is always going to result in a huge "leverage" number. The reason this doesn't work is that she is ignoring the assets on the other side of the balance sheet. For example, Wells Fargo (a rock solid bank) has $549 billion in liabilities and only $48 billion of equity, a leverage multiple of over 11.0x (which would be unsustainable for a normal business). Looking at Fannie Mae, they have $800 billion in liabilities (excluding $2.2 trillion of guaranties that I will get to) and roughly $40 billion in equity. This is 20.0x, which is light and why they are seeking a govt infusion.
This all gets pretty complicated, but the trillion dollar numbers she refers to is for mortage backed securities that have been sold off in securitizations to third party investors. These are non-contingent liabilities and don't show up on the Company's balance sheet (although they are referenced in the Company's financial disclosure).
Basically, GNMA credit guarantees certain payments in the securitization to enhance liquidity. This actually was their primary govt mandate and why they are quasi-govt agencies in the first place. By providing the guarantee (with some implied level of federal support) they make the market more liquid and make it easier for people to get loans.
Under a very complex set of contractual rules, they may ultimately have to perform on some of these guarantees. For this to become a real problem, the forclosure rate would need to spike well above current levels and there would have to be a catastrophic meltdown (making the last 12 months look rosey in comparison). FNMA would also have recourse to collateral, interest reserve accounts, etc. to offset these potential losses. To quote their 10-Q:
"The maximum exposure from our guaranties is not representative of the actual loss we are likely to incur, based on our historical loss experience. In the event we were required to make payments under our guaranties, we would pursue recovery of these payments by exercising our rights to the collateral backing the underlying loans and through available credit enhancements, which includes all recourse with third parties and mortgage insurance."
To give you some color, FNMA has approximately $2.2 trillion of guaranty obligations but because of everything I just listed and quoted the on-balance sheet liability is approximately $15 billion. Again, there would be have to be a massive meltdown many times worse than the current environment for this to become a problem.
Fannie and Freddie actually have fairly high quality assets. To be eligible for the pool the loans had to be "conforming" and meet certain standards. Let's remember that only 1-2% of houses across the nation are in foreclosure, etc. The bail-out is really meant to address the issues that FNMA has with their $800 billion on-balance sheet loan portfolio, not the $2.2 trillion of guarantees as that is not a "real" liability.
How the guarantee does come into play, however, would be in the even that FNMA goes under because of their on-balance sheet problems. The removal of the FNMA guarantee from the market would massively reduce available mortgage financing and create all sorts of turmoil regarding the guarantees. Even though there is an incedibly low probability that these guarantees ever become relevant, the fear that they potentially could and FNMA wouldn't be able to perform is what creates the market instability. This scenario is exactly what the Fed is trying to avoid. Either potentially fund $25 billion now, or have FNMA go under, massively reduce available financing, and create tons of fear in $2 trillion of third-party securities, which would have a ripple effect throughout the entire financial system.
Anyways, hope some of that is helpful. Incredibly complex subject which is why it terrifies me that we are relying on the morons in Congress to fix this.
Please note I used FNMA for simplicity. Everything said for it also holds true for Freddie
EDIT: As to my sources, college finance classes, 8 years in the financial industry, and good old company filings on sec.gov (10-Qs and Ks). As for blogs, people who really understand this are probably not bloggers (as evidenced by the person you linked). People see really big numbers and without the necessary understanding of the financial mechanics involved can draw all sorts of conclusions (most of which are wrong or slanted to meet their own personal agenda). If I stumble across anything good I will let you know. Best place for news like this is bloomberg.com
EDIT2: Man I just read the rest of that guys ramblings. Please do not listen to him on anything regarding finances. If housing prices drop 50% across the board this entire country is fucked and the last thing we are going to be worrying about is a couple trillion of liabilities at a GSE. Seriously, inflation will probably be Zimbabwe like so we can just pay it off using $5 billion bills. Also, referencing a senator, especially bunning, to prove a point is an epic fail. That guy probably can't even balance a check book. Politicians are against it because it is a great speaking point and it sounds good to the uneducated masses to villanize the financial system (which is partially appropriate) and talk rail against the evil government spending your $$$$. That fucker probably couldn't even explain what a securitization is
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MrMonroepassed outon the floor nowRegistered Userregular
Right, that's true. Many of them stuck it out without going nuts on subprimes. Particularly small banks who don't have to answer to shareholders and aren't governed by CRA, but also some large ones too.
But I already explained that 1) the requirements of CRA are pretty much word-for-word what we now accuse lenders of doing wrong, so it's kind of hard to claim it isn't related, and 2) CRA helped to fuel the bubble and provide the basis for the business model, but other lenders all came along long before the bubble popped, so no, you wouldn't necessarily expect CRA banks to do worse.
It's quite easy to claim it isn't related, just as it's easy to claim that it is, so long as neither of us provide any empirical evidence for whether banks governed by the CRA tended to put themselves at more risk than those that did not. I have no idea where to begin looking for those numbers, unfortunately, so this point is going to remain unresolved unless you have some idea where to begin with that research. Unless there's a study already out there, I wouldn't expect you to go through hundreds of financial reports from individual banks and run an ANOVA on the dataset. However, don't expect me to take your hypothesis at face value until you or someone else does.
tl;dr Roanth: It's not really a bailout, it's just the government expressing their intent to stand behind these companies, so that players in the market will feel better about all the "what-ifs" and not abandon the mortgage industry.
It's quite easy to claim it isn't related, just as it's easy to claim that it is, so long as neither of us provide any empirical evidence for whether banks governed by the CRA tended to put themselves at more risk than those that did not. I have no idea where to begin looking for those numbers, unfortunately, so this point is going to remain unresolved unless you have some idea where to begin with that research. Unless there's a study already out there, I wouldn't expect you to go through hundreds of financial reports from individual banks and run an ANOVA on the dataset. However, don't expect me to take your hypothesis at face value until you or someone else does.
The studies are out there - and they showed that CRA lending wasn't actually risky, because the housing boom made it a lucrative business for years. And hence everyone else got on board and fuelded the bubble. However, the CRA requirements are essentially word-for-word what we accuse banks of doing wrong. Lacking the empirical evidence you want, we still have the following very likely dichotomy: either the CRA is very much to blame because lenders did what it said and that's what we now hate them for, or the CRA isn't to blame because doing what it said really wasn't risky, which means we are wrong to now accuse greedy lenders of giving complicated loans to people who couldn't pay, because really that wasn't risky. Either way, my point is made: blaming greedy lenders isn't the whole answer here.
Roanth - thanks. I think that explains it pretty well. I do check bloomberg, but even though I can understand the articles I'm no good at the big picture.
Really I just want to know when to stockpile canned goods and ammunition.
Roanth - thanks. I think that explains it pretty well. I do check bloomberg, but even though I can understand the articles I'm no good at the big picture.
Really I just want to know when to stockpile canned goods and ammunition.
You are way too late for that. I cornered the market on apocalypse staples. Being a good capitalist, I would be happy to sell them to you at a small mark-up and rent you space in my Apocalypse Proof shelter.
Glad you found it somewhat informative. My rule of thumb is people who try to simplify a multi-trillion dollar problem into two or three easy soundbites generally have no clue what they are talking about. At least my ignorance comes wrapped in lengthy paragraphs that contain some real facts (along with some educated guesses).
So we can't have a true free market then. What's wrong about socialism again?
On average it delivers lower wages and a lower standard of living with higher regulation and much higher taxes.
With the exceptions of Britain, Germany, and some of the smaller northern europe nations, Socialism really hasn't worked out that well for those who've used it.
So we can't have a true free market then. What's wrong about socialism again?
On average it delivers lower wages and a lower standard of living with higher regulation and much higher taxes.
With the exceptions of Britain, Germany, and some of the smaller northern europe nations, Socialism really hasn't worked out that well for those who've used it.
Of course, that still leaves Britain, Germany, and some of the smaller northern europe nations, which tend to enjoy the highest standards of living in the world. :P
So we can't have a true free market then. What's wrong about socialism again?
On average it delivers lower wages and a lower standard of living with higher regulation and much higher taxes.
With the exceptions of Britain, Germany, and some of the smaller northern europe nations, Socialism really hasn't worked out that well for those who've used it.
...we are a Socialist country. Just not nearly as much as Europe et. al.
So we can't have a true free market then. What's wrong about socialism again?
On average it delivers lower wages and a lower standard of living with higher regulation and much higher taxes.
With the exceptions of Britain, Germany, and some of the smaller northern european nations, Socialism really hasn't worked out that well for those who've used it.
Of course, that still leaves Britain, Germany, and some of the smaller northern european nations, which tend to enjoy the highest standards of living in the world. :P
Granted, but of those, Britain is just barely Socialist post-Thatcher (who, throwing myself on the grenade, vastly strengthened their economy in the long term by cutting most of the socialist strings) and the Northern European nations are approximately the size of Illinois in terms of both landmass and population, and they get sweet dividends! from North Sea oil, and their energy costs are vastly lower because they generally operate on geothermal or nuclear power to a much higher degree than the United States. They also end up paying a shitload for imports, which has been abated somewhat by the EU.
To whit, one cannot extrapolate the success of Northern European Democratic Socialism with the success of Democratic Socialism in the United States. People who say "But it works over there!" always forget that here is not there.
...we are a Socialist country. Just not nearly as much as Europe et. al.
To an even lesser extent than Britain. Socialism here is mostly limited to defense applications, certain aspects of energy, a smidge of the healthcare industry, and bailing out companies who fuck up catastrophically and whose violent death would cause extreme knock-on effects for the rest of the economy.
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MrMonroepassed outon the floor nowRegistered Userregular
tl;dr Roanth: It's not really a bailout, it's just the government expressing their intent to stand behind these companies, so that players in the market will feel better about all the "what-ifs" and not abandon the mortgage industry.
It's quite easy to claim it isn't related, just as it's easy to claim that it is, so long as neither of us provide any empirical evidence for whether banks governed by the CRA tended to put themselves at more risk than those that did not. I have no idea where to begin looking for those numbers, unfortunately, so this point is going to remain unresolved unless you have some idea where to begin with that research. Unless there's a study already out there, I wouldn't expect you to go through hundreds of financial reports from individual banks and run an ANOVA on the dataset. However, don't expect me to take your hypothesis at face value until you or someone else does.
The studies are out there - and they showed that CRA lending wasn't actually risky, because the housing boom made it a lucrative business for years. And hence everyone else got on board and fuelded the bubble. However, the CRA requirements are essentially word-for-word what we accuse banks of doing wrong. Lacking the empirical evidence you want, we still have the following very likely dichotomy: either the CRA is very much to blame because lenders did what it said and that's what we now hate them for, or the CRA isn't to blame because doing what it said really wasn't risky, which means we are wrong to now accuse greedy lenders of giving complicated loans to people who couldn't pay, because really that wasn't risky. Either way, my point is made: blaming greedy lenders isn't the whole answer here.
Or maybe it's a third possibility: CRA requirements were a bad decision that those banks might have been equally likely to make without the requirements. I'm not saying let government off the hook. Any loan made under the auspices of government regulation and turned out to be awful are just as bad as the ones made by private lenders doing their own thing. I'm just saying that the bulk of this mess comes down to lenders who wanted to make money on a risky venture and buyers who don't know how to read a contract before they sign it. Thus I think any bailout should be aimed at one group alone: people who had mortgages they could afford right up until the shit hit the fan and their rates skyrocketed far beyond what they could have been reasonably expected to imagine. Risky lenders and uninformed buyers need to take their write-offs and go under.
Also, and this is just a pet peeve of mine, can we stop calling every single instance of a government giving money to a private citizen or company when there are no goods or services rendered "socialism?" Socialism is when a government exercises control over the means of production. Social Security is not socialism. A bailout for F&F is not socialism. Lending JPMorgan Chase billions of dollars to keep Bear Stearns solvent is not socialism. These are all incidences of welfare, personal and corporate, something that Democracies do all the time. Calling it socialism means it's only a matter of time till someone pulls out the "they called it National Socialism for a reason," and that way lies madness.
But no, the entire point that several of us have made very clear is that this is NOT just the fault of greedy lenders and stupid borrowers. The government, the real estate industry, Wall Street, rating analysts, everyone was in on it and everyone is to blame. We've also pretty clearly pointed out that steadfast adherence to "reap what you sow" wrt large mortgage clearinghouses will only destroy this country's economy.
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MrMonroepassed outon the floor nowRegistered Userregular
edited July 2008
It wasn't you I was complaining about re: "socialism."
I'm a relative newcomer to D&D, but I can tell that while I won't always agree with you, you are at least specific in saying what your mean all the time, which I think is really admirable. I all too often cram my foot a significant distance down my throat. (see my last post in the embarrassing stories thread)
I'm kinda undecided about whether it's ok to let these firms go under. I don't really see how it has such a terrible effect on the economy other than sending the stock market down, and I don't really think that has much of an impact on anyone other than people who own stock. And of course, I want them to suffer for being idiots and fucking themselves (and us) over. I don't like the idea that I have to finance people making bad decisions.
When it really comes down to it, what I really hate is seeing the executives float away on their golden parachutes without any kind of accountability for what they've done. But then, I know exactly who to blame for that: the shareholders.
I'm kinda undecided about whether it's ok to let these firms go under. I don't really see how it has such a terrible effect on the economy other than sending the stock market down, and I don't really think that has much of an impact on anyone other than people who own stock. And of course, I want them to suffer for being idiots and fucking themselves (and us) over. I don't like the idea that I have to finance people making bad decisions.
When it really comes down to it, what I really hate is seeing the executives float away on their golden parachutes without any kind of accountability for what they've done. But then, I know exactly who to blame for that: the shareholders.
Well, I'll let someone else explain why its important to our economy to have a well functioning credit/mortgage market. But I think you underestimate the number of people who own stock. Let me enlighten you, just about everyone. Do you have a 401k? do you have an IRA? you might be young, so maybe not. But what about your parents? Or the baby boomers who are getting ready to retire and most likely have a significant portion of their retirement tied up in stocks.
This seems to be a position a lot of people take and I think it might stem from an irrational view that wealth is a zero sum game. That is if a few rich people lose a lot of money, everyone else will be better off. That's really not the case. If the market crashes the ultra-rich will be even better off. They'll be the ones who buy up the pieces. Look at who got rich after the great depression, people who had money to buy the now super cheap assets that were suddenly everywhere..
The mortgage market in the US is worth $10-12 Trillion. That's almost the US GDP for a year. Though after an economic crash, it would be more.
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MrMisterJesus dying on the cross in pain? Morally better than us. One has to go "all in".Registered Userregular
When it really comes down to it, what I really hate is seeing the executives float away on their golden parachutes without any kind of accountability for what they've done. But then, I know exactly who to blame for that: the shareholders.
From what I understand, the shareholders aren't empowered to punish executives except under exceptional circumstances. While they theoretically own the company, they're basically along for the ride.
...we are a Socialist country. Just not nearly as much as Europe et. al.
To an even lesser extent than Britain. Socialism here is mostly limited to defense applications, certain aspects of energy, a smidge of the healthcare industry, and bailing out companies who fuck up catastrophically and whose violent death would cause extreme knock-on effects for the rest of the economy.
I think we should nationalise (federal control) of more stuff, especially in critical areas. Health care for one. Energy. Education. That should keep us busy for a while.
But I'd like to hear a good reason why we shouldn't nationalise companies "whose violent death would cause extreme knock-on effects for the rest of the economy". If they're so important that we're on the hook for them anyway, why shouldn't we exert more direct control?
Also, and this is just a pet peeve of mine, can we stop calling every single instance of a government giving money to a private citizen or company when there are no goods or services rendered "socialism?" Socialism is when a government exercises control over the means of production. Social Security is not socialism. A bailout for F&F is not socialism. Lending JPMorgan Chase billions of dollars to keep Bear Stearns solvent is not socialism. These are all incidences of welfare, personal and corporate, something that Democracies do all the time. Calling it socialism means it's only a matter of time till someone pulls out the "they called it National Socialism for a reason," and that way lies madness.
Oh boy, there's many many flavors of socialism. Regular communists. Market socialsts. Democratic Socialists. Social Democrats. Chinese Socialism.
But I'd like to hear a good reason why we shouldn't nationalise companies "whose violent death would cause extreme knock-on effects for the rest of the economy". If they're so important that we're on the hook for them anyway, why shouldn't we exert more direct control?
Your assumption, one that many make, is that if the government was running it then it would be so much better/safer/successful/whatever. You'd need to examine that assumption and justify it. Others might just as easily claim that if an industry is important, then we ought to privatize it and instill as much profit motive as possible.
But I'd like to hear a good reason why we shouldn't nationalise companies "whose violent death would cause extreme knock-on effects for the rest of the economy". If they're so important that we're on the hook for them anyway, why shouldn't we exert more direct control?
Your assumption, one that many make, is that if the government was running it then it would be so much better/safer/successful/whatever. You'd need to examine that assumption and justify it. Others might just as easily claim that if an industry is important, then we ought to privatize it and instill as much profit motive as possible.
The problem is that they can do whatever they want with zero consequences. Large companies acting as if risk no longer matters because they know that the Fed will bail them out isn't good for anyone. They reap the rewards when it's good, we get the bill and market instability when it's bad. If we socialized them, we would also get the rewards, and maybe they wouldn't take such stupid risks anymore.
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Nova_CI have the needThe need for speedRegistered Userregular
The problem is that they can do whatever they want with zero consequences. Large companies acting as if risk no longer matters because they know that the Fed will bail them out isn't good for anyone. They reap the rewards when it's good, we get the bill and market instability when it's bad. If we socialized them, we would also get the rewards, and maybe they wouldn't take such stupid risks anymore.
Governments make terrible business administrators. It would be more expensive in the long run.
The problem with a government run company is that it is subject to the whims of the politics of the entire nation. Which means a profitible government company is bad, since the government shouldn't be profiting (According to many people), losing money is bad since the government shouldn't be losing money (According to many people), market forces can't have a great effect on the prices since the people who buy your products are also the people who vote for you.
Take a private company and then make the board of directors established by popular vote of an entire nation. That's a government company and it's just not a good idea.
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MrMonroepassed outon the floor nowRegistered Userregular
When it really comes down to it, what I really hate is seeing the executives float away on their golden parachutes without any kind of accountability for what they've done. But then, I know exactly who to blame for that: the shareholders.
From what I understand, the shareholders aren't empowered to punish executives except under exceptional circumstances. While they theoretically own the company, they're basically along for the ride.
I'm thinking more along the lines that they all voted to give these guys contracts that include severance packages totaling tens or hundreds of millions of dollars regardless of the circumstances of the termination of the contract. As in, the guy could resign after it's found that he was spending company cash on hookers and blow to the tune of a million a year and he still gets his severance pay.
You don't need special punishments, you just need to not give these guys contracts that incentivize fucking the shareholders.
And yes, I'm aware that there are a lot of people who own stock. (I think the number rests at around 2/3rds of America) I still don't think it's a great market indicator. When those stocks crash, the people who own the most hurt the most, though you're right, they will generally benefit off it more when the rebound happens.
I don't understand the reasoning that there will be more money in the mortgage market after this debacle.
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What is your take on those? I hate, hate, hate the fact that people who were being idiots and got into horrible loans that they couldn't afford are now able to refinance and get loans at sometimes a full percentage point under what I, a person with solid cash flow and good credit, could possibly hope to qualify for.
It is, you just have to make sure that the terms meet up with the reality of the person who's applying. The problem is, they're being risky investments it tends to require more fees and higher percentages which undercuts meeting their reality in the first place. Particularly since you can't buy a house via micro-credit. I wonder if longer term, lower monthly payments would have any potential benefits. Rather than the usual 30 year mortgage, have it be for 50 so the individual payments are that much less; even though they'd be paying more in total.
Its just not good business, because in year 35 they could suddenly need massive surgery and have to opt out of the last fifteen years of the loan, whereas in a 30 year mortgage they're out of your hair. Heck, even if they're forced to jump ship 10 years into the loan they've still paid you much more in a 30 year mortgage than in a 50 year mortgage.
The stockholders might have taken it in the shorts, but did any of the executives running the company actually get hit with the cost of the subprime failure, or was it just time to take the golden parachute and move on to greener pastures?
I believe that 1 major (Indy) and 4 smaller banks have been taken over by the FDIC this year.
During the SNL crisis, the FDIC was taking over 225 a year. Things could be worse.
On Glass Steagal - the banks had been finding ways for years to go around it via mechanisms like holdco structures and other clever manuevering. The repeal of the act was primarily an acknowldgement of an existing market reality.
As some have pointed out, the answer on who is to blame for this mess is - everyone. Anyone who has benefited from low low interest rates going back to 2001 benefited from the primary policy that fueled the massive housing bubble. The fed, govt, CRA, etc. all played a role in this bubble. Likewise, greedy investors, Ibanks printing money off of securitization fees, real estate agents, moronic homeowners who thought putting no money down (or in some case doing negative amort loans), bank managers approving loans, etc. also fueled this massive real-estate bubble are also to blame.
We are all to blame in one way or another and there is plenty of blame to go around. Instead of finger pointing, let's instead look at what we do now. People who advocate sitting back and watching the financial system burn to the ground are moronic. This attitude of "let them reap what they sow" regardless of the disasterous economic consequences is very akin to how the Hoover administration handled the beginning of the depression. Hoover didn't want to meddle and instead let the system correct itself, with great success! Bernake is a scholar of the depression, he understands that when the stakes are high enough, the govt needs to step in to calm the markets and ensure a run-on-the-banks / financial melt-down doesn't occur.
I do understand the sentiment that people who got rich off the bubble should be the ones paying. For the most part, those who made investments in these sectors and the banks that made the loans have been taking it in the ass. Real-estate agents are going out of business left and right. If you really want to get that last 10-20% of punishment, the price is probably going to be a massive financial crisis, the impact of which will be felt by every single person in the country. I mean, does anyone believe that letting the GSE's that hold over half the mortgages in the country go under is not going to massively fuck up the economy and the average American? And even if you have a "belief" that this won't happen, is it worth the risk when the price of a bailout is a paltry 0.8% (assuming $25 billion)of the federal budget (if the funds are even used)? I call that a very cheap insurance policy to ensure the economy doesn't suffer hundreds of billions (or even trillions) of damage.
Trying to dole out punishment (and don't forget real-estate brokers and homeowners who defaulted, everyone responsible should pay) in a mess this large is an exceedingly difficult and potentially expensive proposition. We should instead be focusing on the most effecient ways to stabilize the markets and prevent a repeat of what we have been experiencing over the past year (which of course we will fail to do - there is always another bubble). Burning down your house when your children are in it to kill some rats is excessive and so is torching the financial system and the economy to get that last pound of flesh out of the greedy Wall St types.
EDIT: Also, most of the people clammering to let the banks fail in the financial world are the rich hedge fund / vulture investors and wealthy individuals who will make out like thieves in a melt-down. They will be picking up assets on the cheap and will eventually make a pile of money. They can afford to take this view because their wealth essentially insulates them from a financial crisis. Weird that people on these boards are espousing the views on individuals they probably violently disagree with on every other policy
But think about this realistically. If an executive at one mortgage firm said "nope, not for us" and stuck firm to conservative lending practices, not only would his business likely have been shut down by CRA empowered community action groups or government examiners for not lending enough to the poor, but also since all his competitors generated huge profits for shareholders by participating in this bubble, his butt would be fired pronto and replaced by someone willing to take the same risks to get all that green money. That's why they have golden parachutes to begin with, because it's really easy to get stuck in a no-win situation when you are at a sufficiently high level of authority. Hell, that's why we have corporations to begin with, to protect business and individuals from the emotional response of "hang the captain" every time the market turns.
Assuming the executive isn't a major shareholder (which is often not the case), they are still probably taking a general economic hit due to the poor performance of their company just like anyone employed in that business, but otherwise it's not like they were the ones making all the money to begin with.
EDIT: Also, perfunctory statement of agreement with Roanth.
I mostly just want him punished for his tan.
Honestly? Well, I took out one of those bad loans myself, and I'm still in it, and now I'm looking to see if I can score myself a sweet deal on an FHA secured fixed like I did with my first home. Granted I'll be fine regardless because I took a calculated risk and knew exactly what I was getting into and was prepared for even worse than what's going on now. But if I can find yet another way to benefit in these bad times, then yea for me.
But looking at it ethically and not selfishly, I still think it isn't really much different than any other "bailout." The program is pretty strict, it doesn't allow people to default or skip payments or get a free mortgage or anything like that. It just promises insurance, much like existing PMI, which like most "bailouts" going on right now, it is more of a "don't worry I got your back" than it is a "BAIL, BAIL!" I mean, I hate the fact that people who bought their home a month after me got a full percentage point less than me just based on rate movement. That isn't exactly "fair" either.
You say that, and to ignorant me it seems reasonable. But then I read something like this and
http://theautomaticearth.blogspot.com/2008/07/debt-rattle-july-23-2008-redefining-bad.html
Is that just fear mongering or being needlessly pessimistic?
on another note - where do you go for the financial saga summary? any good blogs?
I don't pretend know how to accomplish the right balance, though, or how to make it seem appealing to anyone in the business of turning a profit.
I think its a little of both. Things are bad right now (though they do seem better than a couple weeks ago). Saying that insuring loans is just a gamble is misleading. All insurance companies take this 'gamble'. When an insurance company insures the value of the house it takes a similar risk. A house could become worthless, if its destroyed. All insurance companies play percentages games, and usually win.
That's true in this case too. Some of those securities may end up being worthless, but I its unlikely that all of them will.
I think America does a good job of balancing this. It just seems part of our culture that people should be owning instead of renting (not that I disagree with this ideal). Our home ownership rate is much higher than other countries. One of the big things we do that other countries don't, is we allow interest on mortgages to be tax deductible. That's a big deal.
Generally home ownership is a correlation (and in many cases shown to be cause) of a lot of good things for families. So our government pushes it hard, including into the hands of those who can't afford it.
What about the hundreds of banks that did exactly this and rode straight through without any major management upsets? There's still plenty of safe money out there, and plenty of brokerages that refused to deal in sub-primes. As was said earlier, not all banks are bound by the CRA and there was obviously a huge number of banks not covered that engaged in risky behavior buying debt. If you want to show that CRA actually did contribute meaningfully to this mess, you have to show that the banks operating under it did noticeably worse than banks who were not. I'm not convinced that's been done yet.
Sharia-Compliant "mortgage" houses, incidentally, have weathered this better than anyone.
Edited for plurality agreement and emphasis.
I was going to agree with MrMonroe on this. The bank I work at has extremely minimal exposure to subprime mortgages, but is one of the bigger banks in the country.
But I already explained that 1) the requirements of CRA are pretty much word-for-word what we now accuse lenders of doing wrong, so it's kind of hard to claim it isn't related, and 2) CRA helped to fuel the bubble and provide the basis for the business model, but other lenders all came along long before the bubble popped, so no, you wouldn't necessarily expect CRA banks to do worse.
You and me both. I've been renting for the last three years because I had no intention of staying here after I graduate, even though theoretically I could probably have afforded to buy something. And all the while, everybody was pushing me to buy, because "hey, you can just re-sell it in a couple years for a huge profit!" As if it was a no-brainer.
Some of those same people are now stuck in houses that they can barely afford but can't manage (or afford) to resell.
But I was the dumbass for renting.
And these are the people who will get bailed out.
Tied into the above, of course. The point is that for at least some of the borrowers involved here, they could easily have either A) waited a couple years until their financial situation improved (this does happen...either changing careers, finishing school, whatever or more likely
Granted, I'm not entirely screwed here. On the one hand, I get to pay a smidge more in taxes to bail some fuckers out, but on the other I'm not tied into a mortgage and hopefully I'll be able to find some property for less when we finally do buy (once I finish school). And with a VA home loan, even a tightening of the mortgage market shouldn't screw me too hard. But at the end of the day a significant portion of borrowers simply should have known better. And while my quasi-socialist side generally has little problem extending a little help to those that have been screwed over, as I get older (and start to actually pay taxes) a more crotchety side wonders why my money should be given to those that screwed themselves over. And laughed at silly old me, the renter, as they did it.
EDIT: Also, I realize that in this case my money should be given to them because not doing so could tank the entire economy, which would most definitely fuck me over as well. But seriously, it's annoying, and I'd like to see the government take some steps to try and ensure that this is a one-time thing.
Sitting around the smoking table and chatting with people about homes was always interesting. Aside from reality tv and lost, everything was insane finance methods or pimping houses with the intent of sale. People who's income is based on the housing boom, getting loans at retarded housing boom terms.
We are spetacularly fucked, but my business sells to the whole country, so oil and stuff makes it rough, but we aren't exactly tied to the local ecconomy. I get to sit back and watch the inertia run out. I can't help but think of heat death.
I think there is a massive amount of blame to go around. In terms of national stuff, we can't really afford to have the major banks fail, so I guess I'm alright with the 'bailout', or whatever. I rent, so I don't feel particularly hypocritical wagging my finger at any of the parties involved.
i'd lime all that stuff that yar posted, but it might be a little much. It's a pretty good thread, I think.
Ugh, that woman is pretty ignorant. For banks, comparing the amount of equity capital to balance sheet liabilities is always going to result in a huge "leverage" number. The reason this doesn't work is that she is ignoring the assets on the other side of the balance sheet. For example, Wells Fargo (a rock solid bank) has $549 billion in liabilities and only $48 billion of equity, a leverage multiple of over 11.0x (which would be unsustainable for a normal business). Looking at Fannie Mae, they have $800 billion in liabilities (excluding $2.2 trillion of guaranties that I will get to) and roughly $40 billion in equity. This is 20.0x, which is light and why they are seeking a govt infusion.
This all gets pretty complicated, but the trillion dollar numbers she refers to is for mortage backed securities that have been sold off in securitizations to third party investors. These are non-contingent liabilities and don't show up on the Company's balance sheet (although they are referenced in the Company's financial disclosure).
Basically, GNMA credit guarantees certain payments in the securitization to enhance liquidity. This actually was their primary govt mandate and why they are quasi-govt agencies in the first place. By providing the guarantee (with some implied level of federal support) they make the market more liquid and make it easier for people to get loans.
Under a very complex set of contractual rules, they may ultimately have to perform on some of these guarantees. For this to become a real problem, the forclosure rate would need to spike well above current levels and there would have to be a catastrophic meltdown (making the last 12 months look rosey in comparison). FNMA would also have recourse to collateral, interest reserve accounts, etc. to offset these potential losses. To quote their 10-Q:
"The maximum exposure from our guaranties is not representative of the actual loss we are likely to incur, based on our historical loss experience. In the event we were required to make payments under our guaranties, we would pursue recovery of these payments by exercising our rights to the collateral backing the underlying loans and through available credit enhancements, which includes all recourse with third parties and mortgage insurance."
To give you some color, FNMA has approximately $2.2 trillion of guaranty obligations but because of everything I just listed and quoted the on-balance sheet liability is approximately $15 billion. Again, there would be have to be a massive meltdown many times worse than the current environment for this to become a problem.
Fannie and Freddie actually have fairly high quality assets. To be eligible for the pool the loans had to be "conforming" and meet certain standards. Let's remember that only 1-2% of houses across the nation are in foreclosure, etc. The bail-out is really meant to address the issues that FNMA has with their $800 billion on-balance sheet loan portfolio, not the $2.2 trillion of guarantees as that is not a "real" liability.
How the guarantee does come into play, however, would be in the even that FNMA goes under because of their on-balance sheet problems. The removal of the FNMA guarantee from the market would massively reduce available mortgage financing and create all sorts of turmoil regarding the guarantees. Even though there is an incedibly low probability that these guarantees ever become relevant, the fear that they potentially could and FNMA wouldn't be able to perform is what creates the market instability. This scenario is exactly what the Fed is trying to avoid. Either potentially fund $25 billion now, or have FNMA go under, massively reduce available financing, and create tons of fear in $2 trillion of third-party securities, which would have a ripple effect throughout the entire financial system.
Anyways, hope some of that is helpful. Incredibly complex subject which is why it terrifies me that we are relying on the morons in Congress to fix this.
Please note I used FNMA for simplicity. Everything said for it also holds true for Freddie
EDIT: As to my sources, college finance classes, 8 years in the financial industry, and good old company filings on sec.gov (10-Qs and Ks). As for blogs, people who really understand this are probably not bloggers (as evidenced by the person you linked). People see really big numbers and without the necessary understanding of the financial mechanics involved can draw all sorts of conclusions (most of which are wrong or slanted to meet their own personal agenda). If I stumble across anything good I will let you know. Best place for news like this is bloomberg.com
EDIT2: Man I just read the rest of that guys ramblings. Please do not listen to him on anything regarding finances. If housing prices drop 50% across the board this entire country is fucked and the last thing we are going to be worrying about is a couple trillion of liabilities at a GSE. Seriously, inflation will probably be Zimbabwe like so we can just pay it off using $5 billion bills. Also, referencing a senator, especially bunning, to prove a point is an epic fail. That guy probably can't even balance a check book. Politicians are against it because it is a great speaking point and it sounds good to the uneducated masses to villanize the financial system (which is partially appropriate) and talk rail against the evil government spending your $$$$. That fucker probably couldn't even explain what a securitization is
It's quite easy to claim it isn't related, just as it's easy to claim that it is, so long as neither of us provide any empirical evidence for whether banks governed by the CRA tended to put themselves at more risk than those that did not. I have no idea where to begin looking for those numbers, unfortunately, so this point is going to remain unresolved unless you have some idea where to begin with that research. Unless there's a study already out there, I wouldn't expect you to go through hundreds of financial reports from individual banks and run an ANOVA on the dataset. However, don't expect me to take your hypothesis at face value until you or someone else does.
The studies are out there - and they showed that CRA lending wasn't actually risky, because the housing boom made it a lucrative business for years. And hence everyone else got on board and fuelded the bubble. However, the CRA requirements are essentially word-for-word what we accuse banks of doing wrong. Lacking the empirical evidence you want, we still have the following very likely dichotomy: either the CRA is very much to blame because lenders did what it said and that's what we now hate them for, or the CRA isn't to blame because doing what it said really wasn't risky, which means we are wrong to now accuse greedy lenders of giving complicated loans to people who couldn't pay, because really that wasn't risky. Either way, my point is made: blaming greedy lenders isn't the whole answer here.
Really I just want to know when to stockpile canned goods and ammunition.
You are way too late for that. I cornered the market on apocalypse staples. Being a good capitalist, I would be happy to sell them to you at a small mark-up and rent you space in my Apocalypse Proof shelter.
Glad you found it somewhat informative. My rule of thumb is people who try to simplify a multi-trillion dollar problem into two or three easy soundbites generally have no clue what they are talking about. At least my ignorance comes wrapped in lengthy paragraphs that contain some real facts (along with some educated guesses).
On average it delivers lower wages and a lower standard of living with higher regulation and much higher taxes.
With the exceptions of Britain, Germany, and some of the smaller northern europe nations, Socialism really hasn't worked out that well for those who've used it.
Of course, that still leaves Britain, Germany, and some of the smaller northern europe nations, which tend to enjoy the highest standards of living in the world. :P
...we are a Socialist country. Just not nearly as much as Europe et. al.
Granted, but of those, Britain is just barely Socialist post-Thatcher (who, throwing myself on the grenade, vastly strengthened their economy in the long term by cutting most of the socialist strings) and the Northern European nations are approximately the size of Illinois in terms of both landmass and population, and they get sweet dividends! from North Sea oil, and their energy costs are vastly lower because they generally operate on geothermal or nuclear power to a much higher degree than the United States. They also end up paying a shitload for imports, which has been abated somewhat by the EU.
To whit, one cannot extrapolate the success of Northern European Democratic Socialism with the success of Democratic Socialism in the United States. People who say "But it works over there!" always forget that here is not there.
To an even lesser extent than Britain. Socialism here is mostly limited to defense applications, certain aspects of energy, a smidge of the healthcare industry, and bailing out companies who fuck up catastrophically and whose violent death would cause extreme knock-on effects for the rest of the economy.
Or maybe it's a third possibility: CRA requirements were a bad decision that those banks might have been equally likely to make without the requirements. I'm not saying let government off the hook. Any loan made under the auspices of government regulation and turned out to be awful are just as bad as the ones made by private lenders doing their own thing. I'm just saying that the bulk of this mess comes down to lenders who wanted to make money on a risky venture and buyers who don't know how to read a contract before they sign it. Thus I think any bailout should be aimed at one group alone: people who had mortgages they could afford right up until the shit hit the fan and their rates skyrocketed far beyond what they could have been reasonably expected to imagine. Risky lenders and uninformed buyers need to take their write-offs and go under.
Also, and this is just a pet peeve of mine, can we stop calling every single instance of a government giving money to a private citizen or company when there are no goods or services rendered "socialism?" Socialism is when a government exercises control over the means of production. Social Security is not socialism. A bailout for F&F is not socialism. Lending JPMorgan Chase billions of dollars to keep Bear Stearns solvent is not socialism. These are all incidences of welfare, personal and corporate, something that Democracies do all the time. Calling it socialism means it's only a matter of time till someone pulls out the "they called it National Socialism for a reason," and that way lies madness.
But no, the entire point that several of us have made very clear is that this is NOT just the fault of greedy lenders and stupid borrowers. The government, the real estate industry, Wall Street, rating analysts, everyone was in on it and everyone is to blame. We've also pretty clearly pointed out that steadfast adherence to "reap what you sow" wrt large mortgage clearinghouses will only destroy this country's economy.
I'm a relative newcomer to D&D, but I can tell that while I won't always agree with you, you are at least specific in saying what your mean all the time, which I think is really admirable. I all too often cram my foot a significant distance down my throat. (see my last post in the embarrassing stories thread)
I'm kinda undecided about whether it's ok to let these firms go under. I don't really see how it has such a terrible effect on the economy other than sending the stock market down, and I don't really think that has much of an impact on anyone other than people who own stock. And of course, I want them to suffer for being idiots and fucking themselves (and us) over. I don't like the idea that I have to finance people making bad decisions.
When it really comes down to it, what I really hate is seeing the executives float away on their golden parachutes without any kind of accountability for what they've done. But then, I know exactly who to blame for that: the shareholders.
Well, I'll let someone else explain why its important to our economy to have a well functioning credit/mortgage market. But I think you underestimate the number of people who own stock. Let me enlighten you, just about everyone. Do you have a 401k? do you have an IRA? you might be young, so maybe not. But what about your parents? Or the baby boomers who are getting ready to retire and most likely have a significant portion of their retirement tied up in stocks.
This seems to be a position a lot of people take and I think it might stem from an irrational view that wealth is a zero sum game. That is if a few rich people lose a lot of money, everyone else will be better off. That's really not the case. If the market crashes the ultra-rich will be even better off. They'll be the ones who buy up the pieces. Look at who got rich after the great depression, people who had money to buy the now super cheap assets that were suddenly everywhere..
The mortgage market in the US is worth $10-12 Trillion. That's almost the US GDP for a year. Though after an economic crash, it would be more.
From what I understand, the shareholders aren't empowered to punish executives except under exceptional circumstances. While they theoretically own the company, they're basically along for the ride.
I think we should nationalise (federal control) of more stuff, especially in critical areas. Health care for one. Energy. Education. That should keep us busy for a while.
But I'd like to hear a good reason why we shouldn't nationalise companies "whose violent death would cause extreme knock-on effects for the rest of the economy". If they're so important that we're on the hook for them anyway, why shouldn't we exert more direct control?
Oh boy, there's many many flavors of socialism. Regular communists. Market socialsts. Democratic Socialists. Social Democrats. Chinese Socialism.
My personal flavor: http://en.wikipedia.org/wiki/Social_democracy
Governments make terrible business administrators. It would be more expensive in the long run.
The problem with a government run company is that it is subject to the whims of the politics of the entire nation. Which means a profitible government company is bad, since the government shouldn't be profiting (According to many people), losing money is bad since the government shouldn't be losing money (According to many people), market forces can't have a great effect on the prices since the people who buy your products are also the people who vote for you.
Take a private company and then make the board of directors established by popular vote of an entire nation. That's a government company and it's just not a good idea.
I'm thinking more along the lines that they all voted to give these guys contracts that include severance packages totaling tens or hundreds of millions of dollars regardless of the circumstances of the termination of the contract. As in, the guy could resign after it's found that he was spending company cash on hookers and blow to the tune of a million a year and he still gets his severance pay.
You don't need special punishments, you just need to not give these guys contracts that incentivize fucking the shareholders.
And yes, I'm aware that there are a lot of people who own stock. (I think the number rests at around 2/3rds of America) I still don't think it's a great market indicator. When those stocks crash, the people who own the most hurt the most, though you're right, they will generally benefit off it more when the rebound happens.
I don't understand the reasoning that there will be more money in the mortgage market after this debacle.