NationStates Jolt Archive

So, for those that know, I’m an attorney, and my specific area of law is finance, banking, and securities law. Which means that over the last few weeks, as the American economy has gone into free fall, I have been asked, both here and elsewhere, in TGs, IMs, emails, phone calls and private conversations, just what in hell is going on here? So, since this is a bit my area, I thought, as a public service to NSG, I’d try to explain just what the hell is going on here. Now, this is a VERY simplistic overview, and meant not to be a comprehensive explanation, but rather a brief overview as to the state of the American economy, and exactly what is going on, and why we’re in the financial mess we are in. I don’t’ do this to be patronizing, or assume you all don’t “get it”, but I’ve had a few questions, so I thought I’d try to address them, for those who are confused. If you know this all already, great. If not, hopefully it’ll be helpful.

So the first question I get a lot is, what the hell is this “security” thing I’m hearing all about? Well, a security, in its most basic terms, is a negotiable instrument. “Well that’s no help” I hear you saying, but bear with me. What do I mean by “negotiable instrument”? It is, at its core, a transferable, sellable, tradable thing of value, an agreement to receive payment. For example, a check. If I write a check to bob, what I have done, essentially, is give Bob the right to collect money from me (well, technically in the event of a check, the right is to collect money from my bank, but let’s not be too technical). Bob now has a right to collect money from me, as evidenced by the check, the check is thus a security, it evidences his right to collect that money. Bob can then sell that check to Sally, which is, essentially, him selling his right to collect that money to her. Now Sally has that right.

And that’s it, that’s all a security is. A piece of paper that demonstrates a right of the bearer to receive money. It could be the right to receive a set amount of money, with or without interest (this is a debt security) or the pieces of paper could represent partial ownership, entitling the bearer to the cash value of the property owned (an equity security, basically what we call a stock) but that’s it at the core. Checks, bonds, stocks, banknotes, IOUs, all of them are just different forms of securities, different ways of saying “whoever holds this paper has a right to collect money from me”

So, if that’s all that is, how does that affect our current situation? Well, we need to ask, who are the players here, and there, essentially, are four, whom I will refer to as Buyer, Bank, Investment Co. and Investor. Here’s how it all went down.

For many years, the housing market was rising, which meant that the prices of homes were on the rise. One day, Buyer sees a nice home worth a million dollars, and Buyer thinks to himself “gee, I KNOW that with the housing market going up, up, up, that one million dollar home is going to be worth 2 million in a few years, and it’s a great investment, and I wish I had a million bucks to buy it with, but I don’t.” Buyer thinks some more, and realizes that he could take a loan from the bank for the million dollars, buy the house, sell it in five years, pay off the loan, and reap the profit.

So he goes to Bank, and says “Bank, please lend me $1 million so I can do this deal I’m dreaming of” and Bank then replies “well we’d love to Buyer, but we’re in the business of making money you see, and we’re going to have to charge you interest. Usually we’d charge 6% a year for our good customers, but…we don’t really know you, you don’t have the best credit score, you don’t have any real assets so…we’re going to have to charge you 10% a year and, not that we don’t trust you at all or anything like that, but we’re going to need you to put up the house you’re buying as collateral”

So Bob thinks a bit, 10% a year means, over the next 5 years, he’s going to have to pay $500,000 just to keep the interest payments off. He thinks, he thinks, and realizes if he liquidates everything, empties his bank accounts, closes his kid’s college fund, sells everything of value, he can keep up with 100,000 in interest for the next 5 years, and then when he sells his home in 5 years for 2 mil, he’ll have paid $500,000 in interest, repay the $1 million principle, and pocket a cool 500k. So he goes “sure thing, where do I sign?” and takes out a mortgage.

A year goes by, Bob faithfully pays his first $100k in interest. Meanwhile, Investment Co. is doing what investment companies do, they look for schemes to invest in. They hear that Bank has this high interest mortgage from Buyer, so they call up Bank, and tell it “hey Bank, you know this guy Buyer? He owes you a million dollars, and 10% interest a year, and he’s already paid $100k? Tell you what we’ll do, we’ll buy from you your rights to payment from him, for one million dollars. Here’s the million you already lent him, we’ll give that to you, so that 100k you made in interest? That’s pure profit for you, and all we ask in return is the right to collect future payments from Buyer, what do you say?” And the Bank thinks to itself, this isn’t such a bad deal, it’s already collected $100k in interest payments from Buyer, it’ll get it’s $1 million back, 10% profit over a year for doing nothing isn’t so bad. So it sells its right to collect the debt from Buyer to Investment Co, and all payments that Buyer makes on his mortgage from now on go to investment Co instead of Bank. So now Investment Co. owns Buyer’s mortgage, and investment Co is collecting that 10% interest a year.

But Investment Co. had to pay $1 million from its own savings, and at 10% interest a year, it’ll take 10 years before it makes its money back. Good long term investment, but Investment Co likes to invest, it likes money NOW, it likes to make deals NOW, it doesn’t want to wait 10 years to get its million back. So it calls up Investor, and it says to Investor “hey, you, I got a deal for you. You’re rich, right? How about you lend us a million dollars, and exchange, we’ll give you a piece of paper that says we owe you a million dollars AND we will pay you 7% per year on that million dollars, for as long as you want, and when you’re ready, just bring this piece of paper back to us, and we’ll pay you your million back”.

So what has Investment Co. done here? Well, they’ve given Investor a security. Specifically, a bond. To be even more technical, it’s a mortgage backed bond. The interest they’re paying Investor is coming from the interest they’re getting from Buyer. Basically, in its very simple terms, they took a million dollar loan from Investor and used it to buy Buyer’s million dollar mortgage. They’re paying Investor 7%, they’re getting 10% from Buyer, and what happens to that other 3%? They keep it. That’s how they make their money. And when Buyer pays back his mortgage, Investment Co. either buys back the bond from Investor, or uses the money to buy another mortgage and continue the process.

So a couple of years go by, and everybody’s happy. Bank has been given it’s million bucks back and they’re out of the picture, Buyer has been paying $100k each year to Investment Co. Investment Co. has been paying 70k a year to Investor. Now Buyer goes to sell his home. But…we’ve got a problem. The market that’s causing prices to go up? Well…that’s changed. Now that million dollar home that Buyer bought, the one he thought he’d sell for 2 million? Yeah, that’s only worth 700k now. But Buyer still owes Bank (actually Investment Co. now) a million dollars. So he sells the home, pays off the mortgage, but is short. Investment Co asks him for the extra $300k, and Buyer basically says “tough shit, I spent everything I had making these mortgage interest payments, I’m flat broke, and you’re shit out of luck, sorry”.

Then to make things worse, investor shows back up at Investment Co with his bond and says “it’s been a good few years, thanks for the 7% interest, but I’d like to cash the bond out and take my million dollars back now, please”. Well, problem. Investment Co. only has $700k from Buyer, and while they’re trying to collect the rest, that’s probably not going to happen, and Investor wants his million. So they sigh a bit, suck it up, give Investor the 700k from Buyer, and dig $300k out of their liquid assets to pay off the rest of the value of the bond, all the while muttering to themselves that it was a bad investment and they got taken to the cleaners on that one.

Which is ok, investment companies have liquid assets, they can cover a few bad deals. But here’s the problem. It’s not ONE buyer, it’s not ONE investor. It’s millions. What the investment companies have been doing, in simple terms, is borrowing money from their investors, using that money to buy mortgages from banks (or, if the investment company IS the bank, issuing their own mortgages to people and cutting out the middle man), betting on the hope that they’re going to get more money from those mortgages than they will pay out in interest payments to their investors. All in all not a bad strategy, provided that the buyers can continue paying their mortgage payments. But if all these mortgages were taken with the knowledge that they weren’t sustainable in the long run, and the hope that prices would rise. But they didn’t. They fell, and fell hard. So all these people who took out mortgages? They can’t pay them now. And all those banks and investment companies that borrowed money, with the expectation that they’d pay off those debts through money coming into the mortgages? Yeah, they can’t pay their debts either.

So what’s this bailout all about? Well, it should be easy to see by now. These mortgage backed bonds? There’s no mortgage backing them anymore. And without money to satisfy the debt, those bonds aren’t worth the paper they’re printed on. The bailout would entail, essentially, giving the investment companies more money to satisfy their debts, so they can pay off their investors. Because if they can’t…well…a lot of people lose their shirts, and they can’t pay of THEIR mortgages and…well, I think we see where that’s going…

So, that’s it in brief, any questions?

*In before Get a blog*

tl;dr

But from the parts I did read which was pretty much all of it, you are on the right track. How long did it take for you to write this up?

Interesting. Thank you.

So how much does the repealing of the Glass-Steagall Act play in this? Not much? Open the door for it?

Very informative, thank you. Really.

That actually does help make me understand it better. You're good at this explaining business. :tongue:

Long read, but worth it.


You teach at all?

Interesting. Thank you.

So how much does the repealing of the Glass-Steagall Act play in this? Not much? Open the door for it?

The Acts were mostly designed to prevent runs on banks, by limiting investment company's ability to collect deposits, so if they bottomed out, as they did here, they wouldn't dip into customer's savings and checking accounts to cover bad debt.

Did it affect things? Well, it certainly hurt Lehman Brothers, who did...well...basically that, and caused a run. However, even if it were still in play, we'd see the scenario like I described. THe up side to that would have been that the banks, having their mortgages bought out, would have remained safer and more secure during the mess, but not entirely so, because instead of morgage based securities they had to pay out, it would have simply been the value of their accounts payable (IE the savings accounts open with them). Which happened also.

The mortgage backed securities added another layer to the mess, but I'm unsure if it would have changed terribly much.

Long read, but worth it.


You teach at all?

nah, not really. Truth be told, I'm good at explaining things like this, because I was never good at understanding them in abstracts, so I had to teach myself in simple terms how to understand it.

Very good, I think you need to add in Insurer.

Actually, this is capitalism in a nutshell and why it requires growth to sustain itself, if no growth, disaster.

It works when new technologies are consistently providing greater efficiency, when populations are growing, which accounts for the extraordinary success of capitalism over the last 200 years, especially in America, which had no legacies, much like the difference in growth from a young plant compared to an old tree,

We live in the narrow prism of our times, assuming this is best, not necessarily.

Wow, that actually made a lot of sense, thank you :)

Yay, another one. The ranks of the people who care is swelling, even on NSG.

I'm getting sick though in real life of how many people have absolutely no idea what's going on, or even appreciate the importance. I've taken to saying "this is bigger than 9/11". That usually gets a response.

Just a thanks for the explanation. Funny how it just takes away the ability to blame anyone for the issue. At this point though it is more damage control than blame that is needed.

wish I had an answer other than throwing money at it, I just have a thing against that, but I really don't see much.

Future regulation of loans could prevent it, but in a capitalist society that is one hell of a regulation.

Just a thanks for the explanation. Funny how it just takes away the ability to blame anyone for the issue. At this point though it is more damage control than blame that is needed.

wish I had an answer other than throwing money at it, I just have a thing against that, but I really don't see much.

Future regulation of loans could prevent it, but in a capitalist society that is one hell of a regulation.

Governments should control growth for a stable society, alas, since not all governments are the same, and since they are competing rather than cooperating, it's unlikely.

Just a thanks for the explanation. Funny how it just takes away the ability to blame anyone for the issue. At this point though it is more damage control than blame that is needed.

wish I had an answer other than throwing money at it, I just have a thing against that, but I really don't see much.

Future regulation of loans could prevent it, but in a capitalist society that is one hell of a regulation.

Oh trust me, there's plenty of blame. While the initial cockup might not be malicious fault as much as it was starry eyed optimism about a continued housing boom, what came next was certainly a problem. Basically the investment companied di three things. First, they trie dot attract new investors, but rather then investing their borrowed money, used parts of it to make payments on interest to the old notes, essentially turning the thing into a giant Ponzi scheme. Second, in showing and creating valuations for their portfolios, they listed the notes and mortgages as having a face value of the note, not the actual market value of the land securing it. This is very bad when you essentially know that the note has, or is about to, default, and you'll never recover its face value. Third they did some interesting and creative accounting, essentially "rolling over" of their bad debt, essentially selling to, and buying back, these old notes, to themselves basically. It created an illusion of a cash flow, but in reality, they were taking lint from one pocket, putting it in another, and pretending someone just stuffed cash into it instead.

How did he sell his $1million house for $700k when he owed $1million? Who gave approval for the short sale? You should tell the audience.

How did he sell his $1million house for $700k when he owed $1million? Who gave approval for the short sale? You should tell the audience.

Well, that also depends on jursidictional matters. In a lien title state, the house is his, he may sell it if he wishes, it's merely collateral securing the loan. Most loans have a "due on sale" clause which means the entire amount becomes due at time of sale. So he can sell it for less than the mortgaged amount if he wants to, but the loan will instantly mature.

Of course, I gave the short version, what happens in most cases is, he just can't pay at all, and the mortgage holder forecloses.

Well, that also depends on jursidictional matters. In a lien title state, the house is his, he may sell it if he wishes, it's merely collateral securing the loan. Most loans have a "due on sale" clause which means the entire amount becomes due at time of sale. So he can sell it for less than the mortgaged amount if he wants to, but the loan will instantly mature.

Of course, I gave the short version, what happens in most cases is, he just can't pay at all, and the mortgage holder forecloses.

Due on sale really goes to negative convexity on the underlying obligation (teh .5 on fixed income risk lol). But U can fix that if you buy duration.

But that isn't waht I was talking about. In most jurisdictions, you can't just sell for less and walk away giving the whomever the finger. You need someone's permission, usually the servicer -who is supposedly in contact with everyone else involved in the mess - to do so. Even then it doesn't always work out. Conversion to jingle mail is the biggest risk I suppose.

So what I am saying is that you should explain how the short sale process figures into this, and why it is so much more difficult these days than back when mortgages were mostly portfolio or pure agency. (In other words how the development of RMBS has made things harder to work out).

Due on sale really goes to negative convexity on the underlying obligation (teh .5 on fixed income risk lol). But U can fix that if you buy duration.

But that isn't waht I was talking about. In most jurisdictions, you can't just sell for less and walk away giving the whomever the finger. You need someone's permission, usually the servicer -who is supposedly in contact with everyone else involved in the mess - to do so. Even then it doesn't always work out. Conversion to jingle mail is the biggest risk I suppose.

So what I am saying is that you should explain how the short sale process figures into this, and why it is so much more difficult these days than back when mortgages were mostly portfolio or pure agency. (In other words how the development of RMBS has made things harder to work out).

Someone else explained something to me yesterday, that sure you need permission to sell but what if that's not what you do.

What if you simply default? Essentially you've simply been paying rent all this time rather than a mortgage.

That leaves the selling to the... to the bank?

Who?

Due on sale really goes to negative convexity on the underlying obligation (teh .5 on fixed income risk lol). But U can fix that if you buy duration.

But that isn't waht I was talking about. In most jurisdictions, you can't just sell for less and walk away giving the whomever the finger. You need someone's permission, usually the servicer -who is supposedly in contact with everyone else involved in the mess - to do so. Even then it doesn't always work out. Conversion to jingle mail is the biggest risk I suppose.

So what I am saying is that you should explain how the short sale process figures into this, and why it is so much more difficult these days than back when mortgages were mostly portfolio or pure agency. (In other words how the development of RMBS has made things harder to work out).

Well, whether it's a short sale or a foreclosure following default doesn't really make the difference, if the mortgage payment is insufficient to cover the RMBS, we have a problem.

Moreover, even if you can't from a legal perspective, just sell short and walk away, from a practical perspective, if you've gone broke paying the interest on your subprime mortgage, that's exactly what you do, since you're so broke at this point you're judgement proof.

Someone else explained something to me yesterday, that sure you need permission to sell but what if that's not what you do.

What if you simply default? Essentially you've simply been paying rent all this time rather than a mortgage.

That leaves the selling to the... to the bank?

Who?

to whomever holds the mortgage at that point. All a mortgage is is the argeement to secure the underlying debt with the real property. If you fail to satify the debt, the real property is collateral.

also for what it's worth, technically you don't pay "the mortgage". A mortgage is the legal instrument that recognizes the debt as existing. You pay the debt. However the use of the word "mortgage" has come to mean the actual underlying debt itself, in common usage.

The real underlying issue is that this is practically endemic in the system, if it's not mortgages it's going to be something. Mortgages is possibly the worst since nearly everything is ultimately underwritten by land.

Once you allow betting on future prices, you can open liquidity on those futures by saying 'look, although I only have $5 in cash, this piece of paper entitles me to $500 at current market prices'.

So you can then borrow, say $500 in lieu.

Yet, as Neo Art says, when that's extrapolated out to billions, and you're not just borrowing $500, but $5, 000, sure, you have liquidity to invest further and overall the market is driven upwards.

So you make your money back. People are even betting again on that $5, 000, ballooning the system even further.

Seems a safe bet save for those who lose here and there. That's fine as long as, in general, the market goes up, if just 1% make money overall, the system is sustainable.

Where it comes to regulation, people can say, well if you stop allowing liquidity for investment, we're going to fall behind country A and country B, especially since they don't have the oversight laws that we have, so the system isn't fair.

To a politician, that doesn't sound good.

This will all absolutely happen again.

*snip the excellence*

So, that’s it in brief, any questions?

Just one. How does the government just "give" $700B to Investment Co.? Where does that money actually go, and what do we, as taxpayers get to show for our unsolicited generosity? I mean, I don't know much about national-level finance, but surely there's not just $700B just a-lyin' around, is there?

How is this not just a giant fiction, and how does this not show that economics is, itself a kind of a ruse? Forgive my ignorance coupled with bitterness at the Administration's hypocrisy. We were SO well invested in the WAR and all, and now this? Yet there was never money for national healthcare, fixing Social Security, providing college educations for HS grads or fixing the nation's crumbling infrastructure, but we can bail out these companies? And what of the so-called "golden parachute" prohibition in the bill? I hear that some are hesitating because of that. So please, tell me who else gets a shitload of money for running a company into the ground?

Sorry -- I know this is a bit rambling, but I'm really frustrated.

Just one. How does the government just "give" $700B to Investment Co.? Where does that money actually go, and what do we, as taxpayers get to show for our unsolicited generosity? I mean, I don't know much about national-level finance, but surely there's not just $700B just a-lyin' around, is there?

How is this not just a giant fiction, and how does this not show that economics is, itself a kind of a ruse? Forgive my ignorance coupled with bitterness at the Administration's hypocrisy. We were SO well invested in the WAR and all, and now this? Yet there was never money for national healthcare, fixing Social Security, providing college educations for HS grads or fixing the nation's crumbling infrastructure, but we can bail out these companies? And what of the so-called "golden parachute" prohibition in the bill? I hear that some are hesitating because of that. So please, tell me who else gets a shitload of money for running a company into the ground?

Sorry -- I know this is a bit rambling, but I'm really frustrated.

Who else? Anyone the government deems necessary enough to that old will-o-the-wisp, the public good, to necessitate stealing your money to prop them up. Don't like it? Too bad, they're the government, they know better, that's why they're the government.

to whomever holds the mortgage at that point. All a mortgage is is the argeement to secure the underlying debt with the real property. If you fail to satify the debt, the real property is collateral.

also for what it's worth, technically you don't pay "the mortgage". A mortgage is the legal instrument that recognizes the debt as existing. You pay the debt. However the use of the word "mortgage" has come to mean the actual underlying debt itself, in common usage.

...and yet those mortgages are so broken up, no one really knows who does, ultimately own them, that's what allowed the run on Bear Stearns and Lehmann Bros, even though they had cash, no one knew what their debts were and both could not honestly assure anyone that even they knew.

When the market smells a weakness like that, bye bye baby.

It also means the risk is taken off the initial bank, which means less oversight in lending.

All this is driven by the idea that extra investment into economy is always a good thing, the trickle-down economic theory that is proven so palpably false.

All politicians know this, all reasonably intelligent people should know this, but we'll put off dealing with it until tomorrow, and tomorrow and tomorrow.

The environment is heading for the same disaster, that's also for sure.

Who else? Anyone the government deems necessary enough to that old will-o-the-wisp, the public good, to necessitate stealing your money to prop them up. Don't like it? Too bad, they're the government, they know better, that's why they're the government.

What the flying, climbing, swimming, spelunking, rappelling, acid-tripping, monkey-spank are you TALKING about?

I am SO glad I asked Neo Art and not you.

Who else? Anyone the government deems necessary enough to that old will-o-the-wisp, the public good, to necessitate stealing your money to prop them up. Don't like it? Too bad, they're the government, they know better, that's why they're the government.

I could have sworn that was an aspirin I took.....

Just one. How does the government just "give" $700B to Investment Co.? Where does that money actually go, and what do we, as taxpayers get to show for our unsolicited generosity? I mean, I don't know much about national-level finance, but surely there's not just $700B just a-lyin' around, is there?

Governments are guaranteeing off land and assets, they can say we have XX amount of actual money but this is underwritten by an overall land/asset value of trillions. So they can borrow, either off themselves (print more money) or off others, sell assets.

How is this not just a giant fiction, and how does this not show that economics is, itself a kind of a ruse? Forgive my ignorance coupled with bitterness at the Administration's hypocrisy. We were SO well invested in the WAR and all, and now this?

Actual budget deficits are a bit of a fallacy, they're not a large part of GDP, it's like owning a huge house, worth millions, you then have income and outcome for which you might have debt here, surplus there, but your house is still worth millions.

Yet there was never money for national healthcare, fixing Social Security, providing college educations for HS grads or fixing the nation's crumbling infrastructure, but we can bail out these companies?

Income/Outgoings are not fully related to asset value, so the government is earning so much in tax income, spending so much in social/war/etc., but they still rest on the guarantee of the entire worth of America. So there's plenty of money for all in some sense, when a serious problem hits, but you can't keep overspending compared to income otherwise you'll soon need to sell the house.

And what of the so-called "golden parachute" prohibition in the bill? I hear that some are hesitating because of that. So please, tell me who else gets a shitload of money for running a company into the ground?

Sorry -- I know this is a bit rambling, but I'm really frustrated.

You should be.

What the flying, climbing, swimming, spelunking, rappelling, acid-tripping, monkey-spank are you TALKING about?

I am SO glad I asked Neo Art and not you.

I'm talking about the giant bailout of private companies by the government, using taxpayer dollars. You asked,
"So please, tell me who else gets a shitload of money for running a company into the ground?"
The answer is, whomever the government deems necessary, which is an increasingly large group. It seems to have become a government policy that, if you are a large enough company, the government will reimburse you for any boneheaded mistakes you might make, such that you will not face any consequences for your actions, thereby leaving you free to commit the same boneheaded mistakes in the future.

I'm talking about the giant bailout of private companies by the government, using taxpayer dollars. You asked,
"So please, tell me who else gets a shitload of money for running a company into the ground?"
The answer is, whomever the government deems necessary, which is an increasingly large group. It seems to have become a government policy that, if you are a large enough company, the government will reimburse you for any boneheaded mistakes you might make, such that you will not face any consequences for your actions, thereby leaving you free to commit the same boneheaded mistakes in the future.

Terrific. Next time, spare the will-o-wisps and just say that, k? Much easier to understand you when your edatorializations aren't quote taking over your entire posts. Thanks for the clarification.

This will all absolutely happen again.
Of course it will. It always does, and it's been going on for at least 800 years (http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_Is_Different.pdf) (pdf).

It's not something that regulation fixes, deregulation causes, or something that is even an outgrowth of modern capitalism. The things people do to get themselves into trouble change with times and technology, the fact that they do doesn't.

The alternative is to not allow people to put their money where they want to. It's been tried, it sucks. So sit back and enjoy the ride - I've actually taken to thinking that they don't call them "Masters of the Universe" because of power or wealth, but because they understand the idea of the benevolent universe (http://www.aynrandlexicon.com/lexicon/benevolentuniverse.html) (sorry about the source, but that's the best expression of what I'm talking about).

How does the government just "give" $700B to Investment Co.? Where does that money actually go, and what do we, as taxpayers get to show for our unsolicited generosity?
That money is used to set up an agency which (in all likelihood, as the details aren't worked out yet) hosts a reverse auction, at which the banks offering the lowest prices will have the MBS bought from them first. That encourages a market to establish a price, and the banks most desperate for cash will bite first.

Then the agency owns the MBS, and hopes that they end up being worth something again as the value of the collateral picks up again and the market stabilises. Some will end up being worth nothing, others will come back somewhat. In the end, the agency will sell the ones that are still useful for a higher price than it bought it and earn some of the money back. The rest is a loss, and in the end the agency is terminated once it has no more MBS left.

I mean, I don't know much about national-level finance, but surely there's not just $700B just a-lyin' around, is there?
No, that'll be financed with debt, ie more treasury bonds being issued. Which sets off all sorts of debates in the markets for those at the moment.

How is this not just a giant fiction, and how does this not show that economics is, itself a kind of a ruse?
At best (and it doesn't show anything of the kind) it would mean that financial economics is a ruse, that is the use of market theories and valuation mechanisms based on economics for investment in financial markets.

We were SO well invested in the WAR and all, and now this? Yet there was never money for national healthcare, fixing Social Security, providing college educations for HS grads or fixing the nation's crumbling infrastructure, but we can bail out these companies?
This is something that isn't optional, while the administration considered social security or healthcare to be so. They don't want to issue this extra debt, but they don't have a choice here.

And what of the so-called "golden parachute" prohibition in the bill? I hear that some are hesitating because of that. So please, tell me who else gets a shitload of money for running a company into the ground?
The idea is that the banks don't get a free ride out of this, so they want to attach punishments to management and shareholders to the right to participate in this buyback scheme. The government would take an equity stake (that would earn big dividends, similar to what Buffett did to Goldman Sachs) which would erode the prices for the banks' current owners, and perhaps add conditions to forbid any big bonuses to be paid for a few years.

But it's a fine line to tread, because the government obviously can't allow the banks to walk away and not take part. Whether that in turn is a credible threat though is another question - the answer to which we won't see until the deal is actually on paper and stamped.

And don't worry, everyone is frustrated. This is truly a necessary evil, there is nothing good coming out of this for anyone. And that includes the CEOs, who haven't just seen their own banks destroyed, but the entire industry and culture they grew up in and indentified themselves with. Don't think these guys like the idea of having to ask the government for cash, plenty of them are as libertarian as anyone here.

Well done Neo Art!
I'm a teacher and reading your posts I know that you make a great teacher!

Terrific. Next time, spare the will-o-wisps and just say that, k? Much easier to understand you when your edatorializations aren't quote taking over your entire posts. Thanks for the clarification.

Any time. I try to mix a bit of the poetic into my posts. Gives them more pizazz, I feel.

Of course it will. It always does, and it's been going on for at least 800 years (http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_Is_Different.pdf) (pdf).

It's not something that regulation fixes, deregulation causes, or something that is even an outgrowth of modern capitalism. The things people do to get themselves into trouble change with times and technology, the fact that they do doesn't.

The alternative is to not allow people to put their money where they want to. It's been tried, it sucks. So sit back and enjoy the ride - I've actually taken to thinking that they don't call them "Masters of the Universe" because of power or wealth, but because they understand the idea of the benevolent universe (http://www.aynrandlexicon.com/lexicon/benevolentuniverse.html) (sorry about the source, but that's the best expression of what I'm talking about).


That money is used to set up an agency which (in all likelihood, as the details aren't worked out yet) hosts a reverse auction, at which the banks offering the lowest prices will have the MBS bought from them first. That encourages a market to establish a price, and the banks most desperate for cash will bite first.

Then the agency owns the MBS, and hopes that they end up being worth something again as the value of the collateral picks up again and the market stabilises. Some will end up being worth nothing, others will come back somewhat. In the end, the agency will sell the ones that are still useful for a higher price than it bought it and earn some of the money back. The rest is a loss, and in the end the agency is terminated once it has no more MBS left.


No, that'll be financed with debt, ie more treasury bonds being issued. Which sets off all sorts of debates in the markets for those at the moment.


At best (and it doesn't show anything of the kind) it would mean that financial economics is a ruse, that is the use of market theories and valuation mechanisms based on economics for investment in financial markets.


This is something that isn't optional, while the administration considered social security or healthcare to be so. They don't want to issue this extra debt, but they don't have a choice here.


The idea is that the banks don't get a free ride out of this, so they want to attach punishments to management and shareholders to the right to participate in this buyback scheme. The government would take an equity stake (that would earn big dividends, similar to what Buffett did to Goldman Sachs) which would erode the prices for the banks' current owners, and perhaps add conditions to forbid any big bonuses to be paid for a few years.

But it's a fine line to tread, because the government obviously can't allow the banks to walk away and not take part. Whether that in turn is a credible threat though is another question - the answer to which we won't see until the deal is actually on paper and stamped.

And don't worry, everyone is frustrated. This is truly a necessary evil, there is nothing good coming out of this for anyone. And that includes the CEOs, who haven't just seen their own banks destroyed, but the entire industry and culture they grew up in and indentified themselves with. Don't think these guys like the idea of having to ask the government for cash, plenty of them are as libertarian as anyone here.

THANK you.

Next question. If they're free-market-loving Libertarians, doesn't this whole event kinda piss all over the "free market is the answer" mantra we've been hearing for so long?

...and yet those mortgages are so broken up, no one really knows who does, ultimately own them, that's what allowed the run on Bear Stearns and Lehmann Bros, even though they had cash, no one knew what their debts were and both could not honestly assure anyone that even they knew.
Part of that went further though as well. The MBS themselves weren't actually kept by the banks either, but shifted away into specialised investment vehicles that served as conduits for the various interest payments. That allowed the banks to go around all sorts of little requirements at times (note: shitty regulation, not deregulation being at fault).

And even more opaque than that are "over the counter derivatives", which are contracts (such as options) on pretty much anything you can think of, designed and sold to demand, but from one party to another, not on any official exchange. And since some of these contracts were linked into MBS, their values suddenly were very difficult to figure out, and the exposure and possible losses the banks had because of them became an unknown.

And that's the thing everyone is scared of: we know the MBS and we can roughly oversee the extent of the problem. But the derivatives based on them, the credit default swaps, the insurance policies, all the stuff not traded on exchanges where it's hard to always find a buyer now and so price discovery is a slow or even frozen process. And the volumes are huge, we're talking tens of trillions of dollars.

All this is driven by the idea that extra investment into economy is always a good thing, the trickle-down economic theory that is proven so palpably false.
No, that's another issue. But perhaps not one for this thread.

Any time. I try to mix a bit of the poetic into my posts. Gives them more pizazz, I feel.

Thou sayest.

If they're free-market-loving Libertarians, doesn't this whole event kinda piss all over the "free market is the answer" mantra we've been hearing for so long?
Who knows. The market would fix itself, to the point where there are banks with less leverage and no MBS exposures. It's just that without government intervention, it would take the form of creative destruction, with the current banks disappearing (with all the money in the US, basically) and new ones taking their place.

But maybe that hurts just a little bit too much. As for the implications that has on the political discourse, the jury is still out. There were plenty after the Great Depression, but we're not at the same stage just yet. We'll see.

Thou sayest.

Yea, verily.

Who knows. The market would fix itself, to the point where there are banks with less leverage and no MBS exposures. It's just that without government intervention, it would take the form of creative destruction, with the current banks disappearing (with all the money in the US, basically) and new ones taking their place.

But maybe that hurts just a little bit too much. As for the implications that has on the political discourse, the jury is still out. There were plenty after the Great Depression, but we're not at the same stage just yet. We'll see.

I don't want to sound defeatist, but what if what the country NEEDS is to suffer something like that? There was nothing to romanticize about the Great Depression, but what it wrought through catastrophe was pretty impressive, or so I was taught. Maybe I'm approaching old-fuck status here, but we've not had anything nearly as hard happen to our generation as had generations past. Mightn't it be time? Conjecture, not wishful thinking.

Next question. If they're free-market-loving Libertarians, doesn't this whole event kinda piss all over the "free market is the answer" mantra we've been hearing for so long?

But this didn't happen in a free market. The SEC, the FDIC, the federal reserve, they are all in the business of creating moral hazard in order to reduce the cost of capital formation.

Society has taken a decision that we will accept moral hazardy stuffs because on balance we believe the cheaper capital, and the benefits that come from it, outweigh the cost of socializing some of the risks.

Of course reasonable people can differ as to whether or not this is the optimal choice. But that is what we have right now.

Thank you, Neo Art, for explaining everything. I find the situation much easier to understand now.

Given what we know now, what do you think would be the best way to avoid a situation like this happening in the future? (Besides trying to rely upon investment companies, etc to avoid making the same mistakes, which is like counting on George W. Bush to lead a seance.)

But this didn't happen in a free market. The SEC, the FDIC, the federal reserve, they are all in the business of creating moral hazard in order to reduce the cost of capital formation.

Society has taken a decision that we will accept moral hazardy stuffs because on balance we believe the cheaper capital, and the benefits that come from it, outweigh the cost of socializing some of the risks.

Of course reasonable people can differ as to whether or not this is the optimal choice. But that is what we have right now.

But the legacy of the Great Depression is that....ultimately...even the most conservative state knows that it has to intervene to head off the panic.

So what happens if Congress does block the bail out? Is it back to panic - or have the Titanic's lifeboats been successfully lowered and the investors filing on in an orderly way?

THANK you.

Next question. If they're free-market-loving Libertarians, doesn't this whole event kinda piss all over the "free market is the answer" mantra we've been hearing for so long?

Here's a really basic diagram of a country's economy, any economy.

http://i205.photobucket.com/albums/bb281/Barringtonia_bucket/Picture1-4.png

The idea is to make the USA circle in the centre bigger. That's it. How do you achieve that?

The investments at the bottom, through profit, and exports over imports, lead to that growth.

Otherwise, it's creating the best environment for that growth, and this is where government comes in.

Some say raise taxes, invest back, letting the government be the agency that controls this, this means more social services, infrastructure etc., leading to outright socialism/communism.

Some people, rightfully, don't think the government should take all taxes. Some people believe less, let the investment at the bottom grow, and it will take care of everything, your basic libertarian.

Every government balances this somewhat to achieve the most stable growth, or they should. Much depends on philosophy. Some say the government should use taxes to provide free healthcare, some say let the economy grow quicker and people will pay for it themselves.

In a global economy, you also have outgoings and ingoings, and these also need to be watched, protectionism, which will be reciprocated, or open markets, leading to less control.

How do you make the middle circle grow, that's it.

Very basic but there you are.

What happened is that the investment section at the bottom is now overly complicated and mostly a false state of affairs because you're allowed to bet on the future of your investment, and borrow and invest on the guarantee of that future.

That works until the future meets reality, as it just has.

I don't want to sound defeatist, but what if what the country NEEDS is to suffer something like that? There was nothing to romanticize about the Great Depression, but what it wrought through catastrophe was pretty impressive, or so I was taught. Maybe I'm approaching old-fuck status here, but we've not had anything nearly as hard happen to our generation as had generations past. Mightn't it be time? Conjecture, not wishful thinking.
I tend to be of the opinion that the hundreds of millions of victims of the violence that would probably follow are a justification for trying to prevent this. It's all sweet and dandy to toughen up, but you can be as tough as you want - a nuke is going to pulverise you anyways. And remember, the Spanish Empire didn't collapse because the English sank their Armada, it fell because of a financial crisis it never got out of.

And even if it didn't get as bad, I'm advised by people older and probably wiser than me that I don't ever want to see a bad recession.

EDIT: On Bank Holding Companies and Bailouts (http://www.informationarbitrage.com/2008/09/on-bank-holding.html) That link explains something approaching a "least bad" scenario for how the bailout might work, for whoever is interested.

So what happens if Congress does block the bail out? Is it back to panic - or have the Titanic's lifeboats been successfully lowered and the investors filing on in an orderly way?

You really don't want to think about it. Seriously.

Whatever happens there will be a bad recession, simply because credit it going to contract anyway. What we are doing here is trying to throw money in to the black hole of deflation, trying to manage the way down.

Nobody is getting away with anything BTW, unless their name is Hugo Chavez or someshit. The entire western economy is so interlinked that a total banking collapse in the US will wipe out pretty much everyone.

This is Bush's plan by the way...

http://i205.photobucket.com/albums/bb281/Barringtonia_bucket/Picture2.png

Bit of a fuck up really.

EDIT:On Bank Holding Companies and Bailouts (http://www.informationarbitrage.com/2008/09/on-bank-holding.html) That link explains something approaching a "least bad" scenario for how the bailout might work, for whoever is interested.

Just on this, piece Leon, so if these are going to becoming BHCs and begin acting more like commercial banks rather than simply investment banks, isn't that just the continuation of what has been happening for the past few years, that is, a trend towards universal banking rather than two forms of banks? Which is what the abolition of the Glass-Steagall act if not promoted allowed to happen. But then the link talks about small 'boutique' banks these will I imagine only be acting as a merchant bank specifically, I know you do a lot more reading on this than I so what do you think of that happening?

This is Bush's plan by the way...

http://i205.photobucket.com/albums/bb281/Barringtonia_bucket/Picture2.png

Bit of a fuck up really.

I noticed that you made the arrow from outside investors/export smaller, this hasn't been the case at all, in fact part of the reason for this crisis is the amount of money coming into the States from outside investors.

at least 800 years (http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_Is_Different.pdf) (pdf).

Thanks for this, after a brief scan I'm going to print it out and read it properly later.

I noticed that you made the arrow from outside investors/export smaller, this hasn't been the case at all, in fact part of the reason for this crisis is the amount of money coming into the States from outside investors.

Fair enough on that, I'm not entirely sure as to the import-export scene, I'd say it's very complicated.

There's some bias against Bush on that one :)

Also, war investment doesn't really all go out of the country, as my first diagram implies, but I think more's going out than in at the moment.

Fair enough on that, I'm not entirely sure as to the import-export scene, I'd say it's very complicated.

There's some bias against Bush on that one :)

Also, war investment doesn't really all go out of the country, as my first diagram implies, but I think more's going out than in at the moment.

Bias against Bush, you don't say.:p

Yeah that's true a lot of defence investment would be inside the economy, I just took a brief glance at it, what you should do is make the outside investors arrow larger and make the overseas investments arrow smaller, if you are a bit bored and really want to hammer home your point.

Bias against Bush, you don't say.:p

Yeah that's true a lot of defence investment would be inside the economy, I just took a brief glance at it, what you should do is make the outside investors arrow larger and make the overseas investments arrow smaller, if you are a bit bored and really want to hammer home your point.

Well, in factoring this in, I'd need to create a pie slice to show ownership of the US by outside interests, which isn't necessarily bad as such but it's getting more complicated than I care my diagram to be.

I'm also not that bored :)

Just on this, piece Leon, so if these are going to becoming BHCs and begin acting more like commercial banks rather than simply investment banks, isn't that just the continuation of what has been happening for the past few years, that is, a trend towards universal banking rather than two forms of banks? Which is what the abolition of the Glass-Steagall act if not promoted allowed to happen.
Well, it's a complete about-face from just a few weeks ago, actually. Citi was maybe the only big company that combined the actual retail banking with a full-on investment banking arm. There were a few others running close, but they didn't usually target retail consumers (more the high net worth types).

And did Citi cop some crap or what! To use the same commentator - the idea was basically that the two businesses wouldn't function together (http://www.informationarbitrage.com/2007/04/citigroup_payin.html). The Masters of the Universe (or MotU) were different people to those silly accountant types sitting behind customer service desks worrying about grandma's savings account. In the US the idea just never took off, and Citi was called ungovernably large, and it was falling behind in terms of returns compared to the straight investment banks.

The reason all that has changed is that the MotU suddenly realise that grandma's savings account is a pretty safe source of cheap funds. And since nobody is lending them anything anymore, they'll take what they can get.

But yeah, Glass-Steagall really didn't make it happen either way. Had the act not been revoked, then it would have to be now because times are so bad that the investment banks just can't continue independent of main street banks.

But then the link talks about small 'boutique' banks these will I imagine only be acting as a merchant bank specifically, I know you do a lot more reading on this than I so what do you think of that happening?
I think it's excellent. The services investment banks are supposed to provide, like advice on corporate financial strategy, IPOs, M&As and so on and so forth will continue to be needed. They're also going to stay as brokers, facilitating trading by everyone with more than a mom & dad-type portfolio.

What's going to end (for the time being) is these banks growing larger and larger so they can use the size of their balance sheets to put their own money on the line. So as he says, some will be big and work the areas in which there are economies of scale. But other investment banks will remain or appear, not as the huge organisations they were now, but small ones. Groups of people with much expertise have either lost their jobs now or will find themselves working in completely new environments, feeling constrained by new rules and culture clashes. Those guys have their expertises in small areas that they were working in, and they'll be considering starting their own business focused completely on what they know best.

And those will be relatively safe. They won't be too big to fail, and since they'll be wary of doing trading with their own money (the people good at that will now go to hedge funds rather than boutique banks) and worried about taking on too much leverage, there will be little reason for them to collapse either. And they'll have little overhead but charge big fees - don't expect pay for the MotU to stay down for long. That's the nature of the business.

Also expect securitisation to return eventually, but with a twist: rather than turning everything into bonds, you just list the assets on a share market. A few banks have been doing it in Australia, with assets they buy such as power plants and other infrastructure items: you group them together and list them as "Babcock & Brown Power (http://www.asx.com.au/asx/research/CompanyInfoSearchResults.jsp?searchBy=asxCode&allinfo=on&asxCode=bbp)", for example. Then the parent company just owns shares in this new firm, and earns during the IPO as well as when dividends get paid (depending on how big a percentage it keeps). The big bonus is that the parent isn't on the hook as badly if the thing doesn't work out. Depending on regulations and the details of the structure, at worst the parent loses its equity stake and that's it. The alternative, as we've seen with Bear Stearns, Lehman Brothers and AIG is that just one part of the company runs into the ground spectacularly but builds up debts and obligations that bring the entire company down. So using that sort of fencing off the obligations will be a way for the future giants to protect themselves. The plus also being, of course, that the individually listed divisions aren't too big to fail.

So what’s this bailout all about?
The consolidation of power in the banking sector.

This is soooo worth reading:
http://www.businessspectator.com.au/bs.nsf/Article/Stability-to-bank-on-JT98M?OpenDocument&src=sph
[...]

Over the past few months the regulators and the deposit taking institutions have readied themselves for an “in extremis” situation.

The sort of thing we are talking about is the inability of a bank or building society to obtain funding from all available sources.

In preparation for that unlikely occurrence, the RBA has been working with the banks to ensure that there is a mechanism for the central bank to supply the funds.

The RBA and APRA have encouraged depository institutions to package residential mortgages on their balance sheets so that they can be used as collateral for contingent financing from the bank.

[...]

Looks like the idea of MBS isn't dead either. If the mortgages underlying them aren't complete crap, they are pretty secure things. So the Australian central bank has sat down with the main retail banks here to actually ask them to produce some using the safe Australian mortgages, to be used as collateral if there ever was a need for emergency loans.

I'm splitting it up into two posts, simply for me to keep track of.
Well, it's a complete about-face from just a few weeks ago, actually. Citi was maybe the only big company that combined the actual retail banking with a full-on investment banking arm. There were a few others running close, but they didn't usually target retail consumers (more the high net worth types).

And did Citi cop some crap or what! To use the same commentator - the idea was basically that the two businesses wouldn't function together (http://www.informationarbitrage.com/2007/04/citigroup_payin.html). The Masters of the Universe (or MotU) were different people to those silly accountant types sitting behind customer service desks worrying about grandma's savings account. In the US the idea just never took off, and Citi was called ungovernably large, and it was falling behind in terms of returns compared to the straight investment banks.

The reason all that has changed is that the MotU suddenly realise that grandma's savings account is a pretty safe source of cheap funds. And since nobody is lending them anything anymore, they'll take what they can get.

But yeah, Glass-Steagall really didn't make it happen either way. Had the act not been revoked, then it would have to be now because times are so bad that the investment banks just can't continue independent of main street banks.

Well, I know that Citiqroup was the major bank that had combined the two, and indeed many banks are victims of their own history, such as in the US where the two operations where spilt in the 30's and in Japan after WWII they were made by the Americans to move away from universal banking, even Australia had something similar. I suppose what I meant was retail banks moving more into investment banking, which is opposite to what was described in the article so I was way out. Indeed they will want to take on the lesser folks deposits since they can't find liquidity elsewhere.

As for Glass-Steagall, so your saying that even if it hadn't been repealed, and I know that there were many many different reasons as to why the crisis came to be, but if that act wasn't repealed are you saying that this would have happened anyway? Which is interesting I might bring this up with my lecturer next time I see her.

I think it's excellent. The services investment banks are supposed to provide, like advice on corporate financial strategy, IPOs, M&As and so on and so forth will continue to be needed. They're also going to stay as brokers, facilitating trading by everyone with more than a mom & dad-type portfolio.

What's going to end (for the time being) is these banks growing larger and larger so they can use the size of their balance sheets to put their own money on the line. So as he says, some will be big and work the areas in which there are economies of scale. But other investment banks will remain or appear, not as the huge organisations they were now, but small ones. Groups of people with much expertise have either lost their jobs now or will find themselves working in completely new environments, feeling constrained by new rules and culture clashes. Those guys have their expertises in small areas that they were working in, and they'll be considering starting their own business focused completely on what they know best.

And those will be relatively safe. They won't be too big to fail, and since they'll be wary of doing trading with their own money (the people good at that will now go to hedge funds rather than boutique banks) and worried about taking on too much leverage, there will be little reason for them to collapse either. And they'll have little overhead but charge big fees - don't expect pay for the MotU to stay down for long. That's the nature of the business.

Indeed, those small banks won't be to big to fail, which should relieve pressure on the market should one or two go belly up, which will be good as they will still be providing the basic services that are needed, I suppose some may even move away from IPOs, M&As etc, and maybe just even place their attention on high net worth individuals, and those fees will certainly be high, not that I care much if the pay of the MotU does go up.

Also expect securitisation to return eventually, but with a twist: rather than turning everything into bonds, you just list the assets on a share market. A few banks have been doing it in Australia, with assets they buy such as power plants and other infrastructure items: you group them together and list them as "Babcock & Brown Power (http://www.asx.com.au/asx/research/CompanyInfoSearchResults.jsp?searchBy=asxCode&allinfo=on&asxCode=bbp)", for example. Then the parent company just owns shares in this new firm, and earns during the IPO as well as when dividends get paid (depending on how big a percentage it keeps). The big bonus is that the parent isn't on the hook as badly if the thing doesn't work out. Depending on regulations and the details of the structure, at worst the parent loses its equity stake and that's it. The alternative, as we've seen with Bear Stearns, Lehman Brothers and AIG is that just one part of the company runs into the ground spectacularly but builds up debts and obligations that bring the entire company down. So using that sort of fencing off the obligations will be a way for the future giants to protect themselves. The plus also being, of course, that the individually listed divisions aren't too big to fail.

That's an interesting way of securitization and very clever, I quite like that idea and the pressure on the economy won't be as great should a few fail, and banks should still be able to borrow from each other. Talking about BNB, now might be a good time to buy some shares, I know it gained 61 cents today (from speculation on Deutsche Bank on a possible takeover, but I bet you knew that already), but once the dust settles it should be move back up to the high 20 dollar mark it was in only a few months ago. I don't know I may have to talk to my stock broker next time I see him, and move into long term holdings like he has been telling me to.

This is soooo worth reading:
http://www.businessspectator.com.au/bs.nsf/Article/Stability-to-bank-on-JT98M?OpenDocument&src=sph


Looks like the idea of MBS isn't dead either. If the mortgages underlying them aren't complete crap, they are pretty secure things. So the Australian central bank has sat down with the main retail banks here to actually ask them to produce some using the safe Australian mortgages, to be used as collateral if there ever was a need for emergency loans.

Interesting but it is what you would expect of the RBA and of APRA, though Australian residential mortgages are safer than American ones I would say due to a number of reasons.

Here's a really basic diagram of a country's economy, any economy.

http://i205.photobucket.com/albums/bb281/Barringtonia_bucket/Picture1-4.png

The idea is to make the USA circle in the centre bigger. That's it. How do you achieve that?

The investments at the bottom, through profit, and exports over imports, lead to that growth.

Otherwise, it's creating the best environment for that growth, and this is where government comes in.

Some say raise taxes, invest back, letting the government be the agency that controls this, this means more social services, infrastructure etc., leading to outright socialism/communism.

Some people, rightfully, don't think the government should take all taxes. Some people believe less, let the investment at the bottom grow, and it will take care of everything, your basic libertarian.

Every government balances this somewhat to achieve the most stable growth, or they should. Much depends on philosophy. Some say the government should use taxes to provide free healthcare, some say let the economy grow quicker and people will pay for it themselves.

In a global economy, you also have outgoings and ingoings, and these also need to be watched, protectionism, which will be reciprocated, or open markets, leading to less control.

How do you make the middle circle grow, that's it.

Very basic but there you are.

What happened is that the investment section at the bottom is now overly complicated and mostly a false state of affairs because you're allowed to bet on the future of your investment, and borrow and invest on the guarantee of that future.

That works until the future meets reality, as it just has.

Thank you again.

Next question.

How is it possible in a finite world (with finite resources) to have continual growth of that middle circle?

Neo, the system setup in the OP seems doomed from the word go. A single bankruptcy breaks not only the mortgage holder (who got royally fucked for being stupid), but the company holding the mortgage and if enough of them fail the company with the bond. Why is such a thing permitted?

Neo, the system setup in the OP seems doomed from the word go. A single bankruptcy breaks not only the mortgage holder (who got royally fucked for being stupid), but the company holding the mortgage and if enough of them fail the company with the bond. Why is such a thing permitted?

Well, keep in mind, if the fundamental initial premise of the hypothetical had held true (the house value went up) then this would have worked beautifully, and everyone would have made money.

Banks (and investment companies) calculate in their investments a certain % of failure rate of the mortgages, they expect some of them to fail, and their investments reflect that. In this instance they thought it ok, because at worst, they'd be left with foreclosure rights on valuable property. But it didn't go that way and the housing market tanked.

As for how to prevent it, it's hard to do that in its basic. What was going on here was, inherently, perfectly legal. They made an investment. You could require that any security issued be backed by liquid assets, but that would destroy growth. If you had the money to secure your debts at all times, why do you need the debt in the first place?

What happened here is a series of debts all built on a single, underlying debt. When that single debt failed, the whole house of cards came down. How to stop it? Well there are ways, you could require at least some leverage on the loans, you could require one loan not be deliniated into further loans, you can do a lot of things, but those might be overly restrictive when it comes to good economic practices.

The question, basically, is how do you stop a business from doing business...

Thank you again.

Next question.

How is it possible in a finite world (with finite resources) to have continual growth of that middle circle?

Well therein lies the question.

First, there's a huge amount of efficiency left in the system, that's where technology helps drive growth.

Second, there's regeneration, whether food or fuel. In terms of food, we're currently wasting our land in terms of over-farming, stripping land of nutrients, wildlife and plantlife.

Technology should solve that as well, alas human nature will not. If there's one real danger it's that we destroy our environment before technology can allow us to live without it. I cannot stress this enough, we're destroying a livable environment. As Jared Diamond wrote - what was running through the head of the Easter islander who cut down the last tree - where trees were simply used to build bigger and bigger housing, monuments to their wealth.

In terms of fuel, oil is clearly not regenerative, we'll run out, but again, technology should solve that.

There's also plenty of space, we haven't even begun to use the sea, which covers 2/3's of the world, so, unless we wipe ourselves out in a nuclear winter, we're probably pretty sustainable for the observable future.

The idea is that we were very close to extinction before, down to about 10-15, 000 but we made it through, compound mathematics means we can grow population quickly from few.

The actual point is what world do we want to live in?

Capitalism certainly ensures one thing, the quickest distribution of spare capacity. Communism, ideal as it is, simply goes against our nature.

The simple fact is that in order to have change, which is necessary in order not to stagnate, we need to accept a certain amount of chaos.

What's frustrating is that those who govern us are more about popularity than effective policy. Greed, our greatest sin, seems exponentially greater in those who are supposed to help curtail it, to help stem too much chaos. Short term popularism beats out long term strategy, easily.

One might argue that, in a democratic system, we get what we vote for, that individually we are simply not concerned enough with the common good to override our own selfish needs.

Yet, theoretically, that's what our leaders are supposed to do, to provide a check to our wanton desires.

The fact is, they're often the most susceptible.

Well, keep in mind, if the fundamental initial premise of the hypothetical had held true (the house value went up) then this would have worked beautifully, and everyone would have made money.

Banks (and investment companies) calculate in their investments a certain % of failure rate of the mortgages, they expect some of them to fail, and their investments reflect that. In this instance they thought it ok, because at worst, they'd be left with foreclosure rights on valuable property. But it didn't go that way and the housing market tanked.

As for how to prevent it, it's hard to do that in its basic. What was going on here was, inherently, perfectly legal. They made an investment. You could require that any security issued be backed by liquid assets, but that would destroy growth. If you had the money to secure your debts at all times, why do you need the debt in the first place?

What happened here is a series of debts all built on a single, underlying debt. When that single debt failed, the whole house of cards came down. How to stop it? Well there are ways, you could require at least some leverage on the loans, you could require one loan not be deliniated into further loans, you can do a lot of things, but those might be overly restrictive when it comes to good economic practices.

The question, basically, is how do you stop a business from doing business...

It seems to me that the basic problem was that a series of banks bet on people defaulting. That's the only thing that makes sense given their lending practices (http://www.cnn.com/2008/LIVING/personal/09/25/money.pushers/index.html). I think the housing market implosion caught them off guard. They having banked on the value of the defaulted houses going up and reselling them. Instead the value tanked and they were left holding the bag. Once those values failed across the board you had companies with neither assets nor collateral to cover their debts which dominoed to our current situation.

It seems to me that the basic problem was that a series of banks bet on people defaulting. That's the only thing that makes sense given their lending practices (http://www.cnn.com/2008/LIVING/personal/09/25/money.pushers/index.html). I think the housing market implosion caught them off guard. They having banked on the value of the defaulted houses going up and reselling them. Instead the value tanked and they were left holding the bag. Once those values failed across the board you had companies with neither assets nor collateral to cover their debts which dominoed to our current situation.

This probably explains it best, and with some humour.

http://www.youtube.com/watch?v=mzJmTCYmo9g

On my life, it's not a Rick Roll.

That's rather good, thanks.

So, that’s it in brief, any questions?
I've a few, but I'll deal with them one at a time.

If I'm following you right, this is all about market confidence, as far as I can see. The reason you can't just say to all of the investors "Tough cheese, we don't have the cash because the housing market crashed, you're going to have to do without" and simply leave them short their investment is because in doing so, the basis for confidence in a system of trade is undermined and nobody makes any more expenditure, money never changes hands and the exchange of goods and services grinds to a halt.

But hasn't this confidence already been undermined by the fact that the system now requires bailing out? What good will paying people back for what they previously invested do for restimulating growth?

I got a TG this morning asking what is meant by “short selling” which has gotten a lot of attention recently, especially since someone in this thread mentioned “selling short”, and the person was wondering if those two terms were the same.

They’re actually not, as selling short has two meanings, depending on whether we’re in the real estate context, or the securities context.

In the real estate context, as was mentioned here, selling short is basically selling a property to satisfy a mortgage, when the value of the property is less than the face value of the mortgage. Going back to the example in the OP, if Buyer has a 1 million dollar mortgage but his home is worth $700k, he can go to the bank and go “look, I’m broke, I can’t pay this mortgage, I can sell the home and give you 700k, and we’ll just call it even”. In this case the bank is losing out on 300k. However often banks will approve this in a slumping market, because they can either take the 700k now, or refuse this. In which case the market may continue to slump, and by the time they go through with the foreclosure sale, that house may only be worth 650k. They can try to get the remaining 350k from Buyer, but he’s broke. So selling short is the bank’s way of cutting their losses.

However what’s been discussed a lot with the term “selling short” is the securities meaning of the term. Basically, most people who invest in stocks are betting the stocks go up. Selling short does the opposite, it’s betting that the stock value goes down.

How’s that work? Like this. Let’s take Bob and Sally. I know Microsoft stock is currently valued at $80 a share, but I believe that it’s going to go down in value. I also know that in Bob’s long term investment portfolio is a share of Microsoft stock. I know Sally wants a share of Microsoft stock. So I go to Bob and say “hey, Bob, this share of Microsoft stock, that’s a long term investment, you’re not selling it any time soon, how about you let me borrow it for a week? I’ll pay you 5% of the face value of the share, so I’ll give you $4.” Bob, who is simply sitting on this share of stock say sure, it’s an easy 4 bucks for him. Now I have a share of Microsoft stock from Bob. Then I go to Sally and say “hey Sally, I know you want to invest in Microsoft, and it’s $80 a share right now. How about I sell you this share I got right here for $75? You’ll save 5 bucks” And Sally, who was about to spend $80, also says sure thing.

A week goes by, and wouldn’t you know it, I was right. Microsoft stock dips and is now worth $70. I now go to Joe who is selling his Microsoft stock, since the priced dropped, and buy it from him for the going price of $70. I then take that share of Microsoft back to Bob “hey Bob, here’s that Microsoft share I borrowed from you, thanks.”

So what happened? Well I bought the share for $70, paid Bob $4 for the privlidge of borrowing his, so I spent $74. But Sally paid me $75 for the share I borrowed from Bob. So what happens to that $1? It’s mine. My whole bet was that the stock would drop enough so that I could buy back a share of stock to replace the one I borrowed, for less than I sold it for.

But wait a minute, I hear you say, the stock I bought from Joe is not the same stock I borrowed from Bob. When I borrowed Bob’s stock, I promised him to return HIS share of stock, not some different stock I bought from Joe! Yes, this is true, but this works when we get into another defining characteristic of securities, namely, fungibility. What this means, essentially, is that a security is always exchangeable like for like. There is no “Bob’s share” or “Joe’s share” or “Sally’s share”. There’s just share’s of Microsoft stock. One share of Microsoft is a share of Microsoft is a share of Microsoft. Remember, what’s a security? It’s just a document that evidences a right of the bearer to receive a value on demand. They are not bound to any one person, and so, as a matter of law, even though I sold Bob’s stock and replaced it with a stock I bought from Joe, those two stocks, those two instruments, are functionally identical. They both do the same thing, and since securities are fungible, I can exchange like for like.

I've a few, but I'll deal with them one at a time.

If I'm following you right, this is all about market confidence, as far as I can see. The reason you can't just say to all of the investors "Tough cheese, we don't have the cash because the housing market crashed, you're going to have to do without" and simply leave them short their investment is because in doing so, the basis for confidence in a system of trade is undermined and nobody makes any more expenditure, money never changes hands and the exchange of goods and services grinds to a halt.

Well that's A. There is that involved. But there's a more important aspect of this that you need to consider. In my example, Investor is some rich guy who has a million dollars to invest, and if he loses it, he might be pissed, but he's not out on the street.

But in the real world, "Investor" isn't one guy. He's hundreds, if not thousands of people, each investing small amounts. Every day people like you and me. These investments? They're not just spare cash rich people have lying around. They're retirement funds, college tuition funds, life savings of normal people.

yes, consumer confidence is a big thing, but the REAL big reason you can't go to investors "look, we lost all your money, sorry" is that these investments are IMPORTANT to people. They depend on them. Saying "we can't pay you back" doesn't just piss off a few rich people. It bankrupts MILLIONS of people

Yes, consumer confidence is a big thing, but the REAL big reason you can't go to investors "look, we lost all your money, sorry" is that these investments are IMPORTANT to people. They depend on them. Saying "we can't pay you back" doesn't just piss off a few rich people. It bankrupts MILLIONS of people
That could, theoretically, be solved by providing them the things they would have had otherwise. For instance, government pension, education grants, transport passes, food vouchers, gifting you your house etc. Bypassing the middle-man of the banks, in other words. As long as the production and trade machine keeps whirling, it's possible to meet those needs without actually giving them their money back, and this could work out better for the taxpayer, especially if what they lost is actually far in advance of what they would end up using.

It seems as though it's the need to keep making things and providing services that's the more pressing problem, because without motivation and trust, nothing'll get done and the resources that these people would have spent their money on are no longer being provided.

That could, theoretically, be solved by providing them the things they would have had otherwise. For instance, government pension, education grants, transport passes, food vouchers, gifting you your house etc. Bypassing the middle-man of the banks, in other words. As long as the production and trade machine keeps whirling, it's possible to meet those needs without actually giving them their money back, and this could work out better for the taxpayer, especially if what they lost is actually far in advance of what they would end up using.

In theory yes, but the bureaucracy behind such a thing would be staggering, to the point that I'm fairly certain that it would be cost inefficient. Somewhere along the line, SOMEONE needs to get paid. Sure, the government, instead of giving the investment companies money to pay me back so I can buy food, can just give me food vouchers. And I can bring those vouchers down to Stop and Shop. But Stop and Shop has its own budgets, they need to pay their wholesalers and distributors. So they’re going to need to redeem those vouchers for cash with the government, and the government either needs to pay them the cash value of those vouchers, or give them NEW vouchers that THEY can use for their distributors. But distributors need money to pay the suppliers, who need money to pay the farms, who need money to pay the workers. At some point, somebody needs to cash out.

And at that point we're right where we were, with a whole level or more of bureaucracy slapped on top of it.

And at that point we're right where we were, with a whole level or more of bureaucracy slapped on top of it.
Conceded. But my question still remains; how is giving people their money back through taxes going to reinspire confidence in the markets?

Conceded. But my question still remains; how is giving people their money back through taxes going to reinspire confidence in the markets?

if you want my opinion...it won't. We’re WAAAAAAAY past “restoring confidence in the market”. We’re at the “let’s try to stop a full on run on the banks because that would be really, really, REALLY bad” stage now. (Do you want me to go through what I mean by "run on the bank" or are we ok on this term?)

if you want my opinion...it won't. We’re WAAAAAAAY past “restoring confidence in the market”. We’re at the “let’s try to stop a full on run on the banks because that would be really, really, REALLY bad” stage now. (Do you want me to go through what I mean by "run on the bank" or are we ok on this term?)
Eep. (I think I get that much, thanks, but since your explanations have been pretty neat to read thus far, don't let me stop you!)

Eep. (I think I get that much, thanks, but since your explanations have been pretty neat to read thus far, don't let me stop you!)

OK, well, why the hell not. Basically it’s this. The reason we’re vaguely “OK” at the moment is because the problems, largely, are affecting people’s long term savings accounts, not short term checking accounts. If someone’s access to long term savings are disrupted for a while, that’s OK, but if people can’t access the money they use for daily living, we have big problems.

When I open an account at a bank and deposit money, that money doesn’t just sit there in a box labeled “Neo Art” waiting for me to come pick it up. When I give my bank my money, they do stuff with that money. Mostly, they loan it out to other people. When I deposit my paycheck, it doesn’t just sit there in a vault, the bank takes that money and loans it to people, for a mortgage, or a car loan, or a business loan, or things like that.

That’s how banks make money. They take my money, loan it to people, and make interest off those loans. But the next obvious question you might ask is, if they give my money to someone else, what happens when I try to get my money back? Well, remember, banks are giving out AND taking in money all the time. The vast majority of a bank’s assets are held in IOU notes. The great bulk of the money in the bank is actually held by debtors, who borrowed that money from the bank. If you added up all the money in everyone’s savings account, checking account, and certificates of deposits, that value would FAAAAAR exceed the cash a bank has on hand at any given moment. Even banks that do very good business, who don’t have many loan defaults, they never really exceed 10% of total deposits as on hand cash. If everyone tried to close their accounts all at the same time, the bank couldn’t do it, they don’t have enough physical money.

Fortunately, that doesn’t happen very often, and the entire banking industry is predicated on one simple concept, that by and large, people don’t all withdraw money all at the same time. Sure, people take money here and there, some close accounts, but for every account that’s closed, another opens, for every dollar withdrawn, another dollar is paid back on a loan. Even though a bank couldn’t POSSIBLY honor every single dollar in every single account all at once, as long as the amount of money people are taking from the bank stays less than the amount of money people are giving TO the bank, we’re good.


And what happens is, remember, banks don’t have enough money on hand to satisfy every account they hold, they can only cover a little. They need money coming IN in order to satisfy the demands of money going OUT. And when things start to go bad, and people start to default on loans, suddenly banks face a pretty serious cash flow problem. They don’t have money coming in any more. And people start to get nervous, and start to think that their money is better off under their mattress. So they start closing accounts. And they start doing it at a rate greater than money coming into the bank. And remember, the bank at any given moment has MAYBE a 10% reserve. That’s it. Once that’s gone, that’s gone. And if the demands of people taking money out of their accounts exceeds the money the bank has coming in, and their reserves are tapped, the bank, quite literally, runs out of money. And that's what we call a run on the bank.

And as bad as fucking with people’s long term investment accounts is, as much a mess that has caused us, when you have people being told by their banks “I’m sorry, you can’t access the funds in your checking account because we’re out of money” you have serious, SERIOUS problems.

excellent information!

so, what do y'all (all you financial types) think is the chances of this bailout thing working?

is it a huge risk? is it doomed to failure? is it a no-brainer great idea that has an excellent chance of saving us from certain depression?

is it a huge risk? is it doomed to failure? is it a no-brainer great idea that has an excellent chance of saving us from certain depression?

Yes.

Well, ok, that's not fair, so let me elaborate. Will it work? Well that depends on how you define "work". Will it fix our economy? No, we’re too far gone for that. The underpinnings of our economic system have gone rotten, and it’s going to take a while, most economists estimate an 18 month recession or worse, to shake it back to healthy again. The whole underpinnings need to be washed away and rebuilt.

What it will do, hopefully, is prevent the scenario I outlined above. As bad as our economy is now, it is NOTHING compared to what will happen on a full scale bank run. That’s the goal right now. Not “fixing” it, not “making it better”, it’s to keep it afloat enough so banks stay in business. Because if there is systematic bank insolvency, you are now in economic meltdown. And while true, the US government does insure up to $100,000 per account, all it takes is 7 million Americans to have that $100,000 cap account, and we’re already hitting the 700 billion bailout cost. Although the FDIC does theoretically insure those accounts, the cost of covering those accounts is astronomical, and would make this bailout look like pennies in comparison.

This bailout won’t make things better. It won’t even stop it from getting worse. It will stop the otherwise inevitable, a systemic meltdown of the banking industry, and the next national depression.

Yay for somewhat averting catastrophe!

Yes.

Well, ok, that's not fair, so let me elaborate. Will it work? Well that depends on how you define "work". Will it fix our economy? No, we’re too far gone for that. The underpinnings of our economic system have gone rotten, and it’s going to take a while, most economists estimate an 18 month recession or worse, to shake it back to healthy again. The whole underpinnings need to be washed away and rebuilt.

What it will do, hopefully, is prevent the scenario I outlined above. As bad as our economy is now, it is NOTHING compared to what will happen on a full scale bank run. That’s the goal right now. Not “fixing” it, not “making it better”, it’s to keep it afloat enough so banks stay in business. Because if there is systematic bank insolvency, you are now in economic meltdown. And while true, the US government does insure up to $100,000 per account, all it takes is 7 million Americans to have that $100,000 cap account, and we’re already hitting the 700 billion bailout cost. Although the FDIC does theoretically insure those accounts, the cost of covering those accounts is astronomical, and would make this bailout look like pennies in comparison.

This bailout won’t make things better. It won’t even stop it from getting worse. It will stop the otherwise inevitable, a systemic meltdown of the banking industry, and the next national depression.
ok. that seems "right" to me.

does the "fixing" rest with congress passing better regulations of the financial industry in general? (and enough time passing for all this to shake out)

Oh trust me, there's plenty of blame. While the initial cockup might not be malicious fault as much as it was starry eyed optimism about a continued housing boom, what came next was certainly a problem. Basically the investment companied di three things. First, they trie dot attract new investors, but rather then investing their borrowed money, used parts of it to make payments on interest to the old notes, essentially turning the thing into a giant Ponzi scheme. Second, in showing and creating valuations for their portfolios, they listed the notes and mortgages as having a face value of the note, not the actual market value of the land securing it. This is very bad when you essentially know that the note has, or is about to, default, and you'll never recover its face value. Third they did some interesting and creative accounting, essentially "rolling over" of their bad debt, essentially selling to, and buying back, these old notes, to themselves basically. It created an illusion of a cash flow, but in reality, they were taking lint from one pocket, putting it in another, and pretending someone just stuffed cash into it instead.

and this is where the real fault comes in. Instead of sound business practices we got Enron accounting. Companies gaming the SEC and tax codes is nothing new. It's just that this time it led to the fall of the major banks in America.

and this is where the real fault comes in. Instead of sound business practices we got Enron accounting. Companies gaming the SEC and tax codes is nothing new. It's just that this time it led to the fall of the major banks in America.

Oh, indeed. I took at look at some of the financials, and it was so convoluted that I, and keep in mind, this is what I do, couldn't make heads or tails out of half of it.

have you been following the current bailout proposal? the bad dealers in this mess can still be prosecuted cant they?

have you been following the current bailout proposal? the bad dealers in this mess can still be prosecuted cant they?

Well I haven’t seen anything that would indicate any immunity from criminal prosecution. Those that engaged in actual criminal fraud can, as far as I can see, be prosecuted for it.

The problem is, a lot of what they did was technically…legal. Just really unwise. Too much starry eyed optimism over the belief that they would continue to be able to meet their promises, and that their mortgage backed securities would stay backed. Which, in hindsight, was really really dumb. But stupidity and over eager investments aren’t criminal.

They may violate a whole slew of fiduciary duties, but that’s a civil matter, and it’s not like these agencies are going to have much money to sue over.

Oh trust me, there's plenty of blame. While the initial cockup might not be malicious fault as much as it was starry eyed optimism about a continued housing boom, what came next was certainly a problem. Basically the investment companied di three things. First, they trie dot attract new investors, but rather then investing their borrowed money, used parts of it to make payments on interest to the old notes, essentially turning the thing into a giant Ponzi scheme. Second, in showing and creating valuations for their portfolios, they listed the notes and mortgages as having a face value of the note, not the actual market value of the land securing it. This is very bad when you essentially know that the note has, or is about to, default, and you'll never recover its face value. Third they did some interesting and creative accounting, essentially "rolling over" of their bad debt, essentially selling to, and buying back, these old notes, to themselves basically. It created an illusion of a cash flow, but in reality, they were taking lint from one pocket, putting it in another, and pretending someone just stuffed cash into it instead.

Is all of that legal?

And if it is, should it be?

Well I haven’t seen anything that would indicate any immunity from criminal prosecution. Those that engaged in actual criminal fraud can, as far as I can see, be prosecuted for it.

The problem is, a lot of what they did was technically…legal. Just really unwise. Too much starry eyed optimism over the belief that they would continue to be able to meet their promises, and that their mortgage backed securities would stay backed. Which, in hindsight, was really really dumb. But stupidity and over eager investments aren’t criminal.

They may violate a whole slew of fiduciary duties, but that’s a civil matter, and it’s not like these agencies are going to have much money to sue over.
yeah. it seemed to me that they were trying to get their money or their growth targets and get out before it collapsed around them. playing a nasty game of hot potato knowing that what they were doing was wrong but doing it because legally they could.

Is all of that legal?

And if it is, should it be?

well, here's the problem with that question. If I'm an investment company and I go "hey, all of our bonds are backed by this big list of million dollar mortgage notes we have the right of payment from, so you should invest with us!" well...it's true, in a literal sense. I do have the right of payment from those mortgages, and I am using them to back my bonds.

But if I happen to know that half of those mortgages are about to default, then I know that there's nothing REALLY backing those investments. And now we're starting to come dangerously close to what we lawyers like to call "fraud".

On the OTHER other hand, their response is simple. "Look, we showed we owned these mortgages, we did. Investment's a risky game, sometimes people default on mortgages, sometimes they don't. We took the risk that it would pay off. We were wrong. We messed up, sure, but there's nothing CRIMINAL about it. We were upfront with it. We declared our assets, Everybody knew we were sitting on a housing bubble, it wasn't OUR fault it broke, we didn't do anything about it. We listed the assets we had as potential receivables. We didn't receive them. That's the risk of investing. We're real sorry about all the money we lost, but we didn't hide anything"

I think the question of actual criminal conduct is going to be answered when real forensic accountants and experts go through the books with a comb and figure out whether they actually outright hid the trouble they were in, and literally cooked the books, or whether they used some rather clever, but technically legal, accounting to make it SEEM like they were in better shape than they were, on a brief examination.

In other words, did they illegally cover up their situation, or did they, underhandedly, but legally, report their situation in an opaque fashion?

Frankly I don't know. And I don't think we're GOING to know for years.

I think the question of actual criminal conduct is going to be answered when real forensic accountants and experts go through the books with a comb and figure out whether they actually outright hid the trouble they were in, and literally cooked the books, or whether they used some rather clever, but technically legal, accounting to make it SEEM like they were in better shape than they were, on a brief examination.

In other words, did they illegally cover up their situation, or did they, underhandedly, but legally, report their situation in an opaque fashion?

Frankly I don't know. And I don't think we're GOING to know for years.

Ugh.

At least it looks like the limits on their pay after bailout look like they're going to stick. Although even the limit being talked about seems too high to me.

Oh, indeed. I took at look at some of the financials, and it was so convoluted that I, and keep in mind, this is what I do, couldn't make heads or tails out of half of it.

This is the biggest problem I have with saying there's equal blame to be shared here. The average person is not a financial expert. The average person knows just enough to get them by and balance their family budget. Hopefully they have enough left over for the year to take their kids on a small vacation. This is all that most people ever have, or ever really think they could have. It's not a bad life or desire to have these things. So when the average guy looks and says, "the bank will give me a loan so I can stop renting and actually own a home. This is it, this is my chance to have the 'American Dream.' They say my payments will be 1695 a month. I can pay that, my property taxes, and my homeowner's insurance and still have money left over in the budget." This is really as far sighted as most Americans are, some even less. They look at their monthly budget and say, "can I afford this." They don't study amortization charts and see how much it will be in the long term. They don't think of gas prices doubling, the dollar falling, inflation rising, food prices skyrocketing, etc." So they trust the experts and put themselves into a loan. Years go buy and the scenario you described plays out and you have what we have now.

I'll share a personal story of this crap. I had mortgage companies literally trying to screw meat every turn when buying my condo. They tried to lock me into combo loans, I/O loans, etc. They told me I didn't qualify for an FHA loan even as a first time buyer. The truth was that I did qualify. This was not one bank telling me this, it was a concerted effort from a number of lenders to F me out of my money. I finally got a straight deal from a mortgage broker who worked directly with Wells Fargo. They gave me a 30 yr traditional fixed mortgage for a lower rate and better payments than someone was trying to do giving me an 80/20 combo loan I/O. Shockingly the 80/20 offer came from a direct lender, not a broker working on commission. They intentionally tried to put me into terms that would A. cost me more money a month B. raise my rates after the initial terms C. increase the likelihood that I would default. This was a matter of greed pure and simple.

This is the biggest problem I have with saying there's equal blame to be shared here. The average person is not a financial expert. The average person knows just enough to get them by and balance their family budget. Hopefully they have enough left over for the year to take their kids on a small vacation. This is all that most people ever have, or ever really think they could have. It's not a bad life or desire to have these things. So when the average guy looks and says, "the bank will give me a loan so I can stop renting and actually own a home. This is it, this is my chance to have the 'American Dream.' They say my payments will be 1695 a month. I can pay that, my property taxes, and my homeowner's insurance and still have money left over in the budget." This is really as far sighted as most Americans are, some even less. They look at their monthly budget and say, "can I afford this." They don't study amortization charts and see how much it will be in the long term. They don't think of gas prices doubling, the dollar falling, inflation rising, food prices skyrocketing, etc." So they trust the experts and put themselves into a loan. Years go buy and the scenario you described plays out and you have what we have now.

I'll share a personal story of this crap. I had mortgage companies literally trying to screw meat every turn when buying my condo. They tried to lock me into combo loans, I/O loans, etc. They told me I didn't qualify for an FHA loan even as a first time buyer. The truth was that I did qualify. This was not one bank telling me this, it was a concerted effort from a number of lenders to F me out of my money. I finally got a straight deal from a mortgage broker who worked directly with Wells Fargo. They gave me a 30 yr traditional fixed mortgage for a lower rate and better payments than someone was trying to do giving me an 80/20 combo loan I/O. Shockingly the 80/20 offer came from a direct lender, not a broker working on commission. They intentionally tried to put me into terms that would A. cost me more money a month B. raise my rates after the initial terms C. increase the likelihood that I would default. This was a matter of greed pure and simple.
i agree with you.

ive bought several houses over the years and its a pretty complicated process. we all rely on our bankers to not be actively trying to screw us (or lead us to a deal that has a very high chances to end in default)

and it is only HUMAN to want things to work out in your favor. so if my banker LETS me have a loan for a great house that seems to be out of my price range....well he knows his business better than *I* do so it must be OK. it takes a suspicious nature to suspect that your banker is not steering you in the right direction. and some serious financial knowledge.

and, to make you feel less special, my father-in-law faced the same kind of crap 50 years ago when he tried to buy his first house on the GI bill.

This is the biggest problem I have with saying there's equal blame to be shared here. The average person is not a financial expert. The average person knows just enough to get them by and balance their family budget. Hopefully they have enough left over for the year to take their kids on a small vacation. This is all that most people ever have, or ever really think they could have. It's not a bad life or desire to have these things. So when the average guy looks and says, "the bank will give me a loan so I can stop renting and actually own a home. This is it, this is my chance to have the 'American Dream.' They say my payments will be 1695 a month. I can pay that, my property taxes, and my homeowner's insurance and still have money left over in the budget." This is really as far sighted as most Americans are, some even less. They look at their monthly budget and say, "can I afford this." They don't study amortization charts and see how much it will be in the long term. They don't think of gas prices doubling, the dollar falling, inflation rising, food prices skyrocketing, etc." So they trust the experts and put themselves into a loan. Years go buy and the scenario you described plays out and you have what we have now.

I'll share a personal story of this crap. I had mortgage companies literally trying to screw meat every turn when buying my condo. They tried to lock me into combo loans, I/O loans, etc. They told me I didn't qualify for an FHA loan even as a first time buyer. The truth was that I did qualify. This was not one bank telling me this, it was a concerted effort from a number of lenders to F me out of my money. I finally got a straight deal from a mortgage broker who worked directly with Wells Fargo. They gave me a 30 yr traditional fixed mortgage for a lower rate and better payments than someone was trying to do giving me an 80/20 combo loan I/O. Shockingly the 80/20 offer came from a direct lender, not a broker working on commission. They intentionally tried to put me into terms that would A. cost me more money a month B. raise my rates after the initial terms C. increase the likelihood that I would default. This was a matter of greed pure and simple.

Oh, agreed. It's true that some people did get into deals they reasonably should have known were bad. Some of those mortgages just should not have been approached by any reasonable person.

But the fact is, most people think in very simple financial terms, and, for the most part, that's ok, they don't have to think about more. They don't need to know the intricacies of financial markets. I do, but that's my job. A nurse doesn't. A mechanic doesn't. A school teacher doesn't. A stay at home dad doesn't. They rely on people to give them the truth.

And these institutions bilked them. They looked at a rising market and saw dollar signs. They took on every loan from every body that would borrow money from them, figuring that even if they defaulted, they'd end up with a house worth more than the face of the note. It was the perfect no risk situation. Either the debtor pays off the mortgage, or he doesn't, in which case, foreclose, and sell the house on a hot market. They had a duty, and they failed it. They were supposed to treat their customers as people, not as revenue streams. They were supposed to come up with the deal best for their debtors, not the deal that would pay them off the most as debt holders.

And then the market bottomed out. And they had underwritten a whole lot of bad debt, backed by collateral that didn't cover the face value of the notes.

Neo, the system setup in the OP seems doomed from the word go. A single bankruptcy breaks not only the mortgage holder (who got royally fucked for being stupid), but the company holding the mortgage and if enough of them fail the company with the bond. Why is such a thing permitted?
To be fair, they weren't transferred on as single mortgages or bonds. They packaged them together, so that one bond was made up of several mortgages. So even if someone defaulted and the sale price of the house was below the value of the debt, that would only have been a small part of the bond that was actually traded. Mathematically, it reduced risk and made it very managable indeed - based on the one all-important assumption that house prices wouldn't fall across the entire US all at once.

Which then of course they did, for the first time since the Depression. That threw all the models into disarray.

This bailout won’t make things better. It won’t even stop it from getting worse. It will stop the otherwise inevitable, a systemic meltdown of the banking industry, and the next national depression.

But...but...libertarians tell me the Governement should just let our economy collapse, because His Majesty, The Free Market will save us.

I think a lot of people also forget credit's cousin, derivatives. In their most common form, they're sort of like an insurance policy for debt; I pay you regular amounts per time period, and if that debt goes under you owe me the value of it in repayment. Other stipulations and terms based upon fluctuations in currencies, interest rates, whatever also can be housed in derivatives.

Of course, the biggest problem with this is that it didn't just involve two parties. Those parties in turn sold derivatives based upon their derivatives to other companies, who in turn might have used those derivatives to back securities, which were in turn sold to others who in turn traded in derivatives based on those securities, and if they issued any of their own they might have traded in derivatives based on those. As you can see, a colossal number of interlocking derivatives can be built up from a small core of actual debt or other securities. The effect of those debts or securities tanking, of course, launches the domino effect that might turn $200 million of losses on the debt in to $2 billion, $20 billion, even $200 billion or more depending on the sheer amount of derivatives out there. Suddenly, companies could owe billions on debt they didn't even own simply through the collapsing effect of those derivatives.

I think we may end up finding out it was the derivatives markets that brought down these companies, not the actual debt itself. All the mortgages, bonds, commercial paper and other forms of debt are only the smallest fraction of the derivatives market and if they go, many, many times more amounts of wealth in the form of derivatives is also lost.

I think a lot of people also forget credit's cousin, derivatives. In their most common form, they're sort of like an insurance policy for debt; I pay you regular amounts per time period, and if that debt goes under you owe me the value of it in repayment. Other stipulations and terms based upon fluctuations in currencies, interest rates, whatever also can be housed in derivatives.

Of course, the biggest problem with this is that it didn't just involve two parties. Those parties in turn sold derivatives based upon their derivatives to other companies, who in turn might have used those derivatives to back securities, which were in turn sold to others who in turn traded in derivatives based on those securities, and if they issued any of their own they might have traded in derivatives based on those. As you can see, a colossal number of interlocking derivatives can be built up from a small core of actual debt or other securities. The effect of those debts or securities tanking, of course, launches the domino effect that might turn $200 million of losses on the debt in to $2 billion, $20 billion, even $200 billion or more depending on the sheer amount of derivatives out there. Suddenly, companies could owe billions on debt they didn't even own simply through the collapsing effect of those derivatives.

I think we may end up finding out it was the derivatives markets that brought down these companies, not the actual debt itself. All the mortgages, bonds, commercial paper and other forms of debt are only the smallest fraction of the derivatives market and if they go, many, many times more amounts of wealth in the form of derivatives is also lost.

I insist you desist from nuanced analysis. That sort of penetrating yet reserved commentary has no place in this forum.

Withdraw your civil, substanced argument and replace or at least edit it with calling another poster an imbecile or at least some catty, acerbic remark. Else, I shall report you to the mods.

Imbecile.

Well therein lies the question.

First, there's a huge amount of efficiency left in the system, that's where technology helps drive growth.

Second, there's regeneration, whether food or fuel. In terms of food, we're currently wasting our land in terms of over-farming, stripping land of nutrients, wildlife and plantlife.

Technology should solve that as well, alas human nature will not. If there's one real danger it's that we destroy our environment before technology can allow us to live without it. I cannot stress this enough, we're destroying a livable environment. As Jared Diamond wrote - what was running through the head of the Easter islander who cut down the last tree - where trees were simply used to build bigger and bigger housing, monuments to their wealth.

In terms of fuel, oil is clearly not regenerative, we'll run out, but again, technology should solve that.

There's also plenty of space, we haven't even begun to use the sea, which covers 2/3's of the world, so, unless we wipe ourselves out in a nuclear winter, we're probably pretty sustainable for the observable future.

The idea is that we were very close to extinction before, down to about 10-15, 000 but we made it through, compound mathematics means we can grow population quickly from few.

The actual point is what world do we want to live in?

Capitalism certainly ensures one thing, the quickest distribution of spare capacity. Communism, ideal as it is, simply goes against our nature.

The simple fact is that in order to have change, which is necessary in order not to stagnate, we need to accept a certain amount of chaos.

What's frustrating is that those who govern us are more about popularity than effective policy. Greed, our greatest sin, seems exponentially greater in those who are supposed to help curtail it, to help stem too much chaos. Short term popularism beats out long term strategy, easily.

One might argue that, in a democratic system, we get what we vote for, that individually we are simply not concerned enough with the common good to override our own selfish needs.

Yet, theoretically, that's what our leaders are supposed to do, to provide a check to our wanton desires.

The fact is, they're often the most susceptible.

More than three years of asking my continual growth question in NSG, and it is FINALLY answered with more than a glib dismissal.

THANK YOU.

I have nothing to add to this thread other than my congratulations to its contributors (for the little that they are worth to a bunch of people I've never met and who don't know me). It's not often you get to see a thread, on any general-issues forum, that manages to be calm, lucid and informative throughout.

Thanks folks :)

I have nothing to add to this thread other than my congratulations to its contributors (for the little that they are worth to a bunch of people I've never met and who don't know me). It's not often you get to see a thread, on any general-issues forum, that manages to be calm, lucid and informative throughout.

Thanks folks :)

No! Stop! The forum itself will have an allergic reaction! Debate of this condensed molarity and saliency will crash the whole system!

Quickly, somebody, say there is/isn't a God! Your candidate, whoever it is, will ruin this country! USians is/isn't a valid term!

Gun smileys! For God's sake, Gun smi---


[System Destroyed]

No! Stop! The forum itself will have an allergic reaction! Debate of this condensed molarity and saliency will crash the whole system!

Quickly, somebody, say there is/isn't a God! Your candidate, whoever it is, will ruin this country! USians is/isn't a valid term!

Gun smileys! For God's sake, Gun smi---


[System Destroyed]

douche.

I think we may end up finding out it was the derivatives markets that brought down these companies, not the actual debt itself. All the mortgages, bonds, commercial paper and other forms of debt are only the smallest fraction of the derivatives market and if they go, many, many times more amounts of wealth in the form of derivatives is also lost.

I'm pretty sure that this is already known, or at least suspected. That's why every other WSJ article seems to be quoting Warren "credit default swaps are financial WMDs" Buffett. As NL said earlier (I paraphrase), it's one thing for everybody to be worried about the value of mortgage-backed securities -- at least one can come up with a value range for those things with the bottom being "zero" and the top being "more than zero". It's another thing entirely to figure out the total potential liability on all the credit default swaps & associated derivatives. At least with some derivatives, such as listed stock options, you can find a list somewhere that details the total outstanding bets everyone's made; not so in this case.

As I was bitching earlier today, the equivalent human-scale situation is that you made a bet on next week's Bears game with your local bookie. Then you made side bets with your roommates on whether you bet correctly, and then they made side bets with the guys on the next floor about whether your bets were better than the bets of the guys down the hall, and so forth. Even if you think you cleverly hedged your original bet, it's not hard to imagine that the situation arises where everybody ends up losing their shirts to the one guy in the corner apartment and nobody can afford to pay rent that month.

But...but...libertarians tell me the Governement should just let our economy collapse, because His Majesty, The Free Market will save us.

KOL, I am sure you have been told before that the free market will sort itself out in the end, it will come at a price a very big price to a lot of people who had nothing to do with this but it will fix itself up. The question is KOL do you want this big price to be paid or do you want it to be sorted out without to much damage?

Oh, agreed. It's true that some people did get into deals they reasonably should have known were bad. Some of those mortgages just should not have been approached by any reasonable person.

But the fact is, most people think in very simple financial terms, and, for the most part, that's ok, they don't have to think about more. They don't need to know the intricacies of financial markets. I do, but that's my job. A nurse doesn't. A mechanic doesn't. A school teacher doesn't. A stay at home dad doesn't. They rely on people to give them the truth.

And these institutions bilked them. They looked at a rising market and saw dollar signs. They took on every loan from every body that would borrow money from them, figuring that even if they defaulted, they'd end up with a house worth more than the face of the note. It was the perfect no risk situation. Either the debtor pays off the mortgage, or he doesn't, in which case, foreclose, and sell the house on a hot market. They had a duty, and they failed it. They were supposed to treat their customers as people, not as revenue streams. They were supposed to come up with the deal best for their debtors, not the deal that would pay them off the most as debt holders.

And then the market bottomed out. And they had underwritten a whole lot of bad debt, backed by collateral that didn't cover the face value of the notes.
No questions or suggestions, but just a couple of thoughts:

I am the farthest thing possible from an attorney and even farther from an economist, but I did use to proofread notes and bond certificates, and over many years I have both drafted and proofed many kinds of corporate documents, and two phrases that keep hitting me in the head from all those thousands of documents every time I think about this are: "fiduciary responsibility" and the concept of the "prudent person."

CEOs, CFOs, investment managers, financial advisors, bank executives, and others whose jobs involve making decisions about who to loan to, who to borrow from, which deals to make and which to avoid, when all those decisions are made with other people's money, are supposedly bound by a legal obligation to act in a reasonably prudent manner. That means they are not supposed to treat the global market like a big blackjack table on which to test out their "system."

And back in the day, I was told that those weren't just words on the paper but that if violations of those responsibilities were found, the individuals in question could be facing SERIOUS disciplinary issues, not just in terms of getting their souls sued away by their shareholders and boards of directors, but also from the SEC and other arms of the government, facing ruin to the point where they would not be able to get any job except laundering money for drug cartels, and there are only so many openings for that work per year.

I wonder if things have finally gotten to the point where we don't really need Enron-level deliberate malfeasance, because we have reached such a critical mass of lack of prudence and lack of fiduciary responsibility that it amounts to the same thing and still deserves punishment, even if it all was, technically, legal.

In other words, is this one of those unsual situations where you can violate the law without actually breaking it? I'm wondering this in relation to the question of whether anything CAN be done to pursuade financial types not to do this shit again real soon.

Another thought: Bush I took away the GAO's enforcement powers. If the next president is not a total douche, he will get those powers reinstated, because I can think of no body better equipped or more motivated to spend all the years it will take to sort this mess out and figure out who did what with whose money when, etc.

And finally, I'd like to join the chorus of general admiration for you, my dear friend (no, really, we're just good friends), Neo Art. This is probably the most intelligent and informative thread I've ever seen -- anywhere, not just on NSG. Thank you for it. It impresses me a lot more than those cutesy cartoons. ;)

No! Stop! The forum itself will have an allergic reaction! Debate of this condensed molarity and saliency will crash the whole system!

Quickly, somebody, say there is/isn't a God! Your candidate, whoever it is, will ruin this country! USians is/isn't a valid term!

Gun smileys! For God's sake, Gun smi---


[System Destroyed]

The system, apparently, is down (http://www.youtube.com/watch?v=O4gqsuww6lw).

And finally, I'd like to join the chorus of general admiration for you, my dear friend

ohhhhhhh

(no, really, we're just good friends),

oh :(

Neo Art. This is probably the most intelligent and informative thread I've ever seen -- anywhere, not just on NSG. Thank you for it. It impresses me a lot more than those cutesy cartoons. ;)

Flattery, my dear, will get you everywhere

ohhhhhhh



oh :(



Flattery, my dear, will get you everywhere
And all you have to do to keep the flattery going is "pierce the soft labyrinth of a lady's ear / With rhymes of this per cent and that per year." ;)

And all you have to do to keep the flattery going is "pierce the soft labyrinth of a lady's ear / With rhymes of this per cent and that per year." ;)

very punny, are you dunne?

very punny, are you dunne?
Oh, heh, heh....heh.


(It's Pope, by the way, just to be a plonk about it. ;))

KOL, I am sure you have been told before that the free market will sort itself out in the end, it will come at a price a very big price to a lot of people who had nothing to do with this but it will fix itself up. The question is KOL do you want this big price to be paid or do you want it to be sorted out without to much damage?

I'd prefer to not be raped thank you very much. I'd also prefer that if I was raped that my rapist would be found and put to trial. I'd also prefer that if the rapist would not be brought to trial, that I wouldn't have to pay him damages if he got an STD by raping me (I do not have an STD so shut it :D) He raped me, got a disease that would be killing him. The government then says "we have a cure for the disease that is killing your rapist. The only thing is that we are going to take billions of dollars from the US government to save you both from the disease. We're only going to give you 1 treatment when you need 10. We're going to give your rapist 20 treatments because we want to be on the safe side." Who do you think is more to blame, the public or the corporations? I'm really interested to hear the answer, because while I find fault with the consumer there are warning labels for a reason. Even if you put a warning label on something it doesn't absolve you from blame when the product you made of inferior materials and lead kills the child you sold it to. So who is more to blame in your opinion?

Oh, heh, heh....heh.


(It's Pope, by the way, just to be a plonk about it. ;))

well god damn, so it is. Damn you Mur. Fine, you win this one.

So anyway...

Check this out...

It doesn't cost much to snap up a house these days in the down-at-heel motor city of Detroit. Agents advertise two-bedroom properties for as little as $1,500 (£800). "It's a phenomenon that's unreal that's going on at the moment," said Lolita Haley, owner of Prime Financial Plus Realty in suburban Detroit. "Foreclosed homes are constantly coming on to the market."

Say I'm cash-rich, should I be buying this stuff?

I mean, it's Detroit so I'm not going to live there but, seriously...

Second, one factor we've all left out is that there's two strands to the amount of foreclosures. One is simply granting mortgages to those who couldn't afford them anyway. It's forgotten that part of the problem is that:

a: People are losing jobs, unemployment is at what, nearly 6%?
b: Variable interest rate mortgages meant they couldn't afford it anyway.

The worst-hit regions in the crisis fall into two categories. There are states that were already economically deprived, such as Mississippi, Michigan and Ohio, where job losses have made it tough for people to keep up mortgage repayments. Then there are relatively well-off areas in Florida, Nevada and California where a particularly aggressive housing boom collapsed catastrophically, leaving millions of people with mortgages far higher than the value of their homes.

It's a two-pronged problem and some of the blame, surely, should be placed at the credit-happy economy, where people aren't encouraged to have savings.

There's other effects too...

East of San Francisco, the city of Stockton has the highest foreclosure rate in the US. City authorities are struggling to cope with vandalism and neglect, as hundreds of homes are abandoned every month.

There are fears that the West Nile virus could spread aggressively as mosquitoes breed in the stagnant water of swimming pools at bank-owned homes. In San Diego, pest control officers have seen a surge in calls to deal with bees and wasps which are nesting undisturbed in vacant houses.

We can sit and blame investors and Wall St. but the fact is that America has simply been overspending. The ease with which one can gain credit certainly helps the economy grow but on ever-increasingly shaky legs.

So anyway...

Check this out...



Say I'm cash-rich, should I be buying this stuff?

I mean, it's Detroit so I'm not going to live there but, seriously...

Second, one factor we've all left out is that there's two strands to the amount of foreclosures. One is simply granting mortgages to those who couldn't afford them anyway. It's forgotten that part of the problem is that:

a: People are losing jobs, unemployment is at what, nearly 6%?
b: Variable interest rate mortgages meant they couldn't afford it anyway.



It's a two-pronged problem and some of the blame, surely, should be placed at the credit-happy economy, where people aren't encouraged to have savings.

There's other effects too...



We can sit and blame investors and Wall St. but the fact is that America has simply been overspending. The ease with which one can gain credit certainly helps the economy grow but on ever-increasingly shaky legs.
no you shouldnt buy property in detroit.

no you shouldnt buy property in detroit.

At $1, 500??

I can sit on that for 20 years and not care too much, I can buy a row of houses.

In the end, the land is still worth something, and the fact is that it will certainly rise in value from $1, 500. Even if it doesn't, I can probably write it off at those prices, it's a worthwhile gambit if I can take the losses without too much worry.

This might not be morally correct but if I'm prudent enough to have plenty of cash on hand, why wouldn't I take advantage of depressed prices?

Very clear and well-informed thread (and debate), especially for NSG. Thumbs up.

Therefore, I submit: [deep breath]

The US should have spent the money it's using to bail out the financial companies on providing every American with a happy fluffy kitten! I think we should just let those institutions suffer awhile for the bad things they have done. They dug themselves into this hole, they should dig themselves out! The pockets of the financial executives are bulging with the sweat of the honest working man! Recession might occur, but the government can just pass laws lowering the prices of everything to affordable levels so that things can continue as normal. This way they will only continue to deepen the gap between the rich and the poor! If they continue with these failed policies, I'm going to move to Canada!

All right, you can continue with the reasonable discussion now. This should hold things for a few pages.

I mean, isn't this what the bail-out proposes, that the market is currently undervalued and the $800 billion is actually a good investment for taxpayers as and when the markets regain their positions?

The idea is that it simply takes those bad debts off the banks, allowing the banks to breathe and continue for the moment even though, theoretically, they should be able to live anyway if we just ignore that debt for the moment and carry on as usual.

So, I"m theoretically acting much as the US government is, buying toxic land that is currently undervalued.

I mean, isn't this what the bail-out proposes, that the market is currently undervalued and the $800 billion is actually a good investment for taxpayers as and when the markets regain their positions?

The idea is that it simply takes those bad debts off the banks, allowing the banks to breathe and continue for the moment even though, theoretically, they should be able to live anyway if we just ignore that debt for the moment and carry on as usual.

So, I"m theoretically acting much as the US government is, buying toxic land that is currently undervalued.

Let's think. The American population is around 312 million at the current time. If we gave just one million dollars to every American they would be able to pay off their debts and the mortgages they are foreclosing on can be paid in full. Of course there are people that owe more than that, but think about the difference from 700 billion to 312 million. Think, you only get your money if you sign a contract to use it to pay off your debts. This is a joke of course, but it sure beats the hell out of 700 billion to 1.2 trillion.

I'd prefer to not be raped thank you very much. I'd also prefer that if I was raped that my rapist would be found and put to trial. I'd also prefer that if the rapist would not be brought to trial, that I wouldn't have to pay him damages if he got an STD by raping me (I do not have an STD so shut it :D) He raped me, got a disease that would be killing him. The government then says "we have a cure for the disease that is killing your rapist. The only thing is that we are going to take billions of dollars from the US government to save you both from the disease. We're only going to give you 1 treatment when you need 10. We're going to give your rapist 20 treatments because we want to be on the safe side." Who do you think is more to blame, the public or the corporations? I'm really interested to hear the answer, because while I find fault with the consumer there are warning labels for a reason. Even if you put a warning label on something it doesn't absolve you from blame when the product you made of inferior materials and lead kills the child you sold it to. So who is more to blame in your opinion?

Come again?

The more I read up on this current crisis, the more the paraelles between this and the popping of the Japanese bubble economy which led to its lost decade are becoming more apparent. If I may ask the resident experts, how likely is a simular situation?

The more I read up on this current crisis, the more the paraelles between this and the popping of the Japanese bubble economy which led to its lost decade are becoming more apparent. If I may ask the resident experts, how likely is a simular situation?

There was a similar, and possibly worse, crisis in the 80s where there was a big problem with L&S (Loan and Savings) companies and a government agency was created to buy off bad debt and ensure liquidity. "Stagflation" was the term of the time.

Of course, I'm more or less a parrot than an expert, so I'd ask others about this...

The more I read up on this current crisis, the more the paraelles between this and the popping of the Japanese bubble economy which led to its lost decade are becoming more apparent. If I may ask the resident experts, how likely is a simular situation?

I'm not all that worried about it. I've got considerable faith that the American economy will bounce back.

I'm not all that worried about it. I've got considerable faith that the American economy will bounce back.

I have considerable faith I will be a millionaire. Hasn't happened yet....

Say I'm cash-rich, should I be buying this stuff?
Well, let's drop high finance by the wayside for a moment - the houses are going to be worth something again eventually. It depends on the area (Detroit maybe less so than some of the stuff being foreclosed in California, for example), but if you had access to cheap money at the moment, and you're happy to wait for some time with selling, then the current glut of houses that have to be sold to people who don't want to buy them is good news for you.

Unless of course we end up coming to the conclusion that house prices really were overvalued by 400% - in which case you could still make some money, but you'd have to be more careful about picking the trough to buy them.

Also, a someone slap McCain (http://www.businessspectator.com.au/bs.nsf/Article/Officials-congress-meet-to-save-bailout-JTW2A?OpenDocument). Really, really hard.

So anyway...

Check this out...

It doesn't cost much to snap up a house these days in the down-at-heel motor city of Detroit. Agents advertise two-bedroom properties for as little as $1,500 (£800). "It's a phenomenon that's unreal that's going on at the moment," said Lolita Haley, owner of Prime Financial Plus Realty in suburban Detroit. "Foreclosed homes are constantly coming on to the market."

Say I'm cash-rich, should I be buying this stuff?

I mean, it's Detroit so I'm not going to live there but, seriously...

Where in Detroit? I might seriously be interested in buying at that price if the neighborhood doesn't suck too much.

http://www.ft.com/cms/s/0/8be8bcb2-1c71-11dd-8bfc-000077b07658.html
US city council files for bankruptcy

The city council of Vallejo in California late on Tuesday voted unanimously to file for bankruptcy, sparking a downgrade on Wednesday in some of its municipal bonds and prompting fears that other cash-strapped local governments might emulate it.

Vallejo, near San Francisco with a population of 117,000, faces an estimated $16m budget deficit for the fiscal year that starts on July 1. This comes amid a decline in tax revenues related to falling house prices coupled with rising salary and pension costs.

Where in Detroit? I might seriously be interested in buying at that price if the neighborhood doesn't suck too much.

No idea though I'm fairly certain it's not in the finest neighborhood.

Well, let's drop high finance by the wayside for a moment - the houses are going to be worth something again eventually. It depends on the area (Detroit maybe less so than some of the stuff being foreclosed in California, for example), but if you had access to cheap money at the moment, and you're happy to wait for some time with selling, then the current glut of houses that have to be sold to people who don't want to buy them is good news for you.

I'm talking cash from my account, cheap as chips.

Unless of course we end up coming to the conclusion that house prices really were overvalued by 400% - in which case you could still make some money, but you'd have to be more careful about picking the trough to buy them.

Well it is Detroit.

Also, a someone slap McCain (http://www.businessspectator.com.au/bs.nsf/Article/Officials-congress-meet-to-save-bailout-JTW2A?OpenDocument). Really, really hard.

He has a base who are adamant against taxpayer money going to save banks, irrational as it is, he has a presidency to win - speaks to my earlier point about short-term populism winning against long-term interests.

Despicable really, although John McCain's camp does say this is not his stance

http://www.ft.com/cms/s/0/8be8bcb2-1c71-11dd-8bfc-000077b07658.html

The Milwaukee Public School District is bankrupt too...so much so that there is even some talk of privatisation.

http://www.ft.com/cms/s/0/8be8bcb2-1c71-11dd-8bfc-000077b07658.html

I mean, here we go...

S&P lowered its underlying rating on revenue bonds linked to motor vehicle licence fees to B from a prior rating of A.

People will bet on anything really, and where a major part of the market crashes, as in mortgages, which are really related to the ability of citizens to spend on everything from food to motor vehicle licenses...

...at some point something's going to happen.

Let's think. The American population is around 312 million at the current time. If we gave just one million dollars to every American they would be able to pay off their debts and the mortgages they are foreclosing on can be paid in full. Of course there are people that owe more than that, but think about the difference from 700 billion to 312 million. Think, you only get your money if you sign a contract to use it to pay off your debts. This is a joke of course, but it sure beats the hell out of 700 billion to 1.2 trillion.

You know you're talking about 312 trillion, right?

Let's think. The American population is around 312 million at the current time. If we gave just one million dollars to every American they would be able to pay off their debts and the mortgages they are foreclosing on can be paid in full. Of course there are people that owe more than that, but think about the difference from 700 billion to 312 million. Think, you only get your money if you sign a contract to use it to pay off your debts. This is a joke of course, but it sure beats the hell out of 700 billion to 1.2 trillion.

Well, aside from the fact that the amount of money involved is just over five times the size of the entire world GDP and is almost the size of the entire credit market including derivatives...

Of course, even if that were possible, it would just produce massive inflation. We're talking hyperinflation, especially once all that money starts being pumped in to the economy. The super-liquid environment of the past twenty years or so has nothing on that.

Can someone tell me why the government would consider bailing these companies out and not buying them out?

Can someone tell me why the government would consider bailing these companies out and not buying them out?
Because they don't actually want them. They're not Bolivarians, they see this intervention as a necessary evil and try to minimise it as much as possible.

It's simple, really. They don't want the good assets, because the good assets are needed to keep the private banking system functioning. But that system and its good assets are weighed down by all the bad assets, which private banks can't keep anymore while staying alive. The government can, so they decided they'll take them. To make sure it's not a free ride for the banks, they're attaching all sorts of extras to punish shareholders (ie make the banks issue extra shares and give them to the government, which pay especially high dividends and so on) and to make themselves look good to the voters (like limiting executive pay).

Then John McCain comes along, loses his marbles and stops everything in its tracks.

http://www.ft.com/cms/s/0/8be8bcb2-1c71-11dd-8bfc-000077b07658.html

Does anyone actually know what happens when a city council goes bankrupt?

no you shouldnt buy property in detroit.

I'll have you know, there are some nice neighborhoods in Detroit.

For example (http://en.wikipedia.org/wiki/Woodbridge_Historic_District)

Not such a good one, for $100

http://realestate.yahoo.com/Michigan/Detroit/Homes_for_sale/71c716201f2d4b1851416b2ea2265375;_ylt=Ap199GYAnsEmtOICqi5wgKnnMrQs?cc=realestate&p=detroit,%20mi&priceHigh=&priceLow=&nodeId=750007014&radius=&bedrooms=&bathrooms=&type=classified&sortBy=price+1&ltype=0

Does anyone actually know what happens when a city council goes bankrupt?
I was wondering that today as well. The obvious thing is that it will default on the bonds it issued.

http://www.law.cornell.edu/uscode/html/uscode11/usc_sup_01_11_10_9.html

If you know your legalese, that's the relevant stuff to read.

Not such a good one, for $100
What! Ghetto or no ghetto, that is worth more than $100. Would there be any legal barriers to me buying that thing from here?

What! Ghetto or no ghetto, that is worth more than $100. Would there be any legal barriers to me buying that thing from here?

I honestly haven't the slightest idea. However, judging from it's location if you were to bought it you may want to have someone else manage and never visit it yourself.

I personally think that a large part of the funds to solve this problem should be taken from the pockets of the very investors and CEOs who knew the whole story and continued to do things the way they were in the name of making a quick buck.

Does anyone actually know what happens when a city council goes bankrupt?
I don't know the legal ins and outs of it, but I can tell you what it was like to be in New York City in the 1970s when that city almost went bankrupt:

First off, it's not just a city council going bankrupt. It's the city that is managed by that council, because they don't have is the money that pays for the running of the municipality.

In NYC, that meant massive layoffs and hiring/wage freezes for city workers and loss of city contracts to private companies/service providers. It meant brutal slashing or outright canceling of budgets for a host of public services. It meant no roof repairs or pest control or new fire extinguishers for schools, libraries, city hospitals, museums, etc. It meant schools had no money to hire teachers or buy books or supplies, had to charge full restaurant prices in the lunchroom while applying to the federal government for welfare/FEMA/military leftovers to feed the students, and had to eliminate class programs were over and above the minimum NY State requirements in every single area -- not just sports and art but math, history, English, science, etc. It also meant that the roads and bridges did not get repaired, and fire and police departments both had hiring freezes and station closures, leading to the obvious results.

What was it like to live in a bankrupt city? Here's an excerpt from a book about NYC in the 1970s:

http://www.digitaljournalist.org/issue0402/at_intro.html

From which:
Dirty, dangerous, and destitute. This was New York City in the 1970s. The 1960s were not yet over, and war still raged in Viet Nam, fueling resentment against the government. Nixon and the Watergate scandal created even more resentment, cynicism, and skepticism. Economically, stagnation coupled with inflation created a sense of malaise. The Arab Oil Embargo of 1973 delivered another blow to the U.S. economy, and brought the misery of long lines to buy gasoline. Conditions in Harlem and Bed-Stuy were horrendous, with abandoned buildings and widespread poverty. The subways were covered everywhere with ugly graffiti and they were unreliable. It seemed as if the entire infrastructure was in decay. Political corruption, sloppy accounting, and the cost of the war were killing the city. Times Square, the crossroads of the world, was seedy and sleazy. Pimps, hookers, and drug dealers owned the night there. Crime was rampant, and the police were powerless to stop it. Random killings by the "Son of Sam" made New Yorkers even more fearful. The parks were in decay, with and litter and bare lawns, and it was home to muggers and rapists. When the proud City of New York had to beg the Federal Government for a financial bail-out, the President said no. The Daily News headline said it all: "Ford to City - Drop Dead."

...

Sometimes entire blocks or several blocks would contain crumbling buildings, abandoned by their owners because the tenants could not pay rent. Conditions in these areas gave rise to street gangs and crime that spread city-wide. People tore the boards of the windows or smashed the concrete blocks in doorways to gain access to these abandoned buildings, which were then used by gangs, drug addicts, and children playing. Eventually, some people moved into these buildings as squatters, and efforts were made to rehabilitate or replace substandard housing. The lack of jobs and housing put enormous stress on the city's public assistance programs including housing, education, and healthcare. Many middle-class whites were deserting the city for the suburbs, perceiving African-Americans and Puerto Ricans as threats. And many corporations left New York as conditions deteriorated, since new communications technology made it possible to do business anywhere. Television production also fled to the West Coast.

Naturally, NYC turned itself around, but only as a result of the combination of national economic rebound, a whole new city government that took aggressive action and a radically different approach, and the population forced by necessity to find new ways of doing things. And no, it was not fun to go through the process.

What was it like to live in a bankrupt city? Here's an excerpt from a book about NYC in the 1970s:

Funny, for a second there I thought I was reading a current article about Detroit.

I was wondering that today as well. The obvious thing is that it will default on the bonds it issued.

http://www.law.cornell.edu/uscode/html/uscode11/usc_sup_01_11_10_9.html

If you know your legalese, that's the relevant stuff to read.

Unfortunately I don't but thanks for the information anyway.

I
[Snip]

.

Yeah doesn't sound good at all. The nearest I can really imagine is in the middle of the Troubles when some of the estates were pretty much run by paramilitaries. It may not be exactly comparable but it resulted in really high unemployment, police could barely get into some of the estates, the other emergency services often had trouble getting in as well and criminal gangs were rampant. It sounds vaguely similar, it must not have been fun growing up at all.

Yeah doesn't sound good at all. The nearest I can really imagine is in the middle of the Troubles when some of the estates were pretty much run by paramilitaries. It may not be exactly comparable but it resulted in really high unemployment, police could barely get into some of the estates, the other emergency services often had trouble getting in as well and criminal gangs were rampant. It sounds vaguely similar, it must not have been fun growing up at all.

Cartoonist/Essayist Ted Rall had a nice line about living in NYC in the 70s: he was serving jury duty, and the judge asked the pool the (standard) question "Has anyone you know been the victim of a violent crime?" The pool's unanimous response was derisive laughter -- of course they did! Didn't everyone?

Funny, for a second there I thought I was reading a current article about Detroit.
These things follow patterns, I guess.

Unfortunately I don't but thanks for the information anyway.



Yeah doesn't sound good at all. The nearest I can really imagine is in the middle of the Troubles when some of the estates were pretty much run by paramilitaries. It may not be exactly comparable but it resulted in really high unemployment, police could barely get into some of the estates, the other emergency services often had trouble getting in as well and criminal gangs were rampant. It sounds vaguely similar, it must not have been fun growing up at all.
Well, there was not the specific conflict that Ireland was going through, and, in a bizarre kind of way, as bad as it was -- and it was bad -- New Yorkers took it in stride. I mean, it's not as if NYC was ever a quiet little town.

I didn't have it anywhere near as bad as others because I was lucky enough to live in a very old, established, stable residential district that was fairly removed from the most violent crime action. All we had to worry about within our neighborhood was frequent burglaries and occasional rapes and muggings. Oh, yeah, and we were one of Son of Sam's hunting grounds (ah, nostalgia). But we had no gang action, thank goodness, and no burned-out abandoned wrecks of buildings or "dracula" landlords draining money out of the area. Of course, once we went outside the neighborhood -- for school, work, recreation -- all bets were off.

But, hey, I'm a New Yorker. I managed to get through it without a scratch. You learn to pay attention to what's going on around you, I can tell you that.

Come again?

Do you place more blame on the American public or corporations and large lending institutions?

You know you're talking about 312 trillion, right?

It was a joke. It kind of was a throw away line. I was bored, it was late at night, and I really just wanted to be ridiculous.

Because they don't actually want them. They're not Bolivarians, they see this intervention as a necessary evil and try to minimise it as much as possible.

It's simple, really. They don't want the good assets, because the good assets are needed to keep the private banking system functioning. But that system and its good assets are weighed down by all the bad assets, which private banks can't keep anymore while staying alive. The government can, so they decided they'll take them. To make sure it's not a free ride for the banks, they're attaching all sorts of extras to punish shareholders (ie make the banks issue extra shares and give them to the government, which pay especially high dividends and so on) and to make themselves look good to the voters (like limiting executive pay).But a bailout will just enable the same fuckups who caused this mess.

These things follow patterns, I guess.


Well, there was not the specific conflict that Ireland was going through, and, in a bizarre kind of way, as bad as it was -- and it was bad -- New Yorkers took it in stride. I mean, it's not as if NYC was ever a quiet little town.

I didn't have it anywhere near as bad as others because I was lucky enough to live in a very old, established, stable residential district that was fairly removed from the most violent crime action. All we had to worry about within our neighborhood was frequent burglaries and occasional rapes and muggings. Oh, yeah, and we were one of Son of Sam's hunting grounds (ah, nostalgia). But we had no gang action, thank goodness, and no burned-out abandoned wrecks of buildings or "dracula" landlords draining money out of the area. Of course, once we went outside the neighborhood -- for school, work, recreation -- all bets were off.

But, hey, I'm a New Yorker. I managed to get through it without a scratch. You learn to pay attention to what's going on around you, I can tell you that.

Yeah, I'd imagine that would be the case. I was lucky, I was born near the end of the troubles (my first day of school conincided with the signing for the ceasefire) so I didn't experience anything as bad as my parents experienced (both of them were nearly escpaed being caught up in bomb blasts, I think). Even then I still have memories of having to escape riots, having to change my name depending on where I was at the time (I have a very catholic name, which is slightly ironic because I'm the son of a methodist minister), having the bomb disposal squad in the neighbourhood every couple of weeks, that sort of thing.
I guess the case of NYC just shows how important it is for the goverment to handle this economic crisis correctly. It's not just the profits of big coperations which are at risks, when the system breaks down, it's going to be the "little people" that suffer.

Do you place more blame on the American public or corporations and large lending institutions?
Personally, and this is only my personal opinion, I make it a 80/20 or 90/10 split, with the greater responsibility falling on the corporations, lending institutions, and government. My reasons are as follows:

1) WHY THE PUBLIC ARE LESS AT FAULT: The number of private citizens knowingly borrowing beyond their means, with awareness that there was a high likelihood that they would default on their loans, is probably very, very small. I say this because the loan programs and packages that were so aggressively marketed to the public were deliberately presented by the lending institutions to make it seem as if the lenders understood the borrowers' limitations, had examined and approved the borrowers, and were going to cooperate with the borrowers through thick and thin to make sure they could maintain good standing on their loans until they were fully paid off.

None of that was true. But when a bank is the one saying it to you -- and you are not a financial expert -- is it so unreasonable to believe them? Banking/credit/finance are such arcane subjects for most people and that is exactly why there are extra burdens of prudence and responsibility placed on those who handle other people's money. How was the average person looking to buy a home or pay for college or whathaveyou supposed to know that, when the lending institution approved their loan, they had done so essentially in bad faith, with no safeguards, no approval process, no intention of keeping the promises made by the rep who got the borrower to sign with that lender? That in fact, none of the things offered to the borrower as an incentive to borrow were actually real.

The only reason I don't let the WHOLE public off the hook entirely is because this went on for so long before becoming a major crisis that the basic crookedness of the whole system did become obvious to anyone who chose to look at it dispassionately. We have been listening to economists' dire warnings, to complaints about predatory lenders, to stories of people being bankrupted by mortgages they couldn't pay off, for years. Many people chose simply to ignore it and keep using this corrupt system.

In their defense, they didn't really have a choice. With the complicity of government, the banks and lenders made sure there was no other system except to pay for everything in full by cash (and how many people can do that with a house or college?). They made this an all-or-nothing game.

What I do blame the public for is that, for all these years when it was obvious that we were all being cheated and used and that the government, via deregulation and legislation that helped the lenders and not the borrowers, were serving us up on a platter to these figurative cannibals, the public (We the People) never stood up and said "cut it the fuck out." We never stood up for ourselves but only kowtowed to these suits who just showed up and claimed that they had some authority over this and, by extension, us. Which is as much bullshit as everything else they've said to us. Look at the lives we live now -- in which fear of a credit rating rules people's lives, in which more emphasis is put on "managing" debt than paying it off, etc. -- it is a fiction entirely invented by the people who are now, themselves, defaulting and falling to pieces right and left, before our eyes.

So it's my take that the majority of borrowers borrowed in good faith, believing what their lenders told them and with full intention to cooperate with the lenders and pay off their debts. And they were deliberately misled, and that is NOT their fault. But it IS their fault that, once it became obvious how crooked the system was, they remained passive and obedient to it. Enough now. Now it is time for them to WAKE UP and GROW UP. Stop giving these grifters the benefit of the doubt, stop being afraid of what we don't know about finance and rely instead on what we do know about our own lives and needs, and exert pressure on the government that is supposed to serve us to fucking do that already.

2) WHY THE CORPORATIONS/LENDING INSTITUTIONS AND GOVERNMENT BEAR MOST OF THE FAULT: Easy. All we have to do is examine the banking/credit industry and past/recent federal legislation to see the corporate and political corruption at work. It is my opinion that there is not a single aspect of the current financial crisis that is not a direct result of the private greed and dishonesty of just a few hundred corporate executives and politicians.

The mere fact that we can talk about a "banking/credit industry" is evidence of this corruption. Do you realize that, a few decades ago, such a beast did not exist because it was illegal to combine the functions of banks and credit companies due to conflicts of interest which would lead to corruption and violation of fiduciary responsibility? This has been clear from day one. Deregulation of banking, which removed all obstacles such as accountability and notions of conflicts of interest, etc., was NEVER anything but a deliberate corrupt enterprise in my opinion, and we see where it has led us.

So I place the bulk of the blame on the banks/lenders and government for the same reason that I place the bulk of the blame for a scam on the scam artist rather than the mark. Yes, the mark should have been more careful and less trusting, but being naive and gullible is not a crime. Cheating people is. Maybe, in spite of all the social pressure against this, borrowers should have been more skeptical of the banks and lending institutions who assured them that they could get the things they needed to improve their lives/futures. Maybe they SHOULD have been more suspicious of anyone -- even a long-established bank -- who came to them, offering to lend them money and seeming really eager to do so (red flag for a scam). But that does not in any way absolve the banks/lenders from the blame for having deliberately dealt in bad faith with the public and for having created via government complicity a system that forces the public to do business with them.


I guess the case of NYC just shows how important it is for the goverment to handle this economic crisis correctly. It's not just the profits of big coperations which are at risks, when the system breaks down, it's going to be the "little people" that suffer.
It always is. People tend to talk about things like this in the abstract, in terms of systems and theories and "corrections" of this or that. They forget just what it is they are seeking to correct. They forget what all that money that was originally for and what will happen in the real world because that money suddenly isn't available anymore.

EDIT: Also, I see it as a fiction that it is the "little people" who suffer from such breakdowns. The ones who see themselves as the "big people" are not as far above the fray as they like to think. Just ask any of the super-rich Park Avenue-dwelling New Yorkers who have to battle the same cockroaches and rats in their multi-million-dollar condos as do the poor living in walk-up tenements just a few blocks away. The effects of municipal breakdown -- filth, vermin, crime, infrastructure collapse, lack of personnel to get public work done, etc. -- affect all, eventually.

As it turns out, wealth does not "trickle down," but poverty and chaos sure as hell do percolate UP, just like mold in the cellar of a fancy house.