These are tulmultous times. No more investment banks on Wall Street

DollarDave

kgingras wrote: »

Interestingly enough, NYT hinted at this back in '99.

September 30, 1999
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

...Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

...''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' ....

Hmm, I wonder if that is the same Franklin D. Raines that is freshman Senator Obama's economic advisor? Would make sense seeing how in the last 8 years, Fannie Mae's top 2 political contribution recipients are Christopher Dodd (brokering the bail-out deal) and Obama (running for President). Obama must have been a particularily apealling person to contribute to as he rose to second-place in just 2 years...

Back to the point, anyone buying this junk paper knew that the risk in their portfolio was higher and they accepted that risk along with the reward. Now, we are expected to alleviate the concequences of that risk. BS.

kgingras

DaveMuell wrote: »

Hmm, I wonder if that is the same Franklin D. Raines that is freshman Senator Obama's economic advisor? Would make sense seeing how in the last 8 years, Fannie Mae's top 2 political contribution recipients are Christopher Dodd (brokering the bail-out deal) and Obama (running for President). Obama must have been a particularily apealling person to contribute to as he rose to second-place in just 2 years...

Back to the point, anyone buying this junk paper knew that the risk in their portfolio was higher and they accepted that risk along with the reward. Now, we are expected to alleviate the concequences of that risk. BS.

Hey – don’t you know the rules? No politics!!! Just kidding.;)

Don’t you find the fact that the article was published in 1999 more than a little interesting though? I think the LA Times has something similar as well but cannot find the link.

I find the political pressure applied to FNM and FRE even more interesting however. It's also worth noting that others in the lending industry were furious (in 1999) that Fannie and Freddie were cutting into their very profitable turf. Government influence got us into this mess - more regulation was not the issue. Nor was poor financial reporting. Risk management models were very, very broken. That is a bigger issue. As was market pressure to grow earnings without regard to the risk involved. Chuck Prince said it best - on another branch of the business, but I find it fitting – “As long as the music is playing, you’ve got to get up and dance.”

Congress was pretty fat and happy about this until things went south. Then they started blaming the banks that they themselves pressured into lowering lending standards to extend more credit to more borrowers. Ultimately I think the blame belongs on them and their perpetual f**king hardon for "the American Dream" of owning a home no matter how poor, unreliable, or unemployed you might happen to be. Policy after policy is based on buoying homeownership. What exactly is wrong with thinking that some people should remain renters... I don't know.

BigMac

Plain and simple/black and white.

bikezappa

jstas

Quote "Oh and I'm not discussing politics, I am responding to you questioning me. There's a difference."

This is your thread and topic.

You must have a mad on.

bikezappa

BigMac

Funny but sad cartoons

bikezappa

kgingras

by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers.

I guess that explains how we got into this finacial mess. I wonder what the % is today?

Did anyone do the math?

Jstas

bikezappa wrote: »

jstas

Quote "Oh and I'm not discussing politics, I am responding to you questioning me. There's a difference."

This is your thread and topic.

You must have a mad on.

Um, I know what I posted a thread about. I posted about a goverment bailout and the economic impact. I did not discuss anything about any political policy. I only discussed how the banking system in this country works. I have not discussed politics, I have only responded to your misguided and ill-informed posts.

You're the one crying about your 401K and how you were going to use that money to retire. Waaaa. Whoop dee friggin' doo! You're not the only one champ, we're ALL hurtin'! You're lucky you only lost 30% of your value. A friend of mine's cousin WORKED for a bank that went under. He has no money, no investments and his mortgage is in danger. Oh, he's also unemployed now too. All of his life was wrapped up in that bank and he lost it all. granteed, the funds and such are still there but when they go from a high of 33.60+ a share to 1.67, that kinda stings a bit more than a 30% loss. Especially when you took advantage of all the breaks your employing financial firm offered to its employees.

Jstas

Kex wrote: »

I don't entirely agree. Better oversight of accepted lending practices (just as there is oversight of trading practices and accounting practices) could have averted at least some of this IMHO, by not allowing such wholesale pushing of mortgages on people who could not reasonably afford them. Just like an investor understands that he should not risk more than 25% of his portfolio in speculative stocks, banks should not have been allowed to risk such large proportions of their lending portfolios on anyone paying more than 40% (or so) of their monthly income into a mortgage, solely on the strength of appreciating home values. Lots of commons sense rules were ignored here. Good oversight could have made it illegal to be so wreckless.

Flooding the market with poorly qualified buyers also contributed to the housing bubble in a large part, IMO, so it was a self perptuating house of cards to begin with. I'm only surprised it lasted this long. I personally think the governement deserves some of the blame, but it's just my opinion, FWIW.

I'm not doubting any of this but when the economy is booming, making certain lending practices illegal overnight would have shut down investment growth and that would have halted everything. That would have led to stunting of teh economy and we'd be in roughly the same position because the lacking of capital backing is where the problem lies.

Besides, when this first started happening, the growth in the housing market was legitimate. How do you tell when it stops being legitimate and starts being a bubble? It's possible to see but difficult. But like what was said in another thread. Policies enacted by an earlier administration before this one opened up loopholes that were exploited. Those loopholes were intended to give disadvataged people a leg up to the American Dream. Nice, noble, good idea. Problem was it was unregulated and the policies were not very well thought out and poorly implemented to boot.

But again, when does the government step in? hind-sight is 20/20. What were the clues? Do you know? I'm not an economist, I don't really know. But I can see where the problems started. But when the problems started, we had other problems with a floudering economy that was going no where quick and skyrocketing inflation. At the time if it wasn't for these housing policies put in place and teh housing market bubbling up, the recession cause by the Tech Bubble bursting would probably still be going on. But you can't prop up a recessive economy with a whole other economic bubble.

When that happens we end up with inflated value (i.e.: inflation) and a bunch of over-valued stuff. The market bursts and adjusts itself through basic economic principles and we end up with a bunch of credit that isn't backed by anything. When that happens, interest rates go up to recover the losses and since all those high-risk loans were signed on adjustable rates, you now have people with mortgage payments doubling in size but paychecks stagnating and yearly raises barely covering the now inflated cost of living increases.

The market will adjust. How long it will take is how long this recession will be. You won't see much happen for 7 years because all those people who over-borrowed walked away and would rather take the 7 year hit than go live on the street. So they can't borrow anything for 7 years. No borrowers playing interest, no profit for banks to reinvest and generate more capital. That goes away, your growth goes away.

It's all crystal clear now but if you are going to put oversight in to that, who do you regulate? Lenders? Borrowers? Investors? Who? When you figure that out, how do you do that without crippling growth, stagnating the economy and driving a recession that you are trying to avoid? Yeah, we can sit here and say we shoulda coulda woulda but didn't but these answers are too late and no where near enough.

Besides, there is no amount of oversight that could have changed this because it would have needed congressional intervention at some point and why would any of them desire to anger their constiuents by limiting growth and taking away profit opportunities when the long term effects were not apparent immediatly? Congress would take too long to act and by the time they did, they would have passed a point where what they had planned to do was not enough and a waste of money and time.

bikezappa

Jstas wrote: »

I'm not doubting any of this but when the economy is booming, making certain lending practices illegal overnight would have shut down investment growth and that would have halted everything. That would have led to stunting of teh economy and we'd be in roughly the same position because the lacking of capital backing is where the problem lies.
.

WTF does that mean? Maybe slow down a bit.

bikezappa

I wonder why the car dealers didn't start selling and financing cars to people that didn't qualify? Maybe they did.

Looking back it makes no sense to do business like that weather you are selling homes or cars. The buyer must convince the seller that they can pay for the produce. This would be economics 101. Otherwize you go out of business very fast.

I understand the explanation others have offered that selling to nonqualified buyers, who could never pay, is the root cause of this metldown. Thank you.

However, I can't imagine this finacial plan of selling to nonqualified buyes lasting more than a few years before the meltdown. But according to these articles this plan was going on for over 10 years. What kept this boat afloat for so long.

There is no politics intended in the about. Just economics 101B.

bobman1235

bikezappa wrote: »

But according to these articles this plan was going on for over 10 years. What kept this boat afloat for so long.

You're talking about multi-billion-dollar companies, and despite all the hyperbole, all the lending to unqualified buyers and whatnot only increased their risk a small amount, so it takes a long time to catch up with them. Throw in how long it took the housing market to really shoot up (and then crash) and other things. Markets move slowly.

bikezappa

Jstas wrote: »

Thank you!
You can **** about your retirement but if EVERYTHING you have is in one place well, now you are the poster child on why you should diversify your portfolio. It helps minimize risk and loss if risk matures.
.

I never said anything about my personnel 401K.

The fact is that most people I have talked to noticed that ALL the options in their 401K are down 20% to 30%. There were no good or safe options in their 401K.

Diversify into what?

bikezappa

bobman1235 wrote: »

You're talking about multi-billion-dollar companies, and despite all the hyperbole, all the lending to unqualified buyers and whatnot only increased their risk a small amount, so it takes a long time to catch up with them. Throw in how long it took the housing market to really shoot up (and then crash) and other things. Markets move slowly.

OK I'll buy that. But why would these billion dollar companies continue to do business with buyers that didn't pay from the get go. That would be bad business. Wouldn't they change the part of the business that was lossing and make adjustments? Stores stop selling items that are losing money.

shack

bikezappa wrote:

I wonder why the car dealers didn't start selling and financing cars to people that didn't qualify? Maybe they did.

They did. It wasn't too long ago that there had to be a cash down payment to finance a car. That went away. Debt ratios went out the window. 72 month car loans became the norm. Upside down? No problem, they just added it to the new car loan amount and finance it as well (add that to the immediate depreciation and you could walk out the door $10-15,000 upside down the minute you drove off the dealer's lot). Can't afford to buy...they would lease it to you. Don't kid yourself into the belief that this is only a mortgage issue. Consumer debt, credit cards are going to be hit hard as well.

It is a change in the fundamental way of doing banking (and business) that was generated by greed. NOT JUST THE CEOs...but each and every one who owns a single share of a mutual fund is to blame as well. In striving to maintain "high rates of returns" MF managers, 401K managers, etc, have pushed publicly tradeed businesses (including banks) to continue delivering high rates of return by growth and income. The days of the largest stockholders of a bank being on the board and having direct input (and corresponding liability for their actions) into the long-term soundness of the institution are long gone. The largest stockholders are now institutional investors (mutual funds, insurance companies, pension funds, etc) whose sole concern is rate of return...even at the expense of the long term viability, stability and health of the business or institution. Banks and financial institutions were told they must maintain certain high levels of growth (say 15%) in economies that were growing at a 5% rate or their stock would be dumped by investors (decimating the value). There was no way they could grow with the economy or steal enough business from competitors to maintain the growth and income levels dictated to them. The only option was to TAKE MORE RISKS and do things to produce the revenues and growth to meet expectations of the "market". I am not saying the companies were not wrong in what they did, but much of it has been due to the nature of the ownership of publicly traded companies.

It’s all about greed…but not just the “evil corporate exec.” but anyone who owns mutual funds (either individually or in a retirement account) who made the determination based on the “rate of return” of that fund. We all have a part in this….and it is why the nation as a whole needs to FIX IT!

End of rant!

Jstas

bikezappa wrote: »

I never said anything about my personnel 401K.

The fact is that most people I have talked to noticed that ALL the options in their 401K are down 20% to 30%. There were no good or safe options in their 401K.

Diversify into what?

Again, losing 20-30% is peanuts compared to the hits of 70-90% some people have taken.

In case you didn't notice, I'm down-playing the loss. Yeah, I know, I'm a jerk, yada, yada, yada.


A 401K may be "diversified by nature" like Kex believes but in reality it isn't. Most 401Ks and mutual funds are based around a certain kind of stock, say tech stocks or pharmceuticals or what have you. It depends on where the 401K is based. My 401K was based primarily around tech stocks because of teh company I worked for with the majority being based on the company I worked for because of their 401K matching policy. The same goes for mutual funds. Fund managers do like what shack said and go for rate of return. What returns hot? Booming markets, like tech or pharmaceuticals. So they load up on those stocks. Granted, they are from different companies but, not necessarily outside of the primary market the fund is based in.

The problem with that? When you get a single company taking a hard hit and the stock drops, it affects other companies in the same market and you get a ripple effect that magnifies the hit and turns say a 15% loss into 20-30% depending on the size of the company that took the hit and how heavily invested you are.

How do you diversify? Different stocks/funds/investments in different markets. You shouldn't have you sole reliance or the majority of reliance on something like a 401K or a single market mutual fund. It's almost as bad as having all your money in one company. What should you invest in? FIIK, do your research.


This investing/banking stuff isn't easy to predict at all and it is one of the biggest and most expensive gambling risks in the known world. If you play heavy, the benefits can be huge but so can the losses. If you play small, benefits and losses are both small. It's all about risk management which is why stock brokerages give you trend information for stocks so you can see where the stocks have been and if you are investing in a fund, how they affected that fund.

Strong Bad

Tell ya what, I'm so glad I held out to buy a home. The prices people were paying for pieces of **** is goddamm amazing! I scored very well!

I remember some former coworkers comments regarding home prices. Someone had mentioned that someone else was buying a townhouse for, I think around $280k. Immediately, someone spoke up and said that this house must be in some ghetto **** neighborhood and be a wreck if they were paying that price.

$280k roughly for a townhouse and it must be a piece of **** in a ghetto neighborhood??? This person obviously WAY overpaid for their house as I later discovered and had this incredibly inflated outlook on home prices. Chalk it up to their high society "I'm better than all of you" attitude.

**** status symbols and egos drove too many people into these bad decisions, including car loans.

When I bought my Accord back in February, the dealership was also a VW dealer. On top of those nice shiny $40k + VW Toureg SUV's were these cutsie signs with financing options up to...yes indeed...96 months! Yes sir, 96 month financing options. So, when I sat down with the finance person to get my Accord for 60 months @ 4.79%, I asked if that sign was a misprint. He pretty much said people are coming in to get the biggest, most flashy and most expensive vehicles so they can look as high class as possible, show off to the world and want the absolute lowest monthly payment they can possibly get. So enter the 96 month option! He said they didn't care how much they were actually paying for it AFTER the 96th payment. Put me in it no matter what!

I settle on my townhouse/rowhome in 3 weeks. I paid $196k for it. It's in a nice neighborhood, an end of group, backs up to the water (I'm going to love my back deck) and is in amazing condition for a late '60's all brick house. I got a traditional 30 year fixed rate at 6.25%. My mortgage is well within my income level (I did not overspend), so i'll be very comfortable.

I have a friend and his wife that let their egos dictate their house shopping. Long story short, they had an ARM that just set to a higher rate. They tried to refinance and guess what, their home lost $80k in value, so they didn't qualify to refinance. Oh my oh my, that ARM added an extra $1400 a month (yeppers, $1400 a month) on to their existing mortgage. They can afford it, but it stings quite a bit!

Oh yeah, alot of stuff is on sale. Smart investors, go shopping!

Old School Polk

Wall Street hasn't been the same since the wall was dismantled by the British in 1699.

Old School Polk

Kex wrote: »

A 401K is considered by most to be diversified by nature, just like a Mutual Fund.

No necessarily. All of the money in a 401K could be invested in your company's stock, another individual investment or an undiversified portfolio (i.e. all financial stocks).

So, keep your eyes on your 401K prize.

WilliamM2

Our economy is based on a free market. It failed all by itself and it is not the government's place to step in and meddle unless something is going to harm the good of the country. The banking problem was caused by banks exploiting a loophole that had the potential to pay off in a big way or fail in a bigger way. Well, we know what happened. Should the government have stepped in sooner?

The government already stepped in, that is exactly what caused this problem in the first place:

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

bobman1235

I wouldn't blame it all on corporate greed, though that's in there. For the past couple of decades the government has essentially forced private mortgage companies to give out risky loans to low income families. It certainly didn't force the current state, but it definitely encouraged it and helped it along.

shack

bikezappa wrote:

Are other countries having the major finacial institiutions also going bankrup?

Or is this just in the US?

Just another example(s) that it's not just us....even though our problems may be helping to make their problems worse (and vice-versa)....

UK government nationalizes Bradford & Bingley
Monday September 29, 8:02 am ET
By Emily Flynn Vencat, AP Business Writer

British government nationalizes Bradford & Bingley to preserve financial stability

LONDON (AP) -- The British government is nationalizing troubled mortgage lender Bradford & Bingley, the Treasury confirmed Monday, taking over the bank's 50 billion pound ($91 billion) mortgage and loan books as turmoil from the U.S. credit crisis spread across Europe.

The sweeping move is intended to preserve financial stability, Prime Minister Gordon Brown told reporters at his Downing Street office. "We will work night and day to make sure that Britain can come through fairly this downturn," Brown said.

The move comes hours after Dutch-Belgian banking giant Fortis NV was partially nationalized with a 11.2 billion euros ($16.4 billion) rescue from the governments of Belgium, the Netherlands and Luxembourg, after investor confidence in the bank disappeared last week. Germany's second biggest commercial property lender, Hypo Real Estate Holding AG, said Monday it had secured a multibillion euro line of credit from several banks, as the financial turmoil in the United States spread further in Europe

bikezappa

shack

I read that also this weekend. I guess we do have a global economy.

I understand that Russia has the worst economic effects.

I guess we all are operating under the same economic rules or non rules.

jdhdiggs

More fun for everyone:

http://in.youtube.com/watch?v=H5tZc8oH--o

If you're politcally oversensitive, please don't follow the link...

bikezappa

Club Polk politically oversensitive?

jdhdiggs

Ya think?

kgingras

Here is the draft legislation for the bailout: http://i.cdn.turner.com/cnn/2008/images/09/28/ayo08c04_xml.pdf. 110 pages in its current form. This thing started as a 3 page proposal. As John Boehner (House Minority Leader) said: "A crap sandwhich." I prefer the term "**** sandwhich"...that we're all gonna have to take a bite from, it seems. I read it last night, and I'm still not for it.

It transfers huge amounts of wealth to people who don't deserve it and haven't earned it. You're going to end up seeing a lot of "creative" accounting from a ton of these investment houses and banks, who'll try to rid themselves of assets they don't want (which we'll all end up "owning").

It also doesn't eliminate any of the policies that got us into this mess in the first place. By that, I mean the Community Reinvestment Act (when did credit become a civil right?), and the creation of Fannie Mae and Freddie Mac. This **** sandwhich also sets a horrible precedent: If you take huge (and stupid) risks, and become "too big to let fail," the good old U.S. government (meaning, we the taxpayers) will bail you out.

We're going down an extremely slippery slope here. And once some of the "incentives" in that package get into the system, it's going to be super-hard to go back to status quo ante, where the markets reward sound financial management and punish poor financial decision-making. And to me, it looks like Paulson is just bailing out all his friends from Wall Street (he was once CEO of Goldman Sachs, and his stock holdings have taken a 500 million dollar hit).

shack

If done right...this will end up costing the taxpayers NOTHING...and potentially show a profit for the treasury. This plan or something similar was necessary...if you don't believe that then you have no concept of the scope and magnitude of the problem/issues. This is not something created by Wall Street, bankers, politicians...it is a system wide problem created by ALL OF US in some form or fashion. It was either this (or similar) or many more massive failures in the US financial system which would have cost the taxpayers MUCH more in short and long run. Failure to act could have brought the whole thing crumbling down.

bobman1235

Which may still happen anyway. Listen to any economist, and they'll tell you they have no idea if any of this will even work. We're spending 800 billion on a gamble that NO one knows will work, and it doesn't seem to be fixing the root cause of much either.

Maybe it's time for everything to come crashing down and for us to reboot.

shack

The root cause of the "mortgage crisis" has already been fixed. If you think there will be anything resembling a "sub prime" mortgage going forward, you are sadly mistaken. The ability to stray from sound banking and lending practices has been taken off the table. and I don't see that changing any time in the foreseeable future.

What must be fixed is the notion that getting rich quick via the stock market, day trading, speculation of commodities and financial instruments, etc, etc, is acceptable. Too many people want to "get rich quick" and taking too many risks on someone elses dime. We must retun to the days of building wealth through systematic work and growth in a sound and reasoned manner. We need to get back to the days of valuing a business or enterprise on it's inherent strengths and/or weaknesses rather than speculation or demand by uninformed investors.

If you allow for everything to "come crashing down" and "reboot" you will get financial anarchy which will lead to things we have only seen in the failure of the economies of 3rd world countrys. It would not be pretty and would be devistating for our country.

bobman1235

I didn't mean to insinuate that I want that or that I hope it happens.


Thanks for all the insight shack. It's so hard to sort through the garbage you hear on the news it's nice to have someone that at least seems to have a deeper and more down-to-earth knowledge of what's going on.