The Unnanounced Class War

[cybercoma]

Who do you get financial advice from then? If you apply for a mortgage and the bank says you can afford it, most people are going to accept their opinions as professionals.

[bush_cheney2004]

Fail, going to the bank and asking for a loan you can't afford is like asking the robber to come in and rob your house.

True...only a fool would let the real estate broker and loan officer elevate the amount of risk and leverage taken on by the borrower. In the U.S. (and I am sure this is true in Canada as well), there are income thresholds and percentages of income that should be allocated to housing loans.

[Bonam]

Who do you get financial advice from then? If you apply for a mortgage and the bank says you can afford it, most people are going to accept their opinions as professionals.

Umm.. how about a quick google search? Or quickly jot down your income and expenses and see how they compare? Are people really this dependent and unable to think for themselves?

[cybercoma]

A quick Google search. Great.

Should I do that before I go to the doctor too?

[kimmy]

Banks didn't want to be forced to lend more money to higher risk people, so your premise is wrong. That's why they sought to get rid if such risk through fancy financial instruments and products.

At this point you're just making stuff up. They absolutely wanted to lend money to high risk people. They aggressively pursued high risk people. They were so excited about lending money to high risk people that they ignored their own due diligence investigators to make it happen. It wasn't government policies that made that happen, it was their own policies.

That policy was to give a mortgage to "Anybody who can fog a mirror," as a former Countrywide employee put it.

It was politicians that wanted banks to lend more to high risk people, and the distortion of the market was the unintended consequences of their good intentions of helping middle and lower income people.

Once again you ignore the fact that only a small fraction of the sub-prime mortgages that were issued were a result of any government rules or quotas. The overwhelming majority of them were not.

And none of that explains why these companies turned their due diligence process into a rubber stamp. And none of it explains why Moody's and Fitch and Standard & Poors were giving this crap AAA credit ratings. And it's these last two issues where there ought to be fraud charges occurring.

-k

[Argus]

What about him? I look at a house as an expense, not an investment. That's buddy's first mistake. Does a house produce anything? I live in a tiny house built in the 1950s, why would I want to go blow money on a palace when I do t have to?

Whether you look at a house as an expense or not if you owe $400k on a house now worth $200k you're likely not going to be making those payments. Better to drop the house and walk away from it. Which, of course, is what so many did.

. Heck even buying a 400k house at a 400k per year is preposterous.

My house is probably worth 400k. It's a 1950s bungalow. What kind of a hole do you live in?

[Argus]

At this point you're just making stuff up. They absolutely wanted to lend money to high risk people. They aggressively pursued high risk people. They were so excited about lending money to high risk people that they ignored their own due diligence investigators to make it happen. It wasn't government policies that made that happen, it was their own policies.

I'm reminded of another documentary I watched. I think it was called Maxed Out. It was on credit cards, and it pointed out that the credit card companies actually WANTED to lend money to lower income people who were riskier. They don't want to lend money to guys like me, after all because I pay off my card in full every month, incurring no expensive interest payments. No, the credit card companies, ie, the banks, deliberately targeted lower income, higher risk (people who already had a lot of debt) people because that's where the big profits are -- in getting people who only pay the minimum, month after month after month. Sure there's more defaults among them, but the profits are more than worth it. And the banks lobbied congress and got a bill through which makes it much more difficult for individuals to declare bankruptcy and get out of their credit card debts. Of course, corporate America (and Canada) still has no difficulty at all in declaring bankruptcy, sloughing off their debts (including pensions) and then carrying on.

[Pliny]

This dude's case falls apart in the very first paragraph with these nuggets of misinformation:

"When someone gets a mortgage from a bank or mortgage broker, that lender can hold the mortgage, but more often sells it to a GSE."

* he was correct, right up to the last 3 words.

"Today, Fannie and Freddie alone either own or guarantee roughly more than half of the nation’s outstanding mortgage total (the ratio would be higher if not for estimated private arrangements)."

* that is true today, and it was true in 2000, but it was NOT true during the housing crisis. During the early 2000s, when the bubble was forming, private securitizers were buying mortgages so quickly that the ratio of mortgages held by Fannie and Freddie plunged from half to less than 1/4.

Trying to pin the bubble on Fannie and Freddie is dishonest. Your source, whoever he is, is omitting crucial pieces of information to support a false narrative.

-k

The fact that Fannie and Freddie were buying those mortgages in any percentage means they were sanctioned by government. It created moral hazard that removed responsibility from the banks to the GSE's since Fannie and Freddie would buy at least some of them. The risk was in how much they would buy. If they bought all of them no problem they would be the ones to tank. But if they didn't then hey let's create these derivatives to hedge our losses.

What do you think they would do? Let Countrywide make all the money selling mortgages to the GSE's?

Do not forget that people who got in and got out before the crash made money including people that couldn't afford a house. You could buy a house with a subprime mortgage, not make any payments for a year and then sell making a huge profit. The problem was those that bought for a purpose other than an investment, like a place to live. They were hurt pretty bad.

Certainly, bankers understood what was going on which is why they hedged themselves against loss. The average home buyer doesn't necessarily have enough savvy to know what's happening. It's easy to sell a house in an inflationary market but you have to get out before the saturation point and inevitable collapse. Accepting the fact that real estate over time always goes up while making the investment in an inflationary market at its peak is a bit foolish but who knew. Politicians certainly didn't and it is apparently their responsibility to regulate the market and the banks. If regulations are not enforced they don't mean a damn thing.

So not only did government sanction it they promoted it and allowed it continue.

Banks protected themselves by hedging potential loss. If the market were regulating the banks none of this would have occurred.

Edited February 2, 2013 by Pliny

[kimmy]

Your argument is bad, and you should feel bad.

The fact that Fannie and Freddie were buying those mortgages in any percentage means they were sanctioned by government. It created moral hazard that removed responsibility from the banks to the GSE's since Fannie and Freddie would buy at least some of them. The risk was in how much they would buy. If they bought all of them no problem they would be the ones to tank. But if they didn't then hey let's create these derivatives to hedge our losses.

What do you think they would do? Let Countrywide make all the money selling mortgages to the GSE's?

You have used a lot of words to say that the banks saw a business opportunity, and took it. Good for them. Nothing illegal or immoral about that.

Do not forget that people who got in and got out before the crash made money including people that couldn't afford a house. You could buy a house with a subprime mortgage, not make any payments for a year and then sell making a huge profit. The problem was those that bought for a purpose other than an investment, like a place to live. They were hurt pretty bad.

You have used a lot of words to say "life is risky".

Certainly, bankers understood what was going on which is why they hedged themselves against loss. The average home buyer doesn't necessarily have enough savvy to know what's happening. It's easy to sell a house in an inflationary market but you have to get out before the saturation point and inevitable collapse. Accepting the fact that real estate over time always goes up while making the investment in an inflationary market at its peak is a bit foolish but who knew.

If bankers had really understood what was going on, they would have realized that their scam would implode if fund managers stopped buying MBSs. And it appears that some did. There were quite a few bank execs who took their performance bonuses and cashed in their stocks and got out of Dodge before sundown.

Politicians certainly didn't and it is apparently their responsibility to regulate the market and the banks. If regulations are not enforced they don't mean a damn thing.

So not only did government sanction it they promoted it and allowed it continue.

This is a valid criticism of the government and regulators, but it is not a justification or an excuse for the behavior of the bankers.

And the whole premise that the banks were failed by regulators or government flies in the face of the "business knows best" philosophy that your type always flogs.

Banks protected themselves by hedging potential loss. If the market were regulating the banks none of this would have occurred.

And this is just ridiculous. On the one hand you point out that the government did nothing, and in the very next breath you say that if the banks were unfettered by regulation none of this would have happened. That's laughable.

The derivatives market that was the instrument by which the banks "hedged themselves against loss", as you put it, was completely unregulated. The stuff they did was exactly what they would do if they were unfettered by regulations, because there were no regulations on derivatives. They were free to do whatever they wanted, and they did, and the result was an unmitigated disaster.

And you still didn't get to the part where they disregarded their own due-diligence research so that they could issue more mortgages. And you still didn't get to the part where these crap mortgages were willfully misrepresented to investors as "AAA" investments.

-k

[Shady]

Your argument is bad, and you should feel bad.

You have used a lot of words to say that the banks saw a business opportunity, and took it. Good for them. Nothing illegal or immoral about that.

You have used a lot of words to say "life is risky".

If bankers had really understood what was going on, they would have realized that their scam would implode if fund managers stopped buying MBSs. And it appears that some did. There were quite a few bank execs who took their performance bonuses and cashed in their stocks and got out of Dodge before sundown.

This is a valid criticism of the government and regulators, but it is not a justification or an excuse for the behavior of the bankers.

And the whole premise that the banks were failed by regulators or government flies in the face of the "business knows best" philosophy that your type always flogs.

And this is just ridiculous. On the one hand you point out that the government did nothing, and in the very next breath you say that if the banks were unfettered by regulation none of this would have happened. That's laughable.

The derivatives market that was the instrument by which the banks "hedged themselves against loss", as you put it, was completely unregulated. The stuff they did was exactly what they would do if they were unfettered by regulations, because there were no regulations on derivatives. They were free to do whatever they wanted, and they did, and the result was an unmitigated disaster.

And you still didn't get to the part where they disregarded their own due-diligence research so that they could issue more mortgages. And you still didn't get to the part where these crap mortgages were willfully misrepresented to investors as "AAA" investments.

-k

You still don't get that derivatives wouldn't have been a problem if they were backed by legitimate mortgages. But the government lowered standards, and played a large part in pushing banks to lend to people that wouldn't have otherwise qualified. They pushed policy that your type love to peddle, so-called helping the poor. It distorted the market. And the bubble of '08 was the end result. Own it.

[kimmy]

You still don't get that derivatives wouldn't have been a problem

Yes they would have, because they allowed the bankers to create the complicated financial structure by which they were able to pass the risk along to others.

The banks were willing to take reckless risks because they had "no skin in the game". That's a structural problem that can only lead to bad results.

if they were backed by legitimate mortgages.

So why were the banks telling their own due-diligence people to rubber stamp anything and everything that crossed their desks?

But the government lowered standards,

Cite a specific piece of legislation, please.

and played a large part in pushing banks to lend to people that wouldn't have otherwise qualified.

You're repeating that lie for about the hundredth time. And for about the hundredth time, the portion of sub-prime mortgages that resulted from government requirements was a small fraction of the sub-prime mortgages, so your attempt to blame government is a big fat failure.

-k

[Pliny]

Your argument is bad, and you should feel bad.

You have used a lot of words to say that the banks saw a business opportunity, and took it. Good for them. Nothing illegal or immoral about that.

You have used a lot of words to say "life is risky".

If bankers had really understood what was going on, they would have realized that their scam would implode if fund managers stopped buying MBSs. And it appears that some did. There were quite a few bank execs who took their performance bonuses and cashed in their stocks and got out of Dodge before sundown.

This is a valid criticism of the government and regulators, but it is not a justification or an excuse for the behavior of the bankers.

And the whole premise that the banks were failed by regulators or government flies in the face of the "business knows best" philosophy that your type always flogs.

And this is just ridiculous. On the one hand you point out that the government did nothing, and in the very next breath you say that if the banks were unfettered by regulation none of this would have happened. That's laughable.

The derivatives market that was the instrument by which the banks "hedged themselves against loss", as you put it, was completely unregulated. The stuff they did was exactly what they would do if they were unfettered by regulations, because there were no regulations on derivatives. They were free to do whatever they wanted, and they did, and the result was an unmitigated disaster.

And you still didn't get to the part where they disregarded their own due-diligence research so that they could issue more mortgages. And you still didn't get to the part where these crap mortgages were willfully misrepresented to investors as "AAA" investments.

-k

Really kimmy,

You can decide on whatever story you like. The fact of the matter is that your following the mainstream interpretation of what occurred. Now I don't know if you approve of the solutions they implemented to bailout the economy and attempt to save the Banks, Wall st,, and pump up the economy with TARP but they are government solutions to buoy a sinking ship.

In other words nothing has changed and there will be another bubble and another bust. They are pumping money out right now to the tune of fifty billion per month. You can see where it is going. Wall st and Washington - both booming concerns at the moment. In the housing bubble they pumped money out in the form of mortgages and real estate development which led to the housing boom.

Like any tragedy of the commons, whether your talking about fish stocks, real estate or profits if you don't take what you can someone else will.

If you truly wished to see those evil banks pay for their transgressions then you shouldn't agree with the solutions they implemented. The banks should have failed they departed from well developed policies that came about over the centuries. Government of course couldn't let it fail - too many influential politicians had their money on Wall Street.

Government decided it should set the stage for economic activity through social policy overriding commonsense economic policy.

The government will not change its basis of operation by relinquishing any control over the economy, and their solutions tell us that they wish to continue with the status quo. Unfortunately, they have reached a very wobbly point and their current boom will soon also bust. They are trying to get money into the hands of the public for them to spend and drive demand and get the economy producing. It isn't working.

Yes Wall st. investment banks should have paid dearly for their mistakes and been liquidated and reorganized from the basement up. That is the price of market failure. Why did they get a bailout?

The warnings were there before the housing bubble burst but Barney Franks, CEO of Fannie Mae and Frddie Mac, was assuring everyone as late as July that all was well. The collapse came in September, of course.

You can believe whatever you like and the mainstream story has no shortage of adherents. but all your left with is griping about Wall St. and evil banks. You wouldn't be doing that if they had been left to the will of the market - they would be gone and what would exist currently would not resemble what they were in the past. Government decided to maintain them in the form you so despise.

Whatever way you look at it Government sets the scene, it did during the housing bubble and it does now but I don't think the status quo can continue for much longer.

Edited February 5, 2013 by Pliny

[kimmy]

Really kimmy,

You can decide on whatever story you like. The fact of the matter is that your following the mainstream interpretation of what occurred.

...and many here are following some kind of fantasy version that doesn't correspond to facts, which is what I am arguing against. I continue to be amazed at the extent to which some people on this message board are psychologically incapable of accepting the reality that the financial crisis was of the banks' own making.

I disagree that I am following a "mainstream interpretation". The mainstream has not talked nearly enough about the behavior that created the subprime crisis in the first place.

And I'm not a supporter of how governments have handled this. It's been extremely disappointing.

If you truly wished to see those evil banks pay for their transgressions then you shouldn't agree with the solutions they implemented. The banks should have failed they departed from well developed policies that came about over the centuries. Government of course couldn't let it fail - too many influential politicians had their money on Wall Street.

(...)

Yes Wall st. investment banks should have paid dearly for their mistakes and been liquidated and reorganized from the basement up. That is the price of market failure. Why did they get a bailout?

Letting the banks fail would have caused total economic chaos. I would have been all for letting reckless banks get what they deserved, but not if letting that happen destroyed every other sector of the economy.

The problem is "too big to fail". I think the solution is "too big to fail is too big to exist." In the past, the US government broke up utilities and telecommunications companies. If a bank like HSBC is too important to be charged for flagrant violations of the law, then they're obviously too big, period.

Maybe once the entire economy isn't dependent on a relative handful of mega-banks, then we can get back to a place where failure means death instead of a bailout.

-k

[Bonam]

Letting the banks fail would have caused total economic chaos. I would have been all for letting reckless banks get what they deserved, but not if letting that happen destroyed every other sector of the economy.

That was the claim the banks made, and the reason politicians gave for bailing them out. But I am not so sure, I have seen no evidence or proof that letting these useless corrupt institutions fail would cause "total economic chaos".

[Bonam]

A quick Google search. Great.

Should I do that before I go to the doctor too?

Most definitely you should, yes.

[cybercoma]

Then I can tell the doctor with decades experience in healthcare, diagnosing and treating people everyday of his life, that he's wrong.

The point is that there's a reasonable expectation that when you see a financial expert, they're not going to mislead you. You go to them because they are the expert and it's reasonable to assume that most people simply don't have the time to invest learning about all of these things. In fact, financial markets have gotten so complicated that even financial experts have a hard time understanding some of the things going on. So it's completely unreasonable to expect that the average Joe, who knows very little about finances, would be able to educate himself beyond that of the expert that makes his/her living doing this.

[kimmy]

That was the claim the banks made, and the reason politicians gave for bailing them out. But I am not so sure, I have seen no evidence or proof that letting these useless corrupt institutions fail would cause "total economic chaos".

Some of the major industries (notably construction and car manufacturing) depend on consumers having access to financing-- if automakers and homebuilders could only deal with customers who could buy with cash out of pocket, those industries would collapse overnight. Just about any new enterprise or expansion or investment or major project is done using financing rather than cash out of pocket. If business ventures and major projects only happened when somebody had the cash in the pocket to pay for it up front, hardly anybody would be able to start anything.

Most definitely you should, yes.

I don't even want to get into that side of things too much, because it distracts from the larger point. Ultimately investing in anything is a risk, and people who lost money in mutual funds that contained Mortgage Backed Securities aren't really much different from people who lost money in tech stocks.

But there is one difference worth mentioning. If you invest in a company that fails for honest reasons (changing market conditions, couldn't deliver their product on time, whatever) you have no reason to feel bitter, because that's how it goes. But if it turns out that the company you invested in had willfully duped investors with false information and run off with their money, then that's criminal. The Bre-X scandal is a well-known example. In Bre-X, geological samples were tampered with to make it appear as though the company had found an immensely valuable gold mining site. People put their trust in the geologist who reviewed these samples, but he was part of the fraud.

With the MBSs, people put their trust first off in the banks' own due diligence process for reviewing mortgage applications, and secondly in agencies like Standard & Poor's, who were supposed to scrutinize these securities. But the banks and S&P were part of the fraud, just like the Bre-X geologist. Investors were duped with mortgage-backed securities, just as they were with Bre-X stocks, but it was done much more subtly. Instead of putting all the bad mortgages in one place, they "securitized" them into derivative-based financial products and used them to pad out other financial products. So that unless you were there in the hotel conference room where the due diligence contractors were rubber-stamping mortgages, you had no way to know what kind of crap mortgages were actually inside the MBS products you own. And because they were spread out among less risky investments, the performance of MBS products was not really that noticeable, up until the foreclosure avalanche hit in 2006.

So while any investment carries a risk, I think there is an obvious difference between a good-faith enterprise that fails its investors, and an intentional attempt to deceive investors. The banks were engaged in the latter. The credit ratings agencies assisted them. Last week, after 4 years of doing nothing, the Department of Justice finally got around to filing a lawsuit against Standard & Poor's for their role in bilking investors.

-k

[Bonam]

Some of the major industries (notably construction and car manufacturing) depend on consumers having access to financing-- if automakers and homebuilders could only deal with customers who could buy with cash out of pocket, those industries would collapse overnight. Just about any new enterprise or expansion or investment or major project is done using financing rather than cash out of pocket. If business ventures and major projects only happened when somebody had the cash in the pocket to pay for it up front, hardly anybody would be able to start anything.

Several major banks and investment firms failing does not mean that there would not be others arising to take their place to provide these services. There is profit in lending money, and if the collapse of a few major players in the field due to bad practices happened, others would rise to take their place. That's how a free market works, failed businesses fail, and new ones take their place. Nothing to fear in this cycle.

So while any investment carries a risk, I think there is an obvious difference between a good-faith enterprise that fails its investors, and an intentional attempt to deceive investors. The banks were engaged in the latter. The credit ratings agencies assisted them. Last week, after 4 years of doing nothing, the Department of Justice finally got around to filing a lawsuit against Standard & Poor's for their role in bilking investors.

A lawsuit that I'm sure will go absolutely nowhere, since, just like the banks, Standard and Poor's is "too big to fail". Bail em out with trillions of dollars, bail em out in the justice system and courts, bail em out no matter what, no matter the cost, no matter the injustice. All because people are afraid of the perfectly natural cycle of capitalistic free markets, where businesses that deserve to fail should in fact fail, even if their failure might cause some temporary shocks to the economy.

And kimmy, yes, there was fraud and bad practices... so why did we throw trillions of dollars to prop up the businesses engaging in it instead of letting them fail and suing the ones that survived for all they were worth? Because normal people like you are afraid that if Lehman and Goldman go bankrupt, somehow you won't be able to get a car loan. When in reality within a week of said failure, someone else would have set themselves up to give you that same car loan, and hopefully will have learned the appropriate lesson from the mistakes of their predecessors.

Edited February 11, 2013 by Bonam

[Bonam]

To add to the above post:

http://www.cbc.ca/news/world/story/2013/02/10/f-rfa-macdonald-wall-street.html?cmp=rss

The "too big to jail" mentality is the exact crap that people are justifying when they argue that these banks needed rescuing.

They did not. It was all a lie. New businesses can and do take the place of old ones all the time.

[kimmy]

A lawsuit that I'm sure will go absolutely nowhere, since, just like the banks, Standard and Poor's is "too big to fail". Bail em out with trillions of dollars, bail em out in the justice system and courts, bail em out no matter what, no matter the cost, no matter the injustice. All because people are afraid of the perfectly natural cycle of capitalistic free markets, where businesses that deserve to fail should in fact fail, even if their failure might cause some temporary shocks to the economy.

Standard & Poor's isn't too big to fail. They're just a bond rating service. The economy doesn't collapse if S&P isn't there to rubber-stamp Wall St's latest junk bonds. And they're just being sued, not put out of commission. I think I read that the amount they're being sued for amounts to a small fraction of their annual profits. It's just a slap on the wrist, like HSBC got for running money for drug cartels and terrorists.

So it's not going to be the hammer of justice. But at least the public shame of having to explain themselves in court should give some satisfaction.

-k

[Bonam]

Standard & Poor's isn't too big to fail. They're just a bond rating service. The economy doesn't collapse if S&P isn't there to rubber-stamp Wall St's latest junk bonds. And they're just being sued, not put out of commission. I think I read that the amount they're being sued for amounts to a small fraction of their annual profits. It's just a slap on the wrist, like HSBC got for running money for drug cartels and terrorists.

Exactly, a slap on the wrist. HSBC should have been given the corporate death sentence for what they did, and so should S&P. But they didn't, and won't be. A slap on the wrist for appearances, that's all.

[bush_cheney2004]

....And kimmy, yes, there was fraud and bad practices... so why did we throw trillions of dollars to prop up the businesses engaging in it instead of letting them fail and suing the ones that survived for all they were worth? Because normal people like you are afraid that if Lehman and Goldman go bankrupt, somehow you won't be able to get a car loan....

All true, but the larger objective is to preserve the full faith and confidence of the financial system, regardless of irresponsible risks or malfeasance by banking institutions. The U.S. government also underwrites FDIC insurance for Joe and Jane Sixpack bank deposits up to $250,000 for each account. Putting fat cats in jail or suing them is a secondary consideration.

[Bonam]

All true, but the larger objective is to preserve the full faith and confidence of the financial system, regardless of irresponsible risks or malfeasance by banking institutions.

I think it is fully possible to both preserve faith and confidence in the financial system, while avoiding irresponsible risks and properly punishing any malfeasance. Just let the malfeasant banks fail, watch new ones take their place, and let people be confident in the fact that if one bank fails another will spring up to take its place.

[bush_cheney2004]

I think it is fully possible to both preserve faith and confidence in the financial system, while avoiding irresponsible risks and properly punishing any malfeasance. Just let the malfeasant banks fail, watch new ones take their place, and let people be confident in the fact that if one bank fails another will spring up to take its place.

But there is no such confidence, hence government depositor's insurance for many banking, S&L, and credit union products. Bankng "bailouts" are fundamental to the design of today's financial system in the USA.

[Bonam]

But there is no such confidence, hence government depositor's insurance for many banking, S&L, and credit union products.

Bailouts went far beyond acting on depositor's insurance and other pre-agreed upon insurance on financial products. There is no government insurance system for risky investments in the stock and derivative markets.

Bankng "bailouts" are fundamental to the design of today's financial system in the USA.

No, they aren't. But if they were, then perhaps said system should be redesigned.