Lehman down. $631 billion dollars out of pocket.

[Select]

It makes sense, Harlowe, but when there are so many at risk of being affected in an already bad situation, do you sit back and watch it happen? I'm leaning to the camp of letting it happen but I feel pretty bad for the people who were naive/foolish/stupid/dreamers/pick a word. There's also the ripple effect. Watch that many people/companies fail and it will touch on other areas where people are "innocent" but in the path of "destruction".

[Klast Brell]

I think you are all oversimplifying this. There are not just 2 players. (not going to put pictures in this one so just try and keep up with me) the home buyer the mortgage broker, the appraiser, the originator, the underwriter, the guy at the mortgage firm that bundles and sells the mortgages to the banks, the banks that slice the mortgages in to pieces and recombine them in to bonds, the insurers which give the bonds an A rating. And you can throw in other miscellaneous people like the flippers, etc.

I'm sure I missed a couple steps but all these people stand to profit. Along the way only 2 parties assumed any risk. All the others acted as middle men taking a portion of the money and passing the risk on to the next guy. They all made a lot of money and walked away leaving someone else holding the bag. The 2 parties who got stuck are the home owner and the large investors who ended up holding the MBS's CDO's and other bonds.

The end investors had the money and needed somewhere to put it. These bonds were A rated and given that the mortgages were going to reset to 10% plus, were going to give a spectacular return on investment. Sure they were experts. Firms like Lehman were filled to the brim with MBA's and economists. They jumped in with both feet anyway.

The homeowners had that desire for the American dream of home ownership. Almost everyone does. When that person was told that they could afford that house it had an effect on their judgment. Until the subprime implosion regular people could reasonably trust that their lender would not give them a loan if that lender did not believe that it would be repaid. When your loan officer tells you that "Yes you can afford this" he speaks as an authority figure. You have reason to trust him. when he tells you that by the time your arm resets you will have enough equity in the home to refinance at a low fixed rate you have an expectation that he knows what hes talking about and can be trusted to steer you right.

Sure some people may have been smart enough and educated enough to wipe the stars out of their eyes and say "no it's too much of a risk" But you and I are smarter than the average bear. We choose our friends because they are intellectually as capable as we are. The stupid people got run off this board with their tails between their legs years ago. Don't assume that because you can see the flies in the ointment everyone can. Especially when their dream home is being dangled in front of their eyes and everyone is telling than that they are fools to rent and should be buying instead.

How many average Joe's do you think were looking at that for sale sign and thinking "Har har har. I'm going to buy a home I can't afford. I'm going to wait for the ARM to reset and then live in disparate straights until I loose everything and declare bankruptcy.

And you. You who are so above it all that you can sit there and sneer. When you started looking for a house how much did you intend to pay a month? How much did you end up paying? 10% more? 20% more? Or did you wipe the stars out of your eyes?

[Harlowe]

If you keep bailing out failing companies - much like constantly lending money to a deadbeat friend, they aren't going to become responsible, they are just going to keep depending on you to bail them out. The companies failing developed greedy, irresponsible and lose practices to make fast money - so they should fail. Other companies with better business practices, more fiscally responsible business practices, will succeed and will fill in the gap. I think the entire market is being schooled right now.

Now I'm not saying NEVER bail a single company out, but don't do it as a rule. Constantly using taxpayer's money to bail out companies with poor business practices is absolutely senseless.

The homeowners had that desire for the American dream of home ownership. Almost everyone does. When that person was told that they could afford that house it had an effect on their judgment. Until the subprime implosion regular people could reasonably trust that their lender would not give them a loan if that lender did not believe that it would be repaid. When your loan officer tells you that "Yes you can afford this" he speaks as an authority figure. You have reason to trust him. when he tells you that by the time your arm resets you will have enough equity in the home to refinance at a low fixed rate you have an expectation that he knows what hes talking about and can be trusted to steer you right.

I think that's a very good point.

[Embar Angylwrath]

Many of the people who are in over their head (not all, but most), are there because they shouldn't have been in the home in the first place. They weren't in the financial position to do so. The market is correcting so that these people are where they should have been... renters.

The banks abd lending institutions took a major risk by over-exposing themselves to one single segment of the economy.. CDOs. Any financial insititution that becomes over-extended bears the risk of that over extension, and now we are seeing that happen.

To Klast.. there are a lot of unemployed loan agents, real estate agents, appraisers, mortgage traders, etc. They didn't escape this either.

As much as I hate the government getting involved in this and propping up companies (which it seems they are less eager to do now, good on them), they should only do so to create a firewall between those to segments and the rest of the economy. Even that is a near impossibility. I think what they are trying to do is sew cloth on the parachute while in mid-fall.. they're trying to dampen the inevitable impact, hoping for a thud, instead of a splat.

[Kulaf]

Klast you have a really wrong view of loan officers. By law in most states a loan officer cannot offer advice on whether or not you should take the loan.....or can afford the loan. They are not financial consultants. If they give that advice they can lose their license. All they can tell you is that you "qualify" for the loan......give you all required disclousers and then it is up to the borrower to consult with any one else they need to consult with.

If you want to know who really deludes home buyers......it is real estate brokers. They talk people into buying homes they cannot afford.....tell them it will appreciate at unrealistic rates.......tell home sellers they can get x amount over real market value....etc. And all of that "advice" is perfectly legal because they are not at all regulated like loan officers are.

But botttom line is people are greedy. I am sorry if that conflicts with your political view of everyone in business is greedy but "joe average" is just this poor sucker who needs protection.

Those people who lost their homes are the same people who refi'd their house every other year to pay off credit card balances.......got talked into that home that is 50k more than they could really afford......walked out of reputable loan brokers offices because they wouldn't tell them what they wanted to hear and ended up at Joe's Mortgage Emporium because Joe told them they could qualify for a IO loan.

[Harlowe]

The problem was lowering the bar to allow people to qualify that shouldn't have.

[Harlowe]

Oh yippy, are we seriously bailing out AIG now too?

http://news.yahoo.com/s/ap/20080916/ap_ ... pkCPOs0NUE

[Arkaron]

The problem was lowering the bar to allow people to qualify that shouldn't have.

Reading over some materials with the limited knowledge of economics I have, it strikes me that sheer greed is what is causing many of these companies to fail.

Anyone else remember a while back that Wells Fargo was accused of racism because so many of the subprime loans went to minorities? I was like: uh, no. You have bad credit because you're poor and make bad decisions. As someone who has shitty credit, I know what I'm talking about.

[Embar Angylwrath]

I think the government is going too far with the bailout. I understand Fannie and Freddie. I disagreed with Bear-Stearns. And I disagree with the policy of intervention in the finance markets. But the decisions the government is making today is charting the course between Scylla and Charibdis.

If they don't intervene strongly, then this is how it works...

Capital used to make loans dry up as banks hoard capital as a hedge on further blaance sheet erosion. No loans, then businesses will have to rely on their own capital reserves for growth, so they will entrench themselves by pushing off capital expenditures and expansions. Without business growth, the job market becomes tighter and tighter, resulting in more and more job losses and unemployment. People who are unemployed can't afford a mortgage, and walk away from homes. Banks, responding to the further erosions on their balance sheet, tighten credit standards even more, hoard even more cash, and further choke the economoy. Its a vicious, self-feeding spiral.

The government has responded by pumping huge amounts of capital into the markets, to try and keep recession at bay. By pumping in billions of dollars, the government is trying to avoid a liquidity crisis, but it runs the risk of adding to deflationary pressures (actually, they know what they are doing is deflationary, but they see a world-wide recession as the greater evil than a periodic deflationary cycle). Its a very fine line they are walking. By responding this way, the government is sending a silent shout that it's doing everything it can to avoid a depression.

Here's what I think the solution should be. The financial crisis is being caused by the unknown of where the bottom of the mortgage market is. Without knowing where the bottom is, institutions can't sell the CDOs because no one knows what they might be worth. If a bottom was supplied by the governemtn, the wildfire spread would be contained, there wouldn't need to be further bailouts of companies, and the market would repair itself. So.. how does the government provide a bottom to the mortgage market?

It offers to buy any CDO at 30% the face value (there may be a range here based on the value of the paper... subprime CDOs would be bought for 10% of face value, while Grade A paper would be bought for 30%). This would provide the bottom of the market. Companies could choose to sell or not, but the decision is on them, since the government set the bottom of the market. This offer would last for 1 year, then the government would stop buying the CDOs.

Banks may continue to fail, but stability would return to the market, and the weak institutions that are heavily extended in CDOs could at least be valued. Balance sheets would have a solid number they could count on, and this shit would stop.

[Harlowe]

Well you can bet getting any kind of loan - whether business, car, house etc is going to be a hell of a lot harder for the forseeable future.

Too bad it wasn't for mortages to begin with.

[Kulaf]

Oh yippy, are we seriously bailing out AIG now too?

http://news.yahoo.com/s/ap/20080916/ap_ ... pkCPOs0NUE

Looks like New York is assisting:

http://www.thealbanyproject.com/showDia ... aryId=4385

I seriously doubt the Fed will get involved but who knows. Personally I think AIG should break up with its insurance arm intact and the rest going into receivership.

[Ddrak]

The deal to allow parts of AIG to loan money to the failing parts is extremely dangerous. You're betting the entire company failing against just the non-insurance parts failing. While NY State may be saying that the company is solid overall, the same things were said of Lehmann, Merril and pretty much every other failied investment group prior to their actual failure.

Dd

[Partha]

The problem was lowering the bar to allow people to qualify that shouldn't have.

Reading over some materials with the limited knowledge of economics I have, it strikes me that sheer greed is what is causing many of these companies to fail.

Anyone else remember a while back that Wells Fargo was accused of racism because so many of the subprime loans went to minorities? I was like: uh, no. You have bad credit because you're poor and make bad decisions. As someone who has shitty credit, I know what I'm talking about.

But some of those people didn't have shitty credit, Ark. They just got sold a product that wasn't good for them. Why? Because somebody gets extra cash from it. Look up 'yield spread premium' and tell me the short term memory and profit needs of businesses don't gravitate towards selling a product that gets them more cash fast.

[Ddrak]

So the taxpayers are 80 billion out of pocket for AIG now. Not sure about that move personally - the net result of AIG failing would be a lot of banks running uninsured on their exposed mortgages and taking an eventual hit. Even with the Fed bailing out AIG, I'm not sure how much it will stop.

Anyone want to take bets on the fate of WaMu?

Dd

[Klast Brell]

I wonder what will cost more this year Iraq or Wall Street?

[Harlowe]

I wonder what will cost more this year Iraq or Wall Street?

Oooooh I'm thinking Iraq.

[Embar Angylwrath]

I dunno Harlowe, add in all the writedowns to balance sheets, bank failures, foreclosure costs, decreased business from a tightening of credit... I think this will blow the cost of Iraq out of the water.

[Ddrak]

It depends on how you define "cost". Up-front cost to the tax payer in the form of taxes is likely to remain the "War on Terror". Cost to the economy and overall income/buying power of the tax payer is by far the Wall Street meltdown. Look at it this way - Lehman is $631b in debt. That money *does* come from somewhere.

Dd

[Ddrak]

Anyone want to take bets on the fate of WaMu?

WaMu down.
Guessing Wachovia will be next. JPMC seems to be coming out of this ok. BAC is gonna take a fairly bit slam but probably survive more or less intact.

On the plus side, no FDIC involvement was necessary to protect depositors.

Dd

[Ddrak]

Yep - Wachovia down.

I'm thinking that ultimately you're going to see 3-4 major banks left in the US that gobble up everything else. Probably looking at a trifecta of Citigroup, JPMC and BAC.

Dd