Uh, this line of thinking is atrociously short-sighted and oblivious to the nature of the problem. Freezing ARMs and other things like that doesn't just help poor "idiots", it ultimately helps the idiots lenders & note holders. I'm talking not only mortgage lenders like CFC, Ameriquest, but the people who bought their securitized assets. Not just banks like CS, Deutsche, Morgan Stanley, Merrill Lynch etc - but pension funds and other investors, who, directly or indirectly, have been bought into the subprime mess. I have lost money this week. Not because I lent money to poor idiots, but becauase the financial services companies, bond insurers, etc who make up my investment portfolio bought a bunch of crap worth of financial product which they didn't understand, in a business they knew nothing about. By keeping defaults low, the lenders are able to make SOME money off their investement. Lenders and Owners of RMBS's DON'T want foreclosures. Foreclosures cost them money. An RMBS pool with a high foreclosure rate is a useless security. A foreclosure doesn't do anybody any good, and in fact foreclosures end up costing YOUR local government money when the costs of policing and securing blighted areas are factored in. Keeping a class of borrowers afloat and avoiding default enables the lenders & noteholders to recover SOME of their investment. This affords a further measure of stability into a system that desperately needs it. Basically this line of reasoning is also what underlies the entire federal bankruptcy protection system. The system allows creditors to recoup some of their losses in an equitable way and, with reorganization, can allow the company to survive and flourish, rather than just allowing massive defaults and dissolutions. It is fun to try to blame the subprime crisis on poor people. But it completely misses the point of why it's a crisis at all.
i'm wondering if the cheap credit is what got us into this mess how is cutting interest rates going to get us out?
I liken it to slowly weening a drug-addicted person off of drugs. The first step may involve giving them a "fix" to get them into some kind of functional state to start the process of repair. I suspect the Fed's goal is to get out of this crisis/panic mode and get some temporary stability. Once you do that, you can start making moves to repair the longer-term issues. Keep in mind - it wasn't necessarily cheap credit that got us here, but the abuse of cheap credit.
I'm looking for my jaw. It dropped and fell on the floor somewhere, along with the sky. Impeach Bush.
Why does the fact that it would cost investors as well as borrowers make it OK? Just because the borrowers who bought homes they couldn't afford were idiots, that doesn't mean the lenders weren't idiots, or the companies that invested in the lenders, or the people that invested in the funds that invested in the companies, etc. Of course, if they all get bailed out, then the one's who didn't do it turn out to be the idiots. People that didn't live beyond their means are the suckers for living modest lifestyles, because there would have been no penalty for spending all of the equity in your house. If the bailout plans go through, why is it not going to happen all over again? We need to let people face the consequences of their actions, so next time they (or the next group of people) won't do the same thing. If that means more money spent policing the blighted areas (because of course no one else is going to come and buy these nice houses at bargain basement prices ), I would rather they spend tax dollars on that than on bailing out everybody that was busying digging themselves deeper and deeper into a hole. We need to force people to stop living beyond their means and force lenders to stop giving loans out that people are never going to pay back, and the penalty will not be enforced by the government, it will be enforced by the market. Once lenders start losing billions of dollars, they will be a little more careful who they lend to.
I'm an idiot because I bought an S&P index fund? It was my job to figure out that rating agencies were putting sham credit ratings on MBS pools & the companies that backed them because they were stupid and greedy and didn't understand the business model, and that the whole financial services sector was bamboozled by this? That's a rather significant burden you are imposing on an individual investor. I'm talking about stabilizing the financial system, and you're talking about teaching a moral lesson to lazy poor people at whatever cost. You don't seem to understand the extent that this impacts people and the markets as a whole. When Merrill Lynch or Bear Stears takes a multi-billion dollar hit a lot of people outside of the CDO business - who in fact had aboslutely nothing to do with it, are afected. Not only thru layoffs but through slowdowns, etc Merrill taking a 10b writedown affects its ability to finance LBO's or regular mergers or whatever else it iwants to do. Meanwhile the people ultimately responsible for Merrill's CDO gamble take their multihundred million severance package and head for the golf course. So much for your incentive lesson. Probably the fact that the asset securitization businesses of the major financial services compaies, rating agencies, and law firms are dead and their people have been laid off. Try getting a job as an attorney working on RMBS securitizations, or doing SIV's. The business is dead and it's not coming back at any point in the next decade. On the originator end, the most reckless lenders are pretty much bankrupt or on life support. Uh...yeah even if it means destablizing the entire financial system? You sound like a sunday school teacher. Moral Hazard is a nice lesson to teach but if it means crushing the financial sector to do it there is no reason to go down with the ship. I guess back when Long Term Capital Management collapsed Wall Street should have skipped the bailout then? Because the bailout worked, and thus far while hedge funds have engaged in risky business in the ensuing decade, nobody has gotten into a crazy leveraged snowball situation to the extent that LTCM did. So let's say the government can spend $100 a month to help keep a mortgage loan afloat, but if the foreclosure occurs, it must spend $150 in foreclosure proceedings, extra policing, and lost tax revenue due to lower property values (tabling the fact that local governments must bear 100% of foreclosure costs and will not be a part of any bailout)- you are telling me this equation is worth it to teach your lesson?I suppose you must support the city of cleveland's lawsuit then? That's just the tip of the iceberg as far as economic losses. Like I said with foreclosures everybody loses - MBS holder has to effectively take a prepayment, and a very craptastic one at that and their investment is effectively lost, with no way to get it back. This reverberates throughout the economy and across the world. BTW, your assumption that buyers are going to swoop in during the midst of a recessionary period is kind of funny. About the only people buying these days are sovreign wealth funds. Again, check with the city of cleveland to see if this scenario has materialized, I am pretty sure Temasek is not buying up blocks of downtown cleveland. Do you have access to the internet? In case you haven't noticed, lenders have lost billions of dollars. That is the issue I am discussing here. Driving the financial system into ruin in the middle of a recession is not a necessary extra step. If the government has the capacity to prohibit excesive volatility it should - that is the idea that underlies such concepts as teh FDIC, SIPC, bankruptcy, etc. I've said it before and I will say it again - it is fun to try to blame the subprime mortgage mess on poor people - but it exhibits very little understanding as to why its a crisis.
what i hope is that this "bailout" actually has a lasting effect. Meaning, the people who were involved in making these risky loans need to have "learned their lesson"...and going bankrupt, jobless, or whatever is that stupid tax. THese people knowningly went into risky deals and when you do that you have to live with the consequences. The govt interfering may not make they deal with the full consequences . Lets hope they understand that they got lucky with the govt assistance and not that they are "entitled to it". The former assumes they will make prudent and calculated risk:reward deals from now on...not being too risky in fear for losing it all. The latter assumes that they will just continue to structure and work deals that are all sorts of shady and just not sound, which dont only hurt themselves but others...both up and down stream.
I think you might be on to something there SamFisher. Very wealthy people will sacrifice kinda wealthy people every day of the week to become very very wealthy people.
Yes I am, is that bad? Should we not all carefully consider the consequences of our actions? Maybe I am not expecting too much of individual investors, but rather, too much of humanity. This is a red herring. I am talking about teaching a lesson to everyone involved at whatever cost. Not just lazy poor people (though I hardly consider people that were putting down 50-100k on a house poor and I didn't say any of them were lazy), but the lenders, the funds that bought the lenders, etc. Maybe that is what is required. Maybe we need to shake the pillars of the American financial landscape such that people that have never produced anything are not among the richest in the country. Someone who makes and sells a product would not cause this kind of mess. Yes, so next time it will be a different take on the same theme. It is the same thing as the crash in the '20s all over again, because people are spending money they don't have and there are companies that are enabling them to do it. It shouldn't be a surprise because the government is doing it constantly. Maybe this country needs a good Sunday school teacher. Is that working? Letting the same behavior continue to a lesser degree, or in a different area? I would suggest that the numbers are arbitrary. Can you prove that the bailout is less expensive than the required steps sans bailout? If it is, does that make it necessarily the best course of action? Should we base all policies on what will require the least government expenditure? I do not agree totally with the Cleveland lawsuit because it puts all of the blame on a few big banks. Sadly, the vast majority of people responsible for the crises (in term of number of people if not necessarily share of fault) are judgment proof. If they weren't there wouldn't be a crises because they could just keep paying their mortgage. Don't buy securities backed by ****ty mortgages. I imagine if the prices fall low enough there will be people who see the opportunity and buy up quite a bit (if there is a determination that there will be no bailout - unlikely so this is all hypothetical). Houses that are foreclosed on do sell at auction, they are not just left vacant for all time. Sometimes we need the volatility. It is what forces evolution. And I will say it again, I have yet to mention poor people. It is your standard use of the class warfare tactic to paint me as anti-little guy.
Got to remember its the demand that drives those risky deals. There is a big problem with the disconnect between buy side and sell side. These sub prime/alt-A deals and derivative CDOs are structured with full disclosure. The problems is often the buy side (pension fund, foreign investors, hedge fund) don't really understand them. Add rating agency's bad ratings. You got a lot of people buying crap. So the smart bankers will always come up with some new type of structure that some sucker will be fooled. The only way to help minimize the risk is for the rating agency and servicers like bloomberg to provide better information to all investors. In the end though, this is the street, there is only so much you can do.
Not really, you are just making a fool of yourself, because you are saying that ordinary investors who do not purchase a poorly understood financial insturment - that you yourself do not know the basics of - should be expected to understand thhis poorly understood instrument that even financial professionals do not understand. Yes, I know taht is what you are talking about - you are selling us a platitude about teaching a lesson. I am talking about economic stability and avoiding recession. I'm ceding you the moral high ground, becausee I'm talking about something a lot more complex that you don't seem to get. Oh yes, and we should also eliminate the DH rule and astroturf. A nice populist sentiment, but in the real world this is hideously unrealistic. It's actually nothing like the crash in the 20's, for a number of different reasons. The crash in the 20's was actually a deflationary period - and the national and world economy is vastly ore complex. It's amusing that you think poor people have so much control over the world economy though. There has yet to be another hedge-fund scenario like the LTCM crash - so yes it did work in terms of preventig a similar situaiton. More importantly, that bailout was to keep LTCM's problems from creating a wreck at the other investment banks and creating a cascading run on debt. And in that sense it totally worked. I can prove that a mortgage paid is better than a foreclosure or a prepayment - that is the fundamental economic principle that the MBS model is built on and something that you have yet to grasp. Especially when it generates the optimal outcome. I[quote[ I do not agree totally with the Cleveland lawsuit because it puts all of the blame on a few big banks. Sadly, the vast majority of people responsible for the crises (in term of number of people if not necessarily share of fault) are judgment proof. If they weren't there wouldn't be a crises because they could just keep paying their mortgage. [/quote] I'm not sure how many times I have to explain to you that a bunch of poor people getting teaser mortgages and ARMS and NINJA loans can't in an of itself afflict global financial markets but I'm tired of doing so. Suffice it to say, your characterization of mortgage lenders and securitizers as rubes being taken advantage of by slick poorsters is severely r****ded. For the second time: Have you investigated the MBS market recenty? Not a lot of buyers. You are applying a high school level of econ 101 to this problem, and you are doing it wrongly. When supply increases, price will go down, provided demand stays the same - which it will not, in a recession. Anyway, I once again say look the city of cleveland for an example. Exactly. We have volatility. You're an idiot if you think that financial markets need more. Actually, you have mentioned poor people several times, you just don't use the "p" word. But my problem with you here is not that, it is that you are anti-stability, anti-economy, and anti-intellectual. You don't understand what you are talking about - and it shows
While I too, would like to pile on the people who borrowed the funds without thinking about what would happen when the rates adjusted Sammy is unfortunately right that the hit to everybody is just too great to let the stupid and the greedy face the consequences of their own irrational exuberance. And I include the lenders and bankers in the stupid and greedy category. (thanks go to Greenspan for the IE phrase). It's baffling that the borrowers are suddenly facing difficulty when rates have not increased substantially from when the deals were signed, and unemployment is still pretty low. Us old codgers remember mortgage rates in excess of 18% and unemployment well over 10%. Just what the frick were these guys thinking getting into these loans? How exactly did they expect to meet their payments when the rates adjusted? If anyone is caught in one of these (or knows a...um..friend...who is...) I'd genuinely like to know their thinking -- because I honestly cannot figure it out. Yet, somehow, the default rates are just too high to pin it on just the borrowers. Something else was at play. I'm guessing people didn't understand what they were getting into...or that they were misled...or that disclosures are not fully there. Overall it stinks. What we need here is.....brace for it.....REGULATION. I know...I know...free market and all that. Only it ain't free when you get bailed out. The S&L scandals and then this. You just can't leave it to the guys who skim off the commissions and the IB fees and then leave the rest of us holding the bag. The riches are too great -- and the risks, it seems, are borne by the rest of us. I know when I sign documents, it seems I have to initial a whole buncha clauses indicating I understand what I'm signing. Better disclosure. The borrowers have to know what they're getting into, and what risks they are taking on. And the burden should be on the lender to ensure the deal is understood. And possibly better cap requirements, etc. Do y'all have mortgage insurance in the US? Something's got to change. If the mortgages don't go into default, the annuity streams don't stop, and we're not in this mess. So why did the payments stop? What dramatic, unforeseen change happened in the economy or elsewhere to effect the consequences of these deals as they were originally envisioned. I can't see anything. Yet too many have defaulted. Crazy.
One big problem is how lending works with mortgage initiaters selling loans to others after they close deals. That takes the risk out of the initial lender's hands - meaning their primary goal is simply to get the biggest loan possible. How to do that? Convince people they can afford more house than they should. While it's fun to blame the borrowers - and some certainly deserve it - the flipside of this is that all people are not financial wizards (and that's OK). I don't expect the local plumber or grocer to understand ARM-Loans and 80/20 loans nearly as well as a banker. And it's understandable that they'd trust what the mortgage company tells them - after all, they are the experts and are lending you money, so it makes sense they would want to set up a loan that you can reasonably pay. But since these lenders don't actually keep the loans, that relationship breaks down and now you have people lending money who have different interests at heart. Should the borrower have learned more about finance? Probably so - but the industry has grown far more complex over the past two decades, and I'm not sure how reasonable it is to expect the average borrower to understand these things nearly as well as the lender encouraging them to go one way or another. As you and others have said, it's nice & simplistic to say that it's their fault and they should pay the price. But the reality is that it would be the rest of us paying for those mistakes if the economy tanks - the people who messed up will stop spending on their iPod, meaning someone who works for Apple and had no connection whatsoever with this mistake will lose their jobs and investors who had no stake in the subprime mortgage mess will see their Apple stock drop, etc, etc. Creating a global recession/depression to teach a specific few a lesson is just complete nonsense.
