Staring into the abyss:
Citigroup announced a steep cut in its stock dividend and another big investment by foreign investors on Tuesday after taking another big write-down related to subprime securities and posting a $9.83 billion loss for the fourth quarter.
Beginning what is expected to be a grim week for financial company earnings, Citigroup said it was writing down $18.1 billion because of soured mortgage-related investments.
As part of a plan to shore up Citigroup, the chief executive, Vikram S. Pandit, said the company would eliminate 4,200 jobs and cut its dividend by 41 percent, to 32 cents from 54 cents a share.
Citigroup also turned to wealthy foreign governments again and announced the sale of a $12.5 billion stake to the Kuwait Investment Authority and several others, including Prince Walid bin Talal of Saudi Arabia. In November, the company sold a $7.5 billion stake to a Middle Eastern fund, the Abu Dhabi Investment Authority.
The latest moves highlight the extent to which Citigroup’s capital position has weakened and raise questions about the company’s diversified business model.
First, the easy question (or maybe this is the hard question)- how many more of these write-downs can the securities firms withstand before we are no longer staring into the abyss, but are plunging headfirst? I am probably like most Americans, and this is something I simply do not understand.
Second the harder (or perhaps the easier) question- Where did the money go? Who profited? I am assuming that those who earned commissions writing the loans made some money on the deal initially, but how do we understand the losses from paper transactions.
Again, I am writing from a position of complete and total ignorance- I just understand that this is bad, bad, bad. So be gentle. But thorough.
*** Update ***
I added Calculated Risk to the blogroll, as it is one we will probably be following over the next few years.
Jon H
What strikes me is, since so much money is being written off anyway, would it really be that much of a problem to let people keep the houses instead of foreclosing? (At the very least, in the case of people who refinanced or took second+ mortgages on their current home. Not in the case of speculators who bought half a dozen or more homes to flip.)
I mean, basically we’ve got people losing homes over “value” that never really existed in the first place, and that illusory value was largely created by the profligate lending by the banks!
If the worst thing to do would be to let homes stand vacant, go derelict, and drag down surrounding home values, then surely there is a good deal of sense in coming to some agreement that keeps people in their homes?
John S.
This is starting to smell a little like the S&L scandals. Funny that every time Republicans hold the reigns of power and act as keepers of the invisible hand of the free market that horrible shit like this seems to happen. Perhaps it’s just a coincidence.
The usual suspects. Despite riding the shares of his company down more than 80% over the last year, the chairman of Countrywide gets to walk away with a cool $87 million. Just like in the Bush white house, failure is rewarded. Maybe the guy will even get a medal of freedom.
Haltelcere
Wouldn’t an appropriate analogy be as follows:
1) I’m the first kid on the block with a bran new pinto. Everyone loves my pinto and rush forward to buy their own pintos, causing the price to skyrocket. So I say “Hey look! The value of my pinto has tripled! I’ll trade future free rids in my pinto for a huge meal of fries and burgers for my friends today!”.
2) Next day – Oh no! Pintos explode on impact and now nobody thinks my pinto is fantastic. Not only does the burger joint guy demand I pay for yesterday’s dinner with cash instead of free rides, nobody wants to buy my pinto from me. So I can’t even sell my pinto to pay for the meal.
3) I’ve got this worthless pinto, I’m broke, and because of OPEC I can’t afford the gas to keep it running. So I cut (write down) my losses by abandoning my pinto on the side of the road since it’s only value is scrap metal now.
Jim M
John
For a good primer on this mess go over to Calculated Risk
Tanta has been following this for a while and gives a very good rundown on all of this.
As far as further writedowns we are looking at probably another $100 to $300 billion once this is all over with.
cmoreNC
The simple answer is:
Lots of people made $$$ on commissions and other fees by:
1) Creating the loans;
2) Flipping the loans;
3) Especially, repackaging the loans in the guise of various investment instruments.
…leaving the final “owners” of those investment instruments to make a bond-like (or even better) rate of return on a secured instrument (unlike bonds, which are simply a promise to pay). Of course, this all comes apart when the underlying property devalues below the amount owed, and the underlying borrower becomes too insolvent to pay off the loan, and the transaction costs to foreclose on the underlying security would cost a significant percentage of the (deflated) value of the collateral, and even after you foreclose, the property becomes difficult to sell even at a deflated price….
So, the simple answer is that the money that actually got funneled off to someone’s pockets was in the form of various transaction commissions and fees for creating mortgage-backed investment instruments, sometimes at multiple stages of the transaction…and the rest of the money that “disappeared” was when e.g. $500,000 was loaned out on a house supposedly worth $550,000, but now it’s only worth $450,000 (or $400,000) now that the real estate inflation bubble has burst.
zmulls
John S., you’re exactly right.
The S&L scandal was where I started to smell the coffee. I fell for the Reagan magic and was ignorant enough about money to think that if taxes got cut the magic revenue fairy would double the lost income.
But all I saw with the deregulation of the S&Ls is a handful of people getting very rich, and me being asked to pay the very large bill. And here we go again.
It’s when I learned that “government regulation” was not a bad thing. At all.
After that I started writing in candidates in protest, and finally in 2004 voted Democratic.
4tehlulz
You forgot one:
4) Government bails out Pinto dealers — leaves consumers with piles of death metal.
cmoreNC
…and I should of course add that payments are now in default, so the instrument is worthless without foreclosure on the now-devalued assets (that you must further discount by the cost of the foreclosure proceedings, assuming the discounted market value can even be obtained for the property in sufficiently timely fashion to avoid further losses from having money unrecoverably tied up in the transaction until the foreclosed property is eventually sold…)
MBunge
“Where did the money go?”
The money didn’t go anywhere because there never was any real money. Oh sure, a bunch of executives are going to walk away with hundreds of millions, but that doesn’t account for the tens (hundreds?) of billions that are vanishing. People like to slam Ron Paul for his gold standard/fiat money stuff but whatever the technical details, he’s fundamentally right. The U.S. dollar isn’t supported by anything but peoples’ hopes and dreams, which means there’s nothing to prevent the creation of “wealth” that has absolutely no connection to any economic reality.
Mike
DBrown
More to the point, look who is buying up interests in this company -Prince Walid bin Talal of Saudi Arabia and foreign governments like Kuwait Investment Authority or complete unknowns like Abu Dhabi Investment Authority. We grow corn to turn into fuel at a cost of one gal fuel for every gal of corn fuel and import the oil from where? Petro dollars are then used by the middle east dictators to buy credit card …that is bank stocks (getting to be one and the same, anyway.) So who will end up controlling the loan on your home?
Jon H
You know, we should have all smelled Doom coming as soon as Bush started talking about an ‘Ownership Society’.
“This is starting to smell a little like the S&L scandal”
Indeed, the mortgage lenders are trying to get out of implementing an accounting rule imposed after the S&L crisis, which would make their losses look bigger.
Pb
Easy credit, greed and short-sightedness, lax standards, bad terms, and poorly understood ones at that. The solution? A little less laissez-faire, a little more action. And for a bit of history (and a good analogy), check out this diary: The 1920s Credit Bubble.
4tehlulz
Not really. The gold standard didn’t stop the massive credit bubble in the 1920s (actually, US gold policy fueled it by keeping interest rates artificially low — sound familiar?).
rachel
But…
Or so thinks Don Surber.
demimondian
I’ll leave the first question to the attorneys and the bankers, who understand it.
However, as to the second, the answer is kind of simple, yet subtle.
Let’s look at the “value” of a mine. A mine is a hole in the ground from which we pull stuff as we make it bigger. The value of the mine lies in the value of the stuff which we can reasonably expect to extract from that hole, limited by the size to which we can dig the hole. It’s a guess about a future income stream — if the hole caves in, then the value of the mine plunges (and, in fact, can become negative, as the remediation requirements kick in). Where did that money go?
That evanescent “value” existed as the estimated value of *a plan for* a future income stream — and, like many plans, it went astray. The same thing happened to the money which has evaporated in the current financial collapse. An income stream upon which people had been depending will no longer be forthcoming, and, therefore, the value of instruments representing that income stream is greatly reduced.
Jon H
“So what do investors fear most in the coming year? The election of a Democrat as president.”
Clearly such investors are being polled from the same pool of morons from which the banking industry draws its management.
ThymeZone
It all hinges on when the parties get paid.
Mortgages are done with real, not paper, money. Real wire transfers move real dollars into and out of real bank accounts.
But the mortgage is a product, and it’s ultimate profitability depends on having the principal paid back, with interest and in a timely fashion. If that doesn’t happen, the thing becomes a money loser.
Meanwhile, the engineers of the program that spawned the mortgage have gotten paid for their efforts. They don’t have to wait for the thing to go to term and get paid off, to make their money.
That’s why they can gin up crummy mortgage products, get rich, and leave behind a trail of shit.
funfunfun
i’m torn between making shirts that say “that money didn’t even happen” and “fake bulk”. “fake bulk” might wrap up steroids, butt implants, and tough-looking SUVs, but if i get fat, it might look silly. what to do?
demimondian
By the way, the mine example I used here is the refutation of Ron Paul and the like. Unless their opinion is that mines have no value, their gold standard ploy is nonsense. As long as we allow trade based on future payment, gold standard money is every bit as fictional as the current so-called “fiat currency”. All currencies are based on our faith in the future, at the end of the day, and a gold standard is simply bogus.
John Thullen
All good explanations of where the money went.
But, the scary part is that no one (even the professionals who designed the system) knows how much money went where and disappeared into its derivative guise as worthless paper.
Thus the stock market’s gyrations.
It might in your money market fund. It might be part of your stock holding in Fannie Mae. It might be off the balance sheet of a European bank and about to appear on balance sheet and then its dividend on the stock you hold will disappear, too.
The accounting was rotten from the original real estate transaction all the way through the transaction’s securitization, its rating by the bond rating agencies, and now coming out the other end of the shredder.
This thing is like the ebola virus.
Andrew
If you want to blow their minds, talk to them about the coming huge deflation in gold value when we capture an asteroid and mine it for raw materials.
myiq2xu
The Republicans. You left the party too early John, otherwise you would have gotten a piece of the action too.
myiq2xu
This might seem like a stupid question, but if they are apying a dividend at all, doesn’t that mean they made some sort of profit?
John Cole
Damnit. And Soros is hosing me, too, because I have not received my check yet.
Bombadil
Boy, context is everything, isn’t it?
Caidence (fmr. Chris)
Both of ya are right. Gold would be awesome right now; gold can still screw you later, rather any commodity can screw you faster than a dime whore on nickel night.
But whoever is backing Paul on policy knows what he’s doing: Paul wants to create a second form of currency — parallel to the dollar we have now — and let the free market decide what it wants depending on where the risk is. A very adult solution.
Of course Washington doesn’t like adult behavior, they like agendas and deals. So Paul’s out.
Caidence (fmr. Chris)
Your definitions are a little tangled, but I understand where you’re looking.
The fact is that our current currency has no underlying asset. It’s pure primitive value based on faith.
A gold standard still has gold behind it, and it’s value is far more tangible (useful in wiring, jewelry, so on…)
Gold can still be bad for us, but right now there’s a whole bunch of people that wish they had a backstop that would keep the dollar from sliding to 0, and there is none in this configuration. You’re only protected if you’ve invested in forex or commodities (to get off the sinking dollar platform)
Kirk Spencer
Some excellent explanations above, but most don’t show where the real mess comes from. Let me build from the Pinto example from Haltelcere above to give a slight hint on that.
Back when you were making deals for the free rides, some people were selling those free rides to OTHER people. And some people were buying a bunch of free rides and selling (bear with me here) the bundle to a bunch of people on the idea that at least some of the rides would be beneficial to them even though they weren’t taking the ride themselves – let’s say to keep the analogy flowing, that some of the rides would go to stores these people owned.
So when suddenly there are no more free rides, you’ve got the restaurant wanting you to pay for the meals. And you’ve got everybody who sold free rides getting hammered by the next link in the chain with demands for their money back – some of which have to be eaten, some of which can be passed further back the chain and eventually back to you. Of course, since everybody already SPENT their money, nobody’s got any to return.
The money never existed. It was just an assumption that the money was coming because real estate prices always go up, and always go up at rates significantly greater than inflation.
Jake
Those who are saying “Money, what money?” are spot on. People were knowingly trading the illision of money. This is the .com bust times a bazillion because it wasn’t a bunch people who didn’t understand the mysteries of the internons throwing cash at what seemed like the best thing since sliced bread.
Merrill Lynch[ed], Countrywide, Citigroup etc didn’t get where they are today because of poor choices or being swept up in the latest craze. It takes fraud to get this kind of mess and if you think the write downs are a full, complete and honest accounting of their problems, I’ve got some land in Florida going cheap.
Caidence (fmr. Chris)
No.
Price of Stock * Number of shares issued = Company Value.
All that’s keeping Citigroup from actually being devalued straight into the toilet (thus forcing everything they need sold off) is the value that people place in Citigroup shares.
Right now, not many are thinking they’re a growth investment, so the only thing keeping it afloat is the promise of a quarterly payment.
Of course, this means that they’re going to be hemorrhaging money keeping the company value out of Hell Frozen Over, but if they can right the ship in time then it shouldn’t be a problem.
Kurzbein
I went over to Calculated Risk and found this quote, which I think summarizes the fundamental problem: “The more recent loans appear to be faring the worst, reaffirming the conclusion that lending standards had become overly lax throughout the mortgage industry in the middle of this decade, as competition for fewer good loans intensified amid skyrocketing home prices.”
Lending standards got lax because there were so many companies trying to profit from the housing boom. As a mortgage company employee, you may know that a house is overvalued. You may know that the borrower isn’t ideally qualified for the amount of the mortgage either. But you also know that if you don’t sell the potential borrower the mortgage someone else will. So you sell the mortgage in spite of the fact that the collateral is overvalued. The point here is that market forces can produce bad outcomes like the ones we’re seeing now. We’ll see a big correction in business practices for the next 10 years or so, but in the mean time we’re left with a big mess and worse, a bailout.
Punchy
John, thank you very much for this thread. I too have zero clue about how all this works, and da peeps here are wicked smart.
I am currently planning on telling Visa and Mastercard that I’m going to write off the ~$2K I owe them, ala Citi and their ilk, so it’s not on my books anymore. I’m sure, being they’re like banks, they’ll understand and accept.
Walker
This is starting to smell a little like the S&L scandals.
This will be much, much worse than the S&L scandals. It is much closer to the Florida real estate mess of 1926. Understand that the collapse hasn’t even started yet. We are barely halfway through the subprime resets and the option arm resets haven’t even begin. The option arms are interest only (or worse, pay less than interest and have the remainder tacked on to your loan). 75% of those with an option arm are making the minimum payment. Hold tight.
Where is the money going? It is disappearing from the system. Poof. Banks create money, and lend it to someone to buy an asset. Person defaults on loan, and bank gets asset, but now bank cannot get the money from selling that asset that they loaned. That money is gone. It is nowhere.
This is called debt deflation. Economists claim to understand it (whether they do or do not remains to be seen).
I am not a gold bug (mainly because my father was and that turned me off of that stuff). But this is how our current monetary system works. Banks create money through loans; that money is not tied to any hard asset, but is simply created by the act of making the loan. Regulation on banks and lending through the Fed is what keeps this from being a worthless printing press. But just as money can be created, it can also be destroyed. If the loan is secured by asset which then looses its value, the money is simply gone.
Dave
It’s Keyzer Soze money – And like that… it is gone.
That’s really the truth of it. The only money that ever truly existed in these loans is the money the loanee paid out before they went belly-up and stopped paying the bank.
Everyone else cashed out and in on the potential of the loan and built up these paper pyramids of value. It’s a legal Ponzi scheme.
MBunge
“Not really. The gold standard didn’t stop the massive credit bubble in the 1920s (actually, US gold policy fueled it by keeping interest rates artificially low—sound familiar?).”
I’m not trying to argue for the gold standard or any of Paul’s actual theories. Just that he’s touching on an underlying truth, that the U.S. financial system has been, for a while now, largely disconnected from any external economic reality.
Mike
APS
If you are interested in who is making money from this disaster, there is a good article in today’s WSJ about John Paulson (no relation to our Treasury Secretary), who is believed to have earned $3-$4 Billion last year managing hedge funds that bet against subprime mortgages.
cleek
but the money that was loaned was presumably spent by the borrower. there’s money on that side of the deal at least. the bank’s ends up not getting its investment back, but the borrower got a bunch of free money.
(not an economist, so this isn’t a criticism… just confusion i guess)
Xenos
This is like asking where all the wealth that the Spanish Empire plundered from South America went. Generally, it was spent on spices, lace, and other perishable luxury goods. The British invested some of their profits into local industry, with rather better long-term results.
The profits from the credit/asset bubbles of the last 15 years (stock margin accounts from the dot-com boom, real estate, and now precious metals and commodities purchased with margin accounts) were invested in the luxury consumer goods economy, houses in a few chic towns, and coastal real estate.
A few of us sold our stock in 1999, or houses in 2004, and have kept money in securities (not stocks) and rented since then. You don’t see the money because frugal types hoard it and wait until a couple years after the correction to reinvest. The smart money interested in real estate has sat out the market since 2002.
ET
I must admit that I am curious. How many of those 4,200 were those that made the big bucks whent the going was good? Or are the many/most of the 4,200 the more low level workers?
LiberalTarian
This is an example of capitalism being bailed out by socialism. Taxpayer money is going to be used to shore these people up.
The angle that makes me most nervous is the rush by foreign entities to try to fill the breach with capital. I don’t understand the logic, the risks, the benefits, or what it means for me. Generalized anxiety–it’s what’s for breakfast.
The Transcendinator
Mike Froman is helping me with all of this. He was Robert Rubins chief of staff at Treasury. Robert, of course, is now running the show at Citigroup.
Be not afraid, because together we can transcend any economic reality and bring each of you a pony.
myiq2xu
It’s not gone, it’s just elsewhere.
Guy gets loan to buy overvalued home, then defaults. He’s screwed, bank is screwed, but seller has cashed in.
Sojourner
It’s the free market in action. What’s the problem?
Dave
“It’s not gone, it’s just elsewhere.
Guy gets loan to buy overvalued home, then defaults. He’s screwed, bank is screwed, but seller has cashed in.”
True, but that money the seller cashed in on is essentially the initial money on that loan paid by the loanee. But then you have the banks packaging these loans and using them as collateral when there isn’t any actual value to them beyond what the loanee may pay back. That’s why it’s Keyzer Soze money.
Somehow this is legal but gambling is a crime unless your in Vegas or on a reservation.
Dave
“The angle that makes me most nervous is the rush by foreign entities to try to fill the breach with capital. I don’t understand the logic, the risks, the benefits, or what it means for me. Generalized anxiety—it’s what’s for breakfast.”
Yeah…the idea of the Saudis having an in with Citigroup makes me a little nervous. At the least I would think it would allow them more access to the inner workings of Citigroup. Combine that with their…tolerance of certain radical groups and I can imagine several unpleasant scenarios.
Xenos
Very true. While ‘subprime’ was the word of the year for 2007, ‘Alt-A’ will be the word for 2009 or 2010. And it is going to kill us.
Alt-A are the non-conforming loans made to people with good credit ratings, but who paid extra points in order to avoid proving income and assets. Since any monkey with a job and some self-restraint can maintain a decent credit rating, an enormous number of people who could not afford to put any money down were given these loans, with not real underwriting analysis, so they could buy overpriced homes.
The Alt-A problem is an order of magnitude larger than the sub-prime problem. It will not manifest itself until at least another year, so hold on tight and hoard Yen, Loonies, Rubles and Krugerrands. (Euros and Pounds Sterling won’t hedge this risk, because Europe and the UK are in as much trouble as we are, but they just don’t know it yet.)
demimondian
Not really. Some of it is, really, honestly, gone.
The wealth effect is real — a person whose house appreciated and who was counting on that appreciation to help with retirement now has lost that appreciation. That welath is, quite simply, gone.
gypsy howell
Oh honey, he did better than that! $87million? Pffft! The real crime was committed when the Tan Man sold hundreds of millions of dollars of his own Coutrywide stock in the last 2 years, at the very same time that he was confidently asserting that Countrywide was in excellent financial shape and was well-positioned to weather any storm.
Where did the money go? It went where it usually ends up in a debt and credit crisis like this – it ends up in the hands of a few tenths of a percent of people at the top rung of the ladder.
I think it’s hilarious (in a bad kind of way) that people like Lou Dobbs go friggin’ apeshit over the Dubai ports deal, but we hear crickets now that foreign governments and sheiks are buying up our whole financial structure.
Interesting times ahead folks. Hang on. It ain’t gonna be pretty.
demimondian
Sadly, it *is* the free market in action. All those economists who kept harping on the externalities of the market…well, there’s sometimes no pleasure in being right, you know?
Dreggas
Even more reason to elect OBAMA!
[ / snark ]
see even an obama supporter can have a sense of humor. Now seriously where did the money go? Ask David Copperfield, then again the illusions created by the past 6 years might even leave him slack-jawed.
The shitstorm is coming and there’s nothing that can stop it. This whole “throw more money” into the system is just like pouring gas on a brush fire. Inflation is the highest it’s been in 26 years and is still climbing. This is what you get for electing people whose singular goal is to accrue more money while screwing you. The only bit of morose satisfaction I take from this is it will screw them too in the end.
myiq2xu
It’s a big swindle, but somebody rides off into the sunset with the cash.
I remember when my sons were collecting trading cards (Magic, The Gathering) and they would brag about how much this card or that card was worth.
I told them that a card was worth nothing until somebody paid them for it.
We can all sit in a room and wheel and deal with an empty bag in a version of musical chairs. You buy it from me andf then sell it at a profit to somebody else.
I make a profit, you make a profit, but when the music stops whoever is holding the bag gets fucked.
Except in this case, the taxpayers will end up bailing out the fat cats, but the little peeples will still lose their homes.
Well, they won’t really lose their homes, the homes are still there, they just belong to Mr. Potter now.
myiq2xu
That “appreciation” never really existed, so how could it be lost?
wasabi gasp
The profits went to help feed poor children for only 19 cents a day.
demimondian
Listen, Dreg, if you can convince me that Obama can transcend this economic joyride, I’ll support him.
demimondian
Finance 101: the value of an asset or instrument is the present value of an annuity based on a reverse mortgage on the asset. The rational valuation of the asset may be either greater or less than the market valuation at any given time, and when the market valuation of an asset changes, the value of that asset changes.
gypsy howell
You got that right. Subprime was the snowball – Alt-A is the avalanche.
Dennis - SGMM
Yep, the market, unfettered by onerous regulation has come through again. Of course those same hearty souls who demanded that government stay out of the way of their buccaneering will now demand, and get, a bailout from that same government (Read: us).
As for the investment by various ME entities, remember that their assets are largely dollar-denominated and that they are sitting on the boatloads of money that we paid them for oil. They know better than to kill the Golden Goose outright. Better to just bleed it to death slowly.
Caidence (fmr. Chris)
Shorter Finance 101: Value is a temporal zen thing. Here today, gone tom– er, already. shit.
myiq2xu
Legal maxim: The value of a thing, is what the thing will bring in an “arm’s length” transaction.
The value of a house is what a willing buyer will pay a willing seller.
If you pay $100,000 for a home, it is worth $100,000 until you sell it, at which time it will have a new value.
Until you sell it, “equity,” “appreciation,” “profit,” and/or “loss” are merely unrealized estimates of it’s current value.
ThymeZone
That’s why they call real estate an “illiquid” asset.
Zifnab
And we get a quick trip back to feudalism, where one guy owns all the dirt. Everyone needs somewhere to live, after all. I can buy or I can rent, but at the end of the day I need a roof over my head. So the bank heads make a killing at selling insecure securities to 401k funds and inexperience investors. The huddled masses get a bunch of houses they can’t afford, default on their debts, and (under the happy new bankruptcy bill) are stuck with expenses in perpetuity and trashed credit that will force them to take more bad loans in the future. A bunch of cheap property goes floating around to be snatched up by the only people who can afford it – the Trumps and the Bob Perrys and the guys who just made all that money selling you bad securities. Land wealth gets consolidated, repackaged, and sold out at inflated rates via rents or future bad mortgages. Bada-bing bada-boom. The rich get richer and the poor get screwed.
Dreggas
BWAHAHAHA
ThymeZone
Quite correct. That’s why equity loans cost more than first mortgages, because the risk is higher. The holder of the first gets the equity first, and the second mortgage gets what’s left over. Which could be zero.
Actually, there is no profit or loss on real estate until sale. Just to be completely correct here. Sitting on equity is fun, but the profit (or loss) is only realized at the time of sale. Equity can give you a warm fuzzy or moistness in your pants, but only the proceeds of a sale can be used as cash.
demimondian
Yup — and if my house will bring $750K today, but would have brought $1M last month…doesn’t that mean its value changed?
demimondian
Two words: reverse mortgage.
ThymeZone
The collapse will create a tsunami of political energy, which he can ride to the White House.
Is that a transcendant scenario, or just a simple seizing of opportunity? Only the keepers of blogorrhea lexicon can decide.
Dreggas
Everyone looks at me like I am nuts when I say that we haven’t seen anything yet…well…I worked in an ALT-A and subprime shop. When the Option-Arms come due and all the shit hits the fan it’s going to be a nightmare, not just an avalanche an avalanche combined with an asteroid.
myiq2xu
The key to making money in a Ponzi scheme is get out early, before everyone else realizes that they are trading overvalued or worthless “assets.”
Punchy
Really, isnt this the whole underlying premise of the stock market? sure, some companies give you tangible dividends, but most have “value” only based on the owner’s belief that s/he will sell it tomorrow for a higher price…
Caidence (fmr. Chris)
Don’t you worry. My financial snobbery aside, I’m still an engineer. Entropy won’t let feudalism come back: there are too many people to be organized and oppressed. Remember that in the Feudal days, the lords had about 50 people, and the “kings” a handful of lords. That’s the only way such things managed to survive: bare bones.
For us, think Mad Max, rather.
Dreggas
I just hope he doesn’t try to wind surf the tsunami…
myiq2xu
No, last month it had an estimated value of $1M.
Now if you had purchased it for $1M last month but sold it this month for $750K, then it’s value changed (and you took it up the poop chute.)
myiq2xu
Ding! Ding! Ding! Ding! Ding! Ding! Ding! Ding! We have a winner!
Welcome to reality.
Dick
Nope. It means its estimated value changed. The value of the house is still what you paid for it, until you actually sell it.
Dave
A good start would be to stop throwing away hundreds of billions of dollars in Iraq. But that’s just me…
Dreggas
And this is why I have a filing cabinet labelled “Zombie Plans”
Dick
Damn slow WordPress. Myiq2xu beat me to it.
Bombadil
And I need to change my alias back again. Dammit.
ThymeZone
Jesus, you’re an ass. The vast majority of real estate transactions are straight sales.
What percentage of mortgages are reverse mortgages, and what effect do reverse mortgages have on the present real estate – credit situation, or the typical house buyer’s position?
Let me save the other people some time: Very very few, and none. That’s the answer.
Dreggas
Of course but that wouldn’t change the underlying fundamentals of this problem. It would just mean that the gov’t would have more gasoline to throw on the fire. We have a perfect storm here, to use the cliche, and it’s only gaining strength it, however, is only minorly influenced by the “war”.
pharniel
btw i see Calculated Risk Mentioned above. here’s the general link.
read it if you want to at least have an understanding of what’s going on and why it’s so bad.
as to why let the saudi’s buy? because then when the banks go under and the forginer’s loose thier shirts we keep thier stuff.
at least i hope that’s the play.
Chris Johnson
It worries me that EVERY TIME somebody even says the words ‘free market’ now I expect them to be lying to me in the most gratituous way.
I like the dream of capitalism as a way to create neat things, but I think the fundamental disconnect is people speculating on the value of value. Somehow, something goes awry. Perhaps it’s just human? A chump is somebody who wants something for nothing, and that’s where the chaos comes from. It’s not really preying on innocents, it’s preying on chumps- the ability to con a person and promise them something for nothing, then trick them.
I run my business in a sort of anti-WC-fields way, constantly keeping reins on the profit and making sure things don’t go beyond what I can honorably support. It makes me wonder if it’s losing me the chump market- and when that market crashes and the chumps are destitute and unable to spend anything, if it’s going to affect me that much.
Probably whistling in the dark.
MY mortgage is fixed-rate and for a place that’s reasonably humble. But in a lot of ways I’m not out for all I can get…
Caidence (fmr. Chris)
Serious Prediction: Jon Corzine will explore Democratic nomination in 2012. Former Goldman Sachs exec, became NJ gov. to fix their current financial disaster.
If this issue keeps up, he’ll stick is head in.
Dave
Dreggas,
No, stopping the spending in and of itself wouldn’t change anything. But using that money to provide tax relief for the middle-class and lowering the debt would be a good first step. You could also audit the DoD budget and stop enforcing unfunded mandates on the states (like No Child) which would put more money in the state coffers.
This won’t change anything about the impending credit disaster. But it would help us ride it out a little better and start to improve our economic fundamentals earlier. Kind of like the idea behind Asimov’s Foundation novels (sorry for the geek reference.)
Dennis - SGMM
I don’t see what everyone’s so worried about. The past few years of careful and thrifty Republican stewardship have left the Treasury with massive surpluses. The government can easily bail out those who deserve it and still have plenty of funds left over to provide tax-holidays or other short term measures to stimulate the economy should that be needed.
Whoops! Just burned out my PC’s snark module.
Dreggas
Unregulated the market will rise in a bubble and in the end burst, driven solely by the latest “fad”. It was housing + credit this time and one of the big contributors was the bankruptcy bill pushed through congress THANK YOU REPUBLICAN SHIT STAINS!
Make it hard for Joe Schmoe to file for bankruptcy ensuring he will be paying you until the day he dies at which point his relatives will take over, fuck you very much.
Caidence (fmr. Chris)
No. Ease off a bit, you’re mixed up in something.
Idiots speculating on wacko ideas are great, as long as they are economically rational. Almost all investors are, thank god.
This speculation is what sandblasts risk from huge values to managable values. In the middle of it, smart people and lucky people win, and stupid people and unlucky people lose, and the transactions between them are zero-sum. And in the end, rational investors go home with their shirts on their backs.
But “chumps” are something else. A chump would be a single mother of 2 who needs a home now, and isn’t worrying two shits about the growth value of the home.
And if she can’t afford it, she needs the market to reflect that, and get rejected for each loan, and then pick up an apartment somewhere at heavier cost now.
But instead we have over-aggressive brokers — those that wouldn’t get a real job — telling her she could get a house. They lied.
This has nothing to do with the rational tsunami of investors fucking each other over for fun and for fortune. That’s good stuff for us, and that’s why governments have allowed such chaotic things to keep existing: they incinerate risk.
demimondian
I admit to being at risk of schedenfreude poisoning — when the recent bankruptcy “reform” passed, I predicted that a great many at-risk debtors would transfer their credit card bills to a defaultable form — their house — and that the financial had better get smart about assessments, and fast.
Guess what? They didn’t. They did. Now, instead of universal default on credit cards, the banks are getting selective default on mortgages. BWAHAHAHA! You broke it, you bought it. Bastards.
cmoreNC
This is fine, except by going down the editorial path about “free rides” instead of focusing on by what mechanism those alleged “free rides” were obtained, you needlessly obscure the issue of just what actual financial mechanisms were used, and whether the mechanisms were inherently faulty or else was it the perversion of their useage that was at fault.
There are four financial *mechanisms* at work here:
1) Commissions and service fees for creating the original mortgages;
2) Commissions and service fees for reselling the mortgages at a profit to other institutions;
3) Commissions and service fees for combining and repackaging the mortgages into other mortgage-backed investment instruments;
4) Interest income from the mortgages themselves (or indirectly from some instrument representing a package of mortgage-backed debt). Note that there can also be an additional small stream of diverted income for servicing the collection and transfer of this interest income to the instrument holder, but this last aspect (interest transfer servicing) is minor and incidental to the problem at hand.
NONE of the above mechanisms themselves are per se at fault. When you need to move and put your existing house on the market, you don’t consider there’s anything inherently wrong about your agent extracting a commission fee for successfuly selling your house at a satisfactory price – although you may quibble with whether you think the agent’s potential role is worth contracting to give them a 6% commission fee instead of a 5% or 4% fee. Likewise, when you shop around for a mortgage for your new house, you may well get the best rate from a company who is actually a mortgage brokerage firm who makes their profit reselling your mortgage to other financial institutions (often banks) rather than directly from a bank. As long as your points + interest rate cost is favorable, do you really care from your perspective that the broker may choose to turn around and make their money reselling your mortgage to a bank or other financial institution rather than from the long-term interest stream off your mortgage? So long as the terms of your mortgage don’t thereby become any more onerous, you don’t. From everyone’s perspective, there are no “free riders” here – everyone involved has provided a service someone the market says is worthwhile, or else a cheaper mechanism will arise and outcompete it. Sometimes, players succeed in warping the regulated environment to create artificially maintained transaction costs/steps – for example, real estate brokers succeeded for years in enforcing a 6% standard commission structure, but such an artificial construct was not involved in the present problem.
THE REAL PROBLEM boiled down to these three things:
1) An assumption that real estate values were immune from ever going down; hence even if a borrower defaulted, the downside risks of real-estate backed instruments were minimal;
2) The intermediaries extracting commission/fee like income at each step for creating, servicing, or repackaging these instruments worked on the principle that they could walk away from these transactions once their part was done (and they’d extracted their fee/commission in whatever form);
3) The ultimate consumers of real estate-backed instruments presumed that these instruments were solid investment-grade and backed by solid collateral (real estate) marketed by reputable financial firms (for example, they owned funds or had investment managers who bought these instruments on their behalf). The underlying assumption “real estate will always rise” kept people from being more vigilant to know and understand enough about the actual underlying properties and debtors behind their investments. They assumed the debtors were no more riskworthy than the overall average of mortgage debt. WRONG!
So what was wrong here is not that people charged their usual commissions for their part in the financial structure of real estate transactions, but rather that the trust and assumptions that the market could count on original mortgage lenders to be vigilantly protective out of self-interest to screen out high-risk transactions. When this fails, the assumption that everyone is being vigilant in their own self-interest at each transaction step also falls apart. If there’s a pirate in the chain, it’s at the step of people in the best position to know the true shakiness of the underlying transaction (the original lender).
Of course, when real estate prices deflate in part due to a mortgage default crisis, what happens is that the holders of secured loans get turned “upside down” – meaning that more is owed on the troubled/defaulted debt than the market value of the collateral backing it. That’s the other place missing money “went” – but where exactly did the original money lent go? It’s in the hands of: whoever sold the defaulted buyer the house (who after all got paid off by the mortgage company in the closing), and all the people in the mortgage chain who extracted a commission-like or transacton fee of some stage along the investment path.
myiq2xu
Ever notice that when a company like Enron implodes, the big boys don’t lose their shirts? Somehow they make out even while riding the company into the poorhouse?
They manage to dump their stocks just before the prices start tanking. Kinda like G-Dub did when he sold 212,140 shares of Harken at $4 a share on June 22, 1990, for a grand total of $848,560. Two months later, Harken announced a larger than expected loss for the previous quarter. Harken’s stock price declined to $1.25 by the end of 1990.
Caidence (fmr. Chris)
FTFY.
Middle class means “can handle things like big smart adults”. Lower class means “cannot handle things with out financial assistance”.
We want the middle class taking hits — because that’s why we wanted people to become middle-class — as long as the upper-class takes a share of said hits proportional to wealth.
Dreggas
I am still not so sure. After all if this were done and things returned to some sense of normalcy, the interest rates would start to rise again negating the tax cuts. Further gov’t has no hand in this mess and could do little to stop it.
Think of it as cancer, it started with these mortgages (leaving aside the credit issues for the moment) those loans were made, then sliced and diced and spread throughout the market, much like cancer cells divide and spread through the body.
Since there was no check in place by the gov’t or any regulatory agency other than the agency of making old white men richer there was nothing to stop it from spreading until there was nothing to be done about it and it brings down everything.
Caidence (fmr. Chris)
cmoreNC, tl;dr
Tsulagi
Not on “our faith” at all. It’s determined by godless international markets who have no use for faith, political parties, talking points, etc. When they’re playing with trillions in currencies, they do their homework, the hard number crunching. They don’t trust their money to faith, ours or anyone else.
Didn’t take a big picture seer to see where this CEO president would take the US dollar. He lined the poor bastard up against a wall, then the bridges-to-nowhere rubberstamping Pubs lined up with their weapons on burst. It wasn’t pretty. The poor bastard is still taking rounds.
But currency trading enabled me to buy two rental properties. If you’re willing to bet a security is or will be fucked up, you can make some money. This was a no-brainer. I had faith in our president. But damn, I missed the timing in shorting sub-prime securities. One guy didn’t adding over $1B to his net worth to make the Forbes 400. In retrospect that was another easy no brainer.
Caidence (fmr. Chris)
Replace “cancer” with “a bad flu virus”, and the analogy is great. Cancer is self-sufficient, these loans are not. It’s just displaced entropy from a bubble that burst.
Once people take their doses of pain, it will be over, and we’ll move on with thinner wallets. Most of the complaints today are “oh noes, you mean I might have to move into a house without a den?? But I couldn’t POSSIBLY watch football in a normal living room! My wife is there…” etc.
Americans are overfed and underworked. They’ll get over it. This blanching is just shock.
cmoreNC
I should add that some large banks (Citibank being a prime example) became extraordinarily undervigilant about more closely examining some of the mortgages they bought from mortgage brokers etc. So in addition to the sloppiness of original lenders, many of the banks who bought mortgages from brokers were at fault in using grossly negligent vigilance about the financial soundess of the mortgages.
myiq2xu
Did you consider that if the housing market wasn’t overinflated by investors then maybe she could afford a mortgage?
So she is forced to rent and by doing so she is paying somebody else’s mortgage instead of her own?
Caidence (fmr. Chris)
This is a flowers-and-roses concept somewhere out of Grover Norquist’s diary, but the idea is that if the market has attracted so many investors, thus locking out mother-of-2, then it’s believed that the market is more risky than a mother-of-2 should have to be burdened with.
In practice, could there be some lag on that mechanism? Definitely. But investors are the bacteria that eat the dead flesh off a wound. Not particularly attractive, but a natural feature of an entropy-rich environment. It’s hard (but not impossible) to say “there’s too much” of this, because if the environment didn’t call for them, they wouldn’t be there.
Again, is this an unusual situation? somewhat.
myiq2xu
I hope you were being sarcastic. Otherwise you are perpetuating conservative myths:
“Rich people are just like everybody else, they just invested their money wisely instead of wasting it.”
“Poor people deserve to be poor because they are lazy, stupid or both.”
As my uncle used to say, “I spent half my life on booze and cheap women. The rest I just wasted.”
srv
Citi – Chairman Robert Rubin, Former Treasury Secretary
Obama’s Economist – RR’s former chief-of-staff, Michael Froman
Nothing to see here, people. Move along.
Dreggas
Overfed and under-worked? Where the hell do you get that? I don’t know where you live but I live in a fucking apartment I have to work my ass off to keep, as do those in the apartments around me. A normal house without that “den” is out of my price range and everyone of us so-called overfed underworked americans.
Kat
The best one-page explanation I’ve found so far:
Americans [are] ‘walk[ing]’ from loans
December 23, 2007
Excerpts:
There has been a major falling out between mortgage insurers, credit rating companies, banks and mortgage institutions, which believed their loans were insured, only to be stunned to find themselves booted into the mire that is American banking.
…
Perhaps most alarming is the credit standing of the major insurers of mortgage loans as Moody’s, Standard & Poor’s and Fitch Ratings slashed insurer ratings and placed the largest insurer under negative credit watch. The mortgage insurers, especially the giant MBIA, stand accused of further imperilling banks and mortgage companies by spending billions on risky CDOs (collateralised debt obligations) and even riskier “double” CDOs.
…
A number of factors are at work. First, many mortgage companies, encouraged by Alan Greenspan during 2002-03, ended mortgage deposit requirements.
Then the banks “sliced and diced” and sold the mortgages in packages so the householder no longer owed their payments to their bank but to anonymous international conglomerates.
Mortgage companies have also, by selling “liar’s loans” and “toxic” mortgage debt, lost moral authority. Householders see no reason to be loyal to them.
…
But the drama now unfolding surrounds the mortgage bond insurers and the credit agencies.
Insurance is taken out in the hope it will never be claimed. However, the insurer has to assume it will be claimed and therefore ensures the premiums are safely invested. The banks, some earlier than others, realised the threat to their mortgages and took some, not nearly enough, insurance from companies such as MBIA and ACA.
As the loans had been sliced and diced, it must have been difficult for actuaries to calculate what insurance was necessary. Even to this day, no one knows who owns and owes exactly what. The CDOs are, after all, collectivised.
It turned out the risk was great and the insurance was needed. Then came the surprise.
The insurer had invested in the very thing the insured was fearful of, the collapse of the value of the CDOs.
Morgan Stanley then commented: “We are shocked that management withheld this information for as long as it did. MBIA simply did not disclose arguably the riskiest part of its CDO exposure.”
But they did. Not to JPMorgan or Merrill, but to the insurers, which evidently didn’t hear, didn’t realise or didn’t think it worth passing on to the major mortgage institutions that their insurance money was tied up in the same risky ventures these companies were trying to protect themselves from.
myiq2xu
What if the market for single-family homes was regulated to encourage owner occupied units and to discourage speculators?
Government-backed low-interest mortgages, tax breaks, etc., that were only available for owner-occupied primary residences?
Kinda like VA loans.
Sorry, I had a liberal brain-fart.
4tehlulz
Yes, I think I will be OK with a declining standard of living.
Jackass.
Caidence (fmr. Chris)
Try that one again. I did not say that.
I said lower-class people are those that cannot handle things without financial assistance. This isn’t some blame issue, it’s a classification.
The lower-class is comprised of people who lack sufficient tangible and intangible resources to put more out than they take in. Possible things lacking: solid assets, liquid money, education, stress support, time, safety, employment, emotional stability.
Somewhere in that list is the formula for the so-called “lazy work ethic”, but my knuckles don’t drag on the ground and I would never be so crude as to use an ad hominem as a system diagnosis. Thank you for knowing that ahead of time.
Regardless of how blatantly stupid a poor person could be, the causes of the deficiency will always be neutral in nature. “fuck you” never gets anything debugged.
And besides, the lazy are all in the middle class, working 6 hours a day and spending their weekends in front of the TV. If you’re looking for my prejudices, they’re over there :)
Caidence (fmr. Chris)
Just because you’re in the room doesn’t mean I’m pointing at you. My rule of thumb is that most people that have jobs around the world work 50+ hours week minimum out of job-market requirement.
Then I hear stories about astrologers playing with tarot out of their homes, pet psychics, and unions complaining that their workers might have to work more than 6 hours day. That makes me think we’re (as a nation) coasting on previous economical successes, and those people that thought life was all diamonds without working their asses off get caught in these corrections.
You act like I’m the guy who created the first subprime contract, and said “fuck it, I’ll take all their money, and they can handle it”
I’m just calling it as I see it. My all means, fight it off, its good for all of us, too. But I still think its going to hurt.
myiq2xu
This is what pisses me off:
Whether it’s the Sub-Prime meltdown, Hedge Funds, the S&L crash, or any other big economic clusterfuck, the fat cat speculators who scream about the “free market” want Uncle Sugar to come to their rescue.
They want “free market” to mean “free to make a profit, guaranteed no loss.”
But the fat cats don’t want the little peeples to have any bankruptcy protection or other guarantees, so if something bad happens the little peeples lose their homes and retirements even when it wasn’t their fault.
The fat cats especially don’t want regulations that would prevent them from cheating and taking advantage of the little peeples. In that regard they want “free market” to mean “free to steal.”
Dreggas
myiq2xu,
Agree completely.
Punchy
Can you explain what this is to an idiot like me? Is this the bank paying you monthy for a percentage of the equity that’s built up? Or something?
myiq2xu
This statement implies that lower class people are not “big smart adults.”
You have a strange view of America. Some people are worried about losing their life savings and being homeless, and you say “They’ll get over it.”
Is that you Dick Cheney?
Caidence (fmr. Chris)
I’m guessing you’re talking about what I’m talking about, and I’m starting to think you think you’re not reading my posts.
This isn’t about policy. I’m generally liberal when it comes to getting people out of the ditch and keeping them from getting underneath the thumb.
This is mathematics. No policy is going to help you beat 2+2=4. Or in this case, falling house value + recession = oh fuck me. I’m only talking about the mechanisms, and it’s all I’m qualified for; I’m an engineer. I can’t talk about banking policy.
People should have probably more protections than they have now. Considering they’re all the labor we get until the robot overlords take over, they tend to be good things to have, them “peoplez”.
But when I look at what people from other countries do as “easy work”, and what we do as “normal work”, things don’t match up. And my suspicion is: were coasting on all this money our parents earned us.
I’m no fat cat, either. I went to a state school because they offered me full tuition instead of MIT, I have no debt, I work my ass off in Manhattan, and I keep my head down. I have $10K in credit completely pristine, and I’ve been hunkering down in an apartment reading the news about why I’m not buying property.
Caidence (fmr. Chris)
this would be relevant to my previous post (actually, a fix) THAT STARTED this sub-thread
I engage you because I think your brain is functioning on levels higher than the average bear. Not reading my posts before going for the kill isn’t helping me maintain that illusion.
myiq2xu
But when the policy is geared to tell people 2+2=8 and encourages them to take risks with their homes and retirements, somebody should have seen it coming and fixed the policy.
myiq2xu
And to return to a thread from yesterday, this is why we need to investigate what’s been going on in this country for the last 28 years – so we can stop shit like this from happening again.
Instead o the administration and the media act like these crisis magically appear out of thin air, bail out the fat cats, and change the subject.
The Other Steve
Yep. You have $100k in equity in your house, you take out a reverse mortgage. Over the next 20 years, the bank pays you a monthly amount and basically buys the equity out of your house.
If you die, the family gets the option of buying back the equity and keeping the house, or letting the bank sell the house and the remaining equity in the house is part of the estate.
It’s very rare here in the US. It’s more common in the United Kingdom. However, it’s becoming more common here in the US and I’ve started to see companies advertising for it so expect it to become a problem in the next 20 years.
myiq2xu
WTF? Examples please!
Have you compared worker productivity in the US compared to other industrialized countries? How about compensation?
Last time I checked, we produce more but make less than European workers.
pharniel
also have dick for vaction as well.
I get a whopping 4 weeks a year and am considreed amazingly under rested by my european freinds.
pharniel
Note that per Caculated Risk Reverse morgatges are still HEAVILY regulated. You have to be a certian age, you have to have x amount of equity etc.
And it looks like underwriting never went south on them. The most opposition to reverse morgatges oddly enough are the people pushing the ‘ownership society’ in the first place.
Caidence (fmr. Chris)
The conclusion of that is correct, but I don’t know what policy you’re thinking of. This was a completely legal form of loan that hinged on the faith that a subprime lender would be able to pay off the loan like a prime lender. But weird shit happens to subprime people. Their daughter does heroin with her boyfriend. The oldest son, bringing up the last 10% of the family salary, is shot on the subway. They can only afford a house next to a lake that’s also a corporate toxic waste dump, and the father gets leukemia. So on, so forth.
But it’s not policy. It’s a contract that had massive risk on the other end. My firm, well equipped as it was, saw the risk to be much higher than the sweet, sweet reward, and stayed away.
NOW: Should the average investor have seen the risk and let the subprime market die, or should it not be expected for a simple investor to be able to see that far down the chain?
Libertarians will say, it’s their fault for accepting the risk in the first place.
Liberals/Pro-Regulators will say, it’s too hard to be a fair decision, someone should step in.
My understanding: There were PLENTY of investment vehicles available other than subprime, the investor should have know to keep walking and look for something else. Also, there’s a trend that these schemes are fueled by unhinged greed.
I may be wrong if: The numbers say that there was a lack of investment vehicles, or if it’s determined there was CONSISTENTLY monkeys telling investors that it’s a fair deal. There were salesmen involved, but not everyone has a salesman calling them. Some people invest of their own accord.
(Re Monkeys (fucking brokers): yes, of course they should be prosecuted for fraud. But of course, you wouldn’t have gotten the focus to notice that until a tragedy, now would you? How would you notice, prevent this the next time this situation rolls around?)
Caidence (fmr. Chris)
On that one, I left you with a question: if there’s logic pointing to torture, and it is a federal crime (and can be prosecuted effectively when they leave office), why isn’t there constant talk about this prosecution? Why isn’t it being picked up on anyone’s radar. (This isn’t rhetoric, I’m asking, you’ve got me intrigued)
Caidence (fmr. Chris)
I’ll go look if I can find some of what caught my eye before. Will you still give me that there are still other whackjobs making a living off of made up jobs?
You’re right on Europe, at least Western Europe. I think they’re doing the same thing. Coasting on past successes, letting their children take the entropy for it.
The Other Steve
You know, in a way the market is self-regulated in this regard. Or it used to be. I still think we need to identify what happened.
But it used to be a lender wouldn’t give you a mortgage to buy a 2nd home with unless you either had the money to pay the mortgage, or you had some kind of business plan with regards to renting it out. See it used to be that lending money had a risk attached with it, and banks would calculate that risk and expose themselves appropriately.
This is why mortgage lenders ought not be bailed out, because they need to feel the pain so that they’ll correctly understand the risk.
The Other Steve
I don’t have time to argue this all right now. In general, I think people ought to take responsibility for their actions. I understand the ripple effects this is all having though.
I’m pretty personally involved in this, as I work for a major mortgage lender. We’re close to going under completely, and I keep hoping for a layoff notice, because the work environment is ridiculously stupid.
On the plus side, I can keep saying to people shocked at my carefree attitude… “What are they going to do? lay me off!? HA!”
pharniel
That’s simple. Brokers should be like Real Estate agents and 1) regulated requiring basic certification and 2) required to act in the best interests of the clients: the borrower and the lender, in that order.
as it is allmost all the brokers I know would have been used car salesmen a few years ago, and would have required more training for that.
Caidence (fmr. Chris)
For the sake of a quick-response:
a.) The only example of 6-hours-a-day I’ve found is for coal mine workers. I think we can all agree that 6 hours of that is about 5.75 hours too many
b.) About 80% of the articles or cases are blocked by subscription
c.) Given the NYT archives, complaints like this go back to the late 1800’s, so this might be more tangled than would make for simple discussion.
I’ll keep poking, but you’ll probably win your challenge.
Kirk Spencer
re the 6 hour workers, I’m betting it’s that myth that constantly hits teachers. “8 to 3. God, if only I could get hours like that.”
Nevermind they have to be in BEFORE school starts and work till AFTER the kids leave. Nevermind the little things like lesson plans and grading, much less mandatory attendance or sponsorship (or both) at various extracurricular activities. Nevermind the mandatory continuing education (self-funded, in most cases). Nevermind… all the other things that explain why teachers have one of the highest 5-year burnout rate of any profession in the nation.
Caidence (fmr. Chris)
They already have that. Didn’t work :(
GOOOO BUSH ADMINISTRATION!!
pharniel
*Kirk Spencer* Says:
Because that’s only the good ones. the dedicated ones.
there are plenty of empty suits (esepcially in middle school) just collecting a paycheck and grading papers.
But as a child of a 1st grade teacher I can tell you that in generaly my mom worked 60 hour weeks on a regular basis, and that was after she’d been at it for 20 years and was on autopilot.
you also forgot one of the most aggressivly Entitled (old word: uppity) and antagonistic client bases ever to deal with: parents, who either don’t care or are insulted that Thier Special Boy (or GIrl) isn’t that special, or are enraged that you stopped thier precious from doing whatever the fuck they wanted to the other children.
peach flavored shampoo
How so? Just curious.
myiq2xu
If you find an answer, let me know. But Donald Rumsfeld won’t travel outside the country now that he no longer enjoys any kind of diplomatic immunity.
pharniel
*Caidence (fmr. Chris)* Says:
Actually the independent broker we used in MI was a freind ( and thus we know where he sleeps) and explained that basically you just need to know how to work the software and that was pretty mcuh it.
at least in MI it was have a good sales ‘vibe’ and be able to not fuckup the paperwork enoguh that it was noticed before closing.
I started being a Calculated Risk junkie when they started to describe the hijink’s going on it matched our freinds stories precisly (escpeically the New Century stuff) I figured CR had an idea what it was talking about.
I’ll try and look up the story, but there were a few states that tried to pass the legislation to do what i just said and the various broker special interest groups threw giant hissy fit of doom.
Ike
There is a very simple analogy for where the money went. Does anyone remember the game “Hot Potato”, in which a beanbag is passed around in a circle while the caller (with eyes closed) calls “hot potato” repeatedly. Once the caller yells “cold” the person with the potato is out.
The sub-prime loan fiasco is ANOTHER in a long series of “hot potato” games that the financial industry has played over the years. Stock market crash of 1929, The Savings and Loan scandal in the 80’s and today. I’m sure your readers have a few others. Speculation runs amok, and the person left holding the bag when the tide of reality comes in is the one that takes the losses.
Back to the analogy, the winners of the game are the ones who get rid of the potato the fastest. Put your money in, let it go up a bit, and take your money out. Who does that include? The CEO’s who raked in bonus after bonus for business performance built on a house of cards, The brokers and dealers who made huge commissions on sales of inflated-value properties and housing developers who merely had to sneeze in order to gain increasingly ridiculous margins on new development to name a few.
The banks played this game and believe me they new it was a game. What they didn’t foresee was the impact of the corruption in bond rating system that they, themselves fermented through strategic deregulation and undue influence. The truly scary part is that the banks and brokerage houses that created the concept of Collateral Debt Obligations (essentially Private Mortgage Mutual Funds)AND pressured analysts for AAA ratings AND fought regulation of mortgage-backed securities at every turn ACTUALLY believed that they were holding AAA rated debt.
To put it in perspective, here’s the sub-prime fiasco in an example to which more of us can relate.
A stranger comes up to you and says:
— On January 1st, the brother of my friend Mike borrowed $100 from him at 20% interest for 1 year ($120 due).
— Mike needed the money quicker than that so, in March, he sold the loan to his mother and father (June and Jim) for $104 and in exchange they were guaranteed the $120 from Mike at the end of the year.
— The June and Jim were going on vacation before the end of the year so in August they sold it to their two sets of parents (Sue, Sam, Sarah and Sonny) for $57/couple ($114 total) in exchange for a GUARANTEE of $120 due at the end of the year.
— At the end of November, I (the Stranger) bought the debt from the Sue, Sam, Sarah and Sonny conglomerate for $116, in exchange for a GUARANTEE of $120 due at the end of the year. I’m leaving to go to the moon in a couple of days and won’t be around to collect it from the brother, so I’m willing to sell it to you for $117 since I only bought it a few days ago, and it’ll mature in a month which will give you a nominal return of almost 3% and an effective annual rate of return of 30%. Sue, Sam, Sarah and Sonny are real stand-up people, so I know they’res good for it and that makes this one hell of a deal, are you in?
Most fiscally sane people would run as fast as their Nike trainers cold take them from this deal, but the Banks all signed right up. Why? Because the stranger said that the brother was “Good for it!”
Needless to say if Mike’s Brother doesn’t pay it impacts Mike’s ability to pay June and Jim. If June and Jim don’t have enough capital to cover what they owe to Sue, Sam, Sarah and Sonny then Sue, Sam, Sarah and Sonny might have trouble paying the Stranger. But at every level of this transaction they’ve all made purchases based upon the income that they EXPECTED to receive at the end of the year.
Now most sane people would never buy this debt and that’s knowing the story behind it. The banks and brokers ok’d these deals without knowledge of the story, nor the people involved: Mike’s brother, Mike, June, Jim, Sue, Sam, Sarah, Sonny nor the stranger. They just accepted the claims of a AAA rating because they figured that Mike would have never lent money to his brother in the first place without a reasonable expectation that Mike wouldn’t default.
F**king hillarious if it wasn’t so sad.
ThymeZone
It’s a particular permuation of secured loan that does not require the borrower to qualify as being able to repay it.
This permits extraction of the equity, usually as an annuity, and …. its most attractive feature …. the homeowner gets to live in the house while the loan cycles along. He converts his equity to cash and doesnt have to move.
But …. the whole thing has zero to do with the present mortgage-credit crisis. It’s an asterisk in the story right now.
ThymeZone
Sorry to hear that. Really. There are whispers in a lot of cubicles at a lot of places these days.
Maybe Alan Greenspan will help everyone find jobs in the new post-Greenspan economy he created?
myiq2xu
I think you meant “borrower” but you’re correct. It was legal, but perhaps somebody should have pointed out that it was not good fiduciary practice to make such loans.
Considering that the government was backing many of these loans (and insuring the bank deposits used to finance them) then it’s not a stretch to say perhaps they should have set standards and paid attention to what was happening.
BTW – “Breach of fiduciary duty” can make a trustee personally liable for losses by the beneficiary. Shouldn’t there be some effort to hold someone responsible for this mess?
“Personal Responsibility” – Isn’t that a GOP/conservative theme?
Punchy
Here’s what I’m confused about–so, the bank is giving you money based on equity. But it’s been established that equity is a arbitrary thing….it’s the worth of a house based on what someone may buy it for…
Ok, say a $300K house now has $100K equity (“worth” $400K), and the bank reverses $50K of that equity back to the owner. What if toxic waste is suddenly discovered in the backyard, plummeting the “worth” of the house to $200K? Does the owner have to pay back the $50K he received b/c the house is now not worth the $100K in equity?
Shorter–what if the equity dissappears…who eats the reverse, the owner or the bank?
myiq2xu
I’m guessing the fine print says the owner – or actually the owner’s estate since it probably won’t become evident until the owner dies.
Caidence (fmr. Chris)
arrg. “Borrower”. “Borrower”. “Borrower”. damn “brane” organ.
Yeah, maybe if government involvement directly interacts with said loans. But liquid markets are lovely things because you don’t have to know who you’re interacting with down the line to do business, you just need to know the risk of the corporation immediately adjacent to you in the transaction. It’s unreasonable to expect the U.S. Government to be omniscient and start morally policing everything going on in the market. Astronomical amounts of work to do that.
Of course (I mentioned that).
Depends. Are they up for election?
Barry
ET Says:
“I must admit that I am curious. How many of those 4,200 were those that made the big bucks whent the going was good? Or are the many/most of the 4,200 the more low level workers?”
(a) One guess, and the hint is ‘schmucks’.
(b) If any high-level guys, um, had to spend more time with their families, they probably left with a million $ or so, to ease the crushing burden of their lives.
ThymeZone
The owner is probably dead. I think these are generally structured to outlive the owner.
The reverse mortgage lender vets the house and its risk factors carefully. This will give you an idea of the kinds of things they are looking at.
myiq2xu
That’s where them “laws” and “regulations” come in. The guv’mint can come in after the feces hits the fan and horsewhip a few varmints.
Of course that’s the beginning of the road to
serfdomthe librul “nanny state” – somebody says “there ought to be a law . . . “Kirk Spencer
A point of interest for some of the comments I’m seeing here. One of the Calculate Risk catch-phrases is “We’re all sub-prime now.” Which is a catchier way of saying, “the problem isn’t the sub-prime loans.”
The core of the problem is that credit was easy, and various safeguards established during the 1930s and 1940s – that had been whittled upon during intervening decades but slightly reinforced in the 1980s (S&L) – were finally removed over the last decade and a half. Note that the rules were removed at the request of lenders, not borrowers. When the blame game gets kicked around, that fact should be kept in mind.
We’ve got a record overhang – property built but not yet sold. We’ve got a record number of houses sold, with every indication that a large chunk of the record’s going to go to foreclosure. We’ve got Commercial Real Estate (CRE) following housing by about 6-9 months. Every foreclosure and unsold house ends up being a burden on a bank – a reduction in money available to lend. Every foreclosure and unsold house ends up being a reduction on the taxes a community receives – both directly and indirectly (property value).
And according to the charts of reset schedules, we’re still in the early stages.
Face
I think Kirk Spencer just set a record for the most depressing series of blog posts on one thread at BJ…
Caidence (fmr. Chris)
Yeah… except you didn’t know to do this until said rotating mechanism intercepted said waste matter. Hindsight, 20/20, etc.
How are you going to find the next thing to regulate when you don’t know what’s going to go bust on you? Of course, now you apply regulations on subprime, after the lowlifes have run out of town (without learning their lesson, as always)… but where are they going to hide next? You can’t be hiring $500K/yr. quant. scientists to sit down over every transaction and churn the numbers. Too few geeks, too many numbers.
and this is why it becomes really attractive for me to say “it’s the investors’ faults for assuming the risk”. Not just because it’s probably right, but because it makes me feel self-assured. And, I get to blame someone! And it’s not me!
Justin
You should have been following Calculated Risk for the last few years. They’ve been on the money in their predictions.
Kirk Spencer
Face, you think THAT’s depressing? feh – you haven’t been paying attention. Add something to the mix that goes like this:
The recession is going to be worse than we experienced after the S&L collapse (also due to a credit bubble mostly conducted in the real estate market.) There are areas – sections of states, possibly entire states – that are going to be in full-blown depressions. It’s going to take at least two years just to reach the bottom unless we “do something” – lots of options each with its own special flavor of pain there.
The longer we go doing nothing – refusing to believe how bad it is, much less working to stop the fall – the worse the ride will be. That’s what natural market forces do, after all – go up and go down, and we’ve been going up for a long, long time. Doing something means the “haves” will have to pay something to help the “havenots”. Now regardless of your opinion of the brilliance (or lack thereof) of the man in the white house (GB or DC), just what odds do you give of anything being done prior to January of next year?
And having said that, let me make it REAL painful. If the president of the US initiates direct military action against Iran, depression is a given. To the failing credit bubble (dominated but not solely in real estate) add oil prices based on supply being clearly lower than demand, AND a lot of people angry at us because they’re paying those oil prices. We won’t go “Mad Max” (caveat that with ‘I think’). But beyond that, we’ll experience such an upheaval that it’ll change us all.
LiberalTarian
Without intent to start a flame war, Caidence (fmr. Chris), I don’t really think you are anything but passingly opinionated wrt what you are talking about.
Maybe you were being flip, but the notion that somehow people in the middle class are all equally immune from predatory lending practices. I am very good at contaminant transport (went for the BS in environmental chemistry and the AA in history), but I am no real estate lawyer. I would not lie to buy a house, but clearly, there were people with good credit who have not missed any payments who are getting screwed in this deal.
For instance, my mother is very very good with money. She has a few stocks, but the bulk of her savings are in very conservative investments, i.e. CDs. She owns real estate, but purchased these properties many years ago, and she is not now likely to make a huge return but she is still likely to have some appreciation.
Now, she should be weathering this economic storm in good stead because she has always been a saver; yet, every time the fed cuts rates to help out the mega-millionaires on Wall Street, she is losing ground. She is not losing the principal of her investment, but she put together a very rational retirement portfolio that should have been adequate with, say, a 6% return. But, everytime the Fed cuts the rate to help the enormously wealthy, my mother takes a cut in her interest income. Combine low interest rate return with spiraling inflation, she is really taking one for the team.
I’ve seen the losses my mother is likely to experience described as a “massive transfer of wealth from the small saver to bail out the already wealthy,” but I have only the wherewithall to worry about it, not the terms to technically describe it and certainly not the ability to make sweeping statements about it.
At any rate, I am not at all flip with respect to how the sub-prime debacle will affect millions of people.
magisterludi
I echo Liberaltarian, but my mom never entered the stock market. She has more than tripled what my step-father left her when he died in Dec 1999 by juggling CDs like nobody’s business. The woman amazes me. We spend our quality time together hitting the thrift stores and finding the best deals on air-fare.
BTW- she’s been solid Republican up to Bush Jr. Now she’s leaning HRC while my heart belongs to Edwards.
srv
sub-prime is just a word made up to redirect attention from the reality of ponzi-scheme banks and hedge funds have made and that Obama will prop up.
I cannot wait to see his plan to transcend capitalism at its best while selling his taxcut.
binzinerator
Isn’t this just the payment coming due on the Bush economy?
This is what I think:
Back in the early 00’s, Bush was stealing from Peter to pay Paul, with the intention that no one would find out exactly was taken until later. Preferably 2009.
In 2002-2003 the Repubs were desperate to have good news about the economy — hell Rove knew they’d take a beating in the election otherwise — and the only thing that looked good was the housing market. This is what mattered to Joe Blow — he heard his house was zooming in value and he thought he was getting rich. See Joe Blow? This is what happens in a GOP “Ownership Society”. You get rich just by owning a house.
In fact, the White House touted this part of the economy over and over again. It was pretty much the only thing that looked like it wasn’t stagnant or tanking. They used it time and again to counter critics who said the economy really wann’t doing well. They needed something to mask the real state of the economy. They couldn’t afford a tanking economy.
They absolutely needed to keep that bubble going, no matter how. Even if they had to fake it. They needed to Enron the economy. Greenspan did a heckuvajob to make that happen. Didn’t he get a medal too?
They helped prop up the housing bubble with easy credit to make it look a lot better overall than it really would (even should) have been. It worked great all around: Bushco avoided getting Bush 41’s comeuppance (remember “It’s the economy, Stupid”?), the GOP money boyz got even richer as they brokered/bought/serviced/sold/resold the worthless shit in their game of musical chairs, and little Joe Average believed he’d make money just by waking up for another day.
All nice, but at a cost that is coming due only just now.
This mortgage debacle is just more brushed-off long-term consequences of another of one of Bushco’s fiasco strategies to win elections. (Iraq is another).
Why is it whenever there are Republicans running the country, we have massive financial scandals that make the rich richer, with calls from these people for government ‘bailouts’? Why does it come from the same kinds of fucks who really truly believe it is the welfare single moms who cry for government handouts because they’re not big smart adults to handle things without financial assistance?
Xenos
And they say John Edwards is an angry man.
In the long run we need to punish (or just let suffer and die) the industries that corrupted the political and allowed this to happen. And out of spite, let’s nationalize the oil companies. All of them (except Citgo, natch).
Conservatively Liberal
Kudos to adding Calculated Risk to the blogroll. They are the BJ of the financial blogs (IMO), plus CR and Tanta offer excellent detailed analysis of financial data and news. The comments are informative and entertaining, with a minimum of disturbances. Lotsa bears there, but I think it fits with the times we are in.
One time a home used to be a place to live, not something you would invest in solely for the sake of making money. Bankers, speculators/flippers, Realtors and a whole host of leeches attached themselves to real estate and sucked it dry. Literally giving out irresponsible loans like candy only fueled the fire. Average workers were seeing the dream of a home being priced into oblivion, and some panicked and bought into loans that they never could have otherwise qualified for.
The bubble has popped, and the ones who took advantage of the system have banked the profits, leaving consumers holding the bag yet again. Financial CEOs getting paid outrageous sums all the while screwing the pooch, middlemen who got their cut up front, packaging crap into investments that were then rated aaa, and on and on. Scam, scam & more scam. A house of cards was built, and now it is falling down.
The more than likely coming fed rate cut is flat out stupid, as is the talk of raising loan limits. Sure, give people a chance to buy that million dollar mansion on Wal-Mart pay. That will sell. Not.
Things are a mess, and it is only going to get worse IMO. Consumer debt is at all time highs, the home ATM (HELOC) is closed, we don’t make jack squat any more, property values are going down and the financial system is in a total mess.
Gotta love Greenspan’s Ayn Rand crap about letting businesses run with no regulation. Unregulated capitalism and free trade are about the dumbest ideas anyone could ever come up with. They are set up so those with the money and/or means can screw others out of their money and/or labor.
The biggest bastards get it all, and everyone else gets screwed. I am so happy to be a renter now, with an excellent FICA score, a few modest investments/cd’s and absolutely no debt. We have wanted to buy a home, but we refused to jump in on the madness. I knew it would not last, that this ponzi scheme would crash.
Tighten your belts, the ride is going to be rough.
Kat
binzinerator: ‘Why is it whenever there are Republicans running the country, we have massive financial scandals that make the rich richer, with calls from these people for government ‘bailouts’?’
In his book The Politics of Rich and Poor (1990), Kevin Phillips calls these periods Republican Heydays. The book is basically about how Republicans have repeatedly engineered such financial Heydays – and the subsequent crashes – throughout US history. They crush the average joe by suckering them into get-rich-quick schemes — better known these days as bubbles. After the crash of these Republican Heydays, there’s typically a populist backlash that lasts for several decades — until a majority of those who remember the last crash have died, at which point their grandchildren and great-grandchildren become prime targets for another great bubble scheme designed to transfer the bulk of the wealth they’ve painstakingly built up over three or four generations back to the wealthy few.
binzinerator: ‘Why does it come from the same kinds of fucks who really truly believe it is the welfare single moms who cry for government handouts because they’re not big smart adults to handle things without financial assistance?’
Oh, they don’t really believe that themselves. They just want all of us to believe this sort of propaganda because it makes us easier to fleece with their bubble-schemes. We haven’t even begun to feel the repercussions of their biggest lie yet — that a trillion dollars in tax cuts for the wealthy few will be better for the nation and the economy than funding Social Security for the baby boomers and beyond.
myiq2xu
When the old ones have died off, we start hearing how easy it would be for everybody to get rich quick if only we got rid of these silly old “depression era” rules that don’t make sense anymore.
We hear that “Government isn’t the solution, it’s the problem.”
After the feces hits the fan we hear “Wow, nobody could have seen that coming.” Nobody except our grandparents.
So the next time you hear that something is being deregulated, grab your ankles and hope they use lube.
Kat
myiq2xu: We hear that “Government isn’t the solution, it’s the problem.”
And now that practically all of our mainstream media is owned by 6 corporations, we hear the propaganda over and over and over until we believe it.
Caidence (fmr. Chris) said: ‘How are you going to find the next thing to regulate when you don’t know what’s going to go bust on you? Of course, now you apply regulations on subprime, after the lowlifes have run out of town (without learning their lesson, as always)… but where are they going to hide next? You can’t be hiring $500K/yr. quant. scientists to sit down over every transaction and churn the numbers.’
How are you to know what the next bubble-in-the-making is? Whatever all the ‘conservative’ financial pundits are now constantly telling you is the greatest fail-safe investment opportunity since sliced bread. Remember 96, 97, and the first 9 months of 98? They were all saying anyone who didn’t invest in the Nasdaq dotcoms was going to miss out on the greatest investment opportunity mankind had ever witnessed — that even the Dow would soon be at 30,000. From 2002 through 2004, the housing boom was the driving force of the economy, and it would go on forever. If all you’re hearing now is how much higher oil, gold, and commodities are going to go, you can bet they bought into those when the price was half of what it is now, and they’re just trying to drive the price up a little further before they sell — and invest their profits into whatever it is they’re NOT telling you about now.
TenguPhule
Invest in Guns and Ammo.
And maps of where CEOs, bankers and other assorted riffraff (like former Congressmen turned lobby ass) live.
We are long overdue for a bloody riot.
binzinerator
@ Kat:
I’ll see if my liberry has a copy of The Politics of Rich and Poor. I also need to read Naomi Wolf’s Shock Doctrine, as I am certain it’s in a sense related.
I’ve always been repulsed by Wolf’s writing — My reaction has vacillated between (facetiously) “O Goddess, forgive me for being born with a penis, for I am The Enemy and The Oppressor.” Or (way more often) I think she sounds like she’s gargling with post-modern intellectual marbles in her mouth while preening in the mirror. It’s been either annoying and fatiguing, or tedious and fatiguing, or both.
But when I read some excerpts from Shock Doctrine, I thought, holy shit, that’s something I’ve been wondering about too, in the back of my head, for years. I haven’t touched Wolf’s writings in many years; it’s time to reread. Perhaps I’ve learned something about myself, about women and about life in the interim and I will see her writings in a different light this time.
However, I’m inclined to think Republican Heydays aren’t the only things these assholes have been trying to engineer. I really think Wolf is onto something here.
No you’re right; they don’t. That makes them all the more despicable.
HeartlandLiberal
I asked a business professor I am acquainted with by email just now, he happened to be in his office, and responded thusly almost immediately as follows as to “where did the ‘money’ go”?
This is a good question. The securities that Citigroup is writing down are exceptionally complex, but the essence is pretty straightforward: these are fundamentally loans, mortgage loans to be particular, that were valued on the presumption that the vast bulk of them would be repaid in a timely fashion. When defaults exceeded expectations, the value of the loans (i.e., in this case the mortgages and bonds)inevitably declines. Citigroup is now written down their value because of the reduced expectations that they will be repaid over the lives of the loans as fully as they predicted. Now your basic question of what happened to the money: one source of the money was predicted to be increases in housing values: that obviously is not a good bet in the near future. The other was the borrowers’ current and future income, and that doesn’t look to robust either especially for the subprime borrowers. So in this case, the money from the write down didn’t go to someone else but rather represents future interest payments that were over-estimated. Hope this clarifies things at least a bit.
Xenos
So the money did not go anywhere, it just never was.
Since our economy has been propped up on the belief that all this wealth was going to exist, we can expect a nasty adjustment.
Maybe we need to go back to, like, manufacturing stuff.