2. I am aware that Congress, by way of the CRA, pressured/forced lending institutions to lower underwriting standards and provide mortgages to minority borrowers that ordinarily wouldn't qualify. Were these banks also forced to provide no doc loans to illegal immigrants or was there a feeding frenzy going on?
3. Who in these lending institutions were approving these loans that were overvalued and they knew couldn't be paid back? Loan officers get paid when the loan closes, they don't care if it defaults next week. I suspect that there was a fair amount of fraud involved in the no doc loans and also appraisals but someone up the food chain, in a corner office with a view approved the this crap.
4. Was the intent just to close these loans, get the fees, bundle the sub-prime garbage in bundled mortgage securities and sell to investment banks and such and to Freddie and Fannie thus passing the stinking fish down the line?
5. If the percentage of residential mortgages in default or close to it is anywhere from 2%-6% why the supposed dramatic impact on the economy?
6. Lastly, should I invest in Avon stock, speculating a run on their popular "Soap on a Rope" or should I not expect to see Raines, Gorelick, Johnson and others in prison orange?
Not only will you NOT see them in prison orange, you will see them in higher positions in the coming years. That's the way this thing works.
One thing folks haven’t discussed is “the uptick rule”.. I think this added a lot to this in addition to the Glass-Stegall repeal.
Personally, re stocks I bought a lot of AIG Monday and diversified the rest of what I have a lot more, including foreign etfs. AIG has risen over 30% in the past two days because folks last week bet it would go under, and sold it down to about $4.00, now, with the thought of a bail out, it has been steadily climbing. The thing about the AIG panic, is part of the company is already backed up under an insurance fund that is completely separate from the investment based banking, so they already have some protection in there.
FBI investigating, will that help?
invest in Avon stock,
.
Diversify, there are thousands of great buys and great companies on sale now. I’m remembering some bank fund that was making lots of gains about 4 yrs ago, there was also a real estate fund, glad I resisted following the pac
That's the idea I get. I suspect most would have done the same thing if in the business and ordered by the Gov't to take on junk assets.
Below is an article that explains the dramatic events of last Thursday which prodded Paulson/Bernanke to move forward with their plan. Fairly scary.
This article doesn't discuss the additional fears also present on Thursday when the naked shorters took control of a handful of large financials, in what may been attempts to drive them to the same status as Lehman.
Good place to start IMO. Long read.
http://www.freerepublic.com/focus/f-news/2084907/posts
Avon - not sure how this company stays alive.
bump
Please unleash what happened here to the word "minority". The institutions were pressured/forced to lower underwriting standards to allow more borrowers to qualify.
You'll have much more success in daily discussions with co-workers on this topic and do it without offending minorities or even "friends of minorities". The truth is, people were given loans who had not the means of repaying the loans. Their ethnicity, race, gender, religion or even sexual orientation has little to do with their ability to repay the loan. Let's keep the conversation at that level please :-)
1. Into banks and other financial institutions that have toxic derivatives off the balance books.
2. Maybe, but that’s just a sideshow compared to the credit default swap racket.
3. It was approved through the business models of these firms. It was by design. Fraud spread through the system like financial HIV, at all levels.
4. Yes. Once the risk could be laid off to another level of the pyramid, they were free to make their next subprime loan (which was a constant).
5. Because for every dollar they had in the bank, some of these firms loaned out 40 times that to others. If they have only one dollar, how do they pay out two defaults? Banks that don’t have the money to pay back their liabilities are effectively insolvent. When everyone you’ve loaned to goes bust, you don’t get back anything you loaned out, and now you’re bust, too.
The thing that irks me is how a company can be allowed to become so huge that it can't be allowed to fail or all hell will break loose globally. I'm thinking of Reagan and MaBell and deregulation and what happened with that? What I see today are many many companies who buy up their smaller competitors and grow that way. When these companies hit bad times, and they always do, Americans are really hurt. In the case of some of these financial institutions, citizens of many countries are adversely affected when these companies fail/falter.
As an aside, from what I've seen, these huge companies are nearly unmanageable due to their size.
In a word: leverage.
Banks borrow money from other banks on the strength of their net capital.
If Bank A has $10 in assets and $9 in liabilities after borrowing money, then Banks will lend them money on the assumption that if anything goes wrong, well as long as defaults don't exceed $1 (10%) then liabilities will not exceed assets and there will be no losses.
But if defaults mount to 20%, then investors who placed assets in the bank will remove their assets out of fear - and then defaults go from 20% to 40% and higher.
It is a vicious circle. Once defaults rise above a specific level of assumed tolerance, then there is a rush for the exits and value evaporates.
I do not have a definitive position on this matter and definitely want to avoid socialism in any form.
With that said, I do think there are some reasons to believe that the $700 billion plan is not completely wrong or in need of rejection.
1. The money as I understand it does purchase bad loans. Those loans are not forgiven and provide in the long term an opportunity for the recovery of the funds. This is not a ridiculous prospect given that land values and property values are ultimately destined to rise in the US— even if they do suffer a temporary crash. This means that potentially, even the taxpayer could realize a return on this now terrible investment.
2. This has been done before with some success. Many people felt horrible about the Chrysler bailout. That bailout did save roughly 1/3 of the US auto industry with socialist action and did yield a long term return on the investment rather than costing taxpayers in the end. Today, Chrysler is a leading auto manufacturer.
3. The germane question is what lesson has been learned and has that lesson truly been learned? We would learn from this that government run systems are bad. Government operated mortgaging should now be dead. If it costs $700 billion dollars to instill a lasting lesson on why statism is bad then it is in some measure a good investment. Perhaps, this lesson could stop the impending nationalization of health care or even student loans. Preventing those events would be a tremendous value despite the short term contradiction.
4. I have to agree with jveritas here. Short term risks of Obama being long term President must be included in the calculation. If we have to pretend to be Socialists for 40 days to develop a hunger for conservatism then we better indulge the sacred ritual. Eight years of Obama or worse would far exceed the 1 trillion dollars— as bad as that sounds.
5. Despite the mortgage crisis, home ownership has increased dramatically in the US and this has for the overwhelming majority of owners been good for them and the US economy. The US economy exceeds 40 trillion dollars in size and so it is possible to absorb this catastrophe.
6. The massive spending which may actually be a true loan from tax payers will temporarily freeze radical socialist proposals including large spending activities by Obama and like minded dems. Obama has already conceded this.
Those are I believe important reasons why this bail out may be acceptable.
Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default.
CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to speculate on market changes. In one blogger’s example, a hedge fund wanting to increase its profits could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money - free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. And there's the catch: what if the hedge fund doesn't have the $100 million? The fund's corporate shell or limited partnership is put into bankruptcy, but that hardly helps the “protection buyers” who thought they were covered.....
The Ponzi scheme that has gone bad is not just another misguided investment strategy. It is at the very heart of the banking business, the thing that has propped it up over the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on “fractional reserve” lending, which allows banks to create “credit” (or “debt”) with accounting entries. Banks are now allowed to lend from 10 to 30 times their “reserves,” essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.2 The problem is that banks create only the principal and not the interest necessary to pay back their loans, so new borrowers must continually be found to take out new loans just to create enough “money” (or “credit”) to service the old loans composing the money supply. The scramble to find new debtors has now gone on for over 300 years - ever since the founding of the Bank of England in 1694 - until the whole world has become mired in debt to the bankers’ private money monopoly. The Ponzi scheme has finally reached its mathematical limits: we are “all borrowed up.”
When the banks ran out of creditworthy borrowers, they had to turn to uncreditworthy “subprime” borrowers; and to avoid losses from default, they moved these risky mortgages off their books by bundling them into “securities” and selling them to investors. To induce investors to buy, these securities were then “insured” with credit default swaps. But the housing bubble itself was another Ponzi scheme, and eventually there were no more borrowers to be sucked in at the bottom who could afford the ever-inflating home prices. When the subprime borrowers quit paying, the investors quit buying mortgage-backed securities. The banks were then left holding their own suspect paper; and without triple-A ratings, there is little chance that buyers for this “junk” will be found. The crisis is not, however, in the economy itself, which is fundamentally sound - or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people's money.
You got to love the Wall Street Business Model.
Profits are Privatized
Losses are Nationalized