4 posts tagged “banking”

I know it would make sense for me to be all over the grumblings about some kind of comprehensive mortgage reform, but there are several reasons for my relative silence. First and foremost, nothing has been clearly decided. Most of the motions up are so freaking muddy that there's no way they can be implemented. For example, let's say they were to try to buy up at-risk mortgages. What happens with home equity loans that are riding along? How exactly do you factor that in? Do you subordinate the subordinate new home mortgage loan to the formerly subordinate second loan? I'm not saying it's impossible, I'm just saying they haven't worked out the basics, so it's all just posturing, right now.

Second, I'm not entirely certain that it's possible to act in time, or if that's even desirable. There are so many, many wild cards.

I just think it's interesting that virtually every solution to the problems of the market boils down to some form of socialism. So, I, of course, would like to see a blatantly socialist response. But, I might just be pot-stirring, there.

I'm thinking, realistically, the best that the government can do for swift, effective action would be to let both sides fall. Take a step back. Let those over-inflated mortgages hang like albatrosses for a bit, so everybody can get a real good look at what happens when you truly believe that laissez faire line.

Won't happen, I know. They've already bailed out the biggest players, and it's just a question of how many folks are going to get bailed out. The problem is, though, that the vessel isn't sea worthy. Every "bail out" just drowns someone else. After all, the money has to come from somewhere....

I say we start with re-structuring how credit is given. I say we re-structure how capital is handled. But, hey, I might be just a tad too convinced....

If you follow the markets, you might have noticed the bad quarter that Bank of America, Citigroup, Goldman Sachs, and other banks are having. Think 've re-considered that Banks are still the best place for your money? Nope. It's bad all over. But I think we're confusing a correction (a very big correction, mind you) for a collapse. The plan to bail out banks is misinformed, if you ask me, but I think that it's contributing to the image that the market is headed towards recession, and that perception, as much as anything else, is driving the market down. Further, this plan is, in the words of William gross "...just taking money from one pocket and putting it in another...". It's taking 75 billion from one secured market (government backed) to bolster another secured market (Commercial paper). It's like a buttress on a wall that's losing plaster. People start to question the structural integrity of the wall, when they should be looking at the quality of the plaster. (Incidentally, if you're still reading, and havn't nodded off, the plaster, in this case , would be the mortgage-backed securities market, which has been a bad idea ever since they lowered the regulations on mortgages)

So, I was talking with a friend who said that the current financial downturn was "all the Bank's fault". I did my best to maintain.

Y'see, the safest place, right now, financially, is a bank. The Banks (Citibank, Bank of America, Wells Fargo, etc.) are weathering the credit crunch just fine because they mostly extend credit, not benefit from the credit of others. Banks aren't risk takers. What people are thinking are banks are more along the lines of private lenders, private investors, and so on.

See, there are money managers, there are speculators, there are money brokers, and all kinds of players in financial markets. Very few are actually bankers.

Seriously, folks are under-educated when it comes to finances. But, I'm no economics teacher. Instead, I'd ask that you follow a few links to wikis: A Bank is not a lender, though banks lend money.There are lots of Financial institutions. The type of financial institution that is most at fault for the current credit crunch, is an independant mortgage lender, which is what the name would suggest: a lender that is not supported by a bank that takes investment capital to secure mortgages that it will sell to the fine folks in investment banking, or to the federal securers of debt, like Fannie Mae, or Freddie Mac. Because these "indies" operated virtually unregulated for a few years, they took on loans that were ill-advised, at best, and that a bank would never be allowed to take.

I've worked in the finance industry long enough that people are now asking me questions about what's going on with "subprime loans".

So, here's my answer, and bear in mind, it's all my opinion.

About 5 years ago, a massive buying boom happened in this country. If you look at when that places us, you'll understand why I think it was an engineered buying boom, but the fact remains that people started investing in financial instruments like there's no tomorrow. Massive, massive numbers of loans were taken out. Yes, an awful lot of them were for homes. Furthermore, a lot of these homes were new homes, of the Tyvek-and-drywall variety that folks call "McMansions" due to their cookie-cutter appearance, and rather large size (most over 2000 square feet). A fair number of the mortgages for these home loans were "exotics": strange new variations on Adjustable rate mortgages, and interest-only loans, and so on. Of these exotics, a goodly portion were so-called "subprime" loans: loans made out to people who qualified for them only because of relaxed standards.

But, a lot of them were "jumbo" loans: Loans for over 417,000 dollars. Also a very large number of loans were made by investors capitalizing on relaxed investment and qualification standards.

How relaxed were all of these standards? Keep in mind that for a fair number (though by no means the majority) the borrower didn't even have to state their income!!

Simultaneously, we had an unprecedented housing boom: new home prices were going up by as much as 300% in some markets, while new construction was at an all time high.

At the same time as that, the amount of commercial paper was just insane. There are four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit (CDs), but all of them amount to short-term loans. These are debt instruments that large businesses use to keep their capital "liquid", that is tosay: it's the spending  money of the finance industry.

So, now, all that massive debt has started to come apart. Lo and behold, people are finding that they spent beyond their means, and are defaulting on mortgages. Commercial paper has become too risky. See, if a bank has too many defaults, they stand a decent chance of folding, in which case, all that money you invested in promissory notes to give them spending money is just gone. So, yeah, people are losing their shirts, worldwide. Keep in mind, lending is an international practice. The credit crunch isn't limited to the US: the whole world is tied in.

So, the multi-billion dollar question is :Why? Why are people freaking out, and why are people defaulting, and why are people blaming the subprime borrowers?

Well, people are freaking out mostly because they're losing jobs, money and the security that these things buy. Why are people defaulting? Because they were stupid, and believed the hype. Why are people blaming the subprime borrowers? Because an awful lot of them are poor.Poor people aren't major share holders. Poor people aren't higher ups in business. So, they have less of a voice in these matters.

But, i know, people probably got hung up on that word "stupid" in the last paragraph. Well, what else do I call it? We had people buying what, by every standard, was overpriced property, with features they couldn't possibly use, using debt instruments they didn't have the earning power to pay. That's stupid. It's stupid to enter into such an agreement from any angle. I know we need shelter. It's a basic necessity. So's food. This was the equivalent of buying some Elvis-sized fried peanutbutter, ham and banana sandwich for $10,000, loaned to you at a 25% interest rate, when you earn $800 a month. Yes, that dumb. When you're buying more than double the amount of home you need (and a poorly constructed home, at that) at a mark up that's around 300% more than you would have paid a year prior, and you're paying for it using a loan that you can barely afford to pay the interest on, let alone the principle, with terms that are byzantine, to say the least, what can you expect other than failure? It's pure stupidity, beginning to end!

This is why I really think this is a DESERVED recession we're skirting. Collectively, we, as a people, have literally mortgaged our future to buy absolutely unnecessary crap. I don't believe the government should step in to "save" people from this mess. This is dumber than smoking. If you bought a $600K home, on a $30k family income, and you bought a 2700 sq. ft. home for you, your spouse, and your single kid, and that home was hastily assembled out of chalk and plastic (drywall and tyvek), you're pretty dumb. If the terms on that loan were 'interest only" for the first 45 payments, followed up by an adjustable rate of payment, plus principle, with the rate set to start at prime plus 5, and you honestly thought "Well, we'll deal with that, when it comes up"., you lack the sense necessary to own even that tyvek monstrosity.

On the other end of that, if you set up such a loan, with such a borrower, and you didn't even bother to verify their income? You deserve the bankruptcy that surely awaits you.

If you. as a builder, have been building substandard housing, simply because you'll make more money by erecting more lousy homes, rather than less well-built homes, you lack the decency to wear the name of human. You deserve every lawsuit, and every death threat.

Look, I don't want to get all "jeremiah' on everybody. I'm not looking down on everybody, but the simple fact is this: there has been a failure to even glance at reality for five years. If you're going to ignore simple facts, you're bound to get checked by that reality, sooner, rather than later.I think that bailing people out on this will simply delay the pain, and thereby make it worse.

Keep in mind that the jumbo loans were bad, too. It's not simply poor, noble, and ignorant that are going down. It's willfully ignorant, rich, and annoying people that are getting a taste. This isn't a case of simply "black hatted evil bankers". This isn't some cryptofascist conspiracy of the illuminati. This is a basic failure of elementary math. Let it burn down.

And i've barely even touched on the commercial paper aspect, which is truly where the big money is collapsing, the fastest. I doubt if you've got too much tied up in commercial paper, so i'm not going to go over it very much, but I think the Fed bailing out multi-billionaires because they made what they even knew at the time were flimsy investments is a recipe for both inflation, and an eventual flat-out depression, when the bad decisions mount up so high that there is no bail out. Do we really want to make the same mistakes as we did back in the late 1920's? Because I don't think even a world war or a new deal will bail us out, this time. Because now, world wars are nuclear, and a new deal has to contend with G7, NAFTA, and Outsourcing.