Posted on 09/15/2009 7:25:49 AM PDT by SeekAndFind
Wall Street did not create risk of bad loans --- the modification of Community Reinvestment Act in 1998 did. It mandated a progressively increasing number of bad loans to be issued. As a result homeonwership rate increased from a stable 65% to 69% --- that's loans to 12M Americans we are dealing with. Wall Street is like a car --- it drives you as directed but it does not tell you were to go. It accommodated the government (with securitization, etc) but it did not create the problem.
Finally, you hold a typical socialist belief that the regulators KNOW and we only need to employ them. They do not, and have a lesser chance of knowing that a decentralized (free-market) management of the economy.
You are engaging in revisionist history, I believe unintentionally. The little “Gov’t made us do it” excuse is not supported by the facts. CRA loans were never more than about 3% of the loans. I can find cites again if you need them.
The blame is Wall Street’s. The gov’t’s blame is in not stopping them. Hopefully, future regulation will stop them.
For your reading pleasure:
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
High-risk mortgage loans and lending/borrowing practices
In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers.[70][71] Subprime mortgages amounted to $35 billion (5% of total originations) in 1994,[72] 9% in 1996,[73] $160 billion (13%) in 1999,[72] and $600 billion (20%) in 2006.[73][74][75] A study by the Federal Reserve found that the average difference between subprime and prime mortgage interest rates (the “subprime markup”) declined significantly between 2001 and 2007. The combination of declining risk premia and credit standards is common to boom and bust credit cycles.[76]
In addition to considering higher-risk borrowers, lenders have offered increasingly risky loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever.[77] By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.[78]
Growth in mortgage loan fraud based upon US Department of the Treasury Suspicious Activity Report Analysis.
One high-risk option was the “No Income, No Job and no Assets” loans, sometimes referred to as Ninja loans. Another example is the interest-only adjustable-rate mortgage (ARM), which allows the homeowner to pay just the interest (not principal) during an initial period. Still another is a “payment option” loan, in which the homeowner can pay a variable amount, but any interest not paid is added to the principal. An estimated one-third of ARMs originated between 2004 and 2006 had “teaser” rates below 4%, which then increased significantly after some initial period, as much as doubling the monthly payment.[79]
The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. However, there are many factors other than credit score that affect lending. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARM’s even to those with credit ratings that merited a conforming (i.e., non-subprime) loan.[80]
Mortgage underwriting standards declined precipitously during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation.[81] In 2007, 40% of all subprime loans resulted from automated underwriting.[82][83] The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay.[84] Mortgage fraud by lenders and borrowers increased enormously. [85] In 2004, the Federal Bureau of Investigation warned of an “epidemic” in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to “a problem that could have as much impact as the S&L crisis”.[86] [87][88][89]
So why did lending standards decline? In a Peabody Award winning program, NPR correspondents argued that a “Giant Pool of Money” (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable. NPR described it this way:[90]
The problem was that even though housing prices were going through the roof, people weren’t making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn’t possibly afford, no matter what the mortgage machine tried, the people just couldn’t swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they’d almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.
parsy, who says stop believing all the “free market” fables
Horsecrap. Wall Street lobbied to get credit default swaps exempted from regulation. Wall Street converted mortgages into bundled securities and sold them to be as safe as government bonds. The list goes on and on - but the point is, Wall Street played a leading role in this fiasco, and pretending otherwise does nothing in preventing a re-run.
Finally, you hold a typical socialist belief that the regulators KNOW and we only need to employ them.
The regulators relaxed long-standing regulations (such as reserve requirements and Glass-Steagal) at the urging of the institutions. You fail again.
They do not, and have a lesser chance of knowing that a decentralized (free-market) management of the economy.
Yeah, Greenspan's image of a self-regulating financial sector was such a brilliant success, eh?
Do you mind telling us the remote island where you have spent the last two years? It sounds like a swell vacation spot to get away from the world.
If all Wall Street did was facilitate stock/bond sales/trades/purchases, then that would be a full time job and a necessary one. What earthly good do hedge funds do? Or day trading? Or most of these derivatives?
What Wall Street is more like now, IMHO, is as if professional sports permitted the players and coaches to make bets on the games.
parsy, who will send you some more later
Sorry, I don’t subscribe to hero worship.
If these ‘Supermen’ were worth 1% of what they get paid, we wouldn’t be in a recession right now. When a BOD is stupid enough to sign off on a contract that says a person gets an outrageous salary, without regard to how a company performs, I take issue with that.
One of the things you learn is that people are expendable, workers are expendable and I can assure you that Senior Managment is even more expendable. A bad manager can kill a company - but when a company signs off on what we have seen here - and there is no one who is apparently accountable - I take issue with that.
As for the “Michael Jordans” in the banking world, how many of these are there? Based upon Leighman Brothers alone, they have to have boasted over 1,000 such superstars. If they were superstars, Leighman Brothers would still be around.
The banking industry needs Conggress to get out, to stop screwing with it; but it also needs a good dose of reality. Paying someone millions, when the bank is failing is ridiculous. No other industry acts this irresponsibly; and no other industry puts a gun to our head and takes our money due to their failure to run their business intelligently.
Here’s the link to congressional report. Gov’t is criticized for NOT properly overseeing Fannie and Freddie.
http://republicans.oversight.house.gov/media/pdfs/20090707HousingCrisisReport.pdf
parsy, who says quit blaming the poor folks.
If the banks were doing fabulously well - you might have a leg to stand on. But wait .... oh yeah, the banking industry collapsed didn’t it? And how many millions of people are out of work? How many millions of people have lost their life’s savings? Aren’t we in a recession?
So, please stop the hero worship. Ain’t drinking the cool aide. We all got sold down the river, and you are telling me that the “financial genius’s” whose personal greed is responsible for this mess, deserve the multi-million dollar salaries.
Before these ‘financial geniuses’ took over, how did America survive 2 world wars and 200 years? I like the Steve Jobs model - pay them $1/yr and if they make the company profitable, they get some money. If they don’t make the company profitable, they don’t get anything and stand a good chance of being fired. The idea of “I get $10 Million if I fail, and I get $11 Million if I succeed” is assinine. Yes, even in banking ... that money comes from somewhere.
If the banks were doing fabulously well - you might have a leg to stand on.
You're in good company saying government has to take over what the private sector's screwed up, that's what everyone says about banks --sample headline: 3 more down: Bank failure tally hits 92.
Let's forget what everyone says and just look at banks. They're fine now but during the Reagan/GHBush years we had 2,935 bank failures. Let's have less Marx and more Reagan.
Who said anything about gov’t take over?
As for more Reagan, I couldn’t agree more. All I’ve said is that the banking system is horribly broken. The bonus’s paid out are entirely unrealistic and unsustainable - and I resent having a gun placed against my head and my money taken from me, my life’s savings taken from me; and given to people in the form of a bonus.
Don’t care if the banker invented a cure for cancer; if the bank fails to make a profit, no bonus. It’s just that simple. That system works just fine in every other industry.
"...financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans."
Financial crisis is merely one side effect of other men's freedom, along with growth and prosperity and tacky lawn ornaments. Suck it up already.
You gots to read further. The good stuff is deeper down. CRAs were about 3% of originations and by themselves would not have thrown economy into depression.
I might be in a position of superior knowledge here, so let me give you this perspective. First, the problem wasn’t the poor folks, probably because their house notes were less than rent. After being pleasantly surprised by the success, the laxer standards were upped to the middle class and upper class.
However when this group got upside down, they could move to cheaper digs, and didn’t mind telling banks/mortgage holders to shove it. IMHO, a lot of this got worse because of oil speculators raising gasoline prices to the point of real pain.
Sub prime is not just housing. I had a client who nobody in their right friggin mind would ever lend money to. This guy got a 7 figure loan on some commercial property. Hardly ever made a payment. For several years. He was able to get out of loan for like 35 cents on the dollar.
IMHO, it was a greedy mortgage broker, and a financier in NY who planned not on keeping the loan who were to blame. Both of these players either made or stood to make a ton of money on the deal. They cared not who ended up with this POS loan.
Anyway, read the rest of the article and you’ll chuckle when you get to the mortgage brokers part.
parsy, who says things ain’t always what they seem
"Sorry, I don’t subscribe to hero worship."
I called no one a hero in my post, and I don't subscribe to hero worship. I merely explained to you that market knows best. Why was Michael Jordan worth $45M/year and not $40M? Because the market said so.
Incidentally, it is arrogant to think that anyone of us knows the market value of anything or anybody. You are also in bad company: the idea that SOMEONE may deduce value other than her private one is due to Marx. Apparently, you are not disturbed.
"If these ‘Supermen’ were worth 1% of what they get paid, we wouldn't’t be in a recession right now. "
The idea that we are in a mess because of anything Wall Street did is not born by the facts. As I said (see also a link to the Congressional report), it (and the Great Depression) was caused by government actions.
Your logic is much like blaming the car for some driver's running down a pedestrian. As you can see, it is similar to another Left mantra: "guns kill."
Apparently, you are not disturbed by this either.
"When a BOD is stupid enough to sign off on a contract"
This sentence tells me that you have not been within 500 feet of a board member.
Moreover, there is a market for board members as well. Surely, in retrospect, equipped with additional information, they may see things differently. This is not what they are paid for; their task is to make best bets given the info they have.
Contrary to your rather arrogant statement, there is not a single stupid person on boards of major companies. And, most certainly, they are not collectively stupid.
Your statements raise the question of whether you have an even vague familiarity with the subject on which you pass judgment.
" that says a person gets an outrageous salary,"
By whose standards is the CEO's salary outrageous? Yours or Marx'?
You also appear to lack intellectual integrity: when was the last time you complained about salaries of movie stars, TV anchormen or basketball players? Rush Limbaugh is worth $60M/year and a CEO that leads 100,000 people is not worth $5M? The standard by which you are outraged is really strange. " without regard to how a company performs, I take issue with that."
Have you seen a contact of a typical senior manager? Probably not.
Incidentally, one of the first things MBAs learn is that what consitutes "company performance" is an ill-posed question: there is no single measure of company performance. Apparently only you know it.
"One of the things you learn is that people are expendable,"
Do you continue to pay a roofer AFTER he is done repairing your roof? Do you continue to pay the kid that mows your loan in winter, when no grass is growing? Do you send checks to the waiter weeks after you are done with the meal?
Probably not.
And yet you want other people to do exactly just that. All employees, including CEOs, are hired to to a specific job and they are paid market prices for those services. When those services are no longer required, why should they continue to draw a salary? On what ethical grounds, and who should be paying them?
THe last question is very pertinent, because people like you view corporations as "rich" managers. In fact, the owners of a modern corporation are most of us. Our retirement moneys and savings accounts are in mutual funds, which in turn buy the stocks of major companies. It is retirees, widows and orphans that own GM, GE, etc. Why should a retired teacher continue to pay a programmer at GE even when his services are no longer needed?
You appear to have a rather incomplete picture of who pays for what in the economy. Misunderstandings easily lead to resentment and bitterness, which is apparent in your post. Please inquire after details of these matters.
"workers are expendable"
Right, and there is no one more expendable that CEOs. They are typically given 18 months after being hired and can be easily sacked. We apparently agree on this:
"and I can assure you that Senior Managment is even more expendable."
"As for the “Michael Jordans” in the banking world, how many of these are there? Based upon Leighman Brothers alone, they have to have boasted over 1,000 such superstars. If they were superstars, Leighman Brothers would still be around."
The relationship of superstars in Lehman to the rest of the starts is the same as in the NBA or baseball. There is one Michael Jordan with $45M/year and a ton of basebal players with $3-5M/year. The pay is purely on perfomance. You bring $500M to the company, you can keep $15 --- much like commission. The base salary of most investment bankers is miniscule. On good years, some people make a ton of money. On bad years they are out --- even after 20 years of good service. The same would happen to Jordan if he, G-d forbid, were crippled in an accident.
"The banking industry needs Conggress to get out,"
Once again, you state your conclusions but not the facts or logic that lead to it. It's your belief. It is purely Marxist. OK, stick with it. Just explain (to yourself) why you consider yourself to be a conservative.
I also notice you are getting a lot of flak over your position. So let me butt in and say, blame for the financial problems can be placed on Wall Street, the gov’t, both political parties, liberals, conservatives, anarcho-capitalists, and everyday Americans, whatever.
BUT, better regulation could have prevented this. Wall Street (WS) was way over leveraged, Fannies and Freddies were subject to lax oversight, and most importantly maybe, is that too many people could make too much money TODAY, to behave responsibly.
parsy, who says there were warning signs, but I think few thought it could get this bad
Parsy, I think we had this discussion before and I explained it then.
Hedge funds are just like any other mutual funds --- people keep their savings in them --- only differently regulated. Day traders are not working on Wall Street: they sit at home and trade from there. They too perform a useful function of enabling the market to function smoothly.
I think we fussed about speculators but I am getting old and my memory is not what it once was. Anyway, try this link and within it is a link about banning hedge funds.
http://www.kiplinger.com/columns/value/archive/2009/va0914.htm
This one explains how one entity can take a tumble even tho it doesn’t hold the bad investment:
http://www.time.com/time/business/article/0,8599,1653556,00.html
After reading wiki, I am not sure you can really define a hedge fund anymore.
On the first link, the author actually runs a mutual fund, so he is hardly a Marxist.
parsy, who hopes you read this
OH, BTW, don’t cite that congressional report until you read the whole thing or somebody is going to embarrass you.
parsy, who is trying to be helpful
This is all true, but not the point: Wall Street, as I said earlier, FACILITATED the push performed by the government
"IMHO, it was a greedy mortgage broker, and a financier in NY who planned not on keeping the loan who were to blame."
How convenient. But mortgages were resold for decades. And that, incidentally, contributed significantly to the economic boom of 1990s. Did not create any problems whatever --- until the Community Reinvestment Act of 1998 that mandated bad loans. Of course, the recking was not confined to mortgages (contagion).
Incidentally, Parsy, knowing how to drive does not put one in a position of "superior knowledge:" one still does not know WHY the car moves and how.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.