Notable day tomorrow--Financial crisis

Dave Siciliano

Final Approach
Joined
Feb 27, 2005
Messages
6,434
Location
Dallas, Texas
Display Name

Display name:
Dave Siciliano
Many of you know the Fed has been meeting with leaders from some top financial firms all weekend.

The WSJ is reporting Lehman will probably file Chapter 7 liquidation.

Merrill Lynch has agreed to merge with B of A.

AIG is under a lot of pressure to raise capital.

These are truly trying financial times. Stock futures are down sharply in anticipation of the market opening in the morning.

Best,

Dave
 
BofA does not need to be bigger. They have such horrible service, I can't imagine an investor worth a flip even using them now.

I had thought AIG was pretty solid. Not so?
 
What is most distressing for me is, the "crisis" is not one precipitated by sudden catastrophic events or conditions which could not have been easily foreseen; instead, there was a frenzy of poorly-underwritten lending and speculative buying and selling of real estate by financially-unqualified investors.

Now, there is huge political pressure to have the gummint step in and save those who guessed wrongly from the consequences of their own folly.

Ridiculous.
 
I am actually glad the guvmint didn't step in and bail out Lehman or Merrill. Better that the shareholders and/or execs of the companies involved bear responsibility for their actions. Unfortunately, I don't see that lessons will really be learned.

I was, however, disappointed with one pundit that blamed this collapse solely on executive compensation..... while performance-based compensation certainly provided a benefit to folks that led the deals, the demands by investors for greater returns (competitive market) really drove some of the decision-making. Blaming it solely on compensation is misplaced.
 
Especially when compensation is a drop in the bucket. It does stick in one's craw however when the millions being paid for real leadership turns into leadership off a cliff...
 
Last edited:
I am actually glad the guvmint didn't step in and bail out Lehman or Merrill. Better that the shareholders and/or execs of the companies involved bear responsibility for their actions. Unfortunately, I don't see that lessons will really be learned.

I was, however, disappointed with one pundit that blamed this collapse solely on executive compensation..... while performance-based compensation certainly provided a benefit to folks that led the deals, the demands by investors for greater returns (competitive market) really drove some of the decision-making. Blaming it solely on compensation is misplaced.

Bill:

Post of the week.

To call what is happening now a "crisis" is like acting shocked when a rock, thrown skyward, falls back to earth.
 
I am actually glad the guvmint didn't step in and bail out Lehman or Merrill. Better that the shareholders and/or execs of the companies involved bear responsibility for their actions. Unfortunately, I don't see that lessons will really be learned.

I was, however, disappointed with one pundit that blamed this collapse solely on executive compensation..... while performance-based compensation certainly provided a benefit to folks that led the deals, the demands by investors for greater returns (competitive market) really drove some of the decision-making. Blaming it solely on compensation is misplaced.

My thoughts exactly. Excellent Bill. The media always likes to play up the class warfare angle and demonize the execs.
 
The next banker that loans a potential home-buyer money without 20% down should be publicly executed.

That was the rule for decades, and it served this country well. This crap about "expanding home-ownership eligibility" only works if the buyers are qualified -- and they were not.

Now, we're all going to lose, thanks to millions of dead-beat debtors defaulting on their promises.
 
Jay, that may work in your neck of the woods, but not everywhere. The ability to get an 80% first mortgage, a 10% second mortgage, and put only 10% down is the only way my family would have ever gotten into a house in the DC burbs. Qualifying for the program was tough. But we were able to refinance in a few years and get into a fully conforming single mortgage. And we had/have good credit.

In my opinion, it was the "make a loan to anybody" mentality that caused the problems. People with bad credit got loans on ridiculous terms (throwing the rock into the air) and now those credit scores are proving to be accurate (here it comes back down).

I think back to the saying that when the elevator operators are talking about making a killing, it's time to get out of the stock market. When "mom and pop" are flipping three houses with borrowed capital, the real estate market is in trouble.
 
I'm with Tim. The problem is not a lack of requiring 20% down, it's a lack of common sense.

If I net (after taxes, insurance, and whatever other deductions from my salary) $2000/month and you're giving me a mortgage for $2500/month, you're an idiot, plain and simple.

Depending on where you live, getting that 20% down may be insanely difficult. Places like DC suburbs, New York, and California are different.

However the thing that makes the 80/20 model work is that if you've saved up that 20% down, you're probably a responsible enough person to make good on your mortgage, especially since you've got that 20% invested in it. If you're irresponsible and you did 0% down, what's your incentive to continue paying your mortgage?

There are actually people out there who say "Oh, I just don't pay those bills because I can't afford them." I've met some of them, and I can't understand how anyone gets that attitude. Then again, I was raised to be responsible.
 
If 20% down was required, home prices would reflect the ability of those living in the area to pay said down payment. Otherwise, there is no need to build.

Just a thought from a slightly different perspective.
 
Is the AIG they speak of in the stock markets, the same AIG that insures many of our aircraft?
 
If 20% down was required, home prices would reflect the ability of those living in the area to pay said down payment. Otherwise, there is no need to build.

Just a thought from a slightly different perspective.

HUH? home prices are driven by demand for housing, not by "ability to pay". In most cities, there's no SPACE to build.

Fairfax County was practically giving houses to teachers and cops because it was the only way to get those essential services. Parts of california had the same problem. Today an apartment much smaller than my house rents for more than my mortgage - significantly more.

NYC would be in a similar boat if not for rent control - housing would be too expensive for many of the people the city NEEDS.
 
Housing can't be more expensive than anyone can pay, because then no one would live there. Plain and simple. If essential workers can't afford it, they either live elsewhere or get government subsidized housing, if the government thinks its worth it.
 
Housing can't be more expensive than anyone can pay, because then no one would live there. Plain and simple. If essential workers can't afford it, they either live elsewhere or get government subsidized housing, if the government thinks its worth it.

No argument. In major metro areas that's what happens - the local societies realize that unless there's some affordable housing they'll end up having to pay their janitors $100K per year, so they spend the money. sometimes it's higher wages, sometimes it's mass transit to bring in folks from the burbs, sometimes it's subsidized housing through rent control or mortgage guarantees.

Frankly, the entire Fannie/Freddie mortgage deal is "subsidized housing". People just went overboard "investing" in homeowners who had shown they couldn't handle a credit card or an auto loan. Why would you invest a large sum in people like that? Part of the pressure came from the feeling that profits are evil, and that banks and other lenders shouldn't be allowed to make large profits, and they should be forced into "investing" that capital in society.

Hope this didn't just slip into SZ, but when you have a societal attitude that "success is good, but NOT TOO MUCH!", then weird stuff happens.
 
As many of you probably already realize, I'm purdy stoopid when it comes to world finance stuff (see my oil market posts).
It seems to me that American businesses have ceased serving anyone but Wall street. Do whatever it takes to increase the price of stock, or be punished. Now, tie the lion's share of the executive pay packages to stock options and see just how far they will go to "create shareholder wealth". Increasing the stock price adds directly to their (the management) bottom line. Layoffs? That will increase the stock price. According to the Harvard School of Business model, "if we cut costs enough, we can make a profit without selling anything".
I've been told that I shouldn't complain about oil profits, that I should just "get in there and be an investor and reap the rewards". Those rewards don't put gas in my vehicles to get me to the grocery store.
Everybody can be an investor. I know this. But for somebody stuck directly in the "middle class" I just see my paycheck doing less and less. Having a few shares of Exxon-Mobil will not feed my kids next week.
 
If 20% down was required, home prices would reflect the ability of those living in the area to pay said down payment. Otherwise, there is no need to build.
I've gotta say that I agree with you on that. I think it was partially the very easy-to-get mortgages which drove housing prices to unsustainable levels in some places.
 
What is most distressing for me is, the "crisis" is not one precipitated by sudden catastrophic events or conditions which could not have been easily foreseen; instead, there was a frenzy of poorly-underwritten lending and speculative buying and selling of real estate by financially-unqualified investors.

Ridiculous.
Seems to me there was a change in the laws regarding the use of profits gained on "flipping" a house a few years ago that allowed a person to buy a house, fix it up and sell it, and not have to re-invest the gains in a more expensive house. Can someone clarify this? I do not know the details. Anyway it is my understanding that it was this change that eventually led to hordes of underqualified borrowers getting their hands on lotsa money to flip houses. A lot of those are the loans that started this whole credit mess to start with. 125% loans, no money down and websites where you could create an entire (and ficticious) income history.
 
As many of you probably already realize, I'm purdy stoopid when it comes to world finance stuff (see my oil market posts).
It seems to me that American businesses have ceased serving anyone but Wall street. Do whatever it takes to increase the price of stock, or be punished. Now, tie the lion's share of the executive pay packages to stock options and see just how far they will go to "create shareholder wealth". Increasing the stock price adds directly to their (the management) bottom line. Layoffs? That will increase the stock price. According to the Harvard School of Business model, "if we cut costs enough, we can make a profit without selling anything".
I've been told that I shouldn't complain about oil profits, that I should just "get in there and be an investor and reap the rewards". Those rewards don't put gas in my vehicles to get me to the grocery store.
Everybody can be an investor. I know this. But for somebody stuck directly in the "middle class" I just see my paycheck doing less and less. Having a few shares of Exxon-Mobil will not feed my kids next week.

I agree that business looks a lot like politics to me. Tell the shareholders (voters) what they want to hear so they'll invest (vote for you) today. Don't worry about next year.

Somehow we need to encourage longer views - but I have no idea how to make delayed gratification popular.
 
Housing can't be more expensive than anyone can pay, because then no one would live there. Plain and simple. If essential workers can't afford it, they either live elsewhere or get government subsidized housing, if the government thinks its worth it.

And you stated it much more clearly than I. :yes:
 
I am actually glad the guvmint didn't step in and bail out Lehman or Merrill. Better that the shareholders and/or execs of the companies involved bear responsibility for their actions. Unfortunately, I don't see that lessons will really be learned.

I was, however, disappointed with one pundit that blamed this collapse solely on executive compensation..... while performance-based compensation certainly provided a benefit to folks that led the deals, the demands by investors for greater returns (competitive market) really drove some of the decision-making. Blaming it solely on compensation is misplaced.

Good post Bill: of the folks I've listened to, the one I agree with said that there was plenty of blame to go around: The execs, investor demands and regulators not up-to-speed. On the mortgage side, the borrowers were taking out very aggressive loans because RE could only go up; mortgage brokers papering things were aggressive, lenders dropped standards, etc. It takes discipline to walk away from money being offered; in some cases to those that had never been offered that much and all they had to do was sign.

Does anyone recall what Allan Greenspan said a couple of years ago? He was very concerned about a possible deflation. With all the leverage that's out there, if real asset values decline there is a multiplier effect. Certainly RE values are declining even though we are showing a positive CPI: you have to look at what that measures.

We now have a problem that is feeding on itself: firms are being downgraded because their equity has deteriorated; firms can't raise equity; therefore, they get downgraded again.

Best,

Dave
 
Does anyone recall what Allan Greenspan said a couple of years ago? He was very concerned about a possible deflation. With all the leverage that's out there, if real asset values decline there is a multiplier effect. Certainly RE values are declining even though we are showing a positive CPI: you have to look at what that measures.

Wha? You mean when he said in 2004 ARM's might be a better deal? (Original speech text here).
 
If 20% down was required, home prices would reflect the ability of those living in the area to pay said down payment. Otherwise, there is no need to build.

Just a thought from a slightly different perspective.

Why is the number 20%, and not 10% or 30%?

I would disagree with a flat-out requirement of 20% down. Y'all are overlooking the fact that each homeowner, each borrower is different.

The downpayment requirement is there for one reason, and one reason only: to provide some security in the event that the value of the house drops during the initial part of the loan term _ AND _ the purchaser doesn't have the ability to repay. If the downpayment is zero but the purchaser can repay, then the loan is safe (provided, of course, that the purchaser has the morals to fulfill their obligation). If the downpayment is 30%, and the purchaser can't repay, then you've got an issue.

As Tim points out, many area have constricted housing markets that tend to keep market values high (and less likely to drop). Thus, those markets have a greater security that values won't drop - in the DC area the area inside the Beltway has held up quite well in home values, while those areas far out have dropped like a rock.

A prudent risk analysis would say that 10% (or even 5%) is sufficient inside the Beltway, while 30% in the areas in Prince William and Prince Georges County would not be.

The issue here is "ability to repay". And that needs to be addressed through risk pricing of the loan (IOW, more income, more docs, higher down payment, lower interest rate). Had risk-pricing been taken into account in the current situation, a lot of the subprime folks would not have been able to purchase, but flexible down payments, etc. would still be available for qualified folks.

Let's look at another case: one of our own has asked a question in another thread about qualifying for a mortgage when moving and taking a new job. Would you cut him off because he doesn't have 2 years at the new job for verification of income, plus a 20% down payment (maybe he's got 15% after paying brokerage fees for selling the old home)? Let's say he has a sterling record of payments where he is now, a high credit score, good employment history, etc. If one puts arbitrary criteria into the law, then it cuts a well qualified person (with high moral responsibility for repayment) out of the system. Sorta like having the FAA impose a new regulation (as a matter of mandate) that you can't take off unless the ceilings are MVFR, even if you're on an IFR flight plan. Or having the FAA mandate the Wings program for a BFR.

The problem here, as I see it, is that the concept of risk management and risk pricing went out the window. The folks responsible for assessing risk didn't care because they 1) sold the loans in a package, or 2) because they were "protected" by derivatives. The folks buying the crap didn't know the real risk (or didn't care because of the high return).

Risk management.
 
And when you have high-risk, high return, then you need to realize that it's musical chairs, and somebody (maybe a lot of somebodies) isn't/aren't going to have a place to sit as the game progresses.
 
Seems to me there was a change in the laws regarding the use of profits gained on "flipping" a house a few years ago that allowed a person to buy a house, fix it up and sell it, and not have to re-invest the gains in a more expensive house. Can someone clarify this? I do not know the details. Anyway it is my understanding that it was this change that eventually led to hordes of underqualified borrowers getting their hands on lotsa money to flip houses. A lot of those are the loans that started this whole credit mess to start with. 125% loans, no money down and websites where you could create an entire (and ficticious) income history.

The change in the laws was a tax change related to your principal residence. In the old days, you paid cap gains tax on any profits of the principal residence that were not reinvested, the rest was deferred (save for a one-time exclusion). There are certain criteria that must be met to qualify.

For "flippers", there is a long-standing exclusion: the "1031" exchange process. Basically, this provision lets you roll over any gains on the sale of a property into a "like-kind" property without paying tax (e.g. single family -> single family). If you don't do the exchange (or don't do it properly), you are taxed on the profit from the sale - either cap gains if your hold period was long enough, or ordinary income if your hold period made it a short-term gain. That provision has not changed to the best of my knowledge.
 
For "flippers", there is a long-standing exclusion: the "1031" exchange process. Basically, this provision lets you roll over any gains on the sale of a property into a "like-kind" property without paying tax (e.g. single family -> single family). If you don't do the exchange (or don't do it properly), you are taxed on the profit from the sale - either cap gains if your hold period was long enough, or ordinary income if your hold period made it a short-term gain. That provision has not changed to the best of my knowledge.

Thanks, Bill.
So my take on it is that the lenient lending practices was what was driving the growth in the "flip this house" market. Is this correct?
The house across the street from flipped twice in 4 years, the first time to finance the flipping of another house. That person got his realtors license for the purpose of flipping up to bigger and bigger houses without paying the entire commission on each sale. He worked for a cell phone provider as a tech by day and last time I saw him was is a 4500 square foot $350,000 house, which I know he had no means of paying the mortgage on. Oh, and he also bought his stay at home wife a new Mercedes SUV so she could take their 3 very young kids with her when she went for her weekly manicure/pedicure. Scary, huh.
 
Thanks, Bill.
So my take on it is that the lenient lending practices was what was driving the growth in the "flip this house" market. Is this correct?
The house across the street from flipped twice in 4 years, the first time to finance the flipping of another house. That person got his realtors license for the purpose of flipping up to bigger and bigger houses without paying the entire commission on each sale. He worked for a cell phone provider as a tech by day and last time I saw him was is a 4500 square foot $350,000 house, which I know he had no means of paying the mortgage on. Oh, and he also bought his stay at home wife a new Mercedes SUV so she could take their 3 very young kids with her when she went for her weekly manicure/pedicure. Scary, huh.

Lenient lending practices and a dose of "pot 'o gold" added to it.

His program worked great as the market was headed up. When the market headed down, it was a game of musical chairs. ("who is left holding the bag?")

Folks that take the risk have to understand that there are consequences to the downside.
 
I'm with Tim. The problem is not a lack of requiring 20% down, it's a lack of common sense.

If I net (after taxes, insurance, and whatever other deductions from my salary) $2000/month and you're giving me a mortgage for $2500/month, you're an idiot, plain and simple.

Depending on where you live, getting that 20% down may be insanely difficult. Places like DC suburbs, New York, and California are different.

However the thing that makes the 80/20 model work is that if you've saved up that 20% down, you're probably a responsible enough person to make good on your mortgage, especially since you've got that 20% invested in it. If you're irresponsible and you did 0% down, what's your incentive to continue paying your mortgage?

There are actually people out there who say "Oh, I just don't pay those bills because I can't afford them." I've met some of them, and I can't understand how anyone gets that attitude. Then again, I was raised to be responsible.
Alan Greenspan was on This Week. The key factor behind this madness is the "fact" that no matter what, the property would be worth more next year, is what broke. Even if somebody along the line had the rebellious idea that there is no way dese goofs can pay, they had no qualms because even on foreclosure they would be whole. Not no more.

I think you're on to something though, those fine, fine kids who see no reason not to walk away from their underwater mortgages and give the keys to the bank (and I hear, amazingly, get ANOTHER mortgage elsewhere, :hairraise: ) wouldn't do it if they had any skin in the game, as with a down payment they had to scrape for.
 
Seems to me there was a change in the laws regarding the use of profits gained on "flipping" a house a few years ago that allowed a person to buy a house, fix it up and sell it, and not have to re-invest the gains in a more expensive house. Can someone clarify this? I do not know the details. Anyway it is my understanding that it was this change that eventually led to hordes of underqualified borrowers getting their hands on lotsa money to flip houses. A lot of those are the loans that started this whole credit mess to start with. 125% loans, no money down and websites where you could create an entire (and ficticious) income history.

Nope.

The law was changed such that you do not have to pay capital gains on sale of a principal residence, but the timing requirements on that preclude its use for "flipping"; you have to have actually lived in the house for two years.
 
The change in the laws was a tax change related to your principal residence. ....
Yeahbut, you're skipping by the fraud. All of these flip wizards got mortgages for the primary residence and said it was OWNER OCCUPIED, when they had no intention whatsoever of occupying the property.
 
Nope.

The law was changed such that you do not have to pay capital gains on sale of a principal residence, but the timing requirements on that preclude its use for "flipping"; you have to have actually lived in the house for two years.

Thanks, it was the two year requirement that I had forgotten. That seems like a pretty good idea to me.
I'm not one for regulating business, but it seems to me we've forgotten what caused the guvmint to regulate these clowns in the first place. Obviously we are dealing with a new set of clowns who have decided to take us down a newer , more inventive way to ruin. People (lenders, bankers whatever) lobby to remove restrictions, then abuse the new freedoms. Now we will all pay. The guvmint will step in and impose restrictions and be the bad guy. If business would just be a bit more responsible there would not be need for regulation nor these financial dilemmas.
 
Yeahbut, you're skipping by the fraud. All of these flip wizards got mortgages for the primary residence and said it was OWNER OCCUPIED, when they had no intention whatsoever of occupying the property.

2 year holding is not a "flip"....
 
Ya know, folks with capital are now investing - I expect the average idiot will call them "robber barons" when they get rich in a few years as the economy recovers.
 
Here's some AIG analysis from one of my favorite bloggers, Ken.


What I'm wondering about is all those credit default swaps out there. Everyone making side bets on who defaults -- what happens when everything correlates and they all do?! :eek:
They are the "Tyco" of finance. Such can go only so far before one branch brings down another.
 
Ya know, folks with capital are now investing - I expect the average idiot will call them "robber barons" when they get rich in a few years as the economy recovers.

:eek:) Luck and timing can certainly be "timely." The house I sold on 05/08 had been on the market since last October. I just received the latest property tax bill -- not my responsibility so I'll have to take it to the new owners -- which went up about $300.00. The house I bought in 06/07, 14 years newer than the other house -- and no mortgage -- also had a tax increase: $80.00.

And considering the just-concluded wild WS weekend, last Tuesday's timing for having moved a bunch into Fund$ which return 10% per annum(paid 1/4-ly) was better than stocks which likely tanked today.

HR
(Photo from 07/04/07 parade and I do not accept responsibility for the spelling errors in the sign)
 

Attachments

  • DSC00790.JPG
    DSC00790.JPG
    3.9 MB · Views: 32
Back
Top