Investor Sentiment

[Duckwheat]

I need to go take my temperature. I am in agreement with Ex-Californian.

People were buying stuff they had no business buying. When the interest only loan came out in Idaho. Oh boy it was not long before that monster came home to roost.

DW

[GMac]

Not world wide as such. We run quite a different banking system down here, both NZ and Aussie. The banks make the call who gets what and most money is raised locally so we aren't as exposed like the US for example. The banks were fussy who they gave it to by preferring to give it to someone who could actually pay it back.

A few finance companies have gone down as they did go a bit silly and borrowed lots offshore. Now that's dried up and the local ma and pa investors are running scared they don't have the inflows to cover the outflows.

The problem we'll have is the US and EU economies tanking and dragging us down into the worldwide mire created by it. Wall Street farts and somehow our arse gets sore.

This whole thing was so obvious to see coming and it looks as if many of the people running the lemons knew also judging by the 'interesting' money goings on over the last year or so.

[Ex-Calif]

Originally Posted by GMac

The banks were fussy who they gave it to by preferring to give it to someone who could actually pay it back.

That's a novel freakin' concept. Why on earth would they do something like that?

[anotherT34C]

Originally Posted by starfish62

Rand has been "discredited" for decades.

Hmmm. Tell that to Alan Greenspan, and any remaining 'trickle-downers'.

[sneuman]

Originally Posted by svcattales

Don't forget the contribution of Washington in this debacle. They made laws to reduce income levels and documentation for home loans. Fannie Mae & Freddi Mac were the "money launderers" who financed this "house of cards" and "fenced" the bogus securities to Wall Street. Lots of blame to go around.

Wall Street not only knew about these bogus securities, they demanded them by paying top dollar. Being able to package them in collateralized debt obligations and sell them to (mainly) China was worth more to them than the mortgages themselves. They knew they were toxic but figured they'd pass the hot potato down the line and have a seat when the music stopped (mixed metaphor for emphasis).

It's really one big circle. The mortgage lenders were eager to sell more packaged mortgages so they preyed on the American dream of home ownership by convincing people they could afford houses they couldn't. Wall Street was just the top of the delusional food chain.

Of course, with recession will come massive credit card default. That's the next shoe to fall. Hold on to your seat (and your wallet)!

[Palarran]

What I would like to know is what is going to happen to the big-boat market with all this. I'd like to take advantage of this if boat prices plunge like real estate has. I've been reading different threads here and elsewhere but can't seem to figure out how to proceed. Do you start making super lowball offers and see what takes? Who sells reposessed boats? How do you know their held by a bank? As some have pointed out, this thing could go way lower so being ready to buy seems to make sense.

[SeaKing]

Originally Posted by Ex-Calif

Well I hope this thread doesn't go south with this comment but I for one disagree that "predatory lending" and "evil home builders" are the entire culprits in the sub-prime problem.

Mr. & Mrs. consumer were buying houses with basically zero equity, ridiculous finance terms - 1 year arms, 30 year interest only loans etc. - You can say these people were victimized but people buying 300-600k homes are not idiots. They were just greedy, trying to live in something they could not afford.

Don't buy what you can't afford. And if the deal looks too good to be true it is.

I agree 100%. A guest at my home last night was trying to pin this on the republican party specifically G.Bush. I had to call him on that and told him it was not either parties problem. It has been just what you said and the fact the some people don't realize you have to be able to afford what you buy whether or not you pay cash or purchase it on credit. The mentality of "what's the Payment, I can afford that" or my credit card minimum payment is low I can charge more!, not really looking at the balance owed.

[GordMay]

A history of banking deregulation measures, beginning with the 1999 Gramm-Leach-Bliley Act* and culminating in a 2004 "voluntary oversight" provision, were at the heart of the current U.S. economic crisis.

* Phil Gramm, McCain's top economic adviser, sponsored the bill that made the Glass-Stiegel act much less than it was, by making it possible for large brokerage firms to act like banks, and allowed the stockbrokers, insurance companies and banks to merge, all without the Glass-Stiegel regulations.

[David M]

I have to respectfully disagree. This crisis started as early as the seventies when congress changed the lending laws which forced lending institutions to lower their standards for who qualifies for a mortgage loan. This was caused by NEW regulations put on lending institutions and not by deregulation. This social experiment had good intentions by getting people of lower incomes into homes. The downside we see now. Don't blame the Republicans....this was started by the Democrats. Although now, there is plenty of blame to go around.

[GordMay]

Originally Posted by David M

I... This crisis started as early as the seventies when congress changed the lending laws which forced lending institutions to lower their standards for who qualifies for a mortgage loan. This was caused by NEW regulations put on lending institutions and not by deregulation...

More information on how Congress forced lending institutions to lower their standards, please.

Oh, I see that the conservative apologists are blaming the CRA for the current problems.

The Community Reinvestment Act (CRA) was a law that compelled certain financial institutions to ensure that every creditworthy American has an equal opportunity to secure a mortgage.

It seems absurd to blame CRA for the mortgage meltdown, when CRA doesn't even apply to most of the loans that are behind it.
In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, that activity largelyended by 2001.
In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified; at the very time when activity under CRA had slowed, and the law had weakened.

[David M]

Gord,
Its called the Community Reinvestment Act which was voted on by a Democratic congress and signed into law by Jimmy Carter in 1977.

Community Reinvestment Act - Wikipedia, the free encyclopedia

It gave incentives to help low income borrowers get mortgage loans.

From WIkipedia:
Relation to 2008 financial crisis

See also: Subprime mortgage crisis In an article for the New York Post, economist Stan Liebowitz wrote that the CRA encouraged a loosening of lending standards throughout the banking industry despite warnings of default. Banks were allowed to loan to consumers who were not credit worthy with "no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment." According to Liebowitz, the chief executive of Countrywide Financial said that in order to approve minority applications, "lenders have had to stretch the rules a bit."[42]

In a piece for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, partially attributed the current economic downturn to the Community Reinvestment Act, charging it with "forcing banks to lend to people who normally would be rejected as bad credit risks."[48]

A Wall Street Journal editorial on the 2008 financial crisis argued that "Washington is as deeply implicated in this meltdown as anyone on Wall Street" because politicians "promoted housing and easy credit". The editorial lists the CRA as one of the "subsidies and policies," and stated that it "compels banks to make loans to poor borrowers who often cannot repay them".[49]

In an article for the Wall Street Journal, Austrian school economist Russell Roberts wrote that politicians and policy makers created artificially high housing prices and artificially reduced the danger of extremely risky assets through requirements Fannie Mae buy ever increasing numbers of “special affordable” and often subprime loans, through strengthening CRA regulations and increasing bank loans to low- and moderate-income families, through creating a capital-gains exclusion for housing up to $500,000, and though the Federal Reserves’ unusually low interest policies.[50]


You may want see this video. Although it does have a political slant, it explains things quite well. As far as I am concerned, neither political party escapes some responsibility.

http://www.youtube.com/v/1RZVw3no2A4&hl=en&fs=1

[skatastrophy]

Originally Posted by GordMay

More information on how Congress forced lending institutions to lower their standards, please.

Oh, I see that the conservative apologists are blaming the CRA for the current problems.

To respond, here's an article that explains the root of the problem: the Clinton Administration

Fannie Mae Eases Credit To Aid Mortgage Lending - New York Times

The action... will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.


Fannie Mae... has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

[Therapy]

Originally Posted by sneuman

Of course, with recession will come massive credit card default. That's the next shoe to fall. Hold on to your seat (and your wallet)!

Pretty sure you are right about that.

Maybe I could own a LCD TV someday soon. Garage sale item?

[Ex-Calif]

Even with laws that require lenders to make loans to "creditworthy" buyers. The buyer doesn't have to walk in to a bank and borrow money that they cannot afford to repay.

Knock-knock - "Open up it's the credit police. You haven't borrowed enough. Sign here..."

<sigh>

[TaoJones]

It's easy to conclude that sub-prime mortgages are the reason that the US, and now the global, banking systems are coming unglued. However, it is incorrect.

Most of us on this forum, probably, have had one or more mortgages at one time or another, so we've acquired a familiarity with just what's involved. We've also heard "sub-prime" over and over again, to the point that we've come to believe it is the problem. In truth, it is only the most visible symptom of a much, much larger problem - derivatives.

Even with all the predatory lending abuses, the "liar's loans" and the insane speculation in the real estate market, had the problem been confined to the American real estate market and the inevitable crash occurred just the way it did, it could never have resulted in the worldwide collapse of the credit markets. Yet that's where we are now, so how did we get here?

Fannie and Freddie weren't the cause of the collapse, either, but they did create the template that the math-modeling genii in the back rooms of the investment banks used to cobble together the collateralized debt obligations that moved the problem up several levels. Even then, had investments in CDOs not been leveraged, the problem could have been contained, though not without significant pain.

But once the Securities and Exchange Commission, in 2004, gave the greenlight to the five major American investment banks to increase their allowable leverage to 30:1 and then 40:1 from 12:1, the problem was magnified by orders of magnitude.

Further compounding the problem was the fact that there was never a market for the structured investment vehicles that the quants had created and the sales force was easily able to peddle on the basis of the attractive yields. Much like the simple-minded house-buyer who only wants to know what the monthly payment will be, the "investors" in SIVs only wanted to know what the yield would be and naively (as it turned out) believed the AAA credit ratings attached to the products.

As long as the vast majority of borrowers made their payments, a reliable stream of interest income was generated, the buyers of the vehicles were content, the sales force kept placing the product with entities throughout the western world and collecting their staggering bonuses each December, and all was right with the world. Even today, well more than 90% of all home-buyers are current with their mortgage payments, but because of the compounding effects of the highly-leveraged investments, only a small percentage of defaulting mortgagees was necessary to knock over the first domino.

That first domino was the revelation in May, 2007 that two Bear Stearns hedge funds were in trouble. One collapsed entirely, the other suffered staggering losses. In itself, that should have only meant "tough ****" for Bear Stearns and the firm's investors, but it meant far more than that.

Since their inception, SIVs were "mark-to-model" investments, meaning that they were deemed to be worth what their creators, and then the entities that bought the "investments," said they were worth. Why? Because, in the absence of a transparent market to provide legitimate price-discovery, there was simply no way to place a meaningful valuation on them.

When the Bear Stearns funds collapsed, and BS tried to sell the SIVs the funds held to cut their losses, it would have placed a market-price on the damn things for the first time. All of the other entities holding SIVs were apoplectic at the ramifications of that. It would have meant that they could no longer place a "value" on their own SIVs, and if they had to be marked-to-market at the fire sale prices BS would get, then all the other entities would have to drastically cut the valuations of the SIVs in their own portfolios. The net loss, and subsequent necessity to raise funds to meet capital requirements, would be devastating - perhaps fatal.

Thus, the flaw in the otherwise brilliant creations the quants had concocted was finally evident - no one had thought it would ever be necessary for there to be a two-way market in SIVs. You bought them, you held them for their lifetimes and you collected a tidy yield. While you held them, you were able to place a value on them and that value was reflected on your books.

Not surprisingly, entities increased the assumed valuation over time. These "valuable" pieces of paper were then used as collateral to borrow more money to buy more SIVs, ad infinitum. Once such a scheme begins to unravel, however, it quickly gains momentum, and although efforts to control the damage have grown at an equally dizzying pace, they have thus far proven inadequate to turn the tide.

That is why $700 billion "rescues" are brushed aside by the markets - it's too little, too late.

Someone, earlier in this thread, suggested that the Chinese were the primary purchasers of SIVs - that is incorrect. Most structured investment vehicles were purchased by western financial entities. The huge trade surplus that the Chinese have accumulated is held almost exclusively in the sovereign debt of their trading partners.

In other words, they have traded the foreign currency that was used to buy Chinese renminbi with which to purchase Chinese-manufactured export items, for short-, medium- and long-dated Treasuries of the countries buying their products.

Whether or not these foreign debt instruments will maintain their value over time (particularly, American Treasuries) is debatable.

TaoJones