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The $200 billion bail-out for predator banks and Spitzer charges are intimately linked

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Dari

Lifer
Oct 25, 2002
17,136
37
91
Originally posted by: Vic
Originally posted by: Dari
Originally posted by: Vic
Originally posted by: LegendKiller
1. As people moved down-credit, they began selling mortgage products not offered to lower-income down-credit people before. All of the "infamous" products you hear about now had perfectly legitimate uses. No/Low doc loans were for self-employed people who don't have W-2s, but have good credit and income. Option Arms are for people who have low monthly income, but high bonus income. ARMs were for people who were match-funding their houses, they were short-term owners and short-term fixed rate borrowers.

All of these uses had long-term historical information that worked well. However, as the products concentrated in FL, NV, and CA, and went down-credit, then the validity of historical information went out the door.
Finally! someone else sees this. Thank you.

"Predatory lending" is not a product. It's selling someone the wrong product. All of these loans had legitimate purposes for the right buyer, most of them had been around of decades, it's just that they were never intended to be used the ways that they were.
Who, in theory, would want a mortgage that increased after a couple of years? Perhaps there is a market for something like that but I think only the gullible would take it.
You seem to have a habit of having something explained to you clearly, and then rejecting that reality on the basis of nothing but personal prejudice. It's annoying and makes you look stupid.
I'm totally a no-fee fixed rate and term kind of guy myself, but even I can understand why some people -- completely intelligent people who know exactly what they're getting into -- might want something a little "outside the box," either due to financial need, benefit, and/or desire to take a risk.
Anybody not gullible enough to purchase these types of mortgages are instead labelled as "investors." NINJAs, flippers, or realty speculators are playing a game that can just as easily blow up in their face and they're left holding millions of dollar in property that they can not even pay the interest on. Some people will call that gambling or risk-taking, but, tell me, who on earth goes to Las Vegas to become rich? The truth is many go there for fun, not to beat the house, which is very difficult to do. So, in the end, these "investors" are no smarter than the gullible I mentioned. When banks were selling these mortgages at super-attractive rates, they knew damn well what they were doing and made quite a lot in the process. The buyers, on the other hand, did not. When the latters' market seizes up, the former is left holding the debt and both parties are fucked. In the end, this is a game you can only play when the market is one-directional. If you think this game can be played when the market is going down, you'd be doing everybody a favor by telling how.

You can take your smart-ass remarks and shove it where the sun don't shine.
 

Jhhnn

No Lifer
Nov 11, 1999
61,732
13,842
136
Some regulators did see it, tvarad. But they were pretty much rendered powerless by the fact that CDO's and other such bundled products are OTC securities, essentially unregulated, and by the laissez-faire attitude from the Admin, Congress, and the head of the Federal Reserve.

Everybody involved made handsome short term profits, some very handsome, even as they detached from the underlying economic reality, the ability of homebuyers to actually meet their obligations. That underlying economic reality is why none of this will get real hunky-dory anytime RSN, even with massive liquidity injections. Many recent homebuyers in the most bubbly market areas are too far underwater for anything to save them, other than the Rapture...
 

NoStateofMind

Diamond Member
Oct 14, 2005
9,716
6
76
Originally posted by: LegendKiller
Originally posted by: tvarad
LegendKiller,

Your views are insightful. However, what I fail to understand is why CDO's weren't seen by regulators for what they were and not allowed to be built up to such an extent as to threaten the entire financial system. I mean, surely there is a certain amount of expertise in the regulatory system that is far above that of the common man that should have seen it coming and headed it off at the pass? Who allowed such loans to be disbursed to unqualified people in the first place? Am I missing something here?


Why did they allow this? Because PC Surgeon's beloved "free market". You see, FASB is not a government entity per se. It's just a professional body which sets accounting policies which are blessed by government regulators. Thus, the banks could still hide this shit because FASB hasn't revised accounting rules. On top of that, the mortgage industry isn't regulated enough on the back-end. Vic will tell you that on the front-end they are, but not beyond that.

New rules require people be qualified for the maximum payment possible under a loan, which is good, but it's shutting the barn doors after all of the cows have gotten out. FAS140, the FASB rule that governs off-balance sheet treatment has been under revision work for 4-5 years, but still hasn't been revised.

You see, FAS140 was a knee-jerk response to Enron, which now, I am sure, will be knee-jerk revised in response to this the other way.

Ahhh, gotta love the "free market" gyrations. Had the government stepped in we could have avoided half this crap, yet the "free market" was allowed to reign. Now, people like PC Surgeon bemoan the whole problem.

It's sort of ironic.
:disgust:

Sorry that I don't agree with your socialist field of view, but this country is based on a free market whether you like it or not. You're problem is not with me or my beliefs but with the way the market is designed, you want a socialist economy as to make everything "safe" or "stable". You have too much faith in government when it comes to the economy. Why not just get rid of all banks and loans companies and just label the all U.S. Government Bank of America? Socialist America will reward the slacker and punish the producer for the "greater good" of society. A free market can work as long as those making the loans use sensible practices. But no, you would rather blame the people rather than corporations/banks/government interference.

If you give your child whatever they want without chastising or making them earn it, do you think they will later on know what responsibility is? Its the same with banks now, instead of making them learn the lesson, you (along with government) want to step in and make it ok. They have learned one valuable lesson though, when times get rough, LegendKiller/government will be there so why worry?

What is also sad LegendKiller, is that you haven't mentioned anything about those who are upside down on their homes or are defaulting on loans, they are no more or less guilty than the banks themselves. The banks get a bailout, so why not the American citizen?
 

nergee

Senior member
Jan 25, 2000
843
0
0
"The banks get a bailout, so why not the American citizen? ".....

Because when the poor schmuck and his family gets thrown out of their house, it's their fault, they
should have made better decisions. But when the man comes calling on the fat pigs on Wallstreet
to pay the piper, they whine that they can't because it's the markets fault......

Bear is history......who's next? Wait a minute, lets thinks about it...anyone for a bank holiday??
 

LegendKiller

Lifer
Mar 5, 2001
18,261
68
86
Originally posted by: PC Surgeon
Originally posted by: LegendKiller
Originally posted by: tvarad
LegendKiller,

Your views are insightful. However, what I fail to understand is why CDO's weren't seen by regulators for what they were and not allowed to be built up to such an extent as to threaten the entire financial system. I mean, surely there is a certain amount of expertise in the regulatory system that is far above that of the common man that should have seen it coming and headed it off at the pass? Who allowed such loans to be disbursed to unqualified people in the first place? Am I missing something here?


Why did they allow this? Because PC Surgeon's beloved "free market". You see, FASB is not a government entity per se. It's just a professional body which sets accounting policies which are blessed by government regulators. Thus, the banks could still hide this shit because FASB hasn't revised accounting rules. On top of that, the mortgage industry isn't regulated enough on the back-end. Vic will tell you that on the front-end they are, but not beyond that.

New rules require people be qualified for the maximum payment possible under a loan, which is good, but it's shutting the barn doors after all of the cows have gotten out. FAS140, the FASB rule that governs off-balance sheet treatment has been under revision work for 4-5 years, but still hasn't been revised.

You see, FAS140 was a knee-jerk response to Enron, which now, I am sure, will be knee-jerk revised in response to this the other way.

Ahhh, gotta love the "free market" gyrations. Had the government stepped in we could have avoided half this crap, yet the "free market" was allowed to reign. Now, people like PC Surgeon bemoan the whole problem.

It's sort of ironic.
:disgust:

Sorry that I don't agree with your socialist field of view, but this country is based on a free market whether you like it or not. You're problem is not with me or my beliefs but with the way the market is designed, you want a socialist economy as to make everything "safe" or "stable". You have too much faith in government when it comes to the economy. Why not just get rid of all banks and loans companies and just label the all U.S. Government Bank of America? Socialist America will reward the slacker and punish the producer for the "greater good" of society. A free market can work as long as those making the loans use sensible practices. But no, you would rather blame the people rather than corporations/banks/government interference.

If you give your child whatever they want without chastising or making them earn it, do you think they will later on know what responsibility is? Its the same with banks now, instead of making them learn the lesson, you (along with government) want to step in and make it ok. They have learned one valuable lesson though, when times get rough, LegendKiller/government will be there so why worry?

What is also sad LegendKiller, is that you haven't mentioned anything about those who are upside down on their homes or are defaulting on loans, they are no more or less guilty than the banks themselves. The banks get a bailout, so why not the American citizen?
Yeah, I'm all for "socialist" policies. If you bothered getting out of your tunnel vision hyperbole filled world you'd realize that what I propose is far from socialist.

"free market" is a libertopian dream that lives in a vacuum, disregarding behavioral psychology.

When a homeowner provides billions in liquidity and market forces, let me know. I never said bail these guys out, I have only proposed not letting the system fail precipitously and let it unwind. Obviously the "bailout" won't save Bear and it probably won't save others. But it *will* let the markets unwind this mess in an organized manner.
 

Jhhnn

No Lifer
Nov 11, 1999
61,732
13,842
136
Heh. The notion that we have a "free market" in this country is laughable. I'ts been regulated and managed to some extent or another for at least 100 years, beginning in the TR era.

As the political winds shift back and forth, the extent and effectiveness of such management shifts back and forth, and various interests come up with new and different ways or extensions/combinations of existing ways to get around regulations, go for that magical fast buck. Pretty quick, "everybody" is doing it, just to be able to compete...

Lemme see... "Free Marketeers" in the Whitehouse, running Congress, and at the helm of the Federal Reserve- marching in formation with investment banks and the rest of Wall St... And, of course, it was very important to cut taxes for the speculative class, too, encouraging, uhh, "Growth", yeh, that's it, the great shibboleth of American politics...

What everybody wants to forget is that some forms of "Growth" aren't sustainable, some are even malignant...
 

Vic

Elite Member
Jun 12, 2001
47,989
8,354
126
This whole discussion is pointless tinfoil bullshit anyway. Spitzer got hoisted by his own petard, not the banking crisis. Moral of the story: don't pen the most draconian anti-prostitution legislation in US history, and then go out and caught with high-priced hookers.
 

BansheeX

Senior member
Sep 10, 2007
348
0
0
Originally posted by: LegendKiller
Yeah, I'm all for "socialist" policies. If you bothered getting out of your tunnel vision hyperbole filled world you'd realize that what I propose is far from socialist.

"free market" is a libertopian dream that lives in a vacuum, disregarding behavioral psychology.
Basically, your arguments always boil down to this, Legend: people are inherently fallible and greedy and therefore we need other inherently fallible and greedy men regulating them.

Sounds like you're the one who disregards behavioral psychology since you wrongly assume that government is an institution in which you put power into the hands of unselfish and infallible men. But we know that's absurd. Politicians and bankers are just like everyone else, pursuant to their own interests. The government has no business in the market. Its purpose, and the arguments for which government truly does offer more help than hurt, are outlined in the constitution.

Originally posted by: LegendKillerWhen a homeowner provides billions in liquidity and market forces, let me know. I never said bail these guys out, I have only proposed not letting the system fail precipitously and let it unwind. Obviously the "bailout" won't save Bear and it probably won't save others. But it *will* let the markets unwind this mess in an organized manner.
I would recommend reading about moral hazard.

http://en.wikipedia.org/wiki/Moral_hazard

I think the funniest part of this post is when you say you don't want to bail people out, and then go on to say that we must bail them out to avoid the hardest fall. Besides doing something you admit you don't want, you justify it by assuming that, long-term, letting the banks fail will for certain be the harder fall. But there's no way you can be certain of that. In fact, I think hyperinflation is a real threat from taking your proposed path.

And morally speaking, any form of bailout is going to hurt legitimate savers unassociated with the goings on of this mess through inflation and debasement of their purchasing power. That is morally repugnant. Period. You cannot steal from one group of people to help someone else. You cannot perpetually make these kinds of self-fulfilling arguments that never end. To you, there is always some economic screw-up divorced from previous actions to which the Fed must attend. Next it will be the inflation caused by all these bailouts, which were themselves a result of artificially low interest rates and bubbles created by the fed under the same line of reasoning.

 

shira

Diamond Member
Jan 12, 2005
9,574
5
81
Originally posted by: LegendKiller
Originally posted by: Dari
OK. Tell us, honestly, what your thoughts were when banks were hawking these securities? Did you think it was a good idea? I remember I was taking this statistics class called Survival Analysis and the professor was railing at how these products were being put together. Mathematicians and economists thought it worked well in theory, but this was the first time it had been put into practice with mortgages. Do you think it failed its first big test?

The major problem didn't occur until historical information wasn't used.


1. As people moved down-credit, they began selling mortgage products not offered to lower-income down-credit people before. All of the "infamous" products you hear about now had perfectly legitimate uses. No/Low doc loans were for self-employed people who don't have W-2s, but have good credit and income. Option Arms are for people who have low monthly income, but high bonus income. ARMs were for people who were match-funding their houses, they were short-term owners and short-term fixed rate borrowers.

All of these uses had long-term historical information that worked well. However, as the products concentrated in FL, NV, and CA, and went down-credit, then the validity of historical information went out the door.

2. As these mortgages were packaged into securitizations, the mezzanine and equity tranches were stuck. What to do? Great, let's pool them and slap them into securitizations (CDOs). For the previous 30 years, almost all of these positions had to be "held" and they are still held by the vast majority of issuers in other asset classes (credit cards, the remainder of consumer credit, corporate credit...etc).

However, mortgages just had so much of this shit, they needed to put it somewhere, so why not double down on portfolio theory. Use the same shit estimates on losses, but then concentrate those losses.

Little did the idiots think that once you reach 100% correlation, you're screwed, especially if your asset values are eroding.

Loss multiples of 5x matter little when the 5x is easy to get to.

This is akin to "high end" auto loans. The structures depend on ow enhancement. That means that if I take losses, there isn't much protecting me. If historical defaults are .32%, I say that acceptable protection is 5x that, or 1.6%. However, it's pretty fricking easy to get to 1.6% losses if things change even slightly.

People in CDO's slapped on 5x losses on things that could have skyrocketing losses, very easily. They used shit data *and* shit estimates on where losses would go.

As far as whether this invalidates the model, absolutely not. Securitization, outside of the mortgage crisis, has issued tens of trillions in securities and not the vast majority perform exactly as expected through several recessions. It's up to credit people and sales people to judge where things are going and react accordingly. As my boss says, "We're all credit people" even though I work in origination.
For those of us not in the business, it might be helpful if instead of using lingo, you'd define your terms as you use them. This assumes, of course, you have any interest in making you post relevant to more than two other people.

Define "match-funding".

Define "mezzanine tranches" and "equity tranches".

Explain how a tranch, which is already a tier of a securitization, can be securitized.

Define "doubling-down on portfolio theory".

What "same shit estimates" are you referring to, considering that nowhere previous in your post do you refer to "estimates" of any kind?

Define "concentrate those losses."

Define "reach 100% correlation."






 

wetech

Senior member
Jul 16, 2002
871
6
81
Originally posted by: shira
For those of us not in the business, it might be helpful if instead of using lingo, you'd define your terms as you use them. This assumes, of course, you have any interest in making you post relevant to more than two other people.

Define "match-funding".
Borrowing money for the amount of time that you plan to own the asset. i.e. You buy a house, planning to move in 5 years, so you get a 5 year ARM in order to take advantage of lower rates versus a 30 year fixed mortgage.

Define "mezzanine tranches" and "equity tranches".
When these credit deals are set up, there are different levels of seniority / risk:
1) Super Senior / Senior
2) Mezzainine
3) Equity

The higher up you are on the ladder, the lower the spread you make (you get less interest during the life of the deal). However, you're also in front of the lower levels with regards to payments (less risk). So if the deal goes bad, and there are defaults, you get your money first.
For example, let's say a deal has a size of $100 as follows:

$20 Senior
$20 Mezzanine
$60 Equity

If the deal goes south, the senior guys get paid first. The Mezzanine investors don't get money until the Senior guys get there $20 back, and the Equity investors don't get money until the Mezzainine guys get paid there $20. This is a very simplistic description of how the the money gets distributed (called a waterfall), but it get's the basic idea across.



Explain how a tranch, which is already a tier of a securitization, can be securitized.

Define "doubling-down on portfolio theory".

What "same shit estimates" are you referring to, considering that nowhere previous in your post do you refer to "estimates" of any kind?

Define "concentrate those losses."

This relates to the Tranches described above. As you can see in my example above, even though the 3 investors (Senior, mezzanine, and equity) are all invested in the same portfolio, the equity investor get's stuck with most of the losses if they occur. This is the concentration.


Define "reach 100% correlation."
 

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