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Friday, March 20, 2009

The fuse is burning

With the economy sliding and more people suffering, here's a sign of what may be coming next.

Comments (35)

I assume that Mr. Madoff is sleeping with one eye open these days.

Many in our congress and the current administration are responsible too for allowing the AIG payments to be honored.
Interestingly, they are free from much criticism, and seem to be sleeping just fine. When it comes to blame shifting Wall Street cannot compete with the experts in Washington.

Gibby, I agree with you fully. Now Im hearing that the bonuses amount to $218 Million.. and we're stil hearing the ruse that these guys must get these bonuses because theyre the only ones who know how to back us out of these deals... it used to be in corporate America, that nobody was so importatnt that they couldnt be replaced and the company would still continue on... now we're being told that doesnt apply anymore, so we must reward the very people who created this mess and let them hold us hostage to their demands or else? It's blackmail.. and was endorsed by members of our congress and this administration...The 100's of billions that we are provided as bail out bothers me too, but I understand that if its not provided, many city, state, school and police and fire pension funds will become insolvent, but I don't see why we must reward the people who sold this garbage fully well knowing what it was to begin with..

The Army can take care of these security concerns.

It should be borne in mind that if these individuals will be hard to replace if they leave, precisely because of the AIG hysteria and the increased risk to investors posed by that hysteria.

Furthermore, the people receiving the bonuses are not "the very people who created the mess," despite their belonging to the financial products division. Credit default swaps is not the division's entire business.

This whole thing is a ridiculous sideshow. People are up in arms about a couple of hundred million when the AIG bailout alone cost nearly 1,000 times that! Thus, while the particular offensiveness of bailing out prosperous execs makes this situation unique (however badly misunderstood), it also depends on grotesque mathematical illiteracy, or "inumeracy," as it has been called.

Gibby makes a good point about the astute diversion of anger by government officials with a lot to answer for.

Idler, then who created the mess in your opinion? You forgot that part... PS - I realize that many players got us to this point, but creating and selling products with dubious at best value and failing to set aside the funds to back up the bets they would fail, is the heart of the situation with AIG...

Robert, my point is that the AIG execs associated with the credit default swaps (CDS) that brought down the company had already departed.

Mind you, while I think the failed catastrophically from a risk management perspective, the fault is by no means entirely theirs either. The ratings agencies themselves led investors to believe that many mortgage-related securities were sound, giving them "A" ratings. Across the board in the financial services industry there was blindness as to the real nature of mortgage-related risk. Many institutional investors went for these instruments. Why don't they all get as much blame as the AIG execs?

Of course the people who defaulted on their mortgages put this whole thing in motion, from a contractual standpoint. But then they were influenced by the same misguided belief in perpetually rising residential real estate prices. They were also aided by the way the government worked to lower lending standards, often by coercing banks. The government also played a critical role in the securitization of mortgages by its implicit (ultimately explicit) backing of Fannie Mae and Freddie Mac, companies that bought and bundled the risk in huge quantities. With many more people in the real estate market than would have been if government hadn't interfered, prices skyrocketed, creating a bubble.

Bearing all this in mind, and the staggering amount of money the government is now promising to pay, it's hard to dust off my pitchfork for AIG executives who had nothing to do with the CDS business.

Puh-leeze, you really think these people care? They care about as much as Daschle and Geithner do for being tax scofflaws.

Its all about ripping off the system and then when your caught coming up with a good cover story.

The 'reign of terror' in France did not solve much of anything. But since history is no longer taught in our schools no one but old folks like me remembers reading about it.

Idler, I agree that not all AIG employees had their hand in this mess and the rest of your analysis for the most part...

I still hold the financial companies most responsible for giving loans to people who could never pay them back once the higher interest rate terms kicked in.. after all, the people in the financial business are supposed to be the professionals..and Ive never seen any legislation that stated the banks must give loans to people whose income could not stand the burden of a well intentioned loan...

the financial company's, the ratings agencies, the realty organizations and the division of AIG that created CDO' all conspired in this ponzi and the politicians had to know fully well what was going on and they did very little to stop it... what a mess

Robert, I agree to a certain extent but I think some qualifications are in order. While the lenders deserve some blame, ultimately all parties must take responsibility for the contracts they sign. The banks sometimes did foolishly grant loans (typically with independent brokers actually pushing the sale) but the government most certainly did pressure banks to lower their lending standards. Banks were rated in part by their compliance.

I think it's wrong to call this a "Ponzi scheme" because that implies knowledge on the part of some perpetrator. There is no such perpetrator who could have absconded from the top of the pyramid: the biggest financial companies got devastated by the collapse of this pyramid, and several were killed outright. They would not have taken on the risks that they did if they knew what was coming.

It's juvenile to say, as a poster above has) that "it's all about ripping off the system." AIG has been in business since the early 20th century. Now the company is destroyed. The financial crisis happened not because these companies suddenly behaved differently but because suddenly there was a tremendous amount of residential real estate debt in the system that was iffy to begin with and became downright toxic.

The politicians did not "know fully well what was going on" if you mean that they knew enough to see this train wreck coming. Some politicians did make some dire warnings of systemic risk, but the politicians who brushed them off, while they might have been in denial, did not understand what they were doing.

It sounds to me as though we are on the cusp of a class war.

Not pretty at all.

We should put the key players in prison. For their safety, of course.

On the cusp of a class war? We're already there. But as long as you make less than $250,000 a year you're on the "right" side. I wonder if the class war will be indexed for inflation?

Next the mob will be marching them from Versailles to the Concergerie. Portland Native is correct - that solved nothing.

You really have to think about how heavily vested interests in this country work to skew public opinion to preserve it. It's no different than anywhere else in the world, at any given time during human history. Disproportionate sums of money require an equally established effort to acquire or preserve them... the richest have always tried to convince the poorest that it's all for the best.

The threat of class war always simmers under the surface, with only martial law or embedded propaganda to keep a lit on it. Even the pulpit has been used to pacify the masses. People ask when crowds take to the streets with torches and pitchforks. Well, it's getting harder to put lipstick on negative and disturbing wealth distribution trends. Or that average incomes haven't kept up with the cost of living. Or that this country and its people are maxed out.

When fewer people are acquiring a higher percentage of total wealth, it's gets lonely on that luxurious island... cry me a river.

ultimately all parties must take responsibility for the contracts they sign.

Including homeowners who knew damn well they couldnt afford the loans, but were "surprised" they qualified.

IMO, this mortgage mess ultimately falls on the government, allowing the rules to be changed so a whole class of people could get home ownership just because someone thought they "deserved" it.

That was obviously a bad idea.

Jon -- that's an interesting tale. Here on our planet, lenders made millions misrepresenting the terms of loans to borrowers, and investment bankers made further millions repackaging those loans for avaricious investors. The easy money made houses even more expensive than they would have been without it.

Jon, Ive yet to see any legislation that directly states or infers that people who can't meet the full terms of the contracts payment schedule, and that includes when the payment goes up to the full rate, were mandated to be given loans... I'd like to see the legislation or memo that stated people who couldnt fulfill those terms had to be given a loan.. so far no one has been able to show me a verifiable document that was based on an actual mandate from the government...

I realize there were programs out there that were meant to increase home ownership amongst minorities, but I still havent had anybody point out to me any legislation that said a bank or one of these mortgage companies that sprung up in the last 6 years had to give loans that they knew the person applying wouldnt be able to fulfill...

It still lands back on the people approving the loans... and where was it written that income didnt even have to be verified? What legislator initiated that legislation?

As far as Im concerned, the responsibility is and was on the loan agent evaluating the requested loan against what should have been verifiable proof of income minimally..

Who were the professionals in this scenario? Aren't professionals supposed to be the smart ones that know what actions are legal and to the best benefit of the company they are creating a liability for? Or did the loan originators not care because they knew nobody was looking or upholding any of the oversight guidelines and they could get paid and be long gone and out of the picture when the full terms kicked in? it was pure greed on the part of the loan agent.. anybody can apply for a loan.. but not everybody is supposed to be approved, especially when its blatant they could never meet the payments when the full terms became due...

Idler wrote, ..."I think it's wrong to call this a "Ponzi scheme" because that implies knowledge on the part of some perpetrator."...

I still say it was a ponzi scheme and here's why, in general, a ponzi is a pyramid of players who pay off the last one in with the newest money in... well, the loan agents sold bogus products to people who would eventually not be able to pay but made money on that deal, in turn, the loan agents bundled loans and sold them to the banks and made money on those bundled loans, the banks then securitized the loans into bundled products and either held them or sold them to Fannie Mae and made money on the deal, and all with the complicit approval from ratings agencies who didnt do there jobs..and then the people managing the bundled securitized toxic products took out insurance through AIG fully well knowing they would default and AIG took cash for those CDO's which made lots of money for the creators of those insured bundled toxic loans and didnt even evaluate the viability of the long term vulnerability to AIG. so yes, all those moves required a vision and knowledge both long and short term on the part of all perpetrators within the financial industries involved..

I remember having that conversation with lots of Portlanders: the one about the fact that our median housing price was WAY above our median family income. That I saw no way that two income couples (you know, the creative class kind who were making 60 to 70K) could afford a $300K house, unless they were getting a boatload of money from Mom and Dad or the lottery.) And then I was hearing about 40K couples (the barista-struggling artist types) getting houses that cost more 250,000K. The math just doesn't pencil out, unless you have an amazingly healthy down payment.

Ultimately, I said, that would bite us in the patootie.

Boy, was I ridiculed. "Oh, Portland's a bargain compared with Seattle and San Francisco."

Sure, but those cities have higher incomes, although I'm gathering not even their incomes were keeping up with housing speculation in those cities.

I've owned seven or eight houses in my 30 years as an adult and I've never bought a house that was more than 2.5 times my income. Not that I couldn't have -- I just didn't want to be house-poor.

I'm feeling a bit smarter these days.

on -- that's an interesting tale. Here on our planet, lenders made millions misrepresenting the terms of loans to borrowers, and investment bankers made further millions repackaging those loans for avaricious investors. The easy money made houses even more expensive than they would have been without it.

Lenders can't read their contracts? Brokers were often unscrupulous, but so were borrowers. There's no way around it. Ultimately, government policy and Federal Reserve actions drove a housing bubble in which consumers as well as financial services professionals.

There are plenty of consumers like Jon whose prudence limited their exposure. Loads of people willingly accepted risky loans. Some were wrongly manipulated, but most acted imprudently, motivated by wishful thinking and aided by denial.

The same denial affected the construction of risk models that plugged in erroneous assumptions about property values based on the past and incautious about the future.

Robert, saying parties trading in CDSs knew they were going to fault is a) something you couldn't possibly know and b) utterly absurd. The bad debt went in many directions only because of shared mistaken assumptions about its degree of risk.

This is your free market for you!

When greed is the fundemental law driving the entire social sturcture you end up with this sort of nonsense.

Of course we should mention that all of history has been created by greed or power hungry humans stealing other humans property or lives.

That should have been "DEfault."

The CRA was the primary instrument of government policy that drove down lending standards, and not just for minorities, but across the board. All banks took advantage of lower standards trusting in the insulation of ever-increasing home values to make up for otherwise poor risks. Government policy also drove the business through the activity of the government sponsored entities (Fannie and Freddie) that banks knew would, and in fact did buy up higher-risk mortgage debt to the tune of $5 trillion.

Throw in the factor of artificially low interest rates dictated by the Federal Reserve, and you have a more or less complete picture of the factors that sufficiently distorted the market long enough to make subprime loans more viable than they were, fooling the hasty risk modelers.

I'm not trying to exculpate any of the parties here, just address the ugly and irrational attitude that places all the blame on the "suits." Everybody was in this to make a buck. The fact that many brokers crossed a line of professional ethics doesn't tell us anything except that some pigs were greedier than others. Greed, wishful thinking and denial played a part in the actions of all parties to this debacle, and not least to borrowers. You're dreaming if you think consumers who took on variable rate mortgages were rolling the dice any more than the bankers or traders. In recent times Americans have come to believe in living beyond their means, as evidenced by the staggering amount of consumer debt. Does the expression "re-fi" ring a bell?

This is your free market for you!

The point I've been making is that it was not remotely a free market!

Government actions distorted the market grotesquely, masking effects that would have manifested themselves quickly in a free market, or at least a freer one. This doesn't get the corporate risk managers off the hook, and it certainly doesn't excuse unscrupulous brokers. But the government pressured the banks to lower their standards and put perverse incentives in place. The actions of the Fed were also manipulations, and highly consequential ones, that distorted what would have been the spontaneous order of a free market. Does anyone believe (if any such thought has ever entered their heads) that keeping interest rates artificially at extremely low rates is a) consistent with a free market and b) unlikely to have consequences?

regarding parties taking responsibility for the contracts they sign.....

IMHO, as
a liberal Democrat and a precinct committee person, the Obama administration is already a failure...

....this bafflegab pitched by Tax cheat Geitner and accepted by bribe taker Chris Dodd in the stimulus bill conference committee regarding the inviolability of the bonus "contracts" for the banking set, when compared to the same players insistence that the auto workers had to give away the provisions of their contracts regarding health care and retirement plans is sickening....

Where did the Democrats go....I guess there is no one remaining in what Howard Dean very pithily described as "the Democratic wing of the Democratic party..."

Gonna quit and go elsewhere from AIG if you don't get your bonus?

I hear Citibank and Merrill Lynch and Lehman and Bear Sterns are......well, then again, they aren't hiring, are they...?

And that resume touting all those years of experience at AIG will certainly be real appealing to any prospective employer.

No problem, you can live on the growth locked into your Roth IRAs and 401k's and the personal investments you placed with Madoff.... em, er, sorry whats that you say?

Gee, maybe dear AIG employee you really don't have very much leverage after all, do you?

so far no one has been able to show me a verifiable document that was based on an actual mandate from the government...

Look up the revisions Congress and the Clinton administration made to the Community Reinvestment Act in 1993. This is where the whole "sub-prime" mortgage thing came from. Lenders were basically told they had to relax their income restrictions because low income people were not able to get home loans.

So yes, those "professionals" at the banks should have known better. But they also didnt want to get in trouble for not lending under government guidelines.

Jon, 1993? why stop with 1993, why don't you go back to Carter.. or even better yet, the New Deal and lets blame FDR...

The only problem is all these toxic loans were from the last 5 years... why'd it take so long for CRA of 1993 to kick in? maybe because it was the extreme interpratation of the CRA of 1993 that lead us to the deliberate lack of oversight we saw..Wasnt there also a flock of retired FBI agents that went public in the last 6 months that said they tried to bring attention to the abuses of lending requirements as early as 2006 and the Bush administration never allowed their complaints to be investigated... I still say there was never, I repeat never, any goal or expectation that banks give loans and especially in the numbers weve seen "go toxic" in the last 3 to 5 years, to people who could never meet the payment schedules required with their incomes...It was the suits and the fly by night mortgage co's that sprung up over the last 5 years that began the decay, and the other finance companies up the line followed through with the scheme..

I say this was a RICO style organized crime that happened... but the problem is both parties in the last 5 years never did enough to stop it because they error on the side of the corporations, because thecorporations are the ones that pay for their re-election campaigns... Dodd and Obama were the largest recipients of campaign election funds from AIG in 2008....

Interesting back and forth between Jon and Robert Pace.

Funny, how adustable rate mortgates (ARMs) have not been mentioned amid this blame game exchange.

Yes, the low income folks with Fannie Mae ARMs could afford the monthly payment when the stock market was good. Yet, as ARMs are indexed to the performance of the stock market, once things went bad, then their monthly payment rose and they could no longer afford it.

Correct me if I am wrong on adjustable rate mortgages and what they were indexed too. My knowledge is from family members who looked at ARMs and various real estate brokers.

In my opinion, both the real estate sector and individual home owners are to blame. The real estate sector did not do its' due diligence in performing more strenuous background checks on whether potential homebuyers could make the minimum payments in the worst case scenario. Likewise, the individual home buyer should have fully understood the risk in "biting off more than they could chew" and the entire terms of their mortgage.

The subprime sector is an easy target, and yet it's just one piece of the economic collapse. Conservatives point to Clinton and/or Carter when citing this, and yet Dubya and his SEC people (at the behest of the financial industry) were the ones to loosen oversight and encourage subprime plundering. I saw the Clinton-Bush regulatory transition firsthand while working for an issuer, trust me when I say I called this debacle back in 2001.

Enough of the subprime nonsense. The biggest reason we're in this mess is because our economy has undergone a serious evolution in such a short period of time. The advent of the internet, the decline of the middle class, the shipping of jobs overseas, the worry of fuel prices/shortages, the decline in wages vs. cost of living, the explosion of debt, etc... isn't it obvious we were due for a massive upheaval?

Young Oregon, Im not sure what triggered the ARM products interest increase, as many of the foreclosures began before we saw the decline in the DOW and other stock market measures..

Its my understanding that many of the ARM products had rate increases after a certain timeframe and thats why we are seeing foreclosure rate increases after a 2 or 3 year timeframe passes after the initial loan began...

the foreclosure rate increases began in 2006, but escalated in the years after that..that's why the news would report that a new wave of foreclosures was being experienced and also corresponded to the number of new mortgage companies that we saw and heard advertised on the AM radio during the same timeframes...my whole beef is that the people who approve loans based on income to debt ratios was/is where the problem began... anybody can apply for a loan... coincidentally, the ratings agencies seemed to know to look the other way and not want to get too detailed in how those loans were approved and with what confirmed detail..

Many of these bundled loans with toxic debt inside them were given AAA ratings.. this is why I have stated that I believe there was deliberate collusion on the part of the financial corporations starting with the front line mortage companies that did the initial deals, to the banks that provided the funds to them who then bought up the bundled loans... to the agencies that sold those bundled loans with toxic debt in them as investment vehicles to many of the largest city, state, police, fire and teacher retirement funds across the USA and other parts of the world... in fact, Eliot Sptizer was arrested just as he was getting ready to go public with his investigations into the rating agencies and their role in approving the bundled securitized loans (with toxic debt in them).

Those securitized loans should have never been more than junk or CCC status... without the ratings of AAA, many of the big time investors into these bundled products probably would have never assumed the risk...

The homeowners who were sold the ARM loans were just the needed pawns to begin the scam... if it wasnt a collaborated event, how did so many people get placed into these loans between the years 2004 and 2007, when as another poster said it was a 1993 Clinton Community Re-Investment program that caused the banks to have give loans to people who would never have qualified... Im supposed to believe it took 10+ years for that 1993 legislation to be implemented... Rubbish...

it was a deliberate abuse of lending standards thats too blame as well as those in oversight who didn't try to fix it...

The only problem is all these toxic loans were from the last 5 years... why'd it take so long for CRA of 1993 to kick in?

Robert, it appears you aren't seriously considering the arguments that have been made. Please do more than a superficial reading of them because some of your questions have already been answered. For example, the effects of bad loans were masked as long as property values continued to rise, driven by Fed interest rate setting and the government carrots (GSEs) and sticks (CRA). (One could say both CRA and GSEs wer ethe "carrot" that incentivized reckless behavior on the part of mortgage brokers.)

This is ridiculous:

Many of these bundled loans with toxic debt inside them were given AAA ratings.. this is why I have stated that I believe there was deliberate collusion on the part of the financial corporations starting with the front line mortage companies that did the initial deals, to the banks that provided the funds to them who then bought up the bundled loans

The "financial corporations" are at the mercy of the raters and depend upon them. There may be all sorts of incest between regulators and companies; I'm not concerned here with arguing about that. The point is that one doesn't "collude" in one's unintentional suicide. AIG has been successful since 1913. It's silly to say that either its managers or their counterparties took on these contracts knowing that they would cause havoc. These people want to make money, and they depended on the rating agencies. That doesn't get their own risk managers off the hook, as I have said repeatedly. But ask yourself why it was that the rating agencies blew it so badly and then maybe you'll arrive at some rational insight rather than pandering to your need to identify the financial guys as the source of all evils. They were way more stupid than evil in this process.

YoungOregon is right to bring up ARM.

TKrueg is wrong in his/her analysis. This crisis is based on a specific "bomb," if you will: bad residetial real estate debt. All those other things, however bad one might argue them to be are irrelevant. All their reputed ill-effects could exist without the creation of a housing bubble.

Idler, find someone else to condescend to...

"They were way more stupid than evil in this process." that's youre opinion...

A cancer is what they were... and I suspect still are...

Idler, PS - I can't wait till the subject of selling naked shares both long and shorted becomes a topic on this board..That's the other dirty secret on Wall Street..

How many trillions of $$ were stolen by the brokerages and their collusion with the Market Makers and the Hedge Funds they share the same bed with...

Right now, the only financial industry I trust are the Credit Unions...

Robert, you're so caught up in your determination to indict your favored villain that you misread me as defending anything Wall Street does.

You decline to refute my stated reasons for holding the opinion that the traders were more stupid than evil. Companies that have existed for the better part of a century suffered sudden death or grievous harm because they trusted the raters. What was different now? You refuse to consider that.

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