CEO of the biggest bank failure in history? Congrats, here's $13.65 million!

[Methanolandbrats]

That doesn't seem the slightest bit wrong to you? I mean, they were giving you a loan where they said, you could afford it if you get a raise and if you get an MBA (and get a new higher paying job to go with it). Neither was guaranteed to happen. She knew you couldn't afford it, but was trying to convince you that you could. She was selling you the loan even though you were the one who was seeking it. If her bank was on the hook, they'd make sure you could afford it right now not potentially in the future. You would be the one trying to get that big of a loan saying things like "I'm working on my MBA" and "We'll get a raise" and they'd tell you to come back in 12 months.

It got to a point where no one left the bank unhappy if they were seeking a loan.

Edit--I don't mean to imply you think they were on the up-and-up, but this is the kind of stuff that led to this mess and why people who had no business getting a loan got one. Everyone isn't financially savvy enough to realize it when traditionally the lenders were the ones who were prudent when handing out there money. (Unfortunately, they started handed out other people's money.)
Correct. Car salesman techniques applied to mortgage lending because the lenders knew they could NOT lose money.

[Stu]

That doesn't seem the slightest bit wrong to you? I mean, they were giving you a loan where they said, you could afford it if you get a raise and if you get an MBA (and get a new higher paying job to go with it). Neither was guaranteed to happen. She knew you couldn't afford it, but was trying to convince you that you could. She was selling you the loan even though you were the one who was seeking it. If her bank was on the hook, they'd make sure you could afford it right now not potentially in the future. You would be the one trying to get that big of a loan saying things like "I'm working on my MBA" and "We'll get a raise" and they'd tell you to come back in 12 months.

It got to a point where no one left the bank unhappy if they were seeking a loan.

Edit--I don't mean to imply you think they were on the up-and-up, but this is the kind of stuff that led to this mess and why people who had no business getting a loan got one. Everyone isn't financially savvy enough to realize it when traditionally the lenders were the ones who were prudent when handing out there money. (Unfortunately, they started handed out other people's money.)


Hell yea it was wrong, although what they said was technically true. We of course didn't go with them (thankfully got a better house for less money).

So yes the builder's saleswoman was wrong. The mortgage company they work with was wrong by allowing talk like this. The end purchaser of the mortgage is wrong to purchase such a risky investment. And yes, the home buyer would be wrong to agree to such a mortgage.

You know who isn't wrong though? the typical tax payer.

[Stu]

Correct. Car salesman techniques applied to mortgage lending because the lenders knew they could NOT lose money.

shouldn't the risk takers who took possession of these mortgages be blamed for their stupidity as well?

[Methanolandbrats]

shouldn't the risk takers who took possession of these mortgages be blamed for their stupidity as well? That's why I don't care if the worst ones are allowed to fail. The people who ran the biggest firms should not have jobs when this is over.

[Sean Malone]

An economist in the UK give his 2cents and it's not pretty.


Even so, the longer you stare at a screen of the Dow Jones or FTSE 100, the more abstract it seems. So this is what it means:
It means millions more Americans, and hundreds of thousands more Britons, will lose their jobs; it means the recession will be deeper and more protracted than previously feared; it means borrowing costs will increase on both sides of the Atlantic. Companies will cut back on investment. Pension funds will be depleted.


The free market can be very creative but it can also be immensely destructive. This is one of those points where the scale of destruction is potentially so great that it could set the economy back years.
This is why so many people – and not just the politicians putting the deal together – are warning that if the deal fails entirely we could be facing a second Great Depression.
The big mistake policymakers made in the 1930s was to allow too many banks to fail. This caused such a financial earthquake that it led to a decade of hardship.



Link (http://www.telegraph.co.uk/finance/comment/edmundconway/3105965/Financial-crisis-Western-world-will-become-significantly-less-wealthy.html)

I'm just trying to figure out if I go into catastrophe mode and liquidate my assets into cash, board up my windows and buy a gun.
Very ominous articles are being written about the sky falling.

[oddlycalm]

Stu's 4 "points" are dead on.
Stu's 4 points succeed only in identifying certain debatable features of the very tip of the worlds largest iceberg.

The crisis is only tangentially related to mortgages. The first problems occurred in mortgage backed securities because mortgages were a slipshod retail product, but have now spread to other instruments that securitize debt of all kinds.

The scope of the problem is that there is a totally unregulated market where $12 trillion of money (one quarter of world GDP) is leveraged to control $235 trillion face value of financially engineered derivatives. All financial dealings are based on trust and without a framework of regulation to work within there is no transparency and, inevitably, no trust. The lack of trust/transparency has frozen derivatives trade which in turn has frozen the credit markets because all debt has been securitized in the same way mortgages have been.

The rating agencies have been exposed as having no clue as to the quality of these securities, and the first default in history of securities rated AAA has now taken place. The fact is that the rating agencies didn't understand the securities any more than the management of the institutions that created them did. The fact that ratings cannot be trusted removes what little transparency remained from these instruments.

Since the derivatives market is completely unregulated there is no way of knowing what the exposure of individual institutions is, so there is zero trust between institutions. Last week Wachovia was touted as a possible savior of an investment bank and this week it fails. :gomer: So the runs on the banks and mutual fund companies have begun and in Washington DC they fiddle away...

Over night four Euro banks were nationalized by countries with far less resources than ours, so that's not going to continue for long. People in Asia and Europe are blaming the US for not taking action, missing the point that their failing institutions got themselves into the derivative market.

oc

[Sean Malone]

Stu's 4 points succeed only in identifying certain debatable features of the very tip of the worlds largest iceberg.

The crisis is only tangentially related to mortgages. The first problems occurred in mortgage backed securities because mortgages were a slipshod retail product, but have now spread to other instruments that securitize debt of all kinds.

The scope of the problem is that there is a totally unregulated market where $12 trillion of money (one quarter of world GDP) is leveraged to control $235 trillion face value of financially engineered derivatives. All financial dealings are based on trust and without a framework of regulation to work within there is no transparency and, inevitably, no trust. The lack of trust/transparency has frozen derivatives trade which in turn has frozen the credit markets because all debt has been securitized in the same way mortgages have been.

The rating agencies have been exposed as having no clue as to the quality of these securities, and the first default in history of securities rated AAA has now taken place. The fact is that the rating agencies didn't understand the securities any more than the management of the institutions that created them did. The fact that ratings cannot be trusted removes what little transparency remained from these instruments.

Since the derivatives market is completely unregulated there is no way of knowing what the exposure of individual institutions is, so there is zero trust between institutions. Last week Wachovia was touted as a possible savior of an investment bank and this week it fails. :gomer: So the runs on the banks and mutual fund companies have begun and in Washington DC they fiddle away...

Over night four Euro banks were nationalized by countries with far less resources than ours, so that's not going to continue for long. People in Asia and Europe are blaming the US for not taking action, missing the point that their failing institutions got themselves into the derivative market.

oc

Very interesting post. :thumbup:

[Insomniac]

You know who isn't wrong though? the typical tax payer.

And I don't disagree here. Unfortunately, here we are. I'd like to hear more ideas on how to handle this. There are a lot of heavy hitters in the financial industry behind this out of necessity. The only other alternative I hear is do nothing. But the people pushing for this aren't saying what happens if nothing is done. I'm hearing a lot of reasons why it should be done, but the only reason I hear for it not to be done is that it's "socialism" or "let the free market take care of it". The first is a reason not to do a bailout, not really a reason to do nothing. The second is fine, but please explain what happens if nothing is done.

Also, why are they only getting warrants to buy non-voting shares in the future? $700B should be buying them ownership in these companies just like AIG. This isn't even a loan. It's essentially the government buying bad assets from these guys to clean up their balance sheets. There's nothing for these guys to pay back. The government hopes to eventually unload all the assets and get their money back. Then also use the warrants. Get an ownership stake now. No one else is going to buy that crap from them. (And if they are, let them!)

[Methanolandbrats]

We already tried the free market for the last 15 years, that worked out real well. How about the government buy the mortgages and rewrite them to reasonable terms. At the same time they inject money into the banking system on a case by case basis allowing some rogue banks to crater and other better managed ones to survive. Write regs requiring risk to stay with the original loan originator. Take interest from mortage payments and pay down government debt. Or some plan like that causes minimum disruption to small business and homeowners. No matter what they do credit will be more expensive and tighter from now on, so find a plan that causes minimum disruption and maximum payback.

[Sean Malone]

I do agree with the politician (name withheld) who is making the distinction that the bill is a "rescue" as opposed to a "bailout". To the general public "bailout" has the connotation of propping up banks and the greedy Wall Street fat cats when actually it is about stabilizing an economic crisis.

[Stu]

We already tried the free market for the last 15 years, that worked out real well.

We've had a "free" market with innaporpriate, poorly designed regulation.

[Insomniac]

I do agree with the politician (name withheld) who is making the distinction that the bill is a "rescue" as opposed to a "bailout". To the general public "bailout" has the connotation of propping up banks and the greedy Wall Street fat cats when actually it is about stabilizing an economic crisis.

It's sad when if you change one word then it changes what the majority thinks. They started last week trying to use rescue instead of bailout. I don't think they'll be fooling anybody at this point after all the headlines. [Appropriate analogy would normally go here.]

[Insomniac]

We've had a "free" market with innaporpriate, poorly designed deregulation.

Corrected that for you.

[Stu]

The only other alternative I hear is do nothing. But the people pushing for this aren't saying what happens if nothing is done. I'm hearing a lot of reasons why it should be done, but the only reason I hear for it not to be done is that it's "socialism" or "let the free market take care of it". The first is a reason not to do a bailout, not really a reason to do nothing. The second is fine, but please explain what happens if nothing is done.

I was listening to C-Span all day yesterday, and the recurring theme during the floor speeches was that we need to act now and that this was the only option.

Of course no one addressed why they have to act today (yesterday), or why they couldn't put it off a week or so to come up with another idea.

The other thing that multiple congressmen said is that they didnt want to be in that position and that it wasnt a perfect bill, but it was the best they could come up with.

[Insomniac]

This guy says let them go bankrupt: http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html

He makes some good points. If he's right, I agree. (I think I said in another post that is the right time to buy up those assets. Let everyone have at them and if someone else wants them, don't buy them. Don't bid against yourself.) I just fear that if the credit markets really do dry up, how many businesses have the cash on hand to keep running for any extended period of time?

[Stu]

Corrected that for you.

well, deregulation is still form of regulation, its just less :p

[cameraman]

The rating agencies have been exposed as having no clue as to the quality of these securities, and the first default in history of securities rated AAA has now taken place.
The ratings agencies were paid by the people that they rated and their methodologies are trade secrets. Right now an unfathomable amount of money is going to evaporate because it turns out that those secret methods were crap and what was represented to be worth X amount is actually worth 1/1000X. Yet the free market people claim that any hint of rules, regulations or standards applied by the government will destroy the economy.:saywhat:

They could not be more wrong. This entire mess is due to the total lack of systemic oversight of the market. Much of the accounting "standards" used by the derivative market should have been illegal but weren't and still aren't and as a result the entire economy is screwed.

[Insomniac]

I was listening to C-Span all day yesterday, and the recurring theme during the floor speeches was that we need to act now and that this was the only option.

Of course no one addressed why they have to act today (yesterday), or why they couldn't put it off a week or so to come up with another idea.

The other thing that multiple congressmen said is that they didnt want to be in that position and that it wasnt a perfect bill, but it was the best they could come up with.

I don't know if this is the cost of delaying the bill, but the treasury dumped another $150B into the domestic markets and $310B into foreign markets. I have no idea where all this cash is coming from (T-Bills?), but it can't be good.

I'd like to see the bill be more punitive. Either work your way out of the mess you're in, or come to us as a last resort. It's time the "sweetheart" deal worked the other way. Somehow these guys are bent over a barrel and the government finds a way not to have the upper hand. We have the money and are the only buyer, we should literally own them.

[Insomniac]

The ratings agencies were paid by the people that they rated and their methodologies are trade secrets. Right now an unfathomable amount of money is going to evaporate because it turns out that those secret methods were crap and what was represented to be worth X amount is actually worth 1/1000X. Yet the free market people claim that any hint of rules, regulations or standards applied by the government will destroy the economy.:saywhat:

They could not be more wrong. This entire mess is due to the total lack of systemic oversight of the market. Much of the accounting "standards" used by the derivative market should have been illegal but weren't and still aren't and as a result the entire economy is screwed.

Time for SOX II. Need to clean up more obvious conflicts of interest. And maybe (wishful thinking, I know) after a long period of time people won't decide, hey we haven't had a problem with conflict of interest in this area, let's repeal this law. That's like saying we haven't had a murder in 20 years, no need for that law.

[Stu]

I don't know if this is the cost of delaying the bill, but the treasury dumped another $150B into the domestic markets and $310B into foreign markets. I have no idea where all this cash is coming from (T-Bills?), but it can't be good.

I dont know if thats related to a delay in the bill or not. I'd assume not since if it had passed, the senate would have voted Wednesday and it would have been on the President's desk as early as Thursday.


But I would like to say, the last time I saw the government react this quickly to a crisis, we wound up with the patriot act. Will people be hating this 700 billion dollar bailout/rescue in 10 years as much as they hate the patriot act?

[datachicane]

I'd like to see the bill be more punitive. Either work your way out of the mess you're in, or come to us as a last resort. It's time the "sweetheart" deal worked the other way. Somehow these guys are bent over a barrel and the government finds a way not to have the upper hand. We have the money and are the only buyer, we should literally own them.

Unfortunately, even the mention of the word 'socialism' (whether or not it actually fits) is so scary that Americans will happily get themselves bent over that same barrel rather than benefit. Such is the power of effective branding.

[Stu]

Time for SOX II. Need to clean up more obvious conflicts of interest. And maybe (wishful thinking, I know) after a long period of time people won't decide, hey we haven't had a problem with conflict of interest in this area, let's repeal this law. That's like saying we haven't had a murder in 20 years, no need for that law.

A lot of people hate SOX. heck, some even blamed the mess we are in now partially on SOX. whether they are right or not I do not know, but there is certainly a strong hatred for the extreme lengths that Sarbanes-Oxley goes to.

[Stu]

Unfortunately, even the mention of the word 'socialism' (whether or not it actually fits) is so scary that Americans will happily get themselves bent over that same barrel rather than benefit. Such is the power of effective branding.

maybe 15 years ago, or maybe even 5. but tell that to the 45-50% of americans that support barak obama and his socialized health care plan. people are much more open to government influence now than in the past.

[Insomniac]

maybe 15 years ago, or maybe even 5. but tell that to the 45-50% of americans that support barak obama and his socialized health care plan. people are much more open to government influence now than in the past.

Private insurance is socialized medicine? Someone may want to tell the Europeans they have it wrong.

[FCYTravis]

The ratings agencies were paid by the people that they rated and their methodologies are trade secrets. Right now an unfathomable amount of money is going to evaporate because it turns out that those secret methods were crap and what was represented to be worth X amount is actually worth 1/1000X.
This.

Does it take a rocket surgeon to figure out that if you pay them enough, you can get a ratings agency to basically call you Treasury-grade?

I read that such is the flight to quality, that T-bills were briefly trading at negative interest rates. That's right, buy a T-bill at $1, get 99 cents back.

The whiz-bang wizards running the financial markets are playing with math to invent brand-new ways to gamble with money, and we need to realize that most of them haven't a clue what they're doing. When they **** up, they **** up big.

Pick up a copy of Liar's Poker, by Michael Lewis... it's the memoir of a mortgage trader inside Salomon Brothers back in the 1980s, just after the "wizards" had figured out how to slice and dice mortgages into something investors would buy.

[Insomniac]

I dont know if thats related to a delay in the bill or not. I'd assume not since if it had passed, the senate would have voted Wednesday and it would have been on the President's desk as early as Thursday.


But I would like to say, the last time I saw the government react this quickly to a crisis, we wound up with the patriot act. Will people be hating this 700 billion dollar bailout/rescue in 10 years as much as they hate the patriot act?

I'd say yes. Over-correction is SOP. Things can't be left alone. There always has to be a new law, or changes to existing laws. These guys treat it as a full time job, and they can't go there and twiddle their thumbs. (I know, obvious joke, that's what they've been doing for years!) At first, being a congressperson was a second job. Now it's a career. The bigger the bill became, you knew it would get messier. In 10 years when the government is still trying to make back the $700B and the investment banks are rolling in profits, people won't be happy.

[Stu]

Private insurance is socialized medicine? Someone may want to tell the Europeans they have it wrong.

forcing people and businesses to carry insurance, and increasing the number of people on financial assistance for health care is socialized medicine.

but thats not the point of what i was saying and i dont want to get sidetracked. all im saying is people today are much more welcome to government intervention.

[Insomniac]

A lot of people hate SOX. heck, some even blamed the mess we are in now partially on SOX. whether they are right or not I do not know, but there is certainly a strong hatred for the extreme lengths that Sarbanes-Oxley goes to.

I can't see how SOX is at fault here. I mean, tangentially people have argued it focused on the short term accounting practices while not addressing long term accounting practices (like mark-to-market).

[FCYTravis]

but thats not the point of what i was saying. all im saying is people today are much more welcome to government intervention.
Yes, because people realize that bowing down to Milton Friedman and pronouncing that the "free market" is sacred and inviolable, makes no more sense than worshiping Karl Marx and declaring that the proletariat are destined to control the means of production.

Simplistic, knee-jerk ideological rigidity is no virtue. Free markets and capitalism are good things - but like many good things, left unchecked and rampant they can very easily become bad things.

Nor do free markets and capitalism take into account moral standards and human well-being. Their goal is single-minded: the maximally efficient allocation of resources leading to creation and growth of wealth. There is no room in free market capitalism for the idea that maybe we should devote some resources to making sure everyone has an opportunity to get an education. There is no account for the moral repugnancy of allowing the elderly to die on the streets. Capitalists could have never sold stock in the massively-unprofitable exploration of space.

That's when the people tell their government, "Do these things, because the free markets either can't do it or don't want to do it." That's why we have public schools, Social Security and NASA.

[nrc]

We've had to moderate multiple posts in this thread in the last hour. It's a shame because I think it's a worthwhile discussion, but we'll give it a breather.