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I Have Good News and Bad News:
The bad news is that Wall Street is in trouble. The good news is that violent crime rates are down, too. Hat tip: Crime & Consequences.
one of many:
So, I'll have less money but that will be balanced out by it being less likely someone will rob me of it?
9.16.2008 3:58am
A. Zarkov (mail):
It could get worse tomorrow. If the exchanges close, then we are in big trouble. This situation has been developing over the last 25-35 years, and we now have an insolvency crisis, not a liquidity crisis. Pay careful attention to the daily behavior of the TED Spread to see how the credit markets are doing. The waves are this crisis are visible a plot. It seems to me that the Fed and Treasury have been treating the latter when the former is the real problem.

The crisis first became evident in March 2007 when Bear Stearns disclosed problems with two of its hedge funds. Then in July it announced the hedge funds had collapsed under the weight of its worthless CDOs. About a year later the managers of these funds were arrested. In March 2008 Bears Stearns itself collapsed and was sold to JP Morgan. Now the entire world financial system is in deep crisis, and we will see finger pointing galore over the next few months.

Anyone with half a brain could see what was unfolding in about 2003 and especially by 2007. I sold my house at the peak, and got out of the market late last year. It was obvious that people could not afford the houses they were buying with price to income ratios near 10 in California instead of the historical value of 3. Didn't anyone ever ask how borrowers could receive loans at below market (teaser) rates, and investors get returns at above market (equilibrium) rates on the same loans? Evidently not.

Why doesn't the press ask BHO and McCain about the repeal of the Glass-Steagall Act? One of the milestones on the road to ruin.
9.16.2008 4:12am
Mark A.R. Kleiman (mail) (www):
The extra-bad news is that the bad news is real, while the "good news" is just spin. Crime in 2007 was down from 2006, but it's still higher than 2004. The ten-year downtrend in crime rates seems to have stalled.
9.16.2008 4:15am
Glenn W. Bowen (mail):
Assignment:

Check this website once a day for a month, keep a tab on shootings, killings, murders-

Norfolk, Va., and environs
9.16.2008 7:48am
tdsj:
Yes, Mark, but crime is still way down from the early-90s peak. We are just sitting in the bottom of a trough, with small moves up or down each year... doesn't that still count as good news?
9.16.2008 9:05am
John Neff:
It appears to me that crime statistics like politics are local with crime hotspots a few city blocks in area the norm. Some crime rates per 100,000 need to be combined with the population density however that would not be relevant for computer assisted crimes or for traveling criminals such as robbers and shoplifting gangs.

If you plot several types of crime rates vs time for each state there are significant differences between states (as one should expect). I don't see much point in combining them nationally.
9.16.2008 9:23am
mls (www):
Violent crime is down now, but wait until all those brokers are out on the street . . .
9.16.2008 9:53am
Anderson (mail):
Ripping off the taxpayers has always been much more lucrative, with less personal risk.
9.16.2008 9:57am
FantasiaWHT:
Dang, mls stole my line, but I would have phrased it as "Wait til the crooks on Wall Street become crooks out on the street"
9.16.2008 9:58am
The Unbeliever:
I don't have an exact causation line, but I'm sure this is all Sarah Palin's fault somehow.
9.16.2008 10:39am
Sarcastro (www):
The Unbeliever AND Bill Clinton's! It's a sinister team-up.
9.16.2008 10:42am
arthur (mail):
Note to Mark: call it even. Violent crime may be higher than it was in 2004, but the stock market (measured by Dow Jones, S &P, or most other ways) is also.
9.16.2008 11:03am
Houston Lawyer:
If violent crime is down, why is the cost of ammo up?
9.16.2008 11:45am
Charlie (Colorado) (mail):

doesn't that still count as good news?


Not while a Republican is in office.
9.16.2008 12:06pm
The Ace (mail):
The question is, is "Wall Street" being down really 'bad'?

Given the house of cards the mortgage securities market was built on, primarily by the federal government presurring lenders to make riskly loans and for Fannie and Freddie to buy and sell them, it had to shake out sometime.
That isn't a bad thing.
9.16.2008 12:11pm
DiverDan (mail):
Just remember that someone's bad news is also someone else's good news. As a commercial bankruptcy attorney, I foresee several years of increasing income - Lehman Brothers alone will keep hundreds of big firm Bankruptcy Attorneys more than fully employed for at least 4 or 5 years.
9.16.2008 12:23pm
Hoosier:
Murder rates are down for the foreseable future, 'cause everyone who needed a-killin' is now killt.
9.16.2008 12:44pm
Anderson (mail):
It's a sinister team-up.

My friend noted that Palin definitely has the look of someone whom Bill Clinton would invite into his office for a little têtê-à-têtê ... or just têtê.
9.16.2008 1:13pm
Anderson (mail):
Oops, just "tête." Pardonnez-moi.
9.16.2008 1:14pm
PC:
Given the house of cards the mortgage securities market was built on, primarily by the federal government presurring lenders to make riskly loans and for Fannie and Freddie to buy and sell them, it had to shake out sometime.


This is by far my favorite piece of spin about Wall Street tanking. The government forced lenders to give irresponsible loans, which forced Wall Street to package those loans as CDOs and resell them, which forced ratings agencies to rate those CDOs as AAA, which forced broker dealers and hedge funds to issue OTC CDSs seven times the GDP of the US, which blah blah blah.

It's a neat talking point from the Limbaugh and Hannity world, but it shows that some people have absolutely no idea how we got into this mess.

btw, McCain is giving a speech right now and it sounds like he is talking about more regulation and limiting executive pay. Strange world we are living in.
9.16.2008 1:15pm
hattio1:
John Neff talks about shoplifting gangs????

Is shoplifting lucrative enough to support gangs?
9.16.2008 1:36pm
PC:
Also, how bad are things when the GOP nominee is running against the GOP? This is the strangest election I've ever seen. The sitting president isn't campaigning at all for his party's nominee. Really baby, I've changed. I promise I won't hit you again.
9.16.2008 1:38pm
Opher Banarie (mail) (www):
Here is another page for tracking local crime stories.

So far in 2008, eleven murders reported just in Santa Ana, which has a population of about 340,000 and almost 80% Hispanic.
9.16.2008 1:45pm
titus32:
btw, McCain is giving a speech right now and it sounds like he is talking about more regulation and limiting executive pay. Strange world we are living in.

And this from the same guy whose name is on McCain-Feingold -- truly bizarre!
9.16.2008 2:06pm
byomtov (mail):
McCain is giving a speech right now and it sounds like he is talking about more regulation and limiting executive pay. Strange world we are living in.

Especially since Carly ("I cut HP's value in half and got a $21 million severance package) Fiorina is advising him.

Unbelievable.
9.16.2008 2:06pm
one of many:
Also, how bad are things when the GOP nominee is running against the GOP? This is the strangest election I've ever seen. The sitting president isn't campaigning at all for his party's nominee. Really baby, I've changed. I promise I won't hit you again.

I wouldn't say that, in 1996 Clinton as the sitting president was running against the Democratic party, although he did campaign for himself. The Nixon-Lodge ticket not only didn't have Ike campaigning for it, he didn't even endorse it for the longest time, and Nixon was Ike's VP. The 1992 3-way was pretty strange too.

Personally nothing for me beats the 1988 election for surrealism, competing for who had the most detailed plan, complaints about opponents being too knowledgeable in the primary debates, attacks based upon opponents being too intelligent or too well qualified to be president.
9.16.2008 2:38pm
A. zarkov (mail):
"It's a neat talking point from the Limbaugh and Hannity world, but it shows that some people have absolutely no idea how we got into this mess."

This is a flip rejection (without evidence to back it up) of an important component of the mortgage-credit crisis. Let's be clear, many factors come into play including: excess leverage, lax regulation, fraud, poor risk management, lax underwriting, wall street greed etc. Now let's zoom in on lax underwriting. How did that come about? It started with The Community Reinvestment Act which spawned outfits like ACORN which pushed phony charges of "redlining." Eventually the Boston Fed produced a manual for lenders stating:
“... discrimination may be observed when a lender’s underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants.”
These so-called "arbitrary or outdated criteria" were simply prudent underwriting standards. Things, like a 10-20% down payment, a good credit score, an appropriate loan-to-value ratio, a steady job with an income enough to meet the mortgage payments etc. The craze to include America's underclass reached absurd levels as you can see from reading Reaching the Immigrant Market, a booklet put out by the Fannie Mae Foundation (yes that Fannie Mae). Note the following.
Key program criteria that ensure successful products for immigrant populations include many alternatives: lower down payments; higher qualifying ratios; acceptance of nontraditional credit history; latitude in proving legal residence; no mortgage insurance requirement; assistance with down payments and closing costs; and required native-language education and counseling.
Here you see Fannie advocating lax underwriting standards for immigrants. A nontraditional credit history means no credit history. Thus the genesis of the "NINJA" loan for the underclass. No income, no job, no assets! Is it any wonder that these mortgages went into default? Of course the mortgage industry and Wall Street exploited this situation for their gain. But let's not deny how this all started.
9.16.2008 2:38pm
Curt Fischer:

byomtov: Especially since Carly ("I cut HP's value in half and got a $21 million severance package) Fiorina is advising him.



History showed us that while there may be many reasons to criticize Ms. Fiorina, HP's performance as a result of her leadership isn't one of them. For example, Wikipedia says


After Fiorina's departure from Hewlett-Packard in 2005, the company quickly prospered, overtaking Dell as the top-selling computer maker in the world. Her defenders, and even some critics, credit her with laying the foundations for that prosperity.
9.16.2008 2:43pm
The Ace (mail):
It's a neat talking point from the Limbaugh and Hannity world, but it shows that some people have absolutely no idea how we got into this mess.

Want to take a guess as to why you can in no way refute what was said?

I'll give you just one...
9.16.2008 2:44pm
PC:
one of many: Personally nothing for me beats the 1988 election for surrealism, competing for who had the most detailed plan, complaints about opponents being too knowledgeable in the primary debates, attacks based upon opponents being too intelligent or too well qualified to be president.

Other than the "too well qualified to be president" bit it sounds like this campaign season.

A. zarkov: This is a flip rejection (without evidence to back it up) of an important component of the mortgage-credit crisis.

Fixt. Yes, the pressure to provide loans to underqualified buyers is a component of the mortgage crisis, but saying it's the primary cause is a wingnut talking point. People with NINJA loans, or other subprime borrowers, didn't create CDOs; they didn't create tranches with absurd rating schemes; they didn't mark-to-fantasy those CDOs; they didn't cut up and repackage the loans into other investment vehicles; etc.

After all of that we can start talking about why Bear Stearns was "too big to fail" and the impact of credit default swaps and the shadow banking industry. Did lending guidelines cause that too?

The Ace: Want to take a guess as to why you can in no way refute what was said?

If you can get past day time radio talking points I'll stop mocking you.
9.16.2008 3:04pm
byomtov (mail):
Curt Fischer,

History showed us that while there may be many reasons to criticize Ms. Fiorina, HP's performance as a result of her leadership isn't one of them.

Please note this disclaimer in the Wikipedia article, just above the section which includes your quote:

This article or section may be inaccurate or unbalanced in favour of certain viewpoints.

Then note that during her 5 1/2 year tenure as CEO the stock price dropped by about 50%. If you were a shareholder during that period would you feel that her performance could fairly be criticized?

The stock recovered after she left. If she had been "laying the foundation" for future prosperity it is highly unlikely the market would have waited for her departure to start recognizing her achievement. That's not the way it works.

The evidence is that Fiorina was a failure at HP. Sticking a quote into her Wikipedia page can't change that.
9.16.2008 3:08pm
The Ace (mail):
which blah blah blah.

Which sums up your post rather well.

However, I did enjoy this:


Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and local taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.


And this,

Indeed, executives of both companies maintain that one of the reasons the firms hold so many bad loans is that Congress has leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing.


I think you should go on pretending none of this is true.
9.16.2008 3:16pm
The Ace (mail):
If you can get past day time radio talking points I'll stop mocking you

You want to take one guess as to why you can't refute what I said?

I'll give you one guess...
9.16.2008 3:17pm
The Ace (mail):
Yes, the pressure to provide loans to underqualified buyers is a component of the mortgage crisis, but saying it's the primary cause is a wingnut talking point something I can not refute.

Fixed.
9.16.2008 3:18pm
The Ace (mail):
they didn't cut up and repackage the loans into other investment vehicles;

No, Fannie Mae did. Under pressure from Democrats in Congress and HUD. All of which is well documented and you can in no way refute.

People with NINJA loans, or other subprime borrowers, didn't create CDOs; they didn't create tranches with absurd rating schemes; they didn't mark-to-fantasy those CDOs;

This is nothing but a talking point.
9.16.2008 3:20pm
EH (mail):
Nouriel Roubini says a big part of the current crisis is not subprime mortages, but a subprime financial system. He thinks The Fed kept interest rates too low for too long, which encouraged riskier lending through the profit motive. Makes sense to me.
9.16.2008 3:23pm
The Ace (mail):
Yes, the pressure to provide loans to underqualified buyers is a component of the mortgage crisis, but saying it's the primary cause is a wingnut talking point

Given that subprime mortgages are the commonly accepted cause of this mess, (The subprime lending industry peaked in 2006 at more than $600 billion in loans, but has since imploded as many borrowers found they could not afford these expensive mortgages, sparking a sharp rise in home foreclosures) and those holding subprime mortgages are, *gasp* primarily low income, minority borrowers - "A 2007 study by the Center for Responsible Lending, a nonprofit homeownership research group, concludes that African-Americans and Latinos are more likely than whites to be steered into high-risk subprime mortgages" - you are posting nothing but talking points.

And there is a reason for that.
9.16.2008 3:28pm
CB55 (mail):
In the NY TIMES last week, Jackie Chimes tells an important back story
to the government's takeover of the mortgage banks Fannie Mae and
Freddie Mac. This is a move that could drive up the national debt by as
much as $200 billion. To come up with the cash, the Bush Administration
is reaching deep into your and your kids' pockets. With the help of the
Center for Responsive Politics, Jackie Calmes came up with facts to help
us try to understand how, over so many years, such wild mismanagement of
both corporations was allowed to happen. Why weren't the watchdogs
barking? Where were the people's representatives? The answer? Follow the
money.

Both Barack Obama and John McCain say the Fannie and Freddie mess is the
result of the cozy ties between lobbyists and politicians, the very
thing they will "change" if elected. But guess what? Neither one of them
has ever had, quote, "A record of directly challenging the companies."

To the contrary, Obama is second among members of Congress in donations
from Fannie Mae and Freddie Mac's employees and political action
committees, even though he's only been in the Senate since 2005. The
former chairman of Fannie Mae originally led Obama's vice presidential
search committee but had to step down in a controversy over favorable
loans he received, while at Fannie, from a company doing business with
Fannie.

Among Obama's contributors are three directors and one senior vice
president of the two companies. Furthermore, Obama's fellow Democrats in
Congress have long been enablers of both corporations.

And what about John McCain? His entire campaign team stepped right out
of a predator's ball. His confidante and top adviser lobbied several
years for Freddie Mac. His deputy fundraiser lobbied Fannie Mae, and his
campaign manager lobbied for both of them, leading a coalition of
beltway insiders whose goal was to "stave off regulations" that might
have short circuited this nightmare.

One wealthy member of Freddie Mac's board has contributed more than
$70,000 to McCain and Republican Party members working for McCain's
election.

Even the guy who vetted John McCain's vice presidential options is a
former lobbyist for Fannie Mae.

This week, both Obama and McCain are speaking up for taxpayers, like you
and me, who have to foot the bill. But locking the beltway barn door
after the horse is gone leaves the stable smelling like you know what.

Now, Senator Obama denounces "golden parachutes" for the deposed execs
of the two institutions. Now, John McCain blames Fannie Mae and Freddie
Mac's troubles on "cronyism" and "special interest lobbyists." Beg
pardon? Does McCain know that if he really intends to throw the bums out
he'll have to start with his own inner circle. As we've heard, you can
rewrite the myth but you can't rewrite the facts.
9.16.2008 3:30pm
The Ace (mail):
they didn't cut up and repackage the loans into other investment vehicles

And the companies bought them because of the belief that Fannie Mae was guaranteed by the government.

In other words, investors plainly think there is some implicit government guarantee of Fannie's debt

And,

the financial markets have long assumed that the government would step in to cover the companies' trillions of dollars of obligations if they were unable to do so themselves. The belief that the government stands behind them helps explain why Fannie Mae and Freddie Mac have historically been able to borrow money at low rates -- and why the demand for their mortgage securities did not dry up as investors abandoned other mortgage-related investments.


Now go on an post some silly talking points in reply.
9.16.2008 3:32pm
PC:
The Ace:

I'm not going to defend Fannie and Freddie. I think they should be the top results if you Google "moral hazard." They had implicit government backing that allowed them to leverage way beyond any sense of responsibility. You know what would have helped control some of that? Oversight.

EH: Nouriel Roubini says a big part of the current crisis is not subprime mortages, but a subprime financial system. He thinks The Fed kept interest rates too low for too long, which encouraged riskier lending through the profit motive.

But Roubini is one of those ivory tower interlectuals (in cosmopolitan New York!) that has a bunch of book lernin'. I bet he hasn't field dressed a single moose!
9.16.2008 3:35pm
The Ace (mail):
You know what would have helped control some of that? Oversight.

Which the party you vote for fought against every step of the way.


In October 1992, a brief debate unfolded on the floor of the House of Representatives over a bill to create a new regulator for Fannie Mae and Freddie Mac. On one side stood Jim Leach, an Iowa Republican concerned that Congress was "hamstringing" this new regulator at the behest of the companies.

He warned that the two companies were changing "from being agencies of the public at large to money machines for the stockholding few."

On the other side stood Barney Frank, a Massachusetts Democrat who said the companies served a public purpose. They were in the business of lowering the price of mortgage loans.

Congress chose to create a weak regulator, the Office of Federal Housing Enterprise Oversight. The agency was required to get its budget approved by Congress, while agencies that regulated banks set their own budgets. That gave congressional allies an easy way to exert pressure.


Want to take a guess at who controlled Congress in 1992?
9.16.2008 3:36pm
Glenn W. Bowen (mail):

If violent crime is down, why is the cost of ammo up?


Two words: "Karl Rove".
9.16.2008 3:38pm
The Ace (mail):
You know what would have helped control some of that? Oversight.

And, I gotta say you're completely wrong on that. How is "oversight" possible when:

A. Congress pressures you to make, buy, and sell risky loans

B. Congress appoints your regulator

C. HUD pressures you to make, buy, and sell risky loans

The way to "control" this was to never have a GSE in the first place.
9.16.2008 3:39pm
CB55 (mail):
The godfathers of banking and financial deregulation is none other than the strange bedfellows of Bill Clinton and Phil Gramm.

Gramm was one of five co-sponsors of the Commodity Futures Modernization Act of 2000. One provision of the bill was referred to as the "Enron loophole" because the House Agriculture Committee drafted it and it was later applied to Enron. Some critics blame the provision for permitting the Enron scandal to occur. At the time, Gramm's wife was previously on Enron's board of directors.

Later in his Senate career, Gramm spearheaded efforts to pass banking reform laws, including the landmark Gramm-Leach-Bliley Act in 1999, which served to reduce government regulations in existence since the Great Depression separating banking, insurance and brokerage activities.

Years later, critics of Gramm point out that this same legislation may have been pivotal in encouraging the corporate practices that led to the 2008 mortgage crises in America.

Between 1995 and 2000 Gramm, who was the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, received $1,000,914 in campaign contributions from the Securities &Investment industry.

Later, as lobbyist for Swiss bank UBS, Gramm pressured congress ease it's restrictions on predatory lending tactics by mortgage brokers. For his efforts, Gramm received $750,000 from UBS in a one year period starting in 2007.

On July 18, 2008 Gramm stepped down from his position with the McCain campaign. However, he often accompanies McCain during the campaign, and continues to be an unofficial adviser on economic and financial matters.

Goldman Sachs and hedge fund/vulture fund managers have all played a key role in the Bush Admin, Obama and McCain economic and tax policies right up to and including the crash of 2008.
9.16.2008 3:42pm
NickM (mail) (www):
How many of the brokers on the street will be taking the gravitational path from their offices?

Nick
9.16.2008 3:51pm
one of many:
hattio,
obviously you have never had occasion to deal with shoplifting gangs, but yes it is. I once had the pleasure of watching a tape of a 3-person gang taking over $4,000 worth of books out of a bookstore in 15 minutes. Sure the resale value of stolen books is probably only a few hundred dollars, but not bad for 15 minutes work and the bookstore was just chosen because it was in the same mall the gang was working for more valuable items. If you add in the shoplift/return scam (higher profit than selling items as stolen) it can be a very profitable enterprise.
9.16.2008 3:52pm
A. Zarkov (mail):
PC:

"A. zarkov: This is a flip rejection (without evidence to back it up) of an important component of the mortgage-credit crisis."


The mortgage crisis was the cause of the credit crisis. We have both now.

" ... but saying it's the primary cause is a wingnut talking point."


I don't know what you mean by "primary." Suppose the government and other organizations had never pressured the banking industry to lower their standards so the underclass could buy houses. Would we have had a mortgage crisis anyway?
9.16.2008 4:06pm
CB55 (mail):
At 8 bucks an hour Pete's Coffee House is looking for Java Beans Engineers.
9.16.2008 4:17pm
Joe Kowalski (mail):
While the subprime lending debacle was in part caused by the stupidity of opening up the underwriting standards far too wide, the other side of that equation was the Fed's choice to keep interest rates way too low, way too long. Without all that extra cash flooding into the markets, needing to be invested somewhere, the subprime lenders wouldn't have had the money to throw at borrowers who were told by those nice fairy godmother(father) mortgage brokers &real estate agents that, "yes, it doesn't matter that you only make $30k a year and have spotty credit, you can have this $300,000 house, no problem!" There's lots of blame to go around....
9.16.2008 4:26pm
CB55 (mail):
Joe Kowalski:


Believe it or not all of the debtors were naive, some were savvy investors. Savvy investors saw real estate as a gold brick that and no limit in return as to investment. They got in today on a string of Condos in FL and NYC and sold the next month. They were not in it for the long haul.

The system has thrown every one to the wolves. Every one is now an Expert in everything from health care and health, old age care, disability, workers comp, credit cards, auto insurance, life insurance, home owners/renters insurance career management etc.

I doubt if there is any one here that is an expert or has an expert in all of the above.
9.16.2008 4:41pm
PC:
The mortgage crisis was the cause of the credit crisis. We have both now.

The mortgage crisis exacerbated the credit crisis, maybe even triggered it, but it was going all going to go down at some point. There was too much cheap money floating around because of, as others have pointed out, artificially low rates set by the Fed. Savings rates were at a negative because people were spending outside of their means.

Sorry, you can't blame that on underwriting standards.
9.16.2008 4:47pm
CB55 (mail):
PC:

Governing and business elites have been lying about the real economy to the American people for years and like good sheep most Americans believe it. It is under reported by the media and spun by employers and schools. The media has spend more time on Palin's most hated books, Rev Wright and the house count of Mccain and Paris Hilton than trying to educate the public about things that matter most.
9.16.2008 5:09pm
A. Zarkov (mail):
"There was too much cheap money floating around because of, as others have pointed out, artificially low rates set by the Fed."


Low interest rates are not the cause of bad mortgages,. It's poor underwriting that causes lender losses. Explain how the following mortgage loan is going to go into default with the lender suffering a loss.

1. LTV= 0.8

2. Credit score= 700

3. W2 income (averaged over 2 years) verified by employer

4. Principle= 3 x yearly salary

5. Appraisal based on site visit by an independent qualified appraiser

6. Applicant not qualified on teaser rate.

7. Maximum monthly payment < 1/4 monthly salary

The above loan is highly unlikely to cause a loss to the lender; after all he has a 20% cushion.


But the industry didn't use prudent underwriting practices; they gave out liar loans and NINJA loans, and qualified applicants on teaser rates. Some had LTV= 100%. In many cases even the closing costs were provided by the seller using a surrogate, often some community group. If they hadn't done all this we would not have had a mortgage default crisis triggering a credit crisis.
9.16.2008 6:52pm
NickM (mail) (www):
A. Zarkov - a lender can still suffer a loss in that situation, especially in a nondeficiency state, if the market drops more than 20%. I saw yesterday a list of the 10 worst housing markets in year-over-year pricing (most of which were in CA, including the Los Angeles market) - 9 of them had >20% drops.

Nick
9.16.2008 7:53pm
PC:
Low interest rates are not the cause of bad mortgages,. It's poor underwriting that causes lender losses.


I never said low interest rates caused bad mortgages. As to underwriting, while the government encouraged lenders to expand who they would lend to, I don't remember the government creating NINJA loans, or option arms, or HELOCs, or creating CDOs, or making ratings agency give high ratings to bundled garbage, etc.

What I do remember is the government looking the other way as this mess was snowballing. I remember the government looking the other way when mortgage companies were writing liar loans, banks were underwriting then bundling those loans then selling them off as investment vehicles. I remember the Fed keeping interest rates low so there was easy money to slosh into the system to prop up the facade of a healthy economy.

So yes, the government may have kicked this off to some degree by encouraging a broader base of loan qualifications, but the government did absolutely nothing to curb the worst of the abuses by broker, lenders and customers. Top that off with investment banks that have 34:1 leverage and are counter-parties to trillions of dollars in a completely unregulated credit default swap market (wave bye-bye Bear Stearns) and we see the mess we're in today.
9.16.2008 8:25pm
A. Zarkov (mail):
NickM:

The reason we are experiencing >20% drops in some markets is directly related to poor underwriting standards causing an abnormal market. Poor underwriting leads to a high default rate which leads to a surplus of housing on the market. Indeed many houses were built in the first place because lax lending standard increased demand. Those markets had income/price ratio of about 10, more than three times the historical value. Moreover most people who can make their mortgage payments do so, even with negative equity. But the lending standard virtually guaranteed that a large number of people would be unable to make their payments once their ARM reset. We have not had drops in prices this large since the great depression.
9.16.2008 8:26pm
A. Zarkov (mail):
PC:

I think we are basically in agreement. All those abuses you list are certainly important factors in creating this mess. But with the proper underwriting standards all those tricks and frauds like bogus credit ratings would not have been necessary. A CDO based on a package of high quality mortgages would not have been a problem. The problem was trying to make a silk purse out of a sow's ear. You need to start out with silk. But let's face it, had the banks tried to impose high standards for loans, they would have faced charges of racism and the Fed threatened to withhold M and A permissions until a bank could show the appropriate stats, which meant loans to unqualified minorities.
9.16.2008 8:37pm
A. Zarkov (mail):
Whoops. Make that price/income ratio.
9.16.2008 8:38pm
deepthought:
News alert: The Fed is planning to take an 80% stake in AIG in exchange for $85B loan.

Let it fail. Let it fail. Let it fail. Let it fail. Let it fail. Let it fail. Let it fail.
9.16.2008 10:15pm
PC:
Let it fail.

Letting AIG fail would trigger a world wide depression. They insure a lot of the financial industry. Luckily the Fed isn't giving AIG "free" money. The loan rate is 3 month LIBOR plus 850 basis points (I have a better rate on my credit cards).

Interestingly it seems that AIG was knee deep in credit default swaps.
9.17.2008 12:45am
deepthought:
PC says:


Letting AIG fail would trigger a world wide depression.


What evidence is there that it would lead to a "world wide depression?" Please cite your sources. AIG, along with Lehman Bros., was a moving force behind the creation of the subprime mortgage debacle. Why shouldn't they be punished for their mistakes? While AIG's failure might lead to disruption of the financial markets, think of its failure as cleaning the Augean Stables of the financial industry.

At least we know who the socialists are in this country. . . . and it's not the Democratic Party, since it's a Republican administration has engineered the takeover of Freddie Mac, Fannie Mae, and AIG and offered subsidies, through the Fed, to the financial industry over the last two months.

The subsidies given to the financial industry pale in comparison to the meager assistance given to homeowners. Apparently homeowners must pay the price for their bad decisions through foreclosure while the financial industry is allowed to have its stupid decisions paid for by the American taxpayer.

Let it fail. Let it fail. Let it fail. Let it fail.
9.17.2008 1:43am
PC:
deepthought: Read the link I posted. No one really "knows" what would have happened if AIG failed, but pretty much everyone agrees that it would not be good. AIG is being bailed out for the same reason Bear Stearns was bailed out: the unregulated shadow banking system. No one really knows how deep that rabbit hole goes.

As far as Lehman goes, I don't think they were as exposed on CDSs as Bear and AIG. There was a small announcement on Sunday that trading would open temporarily before the markets opened. I heard from a guy in the City that firms were moving their CDSs away from Lehman to other companies so a blood bath would not occur as soon as Lehman declared bankruptcy. Things were...hectic.
9.17.2008 3:23am
PC:
btw, I'm not endorsing the bailout of AIG. I'm just passing on what I've read and heard from some friends in the business.
9.17.2008 3:27am
NickM (mail) (www):
Zarkov - I agree with you about why we're experiencing those drops in the first place; my point is that once the marketwide standards have gotten far out of whack, even lenders who make only loans that are sensible by traditional standards are caught up in the mess because the appraisals become based on bubble valuations.

Nick
9.17.2008 10:55am