News Can the market alone fix the economy?

[OmCheeto]

You were just proposing above that mortages could not be resold?

That was me. Whowee dropped his close [/quote]

 

[WhoWee]

Schumer appears to be the pure politician. I can't find in his bio where he's ever had a job, any job, other than professional politician. Graduated from law school and went straight to the NY State Assembly at the age of 23.

I guess his studies and tenure in government make him an authority on the needs of the "common man"?

I will give him credit though, he does enable a convincing argument for term limits.

 

[WhoWee]

That was me. Whowee dropped his close

[/QUOTE]


My mistake...sorry.

I'd like to go 1 step farther than Phil Gramm. I think banks/mortgage companies should not loan on land for new construction (including tear down - rebuilds)...and restrict the loans to a percentage of land value...maybe 50% on existing properties. This requirement would prevent uncontrolled speculation. Admittedly, it will also suppress real estate values...but that's where the problem often begins.

In the late 80's, the Japanese had inflated land values (their banks actually encouraged it) and they used the extreme leverage to buy a lot of prime real estate in Hawaii and on the West Coast. They ran the land cost up BUT the properties couldn't support the debt service...it was a problem.

We saw the same activity in the latest housing bubble. Developers went into the countryside around Metro Washington/Baltimore (for instance) and bought farm land for (a great price for farm land) perhaps $10,000 to $20,000 per acre. The farmer with 200 acres and a sore back couldn't say no to the opportunity to become an overnight multi-millionaire.

Then the developers cut the land up into 1/2 acre lots and started building. By 2007, these 1/2 acre lots were often selling for $300,000 each, add a $300,000+ McMansion and you have a $600,000+ housing bubble participant.

Or take suburban Springfield, VA where a 1,200 square foot ranch which sold for $100,000 in 1982 (same house about $80,000 in N.E. OH)...jump forward to 2007...builders were so short on land inventory they were buying the same 1,200 sq ft ranches for $400,000 to $500,000 TEARING THEM DOWN and building new $500,000+ homes (on the same lot the 1,200 sq ft occupied) and sold many for $1,000,000...more housing bubble participation. By the way, the comparable 1,200 sq ft home in N.E. OH only appreciated to about $100,000 to $150,000.

My contention is this, if the bank told the first time home buyer they needed $300,000 down to buy the $600,000 home...that the land was overpriced and they (based on asset value) were restricted from making RISKY loans...they would have been forced to renegotiate (re-think) with the builder...perhaps cash him out on his cost (or even double his cost) and let THE BUILDER carry paper on the land if he wouldn't reduce the price. If the builders shared the risk (and weren't allowed to borrow on the land either) and the loans were 30 year fixed...the banks would have stronger portfolios, and unless the home buyers lost their jobs...foreclosures would be reduced.

There is another aspect as well...in some areas (Columbus, OH comes to mind) huge tracts of land were owned by a few large developers/speculators. They bought the land (in some cases years ago) at reasonable rates ($500 to $5,000 per acre). As the building boom expanded, builders had to deal with these local "land Barons". The same thing happened...builders out-bid each other and ran the prices up. Lot's of condos went up to reduce the amount of land used per project and home buyers likewise chased the prices...in 2007, $350,000 condo prices were considered "mid-range" and $1,200,000 were a high average...in Columbus, Ohio. Now there is pain in the market...and unsold/over priced inventory...and a few VERY over-leveraged builders.

Bottom line...if there is no limit to the leverage...there is no limit to the price.

 

[DrClapeyron]

I assume the above was written by Paul Krugman.

hmmm... Here's an interesting note by him:



So what does all this mean to me?

Growth investment whereby people place their money in stocks or mutual funds in anticipation that a company's stock value will rise. I remember years ago, late 1990's, when Warren Buffet said that investment in stocks which did not pay dividends is a mistake. So when people invest for the sake of growth they do not care about the performance of the company; whether they make money, lose money, make widgets or simply cook the books to raise the value of their stock to attract more investors (Enron) is of no concern.

 

[WhoWee]

Growth investment whereby people place their money in stocks or mutual funds in anticipation that a company's stock value will rise. I remember years ago, late 1990's, when Warren Buffet said that investment in stocks which did not pay dividends is a mistake. So when people invest for the sake of growth they do not care about the performance of the company; whether they make money, lose money, make widgets or simply cook the books to raise the value of their stock to attract more investors (Enron) is of no concern.

Can't argue with that...it's been the broker's sales pitch for utilities for a long time.

If you bought a business...you'd hope for income...unless you're a venture capitalist and your strategy is to pump it up, package it and cash out. The only problem is they control the deal...you don't.

 

[Astronuc]

So when people invest for the sake of growth they do not care about the performance of the company; whether they make money, lose money, make widgets or simply cook the books to raise the value of their stock to attract more investors (Enron) is of no concern.

True as long as the growth continues until they cash out. But then when the stock tanks (e.g. when Enron, WorldCom, et al collapsed) - people get upset.

Charles Morris indicated "people hate losing money more than they like making it".

The only problem is they control the deal...you don't.

Especially when "irrational exhuberance" overwhelms once sense of responsible investing.

Morris's comment on going forward:

Now it's time that we take the same harsh measures we have long preached to other countries. Re-energizing consumer borrowing and spending with cheap money is exactly the wrong prescription. Consumption has to fall by at least 4-5 percent of GDP, and the money has to be shifted to savings and investment. They hypertrophied financial sector has to shrink drastically. [which it has] And we have to run down the huge over-hang of dollar-based debt by producing more than we buy for the first time in a long time - in effect, by working harder and living poorer.

Time for a little austerity.

 

[WhoWee]

An emotion based..."Fear of Loss" is a salesperson's dream.

 

[DrClapeyron]

An emotion based..."Fear of Loss" is a salesperson's dream.

The US government is using the 'too big to fail' campaign in a similar manner. We are told that the loss of anyone large US bank could spell impending doom to the US capital markets: bonds, stocks and money.

http://www.henryckliu.com/page15.html

The equity markets since the 9/11 terrorist attacks are no longer free markets. They are now a scam operated in the name of patriotism to transfer through managed volatility by the Plunge Prevention Team, of which the Fed is a charter member, the losses that have already occurred but yet hidden to unsuspecting small investors who were too patriotic to sell immediately. The new financial normalcy is a totally new system. The US has entered a new phase of state capitalism with the government deciding who survives and who fails. The American system is being attacked by both Terrorism and the War on Terrorism...

...What kind of logic supports the Fed’s acceptance of a 6% natural rate of unemployment to combat phantom inflation while it prints money without reserve, thus creating systemic inflation to bail out reckless private speculators to fight deflation created by a speculative crash?

Liu's claim is the following: repos use mortgage-backed securities to gain short-term funds. When the repo market becomes speculative the bubble grows, and the repo bubble is tied into the housing market which then bursts after the bubble stops growing.

 

[Vanadium 50]

Variable rates on home loans need to be abolished...they are the culprit...created unnecessary risk.

I was able to buy my first home through a variable rate mortgage.

 

[mheslep]

I was able to buy my first home through a variable rate mortgage.

What do you by mean 'able'? No fixed rate available, or could not afford a fixed rate? In the latter case you'd agree you were gambling your house on the guess that the rates would not rise?

 

[Vanadium 50]

Actually, I was certain that the rates would rise. The ARM had a "teaser rate" that would increase in two years. By a combination of paying more than the minimum and refinancing when appropriate, I paid for my house in 9 years.

An ARM is a financial tool, like any other. It can be used or misused.

 

[OmCheeto]

I was able to buy my first home through a variable rate mortgage.

So did I. I don't understand the problem with them. Though I later switched to a fixed rate, and then again to a lower interest fixed rate. It may have been that my house was a fixer upper and I knew that I could double the value in less than 6 months. Though the county did this for tax purposes for me before I even moved in. Dirty rotten scoundrels...

But that doesn't fix the economy, or prevent us from buggering it again.

My original ARM started at 9%, and had a 14% cap.
So even if it had maxed out in the first year, I'd still have easily made the payments.
People should be cautioned against an ARM with an interest cap which would exceed their ability to pay.
My payments have always been around 20% of my net income.

Is/was there an industry standard for lending on a home?

 

[mgb_phys]

Is/was there an industry standard for lending on a home?

It used to be 3.5x main income or 2x joint income with a 10% deposit

 

[WhoWee]

So did I. I don't understand the problem with them. Though I later switched to a fixed rate, and then again to a lower interest fixed rate. It may have been that my house was a fixer upper and I knew that I could double the value in less than 6 months. Though the county did this for tax purposes for me before I even moved in. Dirty rotten scoundrels...

But that doesn't fix the economy, or prevent us from buggering it again.

My original ARM started at 9%, and had a 14% cap.
So even if it had maxed out in the first year, I'd still have easily made the payments.
People should be cautioned against an ARM with an interest cap which would exceed their ability to pay.
My payments have always been around 20% of my net income.

Is/was there an industry standard for lending on a home?

This explains the consumer side of the equation.

http://www.federalreserve.gov/pubs/arms/arms_english.htm#arm

There are some built in risks if rates rise.

The other side of the equation is the way the loans are bundled and sold/re-sold. Your example of an initial rate of 9% with a cap of 14% = 5% margin.

this is a good read

http://www.globalresearch.ca/index.php?context=va&aid=7413

this is an excerpt:

"That was in 2005. The most Sub-prime mortgages written with Adjustable Rate Mortgage contracts were written between 2005-2006, the last and most furious phase of the US bubble. Now a whole new wave of mortgage defaults is about to explode onto the scene beginning January 2008. Between December 2007 and July 1, 2008 more than $690 Billion in mortgages will face an interest rate jump according to the contract terms of the ARMs written two years before. That means market interest rates for those mortgages will explode monthly payments just as recession drives incomes down. Hundreds of thousands of homeowners will be forced to do the last resort of any homeowner: stop monthly mortgage payments.

Here is where the Ohio court decision guarantees that the next phase of the US mortgage crisis will assume Tsunami dimension. If the Ohio Deutsche Bank precedent holds in the appeal to the Supreme Court, millions of homes will be in default but the banks prevented from seizing them as collateral assets to resell. Robert Shiller of Yale, the controversial and often correct author of the book, Irrational Exuberance, predicting the 2001-2 Dot.com stock crash, estimates US housing prices could fall as much as 50% in some areas given how home prices have diverged relative to rents.

The $690 billion worth of “interest only” ARMs due for interest rate hike between now and July 2008 are by and large not Sub-prime but a little higher quality, but only just. There are a total of $1.4 trillion in “interest only” ARMs according to the US research firm, First American Loan Performance. A recent study calculates that, as these ARMs face staggering higher interest costs in the next 9 months, more than $325 billion of the loans will default leaving 1 million property owners in technical mortgage default. But if banks are unable to reclaim the homes as assets to offset the non-performing mortgages, the US banking system and a chunk of the global banking system faces a financial gridlock that will make events to date truly “peanuts” by comparison. We will discuss the global geo-political implications of this in our next report, The Financial Tsunami: Part 2. "

 

[Vanadium 50]

Is/was there an industry standard for lending on a home?

No more than 28% of gross income for housing expenses, and no more than 36% of gross income for all debt + housing expenses. Usually a 10% minimum down payment is required, although for some programs (e.g. FHA) it can be lower.

With a 5.4% 30-year fixed mortgage and no more than 8% in other debt, that works out to 4.3x annual income.

 

[OmCheeto]

No more than 28% of gross income for housing expenses, and no more than 36% of gross income for all debt + housing expenses. Usually a 10% minimum down payment is required, although for some programs (e.g. FHA) it can be lower.

With a 5.4% 30-year fixed mortgage and no more than 8% in other debt, that works out to 4.3x annual income.

Odd. By that standard I could have purchased a house for $60,000.
My house cost $22,600, and they would not let me have the loan unless I put 20% down.
Which I did. (Who could pass on a house for the price of a new car?)
So I ended up with an $18,000 mortgage on a $15,000 a year income.

hmmm...

Maybe they need to include food and toilet paper costs into future equations when dealing with sub-primers.

 

[Vanadium 50]

During the worst of the bubble, the 36% number was relaxed. I've heard numbers like 55%.

After all, since the price of the underlying asset will increase without bound, what's the risk?

The people who seem to be in real trouble aren't the first time homeowners. They are the people who cashed out the equity in their homes and then spent it.

 

[OmCheeto]

During the worst of the bubble, the 36% number was relaxed. I've heard numbers like 55%.

After all, since the price of the underlying asset will increase without bound, what's the risk?

The people who seem to be in real trouble aren't the first time homeowners. They are the people who cashed out the equity in their homes and then spent it.

Um. You're talking about me...
My current principal is now $43,000.
Though I can afford to pay $400-$500/month on the principal now.
I realized 2 years ago that I only had 10 years until retirement.
I decided I should have the house paid off by then.

I just http://www.building-cost.net/CornersType.asp" on what my house would cost to build today.
$34,000 if I build one myself, and $78,000 to have someone else build it.
Based just on the house and the 78k value, I'd say I've not been too foolish.
But based on my property tax statement, I wouldn't max out unless I borrowed another $110,000!

last years RMV = $140,000
this years RMV = $154,000

... Bwah hahahahaha!

Although... I should pay off my high interest rate credit card, and I do need about $8000 for home energy independence improvements and automotive R&D funding.

hmmm... $60000 over 8 years at 5.75% yields $900/month(with taxes)

That's $200 a month less than I'm paying now for the house and card.

Is anyone lending money nowadays?

 

[Astronuc]

I was sitting next to a guy from Goldman Sachs on a flight last night, and he was reading Michael Lewis's Panic. I mentioned that it would be great that institutions like GS would put together an Entrepreneurship Fund so that they could finance startups, rather than wait around for prodding by the government. He said he expects GS and others to do that pretty soon - within the next year.

I also think it would be worthwhile for technology companies to encourage new innovative ideas, and if it's not in the business plan or it's not a core technology, then spin it off as a new company.

Right now small startups must find an incubator somewhere. This morning, I heard about a small business incubator in Youngstown, PA, which focuses on companies doing B2B software.

 

[WhoWee]

I was sitting next to a guy from Goldman Sachs on a flight last night, and he was reading Michael Lewis's Panic. I mentioned that it would be great that institutions like GS would put together an Entrepreneurship Fund so that they could finance startups, rather than wait around for prodding by the government. He said he expects GS and others to do that pretty soon - within the next year.

I also think it would be worthwhile for technology companies to encourage new innovative ideas, and if it's not in the business plan or it's not a core technology, then spin it off as a new company.

Right now small startups must find an incubator somewhere. This morning, I heard about a small business incubator in Youngstown, PA, which focuses on companies doing B2B software.

Actually it's in Youngstown, OH. The number one success story (so far) is Turning Technologies

http://www.turningtechnologies.com/

 

[Ivan Seeking]

Just a reminder: The first airing begins in 15 minutes. It should be available online after that.

For those struggling to make sense of the economic crisis, help is on the way. Inside the Meltdown is producer Michael Kirk's gripping account of how the country ended up in the worst financial crisis since 1929. The program airs Tuesday night on PBS and will be watchable online after that. This preview excerpt tracks the crisis back upstream to a key source -- the government's failure to heed early warnings on the housing bubble, and the havoc that ensued as a result.

http://www.pbs.org/wgbh/pages/frontline/story/2009/02/banking-at-the-brink.html

 

[ThomasT]

Just a reminder: The first airing begins in 15 minutes. It should be available online after that.


http://www.pbs.org/wgbh/pages/frontline/story/2009/02/banking-at-the-brink.html

I just finished watching this program, and I must say that I still don't understand the situation.

Is it that all of these financial institlutions have been and are so heavily leveraged that they have been and are writing checks that can only be covered if some other institution writes them a check that can only be covered if some other institution writes them a check ... and so on? So, is the whole thing based on promises that ultimately, if the collective 'bluff' is called, can't be kept?

So, even if there was, eg., a certain 'toxicity' wrt the packaging and speculation on large bundles of mortgages, the whole financial world or 'investment economy' is a sort of house of cards anyway?

Is the beginning of the non-confidence domino effect traced back to a million or so mortgage defaults? This doesn't seem to account for enough cash to have affected the investment economy, and as a result the real economy, as greatly as it has. What I mean is, was Lehman Bros., AIG, Fannie Mae, Freddie Mac, etc. cash flow affected that greatly just because of the mortgage stuff?

 

[Ivan Seeking]

I just finished watching this program, and I must say that I still don't understand the situation.

Is it that all of these financial institlutions have been and are so heavily leveraged that they have been and are writing checks that can only be covered if some other institution writes them a check that can only be covered if some other institution writes them a check ... and so on? So, is the whole thing based on promises that ultimately, if the collective 'bluff' is called, can't be kept?

So, even if there was, eg., a certain 'toxicity' wrt the packaging and speculation on large bundles of mortgages, the whole financial world or 'investment economy' is a sort of house of cards anyway?

Is the beginning of the non-confidence domino effect traced back to a million or so mortgage defaults? This doesn't seem to account for enough cash to have affected the investment economy, and as a result the real economy, as greatly as it has. What I mean is, was Lehman Bros., AIG, Fannie Mae, Freddie Mac, etc. cash flow affected that greatly just because of the mortgage stuff?

My take is that slowly everyone began to realize the depth of the problem with not only toxic assets, but also the credit default swaps - that some or much of the investment sector was insolvent. At that point it became a confidence domino effect. So it wasn't that confidence evaporated for no reason; people realized that some unknown number of companies were garbage and there was no way to be sure who was solvent and who wasn't. At that point the credit markets froze.

Note that these companies were not only liable for their own toxic assets, but with the credit default swaps they were liable for the toxic assets that they had inadvertently insured. And from what I gather, this liability even extended generally to the stock market.

 

[Ivan Seeking]

Here we go. There is a timeline and some analysis along with the one-hour video.
http://www.pbs.org/wgbh/pages/frontline/meltdown/

 

[mgb_phys]

I also think it would be worthwhile for technology companies to encourage new innovative ideas, and if it's not in the business plan or it's not a core technology, then spin it off as a new company.

I worked for a company that did that - unfortunately what happened was more like:

Spin off startup company with $X of funding, and attract partners with $Y funding.
Then nickel and dime your $X back from the company with staff transfer fees, rents for incubator space, technology license fees, etc until you have got back the $X and most of the $Y. Then let the company fold.

Apparently the investment of the $X gets a whole bunch of tax breaks for investment, and all the money coming back looks like income to Wall St. Plus you get to basically rob the $Y as a bonus.

 

[turbo]

Just a reminder: The first airing begins in 15 minutes. It should be available online after that.


http://www.pbs.org/wgbh/pages/frontline/story/2009/02/banking-at-the-brink.html

Thanks for the heads-up Ivan. I'll have to watch it on-line. We're in the heat of the high-school basketball tournaments, and in Maine, that preempts all other PBS programming, including the News Hour. Hoops is king here.

 

[Astronuc]

Perhaps the government can start collecting from tax evaders.

UBS to pay $780M, open secret Swiss bank records
http://news.yahoo.com/s/ap/20090218/ap_on_bi_ge/ubs_secrets

WASHINGTON – Banking giant UBS has agreed to pay $780 million and turn over once-secret Swiss banking records to settle allegations it conspired to defraud the U.S. government of taxes owed by big clients.

As part of the deal struck in federal court in Fort Lauderdale, Fla., UBS has made the unprecedented step of agreeing to immediately turn over to the U.S. government account information for U.S. customers of the bank's cross-border business.

In doing so, federal authorities have struck a big crack in Switzerland's vaunted bank secrecy laws.

UBS will pay $780 million in fines, penalties, interest and restitution for conspiring to create sham accounts to hide the assets of U.S. clients from the U.S. government.

"We accept full responsibility for these improper activities," Peter Kurer, chairman of Swiss-based UBS AG, said in a statement. He added that the bank was determined to abide by the terms of the deal with U.S. criminal and securities officials.

. . . .

Going after banks in the Carribean and Atlantic should be on the agenda.

General Electric CEO declines bonus for 2008
http://news.yahoo.com/s/ap/20090218/ap_on_bi_ge/general_electric_executive_compensation

WASHINGTON – General Electric Co. Chairman and Chief Executive Jeffrey Immelt declined a 2008 bonus and millions of dollars in performance awards, saying Wednesday that the company's falling profits and plummeting share price prompted him to forgo the payments.

The Fairfield, Conn.-based conglomerate, which makes everything from locomotives to household appliances, said in a filing with the Securities and Exchange Commission that Immelt will not receive his $11.7 million long-term performance award. Immelt received no bonus and his base salary of $3.3 million was flat with his 2007 paycheck. In 2007, GE paid Immelt a $5.8 million bonus.

The pay decisions, which the board made at Immelt's request, come after painful year for GE as the economy sank into a deeper recession and the financial crisis intensified. Earnings dropped 22 percent, company profit targets were missed, a restructuring of the GE's lending unit began, and shares lost more than half their value.

"Earnings came in well below where we expected. The broad equity markets, and GE's stock price, declined significantly in 2008. In these circumstances, I recommended to GE's board of directors that I not receive a bonus for 2008," Immelt said in a statement.

And the company continues to face challenges. Many investors believe GE will be forced to cut its dividend, now forecast at $1.24 per share for the year, if it can't generate enough cash flow to maintain the quarterly payouts. GE has said it will pay half the dividend but will evaluate whether to pay the remainder.

And the company risks losing its critical "AAA" credit rating this year because of GE Capital's woes. Ratings agencies Moody's Investors Service and Standard & Poor's are both reviewing their top ratings for GE this year. GE's stock, down another 33 percent so far in 2009, is trading at levels not seen since the mid-1990s.

. . . .

Kudos to Immelt, despite the difficulty. GE is a pretty good buy now, even if they cut the divident in half.

 

[mgb_phys]

Going after banks in the Carribean and Atlantic should be on the agenda.

More difficult since they have nothing to gain by helping the US.
UBS (like the similair case with Lloyds) want to operate on Wall St and so have to do what the Fed asks to a certain extent.
They have a lot less influence over a Caribbean offshore bank, the most they could do is threaten to arrest any employees that fly via the US - as they have done with off shore gambling.

 

[mheslep]

I was disappointed that Frontline did not interview Bethany McLean for Meltdown. She's written the most comprehensive and readable prose yet on the background.
http://www.vanityfair.com/politics/features/2009/02/fannie-and-freddie200902

 

[OmCheeto]

Another step in fixing the economy is to return confidence in the system.

Investors in Madoff's scheme may be required to return profits, since those profits weren't really profits. They were someone else's money.

Enter the newest word I've learned today: clawback

http://www.boston.com/business/articles/2009/02/21/madoff_creditors_get_first_report/"
By Beth Healy
Globe Staff / February 21, 2009

Indeed, customer claim forms will, in part, be the road map by which the trustee pieces together who may have received money that should be taken back, or subject to a so-called clawback. Investors who have taken out significant funds from their Madoff accounts over the years may have to return some of it.

And of course, you know what's are telling people just to be quiet and maybe no one will notice the piles of cash in their closets:

Some lawyers are counseling investors against submitting claims. Boston lawyer Pete Michaels said, "If you put in $300,000 and you've taken out $500,000, then you've got nothing to gain by filling out a SIPC form."

Oh shoot... I see it made word of the week last year. I'm always behind.

http://nancyfriedman.typepad.com/away_with_words/word_of_the_week/page/2/"

Clawback: Previously given monies or benefits that are taken back because of specially arising circumstances. Also: a retraction of stock prices or of the market in general.

"Claw back" (the verb form) with this financial definition first appeared in print around 1953, and has been used chiefly in Great Britain and Commonwealth countries. ("Clawback" had an earlier meaning of "sycophant" or "flatterer.") It was picked up by investment bankers and venture capitalists in North America but was rarely used in general parlance until the recent global economic crisis. It's now seen with some frequency in reference to the retraction of large management bonuses. The violence of the image suggests that the effort will be a bloody one.

Insert cute metaphorical analogy here: _______________________