Government says, "All your banks are belong to US." (was Freddie and Fannie thread)

[TheCracker]

BTW if you had a 180,000 mortgage with say Lehman brothers, and they went bust, does that now mean you have no mortgage and you own the house?

No, i believe it means you now owe the money to whichever shark picks up the debt.

 

[Vasco]

in the united states of australia im watching this closely.. wonder what effect it will have on us. Apparently our major banks didnt invenst into subprime mortgage so they say that it wont effect our banks much. But in saying that if major US financial co-operations go down, surely Aussie banks will be effected...

BTW if you had a 180,000 mortgage with say Lehman brothers, and they went bust, does that now mean you have no mortgage and you own the house?

Yeah, glad to see the Macquarie shares go back up, we were all like damn you market can't you see we're not that exposed to them!!!

I don't think the effect will be too far reaching on us though at the moment as the RBA has said, I think similar to Macquarie most other banks in Australia aren't too exposed to the crisis.

 

[livemusic]

I found this article in today's Guardian which expresses what I was trying to say alot better...

http://www.guardian.co.uk/commentisfree/2008/sep/25/wallstreet.useconomicgrowth

Link doesn't work for me.

 

[Touring Mars]

👍 for the heads-up... I accidentally deleted a / Link should work now...

 

[FoolKiller]

What I don't fully understand is to what extent government regulation (or rather, the lack of it) has caused the current financial/economic crisis... what seems to be abundantly clear is that it could not have been wise to have allowed a bunch of investment bankers the complete freedom to take serious risks with almost unimaginable sums of other people's money... I agree that they shouldn't be allowed off the hook for their irresponsible behaviour (and sheer greed), but the bail-out is (to my understanding anyway) not designed to benefit the bankers, but to protect Joe Q Public whose life savings/mortgages/investments depend upon the survival/health of the financial system generally.

Well, part of this is stemming from mortgages that should have never been given out. They were given to people with poor credit ratings, low-incomes, the general stuff that makes a high-risk loan. To help counter the risk the mortgage firms give them an adjustable interest rate. Of course, when the economy has a bad turn it causes the payments to increase and if these people have one unexpected expense they default on their loans. It is a security net. Unfortunately, what wasn't predicted was massive amounts of people defaulting all at once. The banks can't turn around and sell the houses fast enough to prevent losses. For decades some of these banks were safety net investments. Some people invested in them on their own, others through funds.

Now, one would ask; Why would a bank give these people a loan in the first place? This is where government intervention and regulations screwed it up. If you read the Ron Paul commentary on CNN that Danoff posted he discusses the Community Reinvestment Act (1977) and how that started us on this path by requiring that banks provide loans to people they normally wouldn't. In 1995 the Clinton Administration increased the number of these loans that had to be given out.

The very fact that these banks etc. are coming cap in hand to the government for an emergency bail-out would leave any non-socialist government with a major dilemma - stay true to the doctrine of capitalism at all costs and let everyone (from the richest city banker to the lowly saver in the street) pay the penalty, or consider intervention...

It isn't that bad. Most localized banks with FDIC (basically insurance) are fine. The only ones that are getting slammed ultra-hard are the national companies that were handing out loans in droves and those that are investing in them. But as with any investing, if one market going under will kill you then it is you that screwed up, not the system. My 401k is perfectly fine, as is my healthcare benefits, my car loan, my student loan, and all my other insurance.

Although my understanding of the whole situation is shaky to say the least, am I not right in saying that the government have always had atleast some hand in directing the path of the 'free market' in the US, and therefore should shoulder some of the responsibility now that it is going tits up?

It is easy to say that if the government regulations caused the problem to begin with then they should take on some of the responsibility, but that is like saying you cure the disease with the virus.

There seems to be the argument that less, not more, government intervention is what is required - and perhaps in a hypothetical scenario that should be true... but in reality, the government washing its hands of the failing financial institutions would have such a devastating impact that they simply cannot allow it to happen... it seems that calling for "less government intervention" in free market economics is just a bit late.

It is never too late. Sure, not doing the bailout will lead to a number of people taking a huge hit, but throwing nearly a trillion dollars into the market will spike inflation, cause the value of the dollar to plummet even more (I heard a worst case scenario of 90%), and basically all the things that will delay a recovery and leave truly EVERYONE struggling. If I had to choose between a fee greedy banks, people getting loans that they shouldn't, and those that took advantage by investing in that market or everyone I would take let those involved collapse while the rest of us move on and recover in a much shorter time frame than the alternative.

And don't forget, this doesn't even look at the money that the automakers may need/want.

One commentator in the UK said that this entire crisis has been fueled by city bankers not understanding the complexity of (and therefore failing to appreciate the risks involved with) the financial products they were dealing with.

Perhaps regional differences have me confused. By city banks do you mean local banks? Oddly enough, I have yet to see one close their doors because of this. If anyone is having troubling understanding the products it was the consumers, not the bankers. I hear way too many people complain that their interest rate went up. I even know of one girl who refinanced from a fixed-rate mortgage to an adjustable rate. She was talking about how she got the bank to lower her payments and if anyone tried to explain that they could go up at any time she acted like they didn't understand.

That is bad enough, but factor in whose money they are gambling with, and it becomes a worrying state of affairs. And when the chickens come home to roost, who ends up paying? I'd argue that the financial institutions and bankers who took the risks without fully understanding them are to blame, but ultimately it is the folk who stump up the cash who are truly 'responsible'... but surely there comes a point at which the average saver in the street deserves to be protected from risks they were neither aware of, informed about, or properly advised about when making the initial investment? And what chance does the man in the street have of understanding what is happening to their money when the professionals they have entrusted with it don't seem to know what they are doing either?

If anyone invests without learning what they are doing for themselves it is their own fault. We have multiple channels on cable devoted to this stuff. You can't walk into a bookstore without being hit in face by names like Ormann, Cramer, and Ramsey. There are multiple radio shows, online guides, tons of free information. There is absolutely no reason to not understand what is going on when you invest.

As for what is happening with my investments? I can log on to my 401k's site and adjust how my money is balanced, if they switch funds I get an email and a memo goes around at work. I get a quarterly statement that lists every single fund I am invested in, its growth, and how much money I have in it, and what the difference is since last quarter. It is in very a small font and takes up two pages, because I am spread out.

If someone doesn't know what their money is doing the only person to blame is themselves.

 

[Danoff]

The government mistake was leaning on and encouraged banks in multiple ways to practice worse lending habits. Almost all of it in the name of padding home "ownership" statistics - particularly among the black community.

Relaxed lending allowed people to stretch their money farther to get into larger houses than they could have - which drove up the price. Ignorant consumers flocked to the rocketing price of housing and did whatever they could, paying whatever they had to, to get into a house - which drove up prices further.

The rising prices made bad loans look better, which encouraged more people to take them. The federal reserve, which had partly fueled this boom by keeping interest rates too low became under pressure by the sinking value of the dollar to increase rates. The rate increases started the first round of foreclosures and suddenly the feedback loop worked in reverse.

There's a lot of blame to go around. The government gets some blame for leaning on banks to adopt less "racist" lending standards. The government gets more blame for keeping interest rates too low. Banks get blame for unsustainable lending practices, though I have trouble blaming them given that they were responding to a market demand.

Over and above all I blame uninformed home buyers for entering into unsustainable mortgages. There is a growing notion in this country that you are entitled to a house. So when housing prices went up, people didn't stop buying, they just borrowed more. It's irresponsible. Those people have cost me personally a great deal of money, and it is just that they be tossed out on their ear - credit ruined.

 

[YSSMAN]

It depends on who your loans are through. My student loan is through a company called Collegiate Funding Associates and is so far unaffected and my auto loan is through Citizens Union.

Most of mine are backed up through the State of Michigan MILOAN program, but this newest round came from Sallie Mae. What that will eventually mean for me, I don't know. As far as my car loan is concerned, thats through my Credit Union, so I don't think I have too much to worry about, as all the cash is backed up (pretty much) by Amway.

Its all just a lot of fun. Crazy, especially, when a loan of $25 Billion to the Automakers seems like "chump change" when we're throwing around $700 Billion figures in this situation...

 

[TheCracker]

Over and above all I blame uninformed home buyers for entering into unsustainable mortgages. There is a growing notion in this country that you are entitled to a house. So when housing prices went up, people didn't stop buying, they just borrowed more. It's irresponsible. Those people have cost me personally a great deal of money, and it is just that they be tossed out on their ear - credit ruined.

You can't entirely blame joe public for entering into unsustainable mortgages. You can't expect them to fully understand something as complex as mortgages and interest rates. The banks and the banks advisors are the ones who should be looking into a clients finances to see if they can afford the payments before they offer the loan. An independent financial advisor ie someone who works for the client rather someone who is employed directly by a bank (and therefore only has their companies short term interests in mind) would not let their client get into that situation in the first place.

I don't know what the housing market is like in the US but in the UK prices are steep. People are desperate to buy their own house and will take whatever the lenders are offering. Many people don't even have the option of renting either with that generally being as expensive if not more expensive per month than a mortgage would be.

 

[FoolKiller]

Is it bad if for three years I have been waiting for this to happen and then clear up so I could get a house for cheap?

I know a lot of people that seemed truly offended that I was counting on this so that I could take advantage of someone else's misfortune. The thing is, it isn't like I was hoping for it, I saw it coming.

 

[YSSMAN]

I don't blame you, because I was thinking the same thing. Not that a 21 year old should have a house, but hell, I can think of quite a few otherwise "nice" units around here that are available for well under $100K.

 

[Danoff]

You can't entirely blame joe public for entering into unsustainable mortgages. You can't expect them to fully understand something as complex as mortgages and interest rates.

Yes I can. They're responsible for their own finances. Not banks, not the government, not me, them.

 

[livemusic]

Just so I can understand, why did house prices skyrocket? Was it because the mortgages' interest rates were too low so there wasn't much of a profit?

 

[Omnis]

Is it bad if for three years I have been waiting for this to happen and then clear up so I could get a house for cheap?

I know a lot of people that seemed truly offended that I was counting on this so that I could take advantage of someone else's misfortune. The thing is, it isn't like I was hoping for it, I saw it coming.

I'm feeling you on that one. This is all kind of timed perfectly for me and my cousin. He just graduated from college and I have a couple more years. By the time we're ready to get houses, hopefully prices will have corrected.

Just so I can understand, why did house prices skyrocketed? Was it because the mortgages' interest rates were too low so there wasn't much of a profit?

Did you read the link that Danoff posted to Ron Paul's commentary? Basically, the government made laws that regulated the banking system and lending practices. That created a distortion in both. Then, the Federal Reserve system created easy credit, inflating the money supply by lowering interest rates for the banks lending out to all of these people. The artificially low interest rates create malinvestment in markets. Here is another resource: http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory . The credit cycle manifested in the housing market partly because of the government's laws and because that's the market where people most often take out loans to buy something.

 

[Danoff]

Just so I can understand, why did house prices skyrocket? Was it because the mortgages' interest rates were too low so there wasn't much of a profit?

It was a number of things. As Omnis points out above, the government leaned on banks to relax lending standards.

Relaxed lending allowed people to stretch their money farther to get into larger houses than they could have - which drove up the price.

The federal reserve, which had partly fueled this boom by keeping interest rates too low

Those combined with the recent tech bubble burst causing joe public investor to be looking for a safer place to invest his cash -> housing.

Those things operated in a feedback loop. The faster prices went up the better bad loans looked. Even worse loans were devised allowing people to stretch even more, causing the prices to go up even further. As long as the prices were still going up, bad loans weren't so bad.

 

[YSSMAN]

Whoops, here is something that got swept under the rug in this mess...

J.P. Morgan/CHASE just bought out Washington Mutual, after the FDIC bailed them out. That means, guys, that this was the largest ever bank failure in United States history. Strange that it wasn't discussed much today...

To think that I once considered a switch to WaMu, its funny really. Looks like I'll be sticking with my "little" Amway-backed Credit Union for a while.

 

[Omnis]

I can only dream of the day we'll see full-reserve banking. Oh, and say RIP to the FDIC fund too.

 

[FoolKiller]

That means, guys, that this was the largest ever bank failure in United States history. Strange that it wasn't discussed much today...

I do not like the way they determine this. To me a failure means depression style runs on banks and when they collapse 80% of the customers have nothing left.

While this is the largest bank, by assets, to go under I do not consider it a failure, as no one lost anything. None of the banks customers will see anything other than a name change, just as if this were a regular M&A situation.

From the article:

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

Banks traditionally want to prevent other banks from going under because it can have a ripple effect on the whole industry.

So, while this is a failure for WaMu I think that it is a success for the industry as they have shown that when it is fiscally feasible they can take care of themselves without government intervention.

 

[TheCracker]

Yes I can. They're responsible for their own finances. Not banks, not the government, not me, them.

IMO it's the banks fault for leading people to believe they can make the payments. If the banks were not so greedy and incompetent, they'd have been more cautious and turned more people down*. If banks can make short term gains from the puplic's stupidity and naivety then they can only be to blame* when these same qualities turn around and bite them on their backsides.


* i am aware there was some Gov pressure to approve more loans to subprimes.

 

[YSSMAN]

So, while this is a failure for WaMu I think that it is a success for the industry as they have shown that when it is fiscally feasible they can take care of themselves without government intervention.

The market has been working fairly well this morning, I believe JP/CHASE selling out some of its stock to help inject some cash back into the market. It seems like there are some wheels clicking independent to the outrageousness that is that circus that they're having on Capitol Hill, and will that bill not likely to pass today, probably not tomorrow, maybe not even by Monday...

...its all we have left.

 

[Omnis]

IMO it's the banks fault for leading people to believe they can make the payments. If the banks were not so greedy and incompetent, they'd have been more cautious and turned more people down.

So let's blame the most important bank of all, the central bank-- the Federal Reserve.

Greed runs markets. Banks do not have an interest in failure. It's the artificially low interest rate that lead to malinvestment on whichever bank's behalf. That is, they do things they would not have normally done in a correct market. That's the source of what later becomes incompetence. It's not really their fault, but they are still responsible for their business.

Now, the funny part is that everybody is focused on helping those affected by the problem. Nobody is looking at doing anything about the cause of the problem because the government doesn't want to bite the hand that feeds.

If you want to learn more, I suggest reading The Case Against The Fed by Murray Rothbard: http://mises.org/books/fed.pdf

 

[Danoff]

IMO it's the banks fault for leading people to believe they can make the payments.

I don't think anyone is responsible for determining whether someone can make payments besides he person who actually has to make them.

 

[Keef]

Whoops, here is something that got swept under the rug in this mess...

J.P. Morgan/CHASE just bought out Washington Mutual, after the FDIC bailed them out. That means, guys, that this was the largest ever bank failure in United States history. Strange that it wasn't discussed much today...

To think that I once considered a switch to WaMu, its funny really. Looks like I'll be sticking with my "little" Amway-backed Credit Union for a while.

I knew about that early yesterday afternoon, right when it happened, thanks to 700 WLW. And the failure happened just a day after a guy at work decided to take advantage of the low low stock price of 1.50-something and was planning on the company being helped. Nope. Not enough time. I was planning on buying the stock but decided not to. As I left work today the price was a 16 cents and dropping steadily to zero.

They've got a lot of tables and chairs to move. I think I might get me a new desk on the cheap here in a few weeks...

But I'm not sure what happens to the price of 1.9 billion. Apparenlty J.P. owns all their assets--stocks, tables, buildings, the whole lot. But not the rights to the name and trademarks, eh? What happens to all the intellectual property?

 

[Solid Lifters]

I don't think anyone is responsible for determining whether someone can make payments besides he person who actually has to make them.

True, but there are a lot of stupid people out there, and the the Federal Reserve unfairly lowered interest rates to allow poor people to get home loans, in respect to 'fairness.' The stupid people took advantage of this and the Federal Reserve take a apart of the blame along with banks. It may not be as much as the individual who sought and received the loan, but they do bare some of the responsibility.

It is both the banks and the individuals, who sought out the loans, fault for this mess along with the Federal Reserve. Now, the rest of we Americans are being forced to bail them all out, which again is yet another act of federal mandated 'fairness.' It amazes me how both 'fair' (unfair) and stupid the Federal Reserve can behave yet not share part of the blame. They made a mistake and I hope they realize that and learn from it, but I have yet to see or read any proof of that.

 

[Casio]

I agree with Danoff, people have to take some responsibility for their own actions. It's not a right to own a home. We have people here borrowing 300k-400k with no deposit, then when interest rates go up .25% ther all can't afford the repayments.

When you buy a house you have to think "Well, if rates go up 5% in the next year, can I still make the repayments". Regardless of the what interest rates are. The banks should inform them of this, but I don't think they should decline them the option getting a loan, if they realise the risks and are prepared to take them.

 

[Keef]

I don't think it's the banks responsibility to tell people any more than they already do in all their rules and regulations and whatnot. You know, the contract.

That aside, I also think it's every involved partys' fault for this mess. But mostly the fault of the stupid people. Heck, I spent hours online researching parts for my car! I can't imagine how stressful it would be trying to understand the house-buying process. It takes a little effort, but the stupid people didn't bother. Like said many times in here, it's a privilege that you earn, not a right.

 

[YSSMAN]

We need to watch Wachovia closely now, as they're teetering on the brink of collapse as well. As the sixth-largest banking institution in the US, its still a huge deal if they go down. No word on if they'll be given aid by the government or bought outright (I hear Citi is looking into it), but nevertheless, its just one more mess that we'll have to deal with.

 

[Danoff]

When you buy a house you have to think "Well, if rates go up 5% in the next year, can I still make the repayments".

30 year fixed rate.

nevertheless, its just one more mess that we'll have to deal with.

Not really. We could just ignore them. After all, it's not our responsibility to keep them afloat.

 

[Keef]

Yesterday my dad received in the mail an credit card offer from...Washington Mutual. Apparenlty they kept doing what was killing them even when they knew it was killing them. Jeez. Also, I just saw a commercial for Wachovia savings accounts on TV. Don't these companies have more important things to worry about than advertising? They're getting plenty of air time already, and none of it is good. There's no way a simple, happy commercial is going to change anyone's opinion about these companies because everyone already knows what's going on.

 

[FoolKiller]

Yesterday my dad received in the mail an credit card offer from...Washington Mutual. Apparenlty they kept doing what was killing them even when they knew it was killing them. Jeez.

A few thousand on a credit card is not as likely to make a person file for bankruptcy, thus can eventually be reclaimed over time. That and a credit card debt loss is never as big as a $100,000 to $1 million mortgage.

Also, loans did not get them in trouble. Sub-prime loans did. Big difference.

And don't forget that during all of this there has yet to be motion to remove the Community Reinvestment Act, so by law they do have to keep doing the things that hurt them.

Also, I just saw a commercial for Wachovia savings accounts on TV. Don't these companies have more important things to worry about than advertising? They're getting plenty of air time already, and none of it is good. There's no way a simple, happy commercial is going to change anyone's opinion about these companies because everyone already knows what's going on.

Ads are paid for far in advance.

 

[YSSMAN]

Looks as though Congress has reached an agreement as to how we're going to do things as of late last night. You can read a lot of the details right here.

Otherwise, the basics:

Under the Emergency Economic Stabilization Act of 2008, which is expected to come to a vote in the House on Monday, the Treasury Department gets $250 billion immediately to start buying up banks’ and other financial institutions’ least valuable mortgages and complex financial instruments backed by those mortgages.

If needed, an additional $100 billion is available at the discretion of the president, and a final $350 billion is on the table, unless Congress resolves to take it back. The president has the authority to veto such a resolution.

The measure also proposes limited caps on the pay and benefit packages of companies who receive the government rescue, strengthens government oversight of the program and adds an insurance program for financial companies’ bad assets.

At least we're doing something, I guess...