What happens when the banks own all the houses? This is not an ad.
It is quite possible that in the not-too-distant future, huge banks, including FNMA, will control a large portion of America's housing as rental property, courtesy of you and me and the foreclosure crisis which the banks refuse to end and may in fact be fanning. And unless you own your home outright and plan never to move, you may end up as one of the renters, even if you'd like to own your own home.
I've criticized banks for letting houses drop into foreclosure instead of doing what it takes to keep them in the hands of their owners. (Deep down, we know the banks own the houses anyway, but there's at least a patina of ownership in the current system. Work with me here.) Unfortunately my new expertise arises out of necessity; I have been trying to short sell my duplex for nearly a year. Ask any real estate agent how his or her short sales are going to get a sense of how much the banks are stalling these things and how difficult it is.
The buyer is offering more than other comparable properties in the neighborhood have sold for but apparently not as much as Fannie Mae believes the property is worth. I have been concerned that if FNMA (the investor) does not accept the buyer's offer, then the property will drop into vacancy and be vandalized, which would be bad for the neighborhood and for the taxpayers who will ultimately be on the hook for the mess.
Today I encountered a new and chilling wrinkle. A person on the phone at Fannie Mae arily informed me that if the potential buyer for my property doesn't offer enough to meet Fannie Mae's requirements, Fannie Mae would probably foreclose on it, then hold it "for five years or so" and rent it out in the meantime.
I checked out the FNMA website, and sure enough Fannie Mae is setting up to be a giant rental company. And I mean giant. I don't remember the exact statistic but I think Fannie Mae and Freddie Mac hold 85% of all the mortgages out there (sorry if I am wrong on that number.)
http://www.fanniemae.com/newsreleases/2009/4581.jhtml
According to one newspaper article I read, "Many are hoping that other banks will follow Fannie Mae's lead." Now, on the surface this might seem like a fine thing. The program is described as a way to allow renters living in foreclosed properties to stay and sign a lease--20% of foreclosures have a renter living in them when they are vacated, and those people have to go somewhere.
And that would be cool, if FNMA were doing it as a last resort, after going through all the other possibilites including short sales to willing buyers and independent investors at prices that the market will bear. (I'm not a huge fan of this "race to the bottom" mentality myself but lots of people are and if we're going to establish a bottom we'd best get going.)
But for FNMA and other banks to turn up their noses at reasonable offers and embark on a giant plan to effectively hoard housing until the "market comes back?" Practiced extensively by the small number of enormous banks who still own mortgages, (bailed out but not "invested in" by taxpayers), this thing holds the possibility of price-fixing on a grand scale.
Imagine what will happen when everyone in America who is going to lose their first home or investment property loses it. (Sadly, they may not qualify for any of the half-hearted modification schemes that have so far saved some 85,000 folks from foreclosure in a sea of millions of vulnerable or defunct homeowners.) With huge numbers of homes held as REO Rentals, if you want to buy a home your choices may be to purchase it at Fannie's price--or be satisfied with renting--at Fannie's rate, on Fannie's terms, and from one of Fannie's property management companies. What will happen to neighborhoods--and to America's famed "pride of ownership" society? Something, for sure.
I hope I'm wrong about this--but if it is indeed the banks' plan to just forget about doing much other than letting houses drop into foreclosure, be turned into rentals and "marketed for sale" at the banks' price, then paranoia is justified.
What is going on?
This is an unfortunate and undesirable byproduct of our government allowing the ill-considered merger of financial institutions.
The result, of course, has been a heavy concentration of real estate holdings and wealth in general accruing to the behemoths of Wall Street.
Needless to say we've come to discover the fallacy of this scheme and have also come to understand that the genesis of it rests in the political corruption of our entire system of finance and governance in general.
I have my doubts that Washington will ever truly accept this for what it is. So far there is absolutely no indication that our elected officials are the least bit inclined to label this for the corruption it very obviously is. You just can't miss the big bold emphasis this places upon the disconnect from reality that exists in our nations capitol. Creating laws that effectively endorse official corruption is an end run around the ethical conundrum that would otherwise prohibit this condition.
The root of this problem is we have lawyers running things. In every legal contest there are two sides, and of the two, only one can truly be right, with the other having to misrepresent or lie on behalf of their client. This is inherent to the practice of law and is a tragically flawed feature of it. In a lifetime of practicing law this becomes second nature. However, it has no place when those same lawyers are supposedly serving the country. In that context, anything but the truth is undeniably harmful.
October 23, 2009 5:09 AM | Reply | Permalink
I know what caused it--my question is, is this what we want to do about it? Ellen downthread believes it's just fine.
But I think there's a creepy edge to the whole WalMarting of housing thing--not just because of the swathes of bank controlled rentals, although those will be creepy enough, or the potential for price-fixing.
It's the idea that somehow, by sacrificing a large group of people currently living in houses, the whole industry will somehow be purified.
October 23, 2009 10:53 AM | Reply | Permalink
What happens when the banks own all the houses? Have you never played Monopoly?
October 23, 2009 7:32 AM | Reply | Permalink
This is a virtual cigar for a most excellent answer.
October 23, 2009 8:23 AM | Reply | Permalink
Except that in Monopoly the board is static, while in life the supply of houses is not fixed. Builders will build if there is demand. We shouldn't be surprised that banks don't want to dump houses at huge losses - if the sellers were liable for the loss they wouldn't be so quick to want to short sell either. This mess was caused by Washington encouraging banks to make risky loans to people who were bad credit risks, and by those people defaulting. It was not caused by Wall Street, but by main street. People got caught up in a buying frenzy (my first home that I sold for 90k resold for nearly 600k ten years later) thinking that real estate only goes up in value. Flippers waited in line to snap up properties they intended only to resell. Eventually you run out of flippers, and the bubble pops. (Same thing happened in the 20's)
October 23, 2009 9:05 AM | Reply | Permalink
Afeew months ago I did a piece for a local paper on the sub-prime 'crisis.' I don't have my notes, but it turned out only a small percentage of the loans for foreclosed houses were given by banks under CRA influence. Here's what one writer at Business Week says:
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html
October 23, 2009 9:38 AM | Reply | Permalink
I'll agree that the overleveraging of the banks was a big problem. It was based on faulty assumptions about the quality of the loans they held. At 30X it only takes a 3% default to destroy your equity. But the writer is wrong to ignore the fact that FNM and FRE fueled the sub prime lending by creating a market for that paper. Mortgage lenders didn't need to screen people, because they planed on selling the loan to FRE as soon as possible. So, in the end , the system collapsed because banks were overleveraged, FRE and FNM created a market for junk, the gov't pushed banks to make bad loans, the gov't put new accounting rules in place, and a whole lot of people bought homes they knew they couldn't afford hoping that they could either resell at a profit or re-negotiate the loan terms in a few years when they had much more equity - all based on the assumption that prices would continue to climb. When that didn't happen ...
October 23, 2009 10:57 AM | Reply | Permalink
Most of the sub-prime, Alt-A, NINJA, pick-a-pay and other sleazy mortgages were not securitized by Fannie and Freddie. Most were securitized by Citi, Lehman, Bear Stearns, and various other Wall Street players. The loans did not meet Fannie and Freddie requirements until they were forced by the government to start taking on some of these rotten loans when the private securitization market started to freeze up.
October 23, 2009 5:33 PM | Reply | Permalink
Come on, bulldog. You can do better than that. By my estimation you aren't stupid. I therefore have to believe that you intentionally overlook the very creative market that was constructed for mortgage backed securities and the ponzi scheme that is credit default swaps just so you can arrive at a claim that Wall Street had nothing to do with the mortgage crisis.
You are arguing the equivalence of fissionable material having nothing to do with nuclear bombs. Pretty tough to get anyone to believe it anywhere this side of Fox News. You'll have to do better than this to promote your free-market capitalism, 'cuz we simply can't afford the socialist aspect of perpetual bail-outs as required.
October 23, 2009 9:52 AM | Reply | Permalink
"This mess was caused by Washington encouraging banks to make risky loans to people who were bad credit risks, and by those people defaulting. It was not caused by Wall Street, but by main street."
I think you're getting the framing a bit wrong. You got main street gambling on house prices; You had banks gambling on main street's future cash-flow - i.e. the latter's ability to pay their mortgages; and you had insurers and foreign investors gambling on the banks' bets being smart (by lending to banks). Everyone made bad bets, and yet largely only the bankers, their shareholders and their creditors got bailed out... by main street.
So, yeah, the blame can get spread around widely, but when people sense an unfairness, they're looking at who got bailed out, and by whom.
October 23, 2009 10:16 AM | Reply | Permalink
Well, the bad bets made by investors were largely because of the AAA ratings that were given to essentially junk paper. The ratings were faulty because government agencies FNM and FRE backed the loans. The mess was compounded by mark to market accounting rules put in by the gov't as a knee jerk response to Enron. This works until there is essentially no market, then everything gets valued at zero. People panicked because they didn't know what the banks assets were worth, and banks were forced to take huge writedowns as if all their paper was worthless (when in fact only a small percentage was). This forced them to raise capital, stop lending, etc.
October 23, 2009 10:46 AM | Reply | Permalink
And all of this occurred on Main Street?
Everything you address here is the making of a bubble, and Wall Street was more than happy to play it for everything they could. Then, when it went bust they got the government to bail 'em out.
There just isn't any way to gild the lily, bulldog, regardless of how many strokes of the brush you make.
October 23, 2009 10:55 AM | Reply | Permalink
Well, the gov't could have bought the toxic assets (like in the name TARP), cleaning up the banks balance sheets, rescinded the mark to mark accounting rules and eliminated short selling of stock, then re-negotiated the mortgage rates with the property owners to keep them in the houses. That would have worked, and was the original plan. Then it changed into injecting cash into the banks (and taking huge equity stakes, and forcing them to play), while doing nothing about the problem and hoping for the best. Not a good plan.
As far as 'bailing them out', it's more accurate to say the gov't in effect took control of the banks, since they have huge equity stakes in them now. It's likely the gov't will make a profit in the long run.
October 23, 2009 11:05 AM | Reply | Permalink
This is kind a strange 'debate' I don't know what to do about, Bulldog. I don't think anyone wants to defend the GSE's or government oversight. The industry - the GSE's included - got the regulatory framework they wanted, including M2M, because it inflated profits while the bubble lasted.
The standard story - which I adhere to - is that the driver behind the bubble was the flood of sub-prime and alt-a loans. And Fannie and Freddie were very late to that game. The fraudulent ratings had nothing to do with those GSEs but due to collusion between banks and rating agencies.
You seem to be suggesting that the banks and their creditors were 'victims' here. Which is kind of laughable.
October 23, 2009 11:29 AM | Reply | Permalink
Yes, exactly; I'm just concerned that the bailout seems to be for everyone except ordinary people. if the government makes a profit in the long run but a huge
group of people lose their right to own property because of the massive price fixing that was an unintended consequence of am inadequate fix, do we really think that's such a good thing?
October 23, 2009 6:13 PM | Reply | Permalink
I sometimes wonder... If the same amount of money had simply been given to homeowners (so they could make their payments)... wouldn't that have made more sense?
All mortgages paid in full and on time... All banks happy.
The only unhappy people would be the billionaire investors that don't get their 30:1 return.
It'd probably cost LESS than what the bail out has cost... Everybody would still have their homes...
A much better outcome, IMO.
October 23, 2009 9:48 PM | Reply | Permalink
This would absolutely have been the correct solution. Well before the 2008 elections, I suggested that the government step in and simply pay half the payment on mortgages where property values had declined by 50% or more.
I was greeted with catcalls and hoots of derision. By God, nobody was going to bail out the guy who had bought himself the house with the extra bathroom.
October 24, 2009 10:32 AM | Reply | Permalink
Those Billionaires who were buying those Credit Default Swaps KNEW GOOD AND WELL what they were doing... It's their profession to understand these things!
They were banking (Literally) on foreclosures!
That's where they made their real money!
They did this using unregulated, Private Contracts... i.e. No Gov't meddlin' in their business...
They did this because they KNEW EXACTLY what they were doing.
Do NOT try and paint them as poor pitiful victims that were deceived by those nasty little bankers!
October 23, 2009 12:35 PM | Reply | Permalink
The people who bought CDS benefitted when the underlying assets defaulted, but the sellers sure did not. That's why AIG is in such trouble - they sold tons of CDS protecting trillions in assets, and did not have reserves to cover the massive defaults. The problem is if they went bust, it would have spread the collapse worldwide as numerous companies relied on AIG and would have all went insolvent. And millions would have lost their jobs.
October 23, 2009 12:55 PM | Reply | Permalink
So we bailed them out to prevent that from happening.
Those who bought the CDS's got paid. They KNEW what they were doing.
AIG et.al. KNEW they couldn't cover and were gambling that the Gov't would see the risk of allowing them to fail was too great. AIG et.al. couldn't say, "no" to their billionaire investors (Other countries?!?!?) Their gamble paid off. (although, it's a no brainer, really... the Gov't couldn't let them fail. That would have been catastrophic at MANY levels).
So... as far as I can tell... EVERYBODY in a position to prevent this from happening had no reason to do so. There was BIG money to be made... and they made it. AIG et.al. get to keep their Billionaire investors going forward... Billionaire investors are now Trillionaire investors...
And we paid for it.
October 23, 2009 1:03 PM | Reply | Permalink
You see to be forgetting that the Greenbergs lost billions when AIG failed, as did lots of other investors. To try to claim that everyone walked away intact is just silly. The people who lost the least are the homeowners who had little to nothing invested in the first place. They defaulted because in most cases the current market value of their home was less than their mortgage, so they bailed.
October 23, 2009 1:33 PM | Reply | Permalink
They lost the least? They lost everything they had!
The billionaires (the ones who lost) didn't lose everything.
October 23, 2009 1:56 PM | Reply | Permalink
Well, Greenberg went from a billionaire to bankrupt. The people who 'lost' homes that had nothing down and no equity lost what exactly?
October 23, 2009 2:01 PM | Reply | Permalink
Boo-hoo, poor oligarchs.
But poor people in default, screw them!
October 23, 2009 2:49 PM | Reply | Permalink
Boloney!
He didn't lose everything.
Besides... If he's crazy enough to invest EVERYTHING in this one area then he's not so bright afterall.
Those guys never put all their eggs in one basket... They diversify. They know exactly how to Hedge their "bets"...
If there's one guy fool enough to blow it so catastrophically then I suspect it's not at all a bad thing. Afterall... what, exactly, was he trying to do, anyway? He musta thought he was realllllly gonna score big. He gambled and lost.
No tears here.
October 23, 2009 4:26 PM | Reply | Permalink
Except maybe for the billions that Greenberg has squirreled away in Starr International in Bermuda.
October 23, 2009 5:40 PM | Reply | Permalink
For everyone of your billionaire bankers going long CDS, there was another billionaire banker on the other end of the trade who was selling protection. Apart from the AIG bailout, although it was large, there were still lots of Wall Street types who lost big on CDS. It wasn't a one-way-street money making machine.
October 23, 2009 3:31 PM | Reply | Permalink
You're right, obey. And don't forget the sheer arrogance of these schmucks who even now do all they can to escape any regulation or provision that might prevent these abuses in the future.
And then, too, the incestuous little circuit between a very few of the biggest banks and our government and our Treasury does little to instill confidence that our interests are being served.
October 23, 2009 11:03 AM | Reply | Permalink
Remember that as far as being 'bailed out', these banks were taken over. The shareholders lost big as the stock was diluted by the huge stakes the gov't took, in common stock and warrants. This wasn't a give away, it was more of a take away.
October 23, 2009 11:08 AM | Reply | Permalink
Okay.
"BofA and Citi desperately wanted NOT to have government guarantees on their assets."
or
"BofA and Citi could have gotten a better deal at that time on the free market"
Is one of these really your story...?
October 23, 2009 12:06 PM | Reply | Permalink
BofA was pressured by the Fed to buy ML. Other banks like WFC did not want money and were forced to take it.
Sure, at the time of the melt down they needed guarantees, due to M2M accounting, short selling, and Tier1 cap requirements (which all are under gov't control) they were in danger of collapse.
The true culprits in the mess were Congress, and greedy people buying what they couldn't afford.
October 23, 2009 12:40 PM | Reply | Permalink
Greedy people buying what they couldn't afford?
Really?
All the bank has to do (All the bank SHOULD HAVE DONE) is DENY the loan to those who don't qualify.
The people could then be as greedy as they wanna be... but wouldn't be able to do shit about it.
The bank ENABLED them.
October 23, 2009 12:45 PM | Reply | Permalink
And there it is! Banks ENABLED them.
How exactly does the government make anyone fund a loan? Why should I ever believe that the banks did not know what they were doing, lending these bad risk borrowers hundreds of thousands of dollars? Were they all new to the mortgage industry? Am I to believe the banks went mute and could not object to seeing hundreds of thousands of dollars tossed up into the air? There is only one explanation for how this happened. It was planned all along and Paulson and Co. took billions of dollars, unaccounted, and spread the wealth around, like any good Marxist would, except it was only among his friends and there is not even a trickle coming down to the taxpayers who funded the bailout.
October 23, 2009 1:49 PM | Reply | Permalink
The gov't made them fund loans by threatening lawsuits (Reno did this) if the number of low income borrowers were not increased, and by threatening to block any business expansion if they did not comply. Things do not get this screwed up without government involvement. They put pressure to make bad loans, they created a market for the bad loans, they changed the accounting rules, they changed the shorting rules. They created a perfect storm.
October 23, 2009 1:59 PM | Reply | Permalink
And you think the banks were too weak to resist, that they lacked the capacity to defend their wallets? You want to put all of this on Clinton? I would argue the point, but you have to have base your arguments on reality. Clinton? Really? Give me a break. He was 8 years ago. Are you saying his policies were any kind of a driving for after Bush took office?
In what way, Charlie?
October 23, 2009 4:54 PM | Reply | Permalink
It is well documented and not debatable that bankers actively encouraged people to lie on applications, that they dispenses with the formalities of traditional loan applications and standards on same. It is pure Republican bullshit to try and assert their lame and totall false allegation that somehow Congress made the banks engage in irresponsible behavior. Their current irresponsible behavior proves what an outrageous lie that is.
October 23, 2009 1:01 PM | Reply | Permalink
My point would be that those greedy people are your friends, family and neighbors, and their families' lives are changed forever.
October 23, 2009 6:37 PM | Reply | Permalink
Shareholders may have lost money... but those who purchased the CDS's (Mortgage backed securities) made out like bandits!
....
And Obey has a good point.
October 23, 2009 12:36 PM | Reply | Permalink
Yes. And the people who didn't get bailed out, and their neighbors, are in pretty big trouble.
October 23, 2009 6:17 PM | Reply | Permalink
Sure, it was that damn Clinton administration giving mortgages to poor people....not the banks that gambled 100X their real assets, and then asked the taxpapers to pay their margin calls.
Right. Sure. Uh-huh.
October 23, 2009 2:47 PM | Reply | Permalink
I will buy that TPC. That is the answer.
The landlords and the serfs. Hell the gov can sell these in blocks to huge corps..with form contracts.
October 23, 2009 2:57 PM | Reply | Permalink
And foreign investors too!
October 24, 2009 1:20 AM | Reply | Permalink
Although there will be unintended(?) consequences,* increasing the nation's rental stock would appear to be a desirable social goal.
The "ownership society" is nothing but a slogan looking for a justification. It offers a large portion of the population little more than a lifetime of debt peonage (note: according to Schiller capital gains on homes are ephemeral being nothing more than inflated construction costs).
The claim that ownership produces stable neighborhoods is overblown. In fact it is the duration of home occupancy -- whether by owner or renter -- which is responsible for this increased social capital. We need 5-year leases not 30-year mortgages (see, erica's Fannie Mae conversation, above).
Finally, pushing home ownership above some level is guaranteed to result in bubbles -- and we know where that leads.
* Increasing the number of rental units will reduce rents and landlord income with the result that CRE loans will fail and regional and local banks that hold these loans will be under increasing stress.
October 23, 2009 10:05 AM | Reply | Permalink
It's preferred that people own their own homes. When they're not busy trying to flip them in artificually inflated bubble profit schemes... owner do tend to live in their house for prolonged periods of time.
It's preferred because of the equity gained over time... as opposed to renting! When a person rents, they provide that equity wealth to the owner of the property... and over time, the renter gets little more than a roof over their head. Although it's good to be dry, the better Return On Investment is to have something to show for it in the end.
You're suggesting it's really in everybody best interest to have a relative Few "Owners" and everybody else just "Rent". ??? Really?
I have no idea, but I'm guessing you're an "Owner", right?
October 23, 2009 12:22 PM | Reply | Permalink
Maybe this is the end game? The capitalists are completely opposed to any sustainability. They would rather replace then repair. Watch buildings be torn down to build an official looking Walgreens, or Outback Steakhouse, or whatever, even houses. The home buildes are suffering for lack of open land and there are large tracks of old homes bought by low income that could simply be bulldozed and replaced with McMansions, or duplexes. Regardless, the point is that the myriad of small plots become large holdings that can be leveled and replaced with the official looking homes of the 21st century, and these homes will be built by a single, well-connected contractor. It's their vision, or at least, if I had millions of dollars, it is what I would be thinking in the present disintegration of our economy andthe large-scale loss of home owner/occupants.
October 23, 2009 1:55 PM | Reply | Permalink
Bingo
October 23, 2009 6:41 PM | Reply | Permalink
You know... it's great that the Gov't is considering the removal of Antitrust EXEMPTIONS for the Insurance Industry. The sooner the better.
But why not enforce existing antitrust rules???
(Beginning with Raygun this hasn't been done by anyone!).
Stop the MEGA-MERGERS... Level the playing field fer cryin' out loud.
Let NOTHING exist that's "Too Big To Fail".
...............
More on topic now: Wealth is never lost, it's just transfered. When times are good and people have money, they pay off their debt (mortgages, etc)... The bank gets the interest and gets fat. When times are bad and people default, the banks get the property and (ultimately) get fat.
They can't lose.
October 23, 2009 11:42 AM | Reply | Permalink
In reading all the posts here it sounds to me like the government, the banks, mortgage lenders and whoever else stood to make money were all engaged in some form of gambling and euphemistically hung out a big sign to encourage as many citizens as they could to sit down at the table and join in on the fun.
October 23, 2009 11:52 AM | Reply | Permalink
When mortgage backed securities (unregulated, private contracts) pay off sometimes at 30:1
...yeah... it's gambling.
The banks were giving loans to people who shouldn't have qualified (because the Gov't encouraged them to)... and sold those Mortgage Backed Securities for big bucks to BILLIONAIRE GAMBLERS... with the promise that nothing would go wrong or the Billionaires would get paid back in spades.
...yeah... it was INSURED Gambling for Billionaires... They simply couldn't LOSE!
Unlike the average Joe who got a mortgage he wasn't qualified for primarily because he isn't a financial genius nor a Billionaire... The Billionaires KNEW GOOD AND WELL what they were doing.
WE, the Average Joes, were gambling and didn't even know it. The game was rigged. The Billionaires were HOPING we'd default...that's the way they'd get paid BIG!!!
They were literally banking on our failure.
So... were they gambling afterall?
October 23, 2009 12:00 PM | Reply | Permalink
If, as you say, they knew full well that what they were doing would fail and plannned for it so they would make a ton of money, then they have a lot of 'splaining to do.
That is, if they can politely excuse themselves from a hanging party in the town square.
October 23, 2009 12:46 PM | Reply | Permalink
They got paid... just like they planned.
We paid them.
Who are "They"? I'd LOVE to know that! That'd be some party.
But "They" are invisible. PRIVATE Contracts and all...
Remember. Nobody knows where all that money went.
October 23, 2009 12:49 PM | Reply | Permalink
Somebody does. And it's a good bet there are about a dozen or so names that people could rattle off who are certain to know more than they would voluntarily ever tell.
October 23, 2009 1:01 PM | Reply | Permalink
But that's the government's fault for bailing out AIG. They didn't need to do that.
And you're wrong to say they "couldn't lose". Of course they could have lost.
October 23, 2009 4:45 PM | Reply | Permalink
If the govt hadn't bailed them out there would have been a catastrophic event. US banks would have lost everything. The world would have lost faith in our system. Game over.
They HAD to bail 'em out.
October 23, 2009 8:58 PM | Reply | Permalink
How do you know? There were plenty of banks that didn't have monumental CDS exposure. Letting AIG fail would not have caused the whole system to collapse. That is just Paulson and Bernanke speak.
October 23, 2009 10:27 PM | Reply | Permalink
Umm. They have lost faith in the US. It is now up to Obama with no support whatosoever from the GOP to try to restore that confidence. We have a long road ahead. It is much more difficult to restore confidence then to build it from scrtch. Once trust is broken, it never mends to pre-injury. We shot ourselves in the foot with Dubya and we will be limping from here on out. We never should have let Dubya hold a gun. He wasn't grown up enough to know when or how to use it.
October 24, 2009 1:33 AM | Reply | Permalink
They couldn't have lost without the entire US losing.
October 23, 2009 9:39 PM | Reply | Permalink
How? There were plenty of banks who were selling CDS and lost a ton whether or not the government bailed out AIG. Most of the CDS contracts were not written by AIG. There were plenty of banks who lost a ton on their own.
The entire US didn't have to lose. If, for example, Paulson bought CDS on subprime mortgage indices, the other side of the trade could have been any commercial bank (Wells Fargo, Citi, Sumitomo, RBC, etc)
If real estate values kept going up, then Paulson would have lost money on the trade. But instead, values went down, and Paulson won while the commercial banks lost. But there was DEFINITELY risk to the trade.
October 23, 2009 10:32 PM | Reply | Permalink
The failure of AIG would have been catastrophic to the system as all these CDS' (unregulated insurance claims) went unpaid. And you know this, too, MCB.
Perhaps more importantly, it would have resulted in the probable bankruptcy of Goldman Sachs. Do you really think Paulson or Geithner or any of the other Wall Streeters with their hand on the government tiller would allow anything bad to happen to GS? Not very damned likely, especially given that nearly everything they've accomplished thus far is quite purposefully "GS friendly," independent of the consequences for Main Street. They've got their priorities, and guess what? It ain't us.
October 24, 2009 6:33 AM | Reply | Permalink
1. How do you know it would have been catastrophic to the entire system?
2. How do you know that Goldman hadn't hedged its exposure to an AIG default?
October 24, 2009 8:54 AM | Reply | Permalink
1.) The failure of Leaman Bros and Smith Barney sufficiently undermined the confidence in the market to initiate a panic of 1929 proportions. Letting AIG go would have most certainly pushed it over the edge.
2.) Probably the best indication that GS hadn't hedged their exposure rests in the attention AIG got from Paulson, Bernanke, et. al. I'm also curious to know how/why GS or others would hedge against outright fraud such as CDS insurance being issued with virtually no reserves to cover. The systemic ramifications on this order of magnitude are simply too extreme to be absorbed by the financial system. In other words, there is no place to run and hide within he financial sector to avoid getting burned by such a catastrophic failure. And if GS or any of the major players understood the threat yet continued playing the game, they are not only incompetent but criminally corrupt as well - unless they are convinced that the collapse of the financial sector is good for their business and that they can avoid accountability for their participation in the fraud - which, given the way it is playing out, could be argued, I suppose.
October 24, 2009 10:44 AM | Reply | Permalink
That is certainly Bernanke's point of view, but I am not certain that AIG going bankrupt would have caused a collapse of the entire financial system. For better or worse, we will never know if AIG needed to be bailed out or not. We saw Lehman go under and that was a relatively smooth process in terms of settlement of CDS contracts. I think we certainly would have felt an impact from a bankruptcy of AIG, but I've seen no evidence that convinces me it would have been "catastrophic".
As for Goldman in particular, they are too smart to just let themselves take on big risks in one particular counterparty, even if it is AIG. I don't think back in '07 and '08 that Blankfein was thinking "it's OK to have huge exposure to AIG, we don't need to hedge it because Paulson will save us"
Take a look at this article if you haven't already.
http://online.wsj.com/article/SB123756518992096521.html
AIG received a lot of attention from Paulson, Bernanke, et al because they are large. But were they too big to fail? There are some very other smart people like Hank Greenberg who say that AIG would have been better off if it had gone through a Chapter 11 rather than receiving a government bailout.
And you wonder how/why Goldman would hedge against outright fraud? I don't think it has anything to do with fraud. CDS contracts always require collateral to be posted by the party selling protection. So Goldman simply wanted to get the proper amount of collateral from AIG. The "why" is because they are always monitoring their exposure to all counterparties. And the "how" is by requiring any counterparty, including AIG, to post more collateral. Which Goldman certainly did. In addition to getting AIG to give them cash collateral, they went out and bought protection from other dealers against a situation where AIG went under.
October 24, 2009 12:09 PM | Reply | Permalink
And I am not certain that the fall of England at the outset of WWII would have been devastating, either. But I got my guesses.
October 24, 2009 12:17 PM | Reply | Permalink
But what evidence have you seen that tells you that we needed to bailout AIG? I've not seen any analysis by Bernanke or Paulson which says that AIG was too big to fail.
An AIG bankruptcy would not have impacted its insurance subsidiaries which are walled off. And AIG's derivative exposures are to counterparties, not to its depositors.
You didn't need to save AIG, you needed to save the individual banks that would have gone under if AIG had failed. What the government did was much more expensive and had taxpayer money going to counterparties that didn't need it (like Goldman and some foreign banks)
October 24, 2009 12:37 PM | Reply | Permalink
What incentive do the banks have for stoppng foreclosures? They know if they get in trouble Uncle Sugar will rescue them so why not foreclose on people and acquire more property for sale later when the loss will be covered? Instead of bailing out the banking crooks who caused this whole mess, the government should have taken the TARP money and offered every American homeowner direct, low interests (3-4%) mortgages so those who actually could afford their homes at reasonable interest could stay in them, the government would make a handsome profit and the banks could suffer as they rightly deserve to and the people paying for it all (you and me, aka the little people) would receive the benefit on both the front and back end of the deal. Instead what we got was the bill for a deal where the people responsible for the economic collapse benefit on the front and back ends of the deal. That's fucked up.
October 23, 2009 11:56 AM | Reply | Permalink
The banks deserved to suffer for loaning money to people? Don't the 'people' deserve to suffer for borrowing what they couldn't afford to pay back? Why do you see the banks as evil villians in this, and the people who lied to get loans innocents?
October 23, 2009 12:30 PM | Reply | Permalink
I think that many people are not very financially savvy. If they were, they'd KNOW they really didn't qualify for that loan.
But when a Bank reviews all the information... Calculates their risk... and determines that you DO QUALIFY...
Well.. who are you to say, "No"?
They are the experts... this is their job... and it's in their best interest to GET IT RIGHT.
So... The Average Joe actually BELIEVES he's qualified for the loan... and signs on the dotted line.
Yep. The banks fault.
October 23, 2009 12:43 PM | Reply | Permalink
You have it all wrong.
The banks engaged in massive fraud. A very tiny percentage of those in trouble on their mortgages engaged in anything more nefarious than trusting their crooked bankers. That the irresponsible schemes of Wall Street are the underpinning of the mortgage crisis is beyond dispute.
October 23, 2009 12:57 PM | Reply | Permalink
How do you know it was a "tiny" percentage? I bet a lot of people took out mortgages that they knew they couldn't afford but bet that prices would keep going up and they could always sell the house down the road if they had problems with the payments.
October 23, 2009 4:39 PM | Reply | Permalink
The American mortgage was once considered one of the safest loans th make. The international market lusted after those domestic portfolios because they were so reliably profitable.
SOme sneaky book-cookers figured out that by offering low rates that ballooned, they could get a lot of marginally or poorly qualified borrowers to sign on, it's what they meant by "sub-prime."
Before the Bush tax cuts and trillion dollar war effects started turning the economy down, these questionable mortgages were packaged and resold to that hungry foreign market, whose experts were all still expecting traditional American mortgage profits, when they were getting a lot of bad loans to people who either didn't qualify or over-extended beyond their home's worth, with future payments ballooning after the early terms expired.
About that time, the foreign investors delusions about the reliability of American mortgages met headlong into the ballooning payments, and voila, you got iurresistable force v. immovable object, and the collapse was underway.
But those brokers, who gave out those bad balloon loans then resold them as good loans, made out like bandits.
My only question is, did they PLAN to make bad loans so they could sell them off, or did they sell them off when the economy tanked and so many of those loans becoming impending losses?
The former would be despicable, the latter desperate.
Either way, we have a whole lot of glorified bookkeepers calling themselves CEO's and paying themselves billions in bonuses for bad math and crooked ethics.
October 23, 2009 4:54 PM | Reply | Permalink
then paranoia
What do you mean, "paranoia"
Did you not just describe the "market maker" function? (cf. the stock exchange specialist). The specialist maintains an inventory the management of which is intended to be counter to the market.
Which is to say, this is merely meta-capitalism.
(disclaimer:written before reading comments. If, as is so often the case, Ellen got here before me, sorry for the redundancy...)
October 23, 2009 12:17 PM | Reply | Permalink
Right--MetaCapitalism it is.
I'm concerned about the Mina-Capitalists, the ordinary people who bought houses (having gamed the system or not) between 2000 and 2006. The Mina-Capitalists seem to be the only ones who don't have some sort of fallback position, or bailout that was awarded to them.
October 23, 2009 4:53 PM | Reply | Permalink
On the other side of the bank foreclosing and holding the properties: My son, a first time home buyer, is trying to buy a house on a short sale while getting under the wire for the tax credit. It looks as if it's not going to happen. The bank took his offer (full, with an adjustment on closing costs) nearly two months ago. According to his agent, the bank can hold his offer for as long as it wants, waiting for a better one, and it doesn't even have to tell him if they accept another offer. He does have the right to drop out if he finds something else, but this house is perfect for him, and within his meager price range, so he's trying to wait it out. (He's been seriously looking for over a year.)
There is a chance that the first-time tax credit will be extended, and that's good, but in the meantime the bank/owner holds all the cards. Not surprising, but really disgusting.
October 23, 2009 1:32 PM | Reply | Permalink
We have lost our ability to make ths system work for the people on a level playing field. That is waht separates the US from the rest of the world, where those inequities have been in existence for centuries. It was only in the US, a short 230 years ago that the Founding Fathers developed a system to level the playing field. They would be rolling over in their grave if they knew how it has been hijacked by special interests.
October 23, 2009 2:01 PM | Reply | Permalink
Gregor, special interests are, in fact, ruining this country, and yet there is still a good percentage of the population who just can't see it. I don't know how much more proof they need in order to see that the system just can't go on like this.
To them, a "level playing field" means Socialism. They just can't get beyond that.
October 23, 2009 3:19 PM | Reply | Permalink
I think you might recall a time when this country was more socialist in practice than we are today. There is a balance that has become altered. Where once upon a time the interests of the general population were understood to be superior to individual subgroups, now we have subgroups which have become superior to the majority. The actions of government, which are a subgroup under scrutiny in this regard, reflect the imbalance.
October 23, 2009 4:20 PM | Reply | Permalink
It's apparent ignorant people are frightened by the "s" word, but love all the programs with a socialist flavor like Medicare and Social Security. The most important thing for these people is bringing them honest information. Somehow we need ot teach them how to be objective so they are not enmotionally activated by hype, and can understand univeral healthcare is NOT the end of the US of A, just the end of predatory capitalists taking people's money without providing the services proposed in the policy.
October 23, 2009 4:50 PM | Reply | Permalink
I suspect that the bank has no intention of letting the deal go thru.
October 23, 2009 7:05 PM | Reply | Permalink
About 40% of homeowners don't have a mortgage. So those houses are unlikely to be foreclosed.
October 23, 2009 5:46 PM | Reply | Permalink
True. But the perceived (and real) value is being sucked out of their houses as well. Say you bought a house for 20k 20 years ago, and finally paid it off thinking you could sell it for 200 k or so, and you planned to use the money to buy a teeny little retirement condo in Az, supplementing your social security with the leftover cash. Then the market tanked in your neighborhood. Bam, your house is worth 20k again, not that you could sell it anyway. Doesn't matter whether you have a mortgage or not at that point, you're still screwed.
The only good thing about the Fnma plan is that if they bid the market back up again those people might finally be able to sell.
People just
October 23, 2009 7:01 PM | Reply | Permalink
In most parts of the country, the house would not have gone from $200K to $20K. It would be more like from $200K to $120K in most metro areas.
However, Phoenix reall is down a little over 50% from the peak, so that tiny condo in AZ has gone from $100K to $50K. So in your example, the person has $70K left to live on instead of $100K.
The bigger problem is that the interest rates are now so low that the income from $70K is miniscule.
October 23, 2009 11:10 PM | Reply | Permalink
You are correct in your numbers. There are neighborhoods (mine included) where the numbers are this extreme, but most are not.
The larger point I was trying to make is that people who don't have a mortgage aren't necessarily out of the woods: prices have dropped, cutting into their potential profit, and it takes a long time to sell a home these days. I've seen a lot of Grandma/Grandpa houses sit on the market empty for a year or more, and one wonders how Grandma and Grandpa are paying for their new accommodations in the meantime.
October 24, 2009 5:22 PM | Reply | Permalink
Right now you have banks pretty much refusing to renegotiate rates with anyone. How many homes have you heard about that have been saved by refinancing? Near zero.
The beauty of the way it worked out for them?
They were given enough money to allow them to sit back and let even more go into foreclosure. Knowing they have pretty much unlimited bailout protection.
Now... What to do with all of those homes they now own?
Sell them at a loss, of course.
Makes for nice tax write-offs and they still have endless government siphons in place to get more money when they will need it.
Who do they sell them to?
Friends. Associates. Different branches of their own company. Doesn't matter.
No! They will not put them on the market where you and I might get a chance to buy a home at a great price. (Not the homes that are in good condition and have a lot of value, anyways) They won't do that even if they might get more money from you and I.
They would rather sell them to their friends/associates for less money so their friends/associates/different branches of the same company can soak up the profits on the resale.
Look at the former Countrywide guy that was buying homes up for pennies on the dollar. Even though those houses would have likely sold for more individually on an open market, banks are selling them in bulk for pennies on the dollar to their buddies, to themselves.
A post I wrote on this in March:
Everything you need to know about the bailouts...
in 2 short paragraphs. A relatively long post for Atrios. Wheeeeeeeeeeeeee!
Meanwhile a fire sale is going on:
Citigroup left a 100 grand on the table. This looks like a great way to abuse the taxpayer even more.
I want to know who they are all selling in bulk to.
Remember who else was buying up the mortgages in bulk?
The Treasury has shown a willingness to recklessly toss all of our futures away to keep these "Too Big Failures" operating in their self-entitled comfort zone.
What incentive do the banks have to sell these properties for as much as they can when they can sell them in bulk at a loss to their buddies' companies (or even their own companies) so they can turn a profit on them and doing this knowing the failure bankers can ship off all of the bills for the losses to us? Think about it.
If Geithner were handing these trillions to the smaller more responsible bankers some of us little people would be able to buy these cheap houses...
But this way the elite get to keep all of the assets in their greedy hands and have us pay for their gambling addiction failures too. And then they will turn a profit on selling us these properties AGAIN.
Important for Whom? You, maybe, but not me.
I am thinking predatory lenders should already be in jail and that this is a model for more financial disaster for taxpayers. I smell smoke and all I see is a fire and a bunch of greedy arsonists standing around with their gasoline soaked hands in our pockets... And, so far, the elite are achieving their goal of bailing out themselves with our money. From buhdydharma at dKos, some extra food for thought: Read on... [update] Via Newsweek, Follow the Bailout Cash:
[update deux] Via Tengrain, a picture is worth trillions of dollars:
October 23, 2009 8:51 PM | Reply | Permalink
Don't know where you got your stats but...
the market cap of AIG is 5.23 billion and the enterprise value is 74.3 billion.
October 23, 2009 9:51 PM | Reply | Permalink
Those numbers were put together sometime before I wrote the post in March and I did not compile them. The AP did. Tengrain from Mock Paper Scissors just pointed to the AP's compilation of info at the time.
I am pretty sure I verified what he wrote about before I used it in my post. (I usually do) The numbers may have been changed since then?
October 23, 2009 10:43 PM | Reply | Permalink
Excellent
October 23, 2009 9:51 PM | Reply | Permalink
Personally? I think it kind of sucks. Just the fact that we have to write about all of this thievery and nobody in a position to fix it all is doing a thing about it.
October 23, 2009 10:58 PM | Reply | Permalink
Your comment is a new post all by itself.
October 24, 2009 1:25 AM | Reply | Permalink
Yup--it'll be "sell 'em at a loss to friends," then hold the properties to create scarcity (under the guise of only selling to people with the very best credit to avoid future disasters,) then after bidding the market back up as close to top-of-the bubble prices as possible, relax "the rules" slightly, and sell 'em at a profit to everybody else.
Rinse and repeat.
October 24, 2009 5:15 PM | Reply | Permalink