Well he would, wouldn’t he? As usual, George F. Will takes his sweet time getting to the meat of the matter: his final position on Uncle Sam’s $25b low-interest loans for The Big 2.8. And when he does, Will’s irony meter pegs out at 10. “Lemon socialism — the subsidization of the weak — is supposedly needed lest a U.S. automaker file for bankruptcy, causing the sort of civil disorder and social chaos that accompanied the disappearance of Studebaker, Packard, American Motors and others.” Will’s summation hedges his rhetorical bets, but the message couldn’t be any different from Washington Post stablemate and nominal car critic Warren Brown. “Detroit says, correctly, that some of its problems stem from fuel economy and other mandates imposed by the 535 automotive engineers on Capitol Hill. But that is beside the point, which is: No one thinks that the failure of an auto manufacturer would pose systemic risk to the economy. Americans would just buy a different mix of cars.” In fact, day after day, month after month, year after year, they already are. [thanks to loads o’ folks for the link]
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The Big 3 are just chicken feed in the whole economic mess. Whether they bail them out or not with the economy going in the tank it aint gonna matter.
The Big 3 are just the canary.
The Real Estate correction is far from over and the economy is going to continue to slide until real estate stabilizes
Ahhh, yes! I remember well the tales of my Father and Grandfather of the great Studebaker riots……….
Will hits the nail on the head, “Lemon Socialism – the subsidization of the weak”. Where is John Galt when we need him…..Oh, wait, I am John Galt.
Wow, NICE Ayn Rand reference. Nowadays I wish I’d never read that book– strikes a bit close to home, hey?
Where is John Galt when we need him
He was running the Fed. He turned out to be a looter.
I’m sure George voted aye for deregulation of the financial and lending industry as well. We all know how well that worked out.
I’m sure George voted aye for deregulation of the financial and lending industry as well. We all know how well that worked out.
The meltdown of the financial sector has its roots in the over-regulation of the mortgage industry. See Fannie, Freddie, Community Reinvestment Act, ACORN.
The government forced banks to lend money to people and send money to neighborhoods it would not have without being regulated to. Home prices then go up because mortgages are so easy to get, then defaults skyricket because so many people have mortgages that should have never qualified in the first place. Boom – you have Bear Stearns, Countrywide, AIG, and the like.
In the meantime, Will is also correct about propping up failing auto manufacturers. We should not subsidize subpar things.
The meltdown of the financial sector has its roots in the over-regulation of the mortgage industry. See Fannie, Freddie, Community Reinvestment Act, ACORN.
The government forced banks to lend money to people and send money to neighborhoods it would not have without being regulated to. Home prices then go up because mortgages are so easy to get, then defaults skyricket because so many people have mortgages that should have never qualified in the first place. Boom – you have Bear Stearns, Countrywide, AIG, and the like.
Too much regulation? Really! I call this the “blame the brown people” excuse. No doc, no down, option ARMs were not created to put poor minorities into homes. They were created to keep the bubble inflating so Wall Street could pay out tens of billions of dollars in bonuses per year. The poor bastards stupid enough to take out the mortgages were just grist for the mill.
@ Qwerty and Casual Observer,
When I took out a loan to buy a house in 2004, I qualified for MUCH more than I would ever borrow. It would have been reckless, irresponsible and stupid for me to borrow that much.
Yet reckless, irresponsible and stupid are what some people are. Are you saying it is the government’s job to protect the stupid from themselves?
People signed loan docs and EFFING DIDN’T READ THEM – I have a hard time generating sympathy. This isn’t some bait and switch, 4 point font thing. People need to take responsibility for their actions and the mortgage meltdown is an example of how there is more than a kernel of truth in what Phil Gramm said – we are a nation of whiners.
Casual Observer
Not even close.
Because of a lack of regulation and an excess of greed and self interest Wall Street bundled high risk mortgages into vehicles they sold all over the world as moderate to low risk that have now tanked. They have also lost the confidence of the investor which will dry up the money supply. So without govt intervention the supply of money goes away and with it the business.
Casual Observer is exactly right
“The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk “no doc” and “liar loans,” in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.
The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress’ move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.””
http://townhall.com/columnists/WalterEWilliams/2008/09/17/stubborn_ignorance
Qwerty – when logic and fact fails to support your argument, just inject some race into it. Nice strategy.
Banks like their money, and they’re not in business to hand it out to people that can’t pay it back. Read a book not authored by Karl Marx.
Getting back to the point of this entry – Will is correct in concluding that bailouts need to come to an end, or we’ll have an endless cycle of bad companies funded by taxpayers.
Qwerty:
Just re-read your post… my response is in violent agreement with yours.
The whole regulation debate is just as useless as the debate over taxing the rich.
When we say, “Tax the rich,” in this country, we mean to say, “Tax the high income earner.” The distinction is lost because the conservatives are unwilling to take up the fight.
Similarly, “deregulation” in the case of these troubled companies was not deregulation at all. It was a loosening of regulations along with tacit approval of unsound investment strategies for a social agenda. Unregulated companies were rarely involved because the government could not influence (or mandate for Frannie) them to take these silly risks.
A company that has never been regulated would likely have the ability to see the risks of entering into this fixed game. Without the ability to figure the odds, the unregulated company would not likely be in a position to invest in these vehicles.
It’s rather disingenuous to compare the disappearance of small automakers such as Studebaker-Packard with GM. Will has a tendency to engage in cheap rhetorical tricks like that. I wouldn’t expect that of someone with his education.
Casual Observer’s insistence that the meltdown of the financial industry was caused by over-regulation is quite remarkable. All those banks were forced to lend to all of those irresponsible people. Forced!
Um, if you’re going to make such an exotic argument, how about providing some data to back it up?
Um, if you’re going to make such an exotic argument, how about providing some data to back it up?
They were forced through legislation and the intimidation of lawsuits. Not to mention, failure to lend also meant blocking the growth of the bank by preventing them from building new branches.
Read an article:
http://johnrlott.tripod.com/op-eds/FoxNewsMortgagesReg091808.html
Accepting these new criteria was hardly voluntary. The Fed warned the banks:
“Did You Know? Failure to comply with the Equal Credit Opportunity Act or Regulation B can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.”
OK, let me get this stright, it is the ” Community Reinvestment Act of 1977″ that is the cause of our economic problems today?
I love when folks pull stuff like this out of their a$$ without giving it much thought! Nice try, but to place the blame on this act and “too much government regulation” denys far to many other factors that are in play in this crisis.
No matter how you sum it up this is a crisis brought about by the banks that the rest of our financial industry. THEY created these half-a$$ “financial products” and than push marketed them to the “average Joe” who in most instances did NOT know any better. The fact of the matter is once these sub-prime Mortgages arrived in force (being pushed by the MAJOR US banks and lenders) it became very difficult to get a “REAL” Mortgage in many communities. In otherwords these “loan shark” loans became the NORM!
Once upon a time in America we had good sense and understood that the process of home ownership was NOT to be taken lightly and abused by any of the major parties involved; Buyer, Seller, & Lender. Today the American middle and working classes are simply being “pimped” and treated like cheap whores by a group of unprincipaled “money men” that are willing to destroy lives and the foundation of our country for the sake of profit.
It appears that America have forgotten the moral of the fable about the goose that lays those golden eggs.
Banks like their money, and they’re not in business to hand it out to people that can’t pay it back. Read a book not authored by Karl Marx.
The banks were not risking their money. Their liar loans were sold as soon as they were signed so they could be turned into mortgage backed securities and sold off to investors who were just as mathematically challenged as the home buyers. The banks and mortgage brokers did not care one bit whether the mortgages could ever be paid off.
This has nothing to do with banks being forced to give out loans to brown people for fear of being sued. It was about massive fraud from the bottom to the top, fraud that was only possible because the government completely abdicated its responsibility to regulate the industry. The lack of regulation was in no small part the fault of politicians who embrace laissez faire capitalism as a near religion. They simply do not believe in market failures; it is a heresy to them.
You might want to read something more complicated than Republican talking points.
The Community Reinvestment Act is a red herring. It’s a scapegoat that is basically irrelevant to the overall mortgage mess. The CRA is very limited in what it asks lenders to do. The problem with the mortgage industry is lack of standards in their mainstream loan and lack of dilligence by securitizers and investors – not to mention insufficient regulation. I’m a lawyer who deals with consumer mortgage cases every day. You should see the crap that passes my desk. I saw a Countrywide loan to a past-bankrupt debtor that was saddled with private mortgage insurance over $500 per month – that’s just the insurance – in what was 100% financing, subprime rate to begin with. Beneficial/Household Finance was financing at 120% of (inflated) appraisal value. Typically this type of deal happened when a previous loan from the same lender was flipped, generating huge origination charges each time.
I’m not saying the consumers are blameless. A portion of the homeowners were stupid, some were greedy, some were opportunistic; but these folks aren’t controlling my retirement money. The MBA bozos at the brokerage houses are controlling my money. These high-salary “geniuses” bought this junk without looking into it.
The Community Reinvestment Act of 1977 if anything was about inducing banks to provide mortgages in under-serviced communities. It was not about creating financial products backed by mortgages that in reality did NOT make sound financial sense to anyone involved.
The only thing banks needed to do under this act was offer loans and mortgages to those that were QUALIFIED, not to every person with a pulse. Trust me there were enough qualifed barrowers in these communities for the banks to make a decent profit, NOT a super winfall that would sustain itself year after year.
Hell, even those poor folks understood this until the banks cames in and started to convince folks that even with a low income they too could afford to be a homeowner. It is not like a bunch of low-income folks and people with bad credit suddenly ran to the banks demanding mortgages. THE BANKS WENT TO THEM!
The banks were not risking their money. Their liar loans were sold as soon as they were signed so they could be turned into mortgage backed securities and sold off to investors who were just as mathematically challenged as the home buyers. The banks and mortgage brokers did not care one bit whether the mortgages could ever be paid off.
That is spot-on. This is the point where Fannie and Freddie – more government involvement – steps in. They bought about half of the sub-prime loans that were written.
I apologize for continuing the debate. I’m off this one and back to cars.
In 1995 the government changed the CRA to allow sub-prime loans and then used Fannie and Freddie to prop this up.
Clinton Administration Changes of 1995
“Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. [2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent. [3] [4]
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
Then the governments took the banks that did not want to make the bad loans to court and punished them.
“CHICAGO BANK CHARGED WITH DISCRIMINATORY
REDLINING” LENDING
“in media and direct mailings targeted to generate loan applications from neighborhoods allegedly discriminated against;
provide a minimum of $300,000 to develop and implement a comprehensive consumer education program in credit counseling, financial literacy, and business planning for residents and small businesses in predominantly minority areas.”
http://www.usdoj.gov/opa/pr/2004/July/04_crt_478.htm
If ever there was a perfect time to let the dinosaurs a.k.a. GM, Ford and Chrysler expire, this is it. Let them sink under the weight of their own stupidity, incompetence and greed.
I would like to know which way the pro regulation crowd REALLY believes things happened.
Was it:
A) A bunch of evil people broke the law.
or
B) A bunch of people took advantage of a laissez faire system that now needs to be regulated
or
C) The system was regulated, but badly.
Occasionally I read George Will’s columns, because I’m distantly related to some people with the surname Will, and my given name is George. Not really a good reason, I guess.
This column ended up in my Sunday paper yesterday and after reading it, I remembered why I thought he should stick to critiquing baseball instead. I was going to comment on the ‘riots’ that occurred after the dissolution of Studebaker-Packard and the absorption of AMC into the (old?) Chrysler Corporation, when I saw this at the bottom of the online version of the column:
“George Will’s e-mail address isgeorgewill@washpost.com. His wife, Mari Will, is a consultant for the Japan Automobile Manufacturers Association.”
I would submit that information should have been disclosed somewhere in the midst of the column, rather than an attribution in the online version. This certainly did not show up in my local paper, although it could have been left off due to Mr. Will’s relative celebrity.
To me, bad-mouthing the domestics without this little revelation smacks of conflict of interest, or at least poor research. I follow the mantra, if it looks/smells/feels bad, it IS bad.
Additionally, the attempt at humor(?) concerning Studebaker-Packard and AMC is equally poor considering that S-P lived on in Canada for a couple of years after, and after the cessation of production, the corporation lived on.
There was an entirely different economy in the US in 1964. We were not speaking of a single domestic manufacturing segment’s major players conceivably shuttering operations and disgorging thousands of employees into a very weak job market.
AMC was absorbed by Chrysler in 1987 and the Jeep products still live on today. AMC may have disappeared as a distinct entity, but some of the products are still out in the marketplace.
Really, Mr. Will. Stick to baseball. (I hope we’re not distantly related, too.)
The idea that the lending market represents a failure of the free-market system or too little regulation is laughable.
The simple fact is that this has been building for years, and, yes, efforts to extend credit to poor people – who tend to be disproportionately minority – WAS a government policy. And, yes, banks WERE under pressure to relax lending standards, or face charges of discrimination.
In the 1980s, groups such as ACORN began charging that banks were discriminating against minorities. They even had a name for it – “redlining.” Thus, credit standards that had been used for years to determine the ability of a borrower to pay back loans became caught up in the cauldron of racial politics.
In 1995, in response to a 1992 Boston Federal Reserve study that supposedly showed systemic racial discrimination in mortgage lending, the Community Reinvestment Act was amended to require banks to find ways to provide mortgages to poorer (read, minority) communities. Banks with poor reviews were punished, some saw their merger plans frustrated, while others faced direct challenges by the U.S. Justice Department. Banks responded by instituting more “flexible” standards for poor borrowers.
Financial institutions were under the gun to increase lending to poor communities. And since these people didn’t meet the normal income and credit-scoring guidelines (that’s usually why they are considered to be “poor”), the standards had to be relaxed.
One of the most aggressive lenders to these clients was Countrywide, which was praised by community activists and even the Fannie Mae Foundation for it’s “flexible” underwriting criteria that allowed it to provide loans to low-income people. Now Countrywide is one of the symbols of the current mess – or was, until AIG, Bear Stearns and others began grabbing the headlines.
Over time, the credit bubble spread, and Wall Street tried to make money off this trend. George W. Bush rode into town with his “ownership” society mantra, and in the wake of 9/11, one of the ways the federal government kept the economy going was through the availability of easy credit. The auto manufacturers joined the trend, for example, as giving financing to anyone with a pulse was one way to prop up sales and keep the lines running. Credit card companies relaxed their standards, too.
There is plenty of bipartisan blame for this mess, but the bottom line is that government has been “meddling” in the banking and financial sectors for one reason or another for over 15 years, so the idea that those sneaky Wall Street types did this in a backroom while the government turned a blind eye is wrong.
The bubble is now bursting, but if people really want to understand the root cause of this mess, I would suggest going beyond the simplistic “we need more regulation” mantra and instead learn how policies are enacted and how said policies have unintended consequences, and ripple far through the economy.
Dr. Lemming: It’s rather disingenuous to compare the disappearance of small automakers such as Studebaker-Packard with GM.
The GM of 2008 isn’t the same as the GM of 1958. It would not be the end of the world – or even the end of the domestic automobile industry – if GM collapses. That’s Mr. Will’s point, and it’s a valid one. We’ll all survive if GM collapses. If anything, in the long term we’ll probably be better off if we let the market run its course, as opposed to using taxpayer money to prop up a poorly run enterprise that is about three sizes too big for its current market share.
If people want to save GM, Ford or Chrysler, here is what they can do – go down to the local dealer, pick out a brand-new vehicle (not a used one), and pay full sticker. If enough people do this, there won’t be a need for a government bailout. If people don’t want to do this, they have voted with their wallets, and should not be forced to have their tax dollars prop up a company that they have chosen not to support.
Chairman of the Banking committee gets a sweetheart loan from countrywide? Funny that the MSM ignores this Democrat corruption while they zero in on an Alaska cop that tasered a ten year old.
“Two U.S. senators, two former Cabinet members, and a former ambassador to the United Nations received loans from Countrywide Financial through a little-known program that waived points, lender fees, and company borrowing rules for prominent people.
Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans.”
cont.
http://www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal
Geeber said, “The bubble is now bursting, but if people really want to understand the root cause of this mess, I would suggest going beyond the simplistic “we need more regulation” mantra and instead learn how policies are enacted and how said policies have unintended consequences, and ripple far through the economy.”
Exactly. This isn’t really a case of too little or too much regulation. When it comes to the question of regulation, the problem was that the regulation was just badly thought out and implemented. The perfect storm formed due to the competitiveness and hubris of Wall Street where many people knew there was a problem years ago, but didn’t or couldn’t do anything about it. IIRC, the WSJ printed editorials about the situation at Franny at least two years ago.
There must be regulation in the mortgage market and in banking. No one disagrees with this. The regulations we had did not work. No one disagrees with this. The argument needs to come down to individual regulations and how each of them affected the situation. Not one single regulation or group caused this problem, it was a synergy.
However, that does not absolve the people responsible. Business leaders, legislators, regulators, political appointees, and the President all bear responsibility.
I dismiss anyone in those groups who want to claim they had nothing to do with it. They better put up one hell of an argument that has more to do with what they were doing to fix it than pointing the finger at others.
Well if somebody robbed a bank and the bank was then broke i would want the robber to spend several years in the pen.
People signed loan docs and EFFING DIDN’T READ THEM – I have a hard time generating sympathy.
It’s not a matter of sympathy, but of accepting the fact that the average consumer does not understand leverage or variable interest rates to the extent required to allow such inherently risky products in the consumer market.
This zealous desire to blame Joe Sixpack for the problems of the economy ignores the fact that your average professional actuary should have been able to see this coming.
I give the professionals enough credit to believe that they knew that this bubble bursting was certainly was at least possible and fairly likely. However, they wanted the fee income that came from putting the deals together, and the behemoths in the economy such as AIG knew that the Fed would have no choice but to bail them out when the fit hit the shan.
It comes down to this — high leverage (read: low or no down payments) creates whipsaw effects, both positive and negative. It doesn’t matter what your FICO score is, the likelihood of a default of a loan product with no down payment is substantially higher than one with a reasonable down payment.
These products shouldn’t exist at all, because there is no way to insure against the risk at a systemic level, and defaults at the catastrophic levels that we are seeing are inevitable when they exist. No rating agency or amount of consumer literacy with loan documents can fix this. The only to prevent it is to not have such loans exist in the first place.
PCH101,
The money from the deals was not “free”, it was easy and tainted, but not free.
You are correct that we can’t blame Joe Sixpack, but I don’t see a lot of need to bail him out with taxpayer money. If I lost money on a deal I didn’t really understand, should Uncle Sam bail me out? If you want to go after the guy who sold the loan for failing to meet professional standards or something, I can go along with something like that.
I am not sure what you mean by “products”. I am sure that whichever end of the deal you look at, there were products that were flawed. I am all for fixing this with regulation, but little I have heard so far addresses this directly.
I don’t see a lot of need to bail him out with taxpayer money.
Something needs to be done to allow for these loans to be stabilized and worked out, otherwise the market will not bottom out and things will get much worse than they need to.
That being said, a lot of people are going to lose their homes. Many of them will just have to deal with it.
The bailout efforts are largely focused on the companies, which is as it should be. The failure of Fannie, Freddie, AIG, etc. could destroy the entire economy. The little guy collectively can harm us, but individual little guys cannot, and some of them will have to pay for it.
I am not sure what you mean by “products”.
I’m talking about anything that isn’t a fixed rate mortgage with a substantial down payment. ARM’s, interest only loans, Alt-A’s, home equity lines, etc. all have inherently higher rates of default, rates too high for the system to absorb en masse when times get bad.
Downturns are inevitable in a market economy. We cannot permit there to be loan products that are likely to implode during one of these inevitable downturns. That may appeal to the greed of the financiers, but you can see now who gets stuck with the bill.
Dr Lemming :
September 22nd, 2008 at 11:01 am
It’s rather disingenuous to compare the disappearance of small automakers such as Studebaker-Packard with GM. Will has a tendency to engage in cheap rhetorical tricks like that. I wouldn’t expect that of someone with his education.
When Studebaker closed down in 1963, 10,000 jobs were lost right before Christmas.
Did you know that Alan Greenspan was a close friend to Ayn Rand?
Just check out the Wikipedia entry on Ayn Rand and then search for Greenspan.
Pch,
I am not sure all those products are necessarily bad things that should be banned. Instead, they need to be properly valued. It was only due to a perfect storm of head in the sand valuations that led to the huge volumes of these deals being available. I will never understand why regulators allowed such an insane amount of valuation of these things on the books.
When it comes to bailouts, my only concern is that the first guys to get a haircut are those who took the risks. I am not concerned about the stockholders and executives of these firms. Not one bit. Frannie should be completely socialized, stabilized, and then have all parts that are best privatized sold off and out of the hands of Congress. Whatever is decided needs to be government controlled should stay that way. I am not a fan of the whole “public-private partnership.” Most of the top people in these organizations couldn’t have actually run a lemonade stand without employees to actually make it work.
As for AIG, do the same. Sell off the parts that we can to get back the bailout money. And slowly roll the whole thing up as we can without stopping the flow of capital or eliminating confidence. If it is indeed the fact that the AIG deals were set up in such a way that they depended on getting bailed out, then at least leave them with nothing. We left the decision makers at Chrysler intact, and what did we get? Another failure in what is really, a short amount of time.
Flarn,
10,000 jobs. So the question is, how many of those people never found work again? That’s what we are supposed to believe is going to happen to every UAW member who loses his overpaid job unless we bail them out. And we are supposed to feel personally responsible for it, too. Last time I got laid off, I didn’t get a single cent from anyone in Michigan.
Since I made at least a dollar more than a UAW worker (though not more in total compensation), I suspect they would have simply laughed at my well deserved plight.
Instead, they need to be properly valued.
They will eventually default in large enough numbers to create the problems that we are seeing today.
This cannot be helped — when borrowers have no skin in the game, large numbers of them will default. Traditionally, banks have demanded collateral precisely because they want a hammer to hold over the borrower’s head. If the borrower has little or no money in it, the borrower has little incentive to keep it afloat.
One can’t possibly value that properly, the loss reserves required on the balance sheet would be extreme.
When it comes to bailouts, my only concern is that the first guys to get a haircut are those who took the risks
In theory, this should happen. In practice, it doesn’t and can’t, because their failure becomes our failure. When they pay, we pay. They have a gun to our heads, and they damn well know it.
We aren’t bailing them out for them; we’re doing it for us. If the feds hadn’t done this stuff, we could have had a depression — that is no joke, we are that close to the edge.
Their shareholders are getting killed and their top managers being forced out, so there is some justice here. But the bonuses that were earned in past years aren’t coming back.
How the Democrats Created the Financial Crisis: Kevin Hassett
“The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.
Turning Point
Take away Fannie and Freddie, or regulate them more wisely, and it’s hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
It is easy to identify the historical turning point that marked the beginning of the end.”
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0
On the values, it would seem to me that the proper valuations used to be there, and that has somehow changed.
I don’t know exactly how it’s done now, but I suspect that somewhere the likelihood of a default is mixed into the formula. As you say, the likelihood of a subprime default is extremely high, and the more of them in a given area, the higher the risk of a domino effect. I would have put the value of a subprime california loan at pennies, while one in Aspen might be worth near face value.
If the loss reserves would be extreme, then GOOD! That’s where we went wrong, is it not? This should have never gotten this big because only private players should have been able to play in the markets due to the risks.
If someone offers you a pig in a poke, you won’t buy it. How come the SEC and others allowed companies to buy dozens of supersized 5,000 pig sized pokes and put them on their books as if they had just bought 5,000 prize pigs rather than a bunch of feral cats?
If the officers of Jared Jewelry put a bag of paste on their books as gemstones, they would be prosecuted. It’s FRAUD. If you run Lehman, how do you claim you didn’t know? If you are that stupid, don’t you have a fiduciary duty to resign?
Let’s be gracious. Leave them each 3 million, and take the rest. Bail out the company, but weed out the so called leaders.
Sorry about the rant, but I am still pissed.
As you say, the likelihood of a subprime default is extremely highd
It isn’t just subprime. There are plenty of loans in today’s market that had little or no equity to begin with, and have since lost whatever they may have had and more. Even the prime borrowers are a great risk under these circumstances. They are less risky, but still too risky during times like these.
If the loss reserves would be extreme, then GOOD!
What I’m really telling you here is that it isn’t realistic to expect anyone to book these inherently risky loans to the extent that we are talking about. There will be motivations to do otherwise, and do otherwise they shall.
If you run Lehman, how do you claim you didn’t know?
Because it is possible to use the data to say otherwise. Which is what they did.
We need to separate theory from practice. If you allow bad practices, they will be used. We tried doing what you’re suggesting — assigning a value to them — and it didn’t work, because there is far too much room for interpretation to make that workable.
This would be akin to dealing with rapists by making sure that they carry insurance policies that will pay out their victims in the event that they rape again. Clearly, that isn’t a solution, because the goal needs to be prevention, more so than recompense.