Continuing to examine and hold a lively discussion of the Northern Virginia Real Estate market.
Please post your local house search updates, MLS finds, on-topic ideas, and links here.
On the next wave: Calculated Risk, option ARMsGiven what a small number of actual option-ARMs our region has, I'm pretty certain this is going to be another nothing-burger, or at worst a continuation of the same drip, drip, drip of REOs. However, I found the graph at the bottom of current total combined loan to value ratios interesting. I wish I could turn it into a cumulative distribution in my head... And that there were one for this region alone... But it looks to me by eye, that the midpoint for prime loans is at about 110%, and it trails off quickly thereafter. But one really really needs a regional graph to reach any conclusions.
Cara-Yeah I find that graph very difficult to read. For one the numbers don't really line up with the lines which makes it confusing. It also seems wrong, I keep on hearing that 1/4 to 1/3 people are underwater. This chart makes it look like 60-70% of people with mortgages would be underwater which would be about half of all people. Ohh well I assume that at least the shape is correct even if it is skewed slightly.
Fitch Ratings, which rates mortgage backed securities, estimates there are about $200 billion worth of option ARMs out there, with nearly $30 billion scheduled to reset in 2009 and $70 billion in 2010.Many have already been foreclosed upon, but the numbers aren't that big for option-ARMs - way more dangerous than Atl-A's.Of course, CRT's posts on "toxic" mortgages in this area are excellent. Bottom line: there just aren't that many in NOVA.Watch out for gloom and doomers to combine Alt-A with option-ARMs to get huge numbers. Alt-As are resetting to LIBOR + 2 to 3% premiums or 3-4% interest + a small principal amount.The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor).ARM Index QuotesThis quote is from an article written in early February 2009. Rates are down significantly since then."Many people are actually seeing their adjustable rates fall," said Barry Glassman, a financial adviser with Cassady & Company. "Some loans are resetting even lower than some fixed-rate loans."Foreclosures:Sharga said emerging foreclosure markets include Boise, Idaho; Provo, Utah; Portland, Ore.; Joliet, Ill.; and Fayetteville, Ark. "Follow the unemployment numbers and you'll be able to track it," he said.Obviously, this is not NOVA - unemployment 4.5%"What I hear is about large bulk purchase initially which do not show up in the MLS service, so we don't capture that in our sales statistics."Gone before they hit the market anyway. And if investors were going to dump them, wouldn't we see something in the inventory numbers by now? spider says there will be a stampede of listings starting 1/1/10. Inventory is up by a few hundred as of 1/12/10 in Northern Virginia. Some should be expected as people re-list after the holidays.One reason is that Northern Virginia was very aggressive on foreclosures, so home prices there dropped very quickly.The foreclosure crisis is over.
When this house sold in 2005, I was watching the market, and this one in particular convinced me once and for all that there was a serious gap between house prices and reality. The couple that bought the house couldn't afford the price they paid, that much I knew. They did a remarkable job in hanging on for so long. It's a pity, too, because they clearly didn't deserve what is happening to them, and I'll give them credit for sticking it out so well.But my guess is the bank is taking a $200K+ hit here.http://www.redfin.com/VA/Woodbridge/13100-Nottingdale-Dr-22193/home/9185700
Xpovos- If the bank loses 200K on a 450K loan is not that bad compared to most foreclosures. Depending on the type of loan most loss severities are between 50-70%. For cheap subprime houses sometimes the loss severaties are north of 100%.
xpovos,Well hopefully the short sale will help them get that albatross of a mortgage off their backs.A very good illustration of exactly how bad the bubble got. Drive until you qualify still didn't lessen your housing cost enough to make it doable in the long term.How close do you think the current price is to reasonable?
Cara,That's a very decent price for the house and relative incomes assuming the condition is OK. I'd expect it to sell quickly at or slightly above that price.Oh, by the way, did you by any chance happen to look at this property when you were searching?http://franklymls.com/FX7102909It's Burke-area, and caught my eye today, but if you've seen it, I'd like to know more.
housebuyer,$200K hit might not be bad compared to a foreclosure, as that clearly adds extra costs-hence why they're willing to even attempt the short sale there. But as my grandfather used to say, there's not many of them in a dozen.
Has anyone seen a graph that shows the correlation between value underwater and default rates?Xpovos- I have not been inside that house, but I drive around that area pretty regularly. The area is pretty nice, but based on the size of the house and the pictures I would guess the house is 50-70 years old and has minimal maintenance done on it for at least the last 20 years. The value is entirely the land, I would guess the building has enough structural issues that it would be cheaper to start from scratch rather than fix all the problems it has.
HBHere's a graphic from earlier in the year http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion spent 2.5 Trillion and so far claims $45 billion in profits?until they unwind that position they don't have dick for a profit.committed 12 trillion in guarantees?HB Says"For sure most of these are not credit derivatives they are simply loans and securities that the fed bought."It was all garbage, bad paper, bad contracts, bad insurance.as for letting the banks fall?Take them into conservatorship, fire half the people, slash salariesto GS-14, and push them through bankruptcy.Let them eat the pain of what they handed out.
xpovos,I saw it online, but I didn't go look at it in person. As housebuyer said, at that price, one assumes it must be a tear down given the size of the lot.
CARAa prime loan is supposed to have 80% LTVwhen a Prime Loan is 100% LTV it's ALT-A.When a prime Loan is 100% LTV people lose interest in protecting their equity, because they don't have any.at 80% LTV, people who need to sell will clean it up, do cosmetic repairs, cooperate with agents, andtry and get 10-50K out after closing. If they lost their job or need to move, they go with class.at 100% LTV, people walk, they package short, they stop caring.Each foreclosure knocks 50K off of every house within the community.they sell low and drag down comps.Now maybe flippers can come in,but if 60% of Prime mortgages are now "Bad" how many people walking does it take to poison the community.All these people, "Robert", "TN"won't buy if a community has a pedophile in it. Well will they buy if it's got a foreclosure?
Hmm, so like my grandfather's old place, only more expensive. Brilliant.
Pat-Your link proves my point. The largest thing you see here is 3 trillion to ensure money markets. They spent 4 billion before the program was ended. They spent 178 billion buying commercial paper, out of the 1.8 trillion they said they would. Seeing the world is no longer ending I would bet this paper is worth more than what they paid. They bought MBS that the government was already on the hook for through Fannie and Freddie. So this just means the government doesn't have to pay someone else interest. There is no additional risk to doing this. Basically no money was spent on PPIP because MBS prices rallied too much to use it. Sure they may lose some on TARP, but a lot has already been paid back and they made large profits on what was paid back. So basically the only things they will lose significant amounts of money are GM and AIG. I don't think you understand how intertwined the financial system is. If they let AIG fail, it would have brought down Citi, then BofA, Wells, JPM... There would be no banks left. Do you really think our country has a system set up in place to handle the bankruptcy of nearly every single bank. In the mean time all lending would stop while they are in bankruptcy, so people would stop buying things since the credit cards would be gone. I promise you in your scenario, we end up in a situation comparable to the great depression. Which probably leads to a massive war (most huge economic upheavals do.) So sweet instead of overpaying some bankers we end up in a world war. That sounds fun.
On the Frankly link I posted earlier, here's some data from the Fairfax County assessment:Utilities WATER NOT AVAILABLE SEWER NOT AVAILABLE GAS NOT AVAILABLEThat can't be right. Can it? Gas I could believe, even water, if it had a well--that would be a huge reason not to buy--but no sewer?
Xpovos-I am pretty sure most of the places have septic systems, rather than the city sewer system. Am I crazy?
Pat,What part of this being a national graph did you miss? What part of it not adding up to the percentage of underwater owners presented everywhere else did you fail to recognize?I don't live in DC. These things have already played themselves out in most of NoVa. Where I live there have been foreclosures for 2 years, people are still buying. Each new foreclosure does not drop the values 50k. It might have at one point in time, it doesn't anymore. There have been loads of them. But what this year's market showed in spades is that buyers will pay a premium for a house that's actually in good condition and move in ready, and not a disaster waiting to happen.Here, here's a typical REO for sale today:http://franklymls.com/FX7232795Check the comps to see what they sold for in the same neighborhood last year:http://franklymls.com/FX6805717current lists 390k, sold in 9/17/2008 for $306k.Check the solds, look at all the flips making a tidy profit. Notice how all the normal sales and flips sell for similar amounts. The dynamics going on in DC are not the same as what's happening in NoVa. There's still insane disparities in close prices, there's still all kinds of upheaval you've showed us. That's just not what's happening in the suburbs anymore. Price discovery has happened out here. Interest rates are about the only possible hitch left.And you are so full of shit with respect to people doing upkeep on their homes only if they still have equity on paper at any given moment. People don't judge whether or not to fix their roof based on what the house will sell for, they fix the roof because they live there.Yes, the remaining 2005-2007 buyers who haven't already lost their homes to foreclosure are going to continue to be a drag on neighborhood conditions if they can't afford their houses. But that's a function of buying more than they can afford not equity. Will any income shock mean they enter the foreclosure pipeline? Yes. Will we continue to have foreclosures over the next 2-3 years? Yes. But in case you hadn't clued in, in NoVa the foreclosure rate is going down, not up.DC doesn't have the same quick foreclosure process, it's inventory hasn't seen the same plunge, it's median prices haven't budged as much. The war isn't over for you yet. But that doesn't mean it's still raging in NoVa.I reject your entire philosphy that owning houses only make sense if they appreciate. You are so full of shit. Houses need to appreciate so that retirees can fund their medical care? WTF? How the heck is that plan going to work? Everyone has the same risk profile, but each individual has a different trajectory for their "insurance" policy if it's their house. And why would a normal paid-off house appreciating only in lock step with inflation not be sufficient anyway? It's a terrrible retirement plan.DC and NoVa are not in the same stage. When are you going to get that through your head? Here buyers today can now buy houses affordable at today's incomes and today's rates and without it being much more expensive than renting an apartment, and they are chosing to do so. To live in. Capiche?
housebuyer,OK, so it has a septic system. That goes right to the top of my home inspection priorities, now. Still, no water? So, we are assuming well water?Well water + Septic system + small house. I can definitely see why it hasn't sold.According to tax records, it's a single owner since 1969.
housebuyer,IrvineRenter posts this one about cure rates of default all the time: IHB blog postBut I can't find a strict default rate, nor his source on the cure rates.
Xpovos-Yeah I don't know I would trust it the house looks ancient and looks like it has a ton of problems.
HB"If they let AIG fail, it would have brought down Citi, then BofA, Wells, JPM... There would be no banks left"Lots of banks, just not hedge funds that have checking services.Look in the UK the 5 biggest banks all went Tits up and the UK put theminto conservatorship.Had BofA fell, FDIC could haveguaranteed checking accounts, savings accounts which they do,and then, the name on the branch changes.Citibank is Bankrupt. NuCiti buys their assets for 5%and keeps it all running on the retail side. The Hedge fund sidedies.Had BofA Died, they could haveNewBank-America, closed the hedge funds, and kept rolling.That is what happened to GM.OldGM is stuck in court for another 11 years, NewGM is running, selling cars and rolling.CaraOuter VA is doing better, and sureif you have a good gig, buy a house.I look at a house as needing to pencil out to within the Discounted cash flow of a rental.I'm renting a 2BR in Arlington for 1035/month, any sort of 2BR condo is still way too pricy and a 2BR House runs up my burn rate hard although i'm thinking of a place off Glebe near 50.if the price goes lower.if the housing market was healthy they wouldn't need a buyers bribe.if the mortgage market was healthy FHA and the feds wouldn't be 90% of mortgages.
housebuyer,Nothing price won't cure. But it was out of my price range to start, and with the investigation has been placed solidly into the 'no way' category. The 0.5 acres and mature trees did catch my eyes though...
Cara-Thanks for the data not exactly what I was looking for, but it was still very useful / interesting.
pat said...at 100% LTV, people walk, they package short, they stop caring.Each foreclosure knocks 50K off of every house within the community.they sell low and drag down comps.Already, in Northern Virginia, median home prices were up 12 percent in November compared with a year earlier. In Prince William County, which had one of the region's highest foreclosure rates, median prices rose 23 percent.If they stop caring when prices go down, what do they do when prices go up?
Pat- Very few of the large European banks defaulted on their debt. While some got taken over by the government their debt was not whipped out. The problem is there is a ton of lending between the banks and they own a lot of each others debts. So if one of the major banks failed it would drag down the others.
Pat,Where do you live? 1035 is less than the prices we found for affordable rental housing with upper limits on the income.Penciling out to cash-flow positive is only likely to happen for condos and some townhouses. But I'm not convinced you're using an appropriate comparison point for rent. Sure, before the next upturn, house prices might also pencil out to cash-flow positive, but only by stagnation in housing and inflation.Yes, the national housing and mortgage markets are still on life-support. Part of my underlying assumptions is that the Fed won't pull the plug until the national picture has steadied itself.
WowI am not sure what he said to upset you Cara, but whatever it was isn't worth it. (Yes, I am aware that might come across as somewhat hypocritical in light of some of my previous arguments here...)On an unrelated note...Here is a data-point I can't make sense of. I have seen parts of the discussions that concluded that only a small portion of the DC area housing stock is currently financed with exotic loans, but how does that fit with this old Washington Post article?(Something I saw in a thread Anonymous linked to earlier)http://tinyurl.com/937ar"About 54 percent of home buyers in the District purchased their homes using interest-only loans so far this year, according to LoanPerformance, a San Francisco-based company that tracks loan originations nationwide. About one-third of buyers in Maryland and Virginia are buying with interest-only loans.Just five years ago, only about 2 percent of home-purchase loans in the Washington area involved interest-only terms. "If interest only loans made up between one third and one half of all loans in the DC area in 2005, where did those loans go by 2009?Were they all refinanced? Or were flippers disproportionally represented to such an extent that they were almost all sold again in the 2006-7 time frame? Is it possible that the IO loan phenomenon was limited almost exclusively to the spring of 2005 and that in the total scheme of things spring 2005 just doesn't represent that much of the area's housing stock?Is it possible more of them are still out there than the data suggests? Was the WP article incorrect from the start? (not a very exciting explanation from a discussion standpoint)
housebuyer,I don't have any credit cards issued by a bank, only by a credit union. For those of us that have money only in credit unions, we know that we would still have access to our money because it is insured by the NCUA and the much troubled FDIC. I think the problem with the national banks is the arrogance in which they operate. They are rewarded for taking stupid risks and bringing the world economy to near collapse. The fact that they don't get that what they did was so WRONG is what makes people angry. I have yet to hear any of these banks apologize.
Leroy,It's not what he said today, it's the accumulation of comments that basically claim that owning a home only makes sense if it's an appreciating asset and that underwater home owners won't do maintainence. I had been letting them go, letting everyone else judge them on their merits, but the "CARA" part implied that he wanted an actual response of opinion from me in particular, which I until this time hadn't really given directly.Thankfully, although I flew off the handle (not for the first time as Va_investor and Kevin can surely attest), Pat calmed things back down again in his response.
Robert said..."In Prince William County, which had one of the region's highest foreclosure rates, median prices rose 23 percent."Only because you posted this to my Case-Schiller reference the other day - "I don't care about Prince William County."
To what extent homeowners are underwater also plays a role in the decision. Owners with negative equity of 10 percent or less rarely default, according to researchers from the graduate schools of business at the University of Chicago's Booth School of Business and Northwestern University. But once negative equity reaches 50 percent, close to one in five owners would walk away.The findings show that one out of four homeowners who default on their mortgages are making a strategic decision.
Jeremy -I believe I said Prince George's County.
CaraI live near what's left of the Adams Square Mall on Columbia Pike.I've been here since 04, so it'sfair dinkum stable and my Landlord never did any fancy finance.Now the place has window shakers instead of central air, it lacks a DW and W/D and the electrical system is pretty limited.But we have FIOS and that cheap rent sure is a good feeling every month.And yes, this place is cheaper then the RPJohnson subsidized housing.
Leroy,I can't find it but we've tried to figure this out before... All the possibilities you list are amongst the potential contributing factors. The NY Fed data is as a percentage of all outstanding mortgage loans. With a 4? year average lifetime of a loan, assuming two years of insanity lending, cuts the percentage down to 25%, given the near 50% default rates, leaves only 12% outstanding.If you assume the rest can be explained by short-term flippers chosing the lowest monthly cost option, then you need that to make up 50% of the remaining originations to keep the total IO's outstanding under 6%.The 50% I/O originations was a sure sign the bubble had to pop soon because buyers were running out of the ability to pay any higher prices, but it may not be the right metric for easily determining how many more foreclosures are yet to come.
Pat,Are you planning on buying something that is in similar condition? (or will be once you're done fixing it) If not you can probably safely use a higher rent for your calculation of whether renting it out could cash-flow positive in the future.
Robert said..."I believe I said Prince George's County."Yes. You implied that Prince George's county is what made the numbers I referenced look bad and you didn't care about their numbers. I'm implying that PW County is making your number look good, and I don't care about PW County.
Leroy,It was half of all loans made in 2005.Really rough example: if everyone moves once every five years, then on average, 20% of the population moves every year. If half of that subset used IO loans in a given year then only 10% of the total population is using an IO loan.Furthermore, the term you used was how "housing stock" was financed. If housing stock includes homes that are paid off that increases the number of homes being considered and further reduces the percentage of exotic loans to all housing stock.This may or may not be true given your articles but it's at least a suggestion on how to reconcile the statements.My $0.02
CaraI don't want to buy an investment house, but that said if work takes me out of town, I want to be able to rent it out and not lose my Posterior.Me I want a place, where we can put in a roof deck, and a little garden and some solar panels and I can drink scotch and watch the sun set.I want a place where i can walk to the metro without paying $4000/month total cash flow.I want a place where we can have a kid if we want to, and definitely have more then one cat.I want a place where the girl can go out and not get robbed or assaulted at night if i'm not around.i want a place thats cheaper then a hotel room for 5 nights a month.I'd like the place to pencil out against rent.With the wonderful deal we have right now, I'm just chilling.even the best places don't pay off until 8 years out, now if rates go up 2 points? Lots of stuff will get cheap.And yes I'm looking in DC because we like the action, and, that meansit's a different market from PWC orManassas.I saw TH's in Woodbridge last year for 80K, but the Girl said she'd cut her wrists if she had to live in woodbridge.I'd rather deal with the occasional crazy homeless guy then I-95 or 66.
Pat,I don't honestly know where that place is. But safety, ability to do what you want with the place and not too expensive and action is a tough combination, because you are clearly not alone in wanting all that. You can choose to compromise on the safety as you're doing in DC, or you could compromise on the action and consider Kingstowne or Rockville. (or whatever the equivalent is on other metro lines).If you keep renting that same place you should be able to put down 40% or more in a few years, which is one sure way to minimize monthly costs. So you might as well wait.
Hayfield-I agree that it is crazy how much bankers make and that they did not apologize for almost bringing down the system. I would be perfectly happy if they had higher tax rates for the top earners so that they do not have absurd compensation. But even though I am not happy with the bankers I am very glad they saved the banks. The system is very intertwined and weak. The costs of letting the system fail would have been catastrophic for all of us. So as I said sure reduce their pay, but do not let the system fail.
housebuyer, I just can't imagine how you completely believe in this BS about "bailout was to save the main street". Bailout was a mistake - we would not have been worse off - trust me. 160 top economists sent out a letter to stop the bailout : LinkyWithout the bailout, debt & stock holders would have taken significant haircut. But, banks would have survived - lot of rich people would have lost lots and lots of money - which they absolutely deserved. FDIC could protect the deposit holders..there was 0 need to save hedge funds.I can't write enough about the complete ignorance of our common public to believe such campaigns. We have been duped, my friend - wake up - it's been over a year now.
And no...we are not better of. Instead of bankers owning toxic assets - you, me and our kids own it now. Congrulations!!
spiderwhy were we able to do a flying bankruptcy on GM and we couldn'ton a bunch of scummy bankers?Because the Bankers know who in politics are getting laundered money from the mob and overseas, whileAuto Workers just turn wrenches.the banks and the phone company know all the secrets.
And, washington is NOW wondering how to solve the wall street's bonus problem - ever heard of moral hazard!!!
pat, Fed/Treasury have been and are still run by Goldman. I still get red when I think about this robbery. I have campaigned against it, and so many other economists. Common men still believe this was done for them...yeah right!!
Pat & Spider-Have either of you ever worked at a bank much less high enough in a bank to have a clue what they are holding on their books. I will assume the answer is no. For one I will tell you they are always loaning money back and forth between each other and they would be insolvent if this debt could not be repaid. Also I am sure you will agree that Citi, Merill, & probably BofA would have failed with out government intervention. After this happened I am not sure how you could possibly think there wouldn't be a run on all the major banks. The problem is banks lend long term but borrow short term so if there was a run they could not get the money needed to pay the people who wanted the money bringing these banks down too. Goodluck getting loans without these banks.The FDIC has limits set at 250K for a reason they can't afford to ensure the deposits by the big boys. Having them cover deposits would have been far more expensive bailing out the banks.Also what common people are you talking about that were duped into thinking bank bailouts were a good idea. All the common people I know think saving the banks was a terrible idea.Spider- What bailouts are you talking about. They made money loaning TARP to most of the banks. As I said they got hosed on AIG and GM, but I think it is hard to say that GM is a wallstreet not mainstreet example. Buying Agency MBS helped the banks, but it helped homeowners more because it stopped their house from continuing to lose value.I could go on for other programs, just let me know which ones saved banks not mainstreet, so I can see if I agree or disagreePat-Now your just being silly thinking that the reason that banks have money is they are money laundering from the mob. I bet you think the mob is also still running the strip in Vegas. Get real there is too much money to be made in these industries to risk dealing with the criminal element and risk getting shut down.
Spider-Sure I agree that bankers are overpaid. I would be fine as I said before if you put a huge tax on their bonuses, although I don't see a reason to single them out over other people so maybe they should just raise the marginal tax brackets for the rich. I also agree that the fed/treasury does what wallstreet wants, but do you really think main street would have been better if they kept rates higher. Pat-GM is not as intertwined as the banking system. It is also one company, which is much smaller (in terms of assets) than many of these banks. Saving GM by giving it funding while it went through bankruptcy will likely be one of the largest places the government loses money. Handling several thousand banks at once would have taken forever and been more expensive.
Catching up...The Anonymous saidAfter a response from me, he goes on to throw out a strawman about homeless on the street in Arl. And even Cara suggests I am engaged in "wishful thinking" and need to "take off the rose colored glasses", all for suggesting ARL might not revert to the mean.I didn't load the old discussion but homeless on the streets of Ballston, Clarendon, etc certainly still have a negative effect on home prices there. I would be interested in hearing what makes someone choose to be homeless in Arlington vs. DC. I'd also be curious what the homeless population was like at the Central Library in say 1999. Any long timers in Arlington know? Right now there are sometimes homeless sleeping on the benches outside of that library but I can't say I ever see any inside. Contrast that with a DC library which often is overrun with the homeless inside.Just discussing this from a property value perspective. I think we can all agree the presence of homeless near your home and in public areas like libraries is a negative.
Leroy saidSince we were doing the "evaluate our predictions" thing in a couple of the earlier threadsI correctly predicted Dow to 10,000 would occur within a month. :)I also thought the Dow to 10,000 thing was real. I remember a lot of commentators were like sell, sell, sell this is unsustainable. A lot of people were saying bear rally etc.Well I think the past three months or so shows that I was right (and others saynig hte same thing). It was the Dow dropping to 6500s in April 2009 that was crazy. The reason we exploded upward so quickly was because the drop to 6500 was idiotic, stupid, behavioral economics people are idiots and were panicking and overestimated how bad things were.End soapbox. :)
Of course, the Dow will drop to 8,000 now or something crazy now that I had all that bluster. ;)
Robert saidBut, #2 in all of those sectors.Nitpick the rest, but note, Obama has been in office less than a year.#2 in the financial sector? Isn't that Charlotte? Maybe that changed after the fall of Lehman and other places.
"spider said...housebuyer, Bailout was a mistake - we would not have been worse off - trust me."Wow such certainty! We would not have been worse off? Trust me?I wish you could have been in my shoes during the first week or two after Lehman failed and the TED, A2P2 etc started blowing out. It started with calls from a handful of clients (all small businesses, "main street america", employing 50-500 people apiece), each was complaining that their lender was threatening to pull their revolving line of credit - the same instrument they used to buy inventory, pay salaries, etc.These businesses were all very healthy, very solvent, just did not cash flow well (hence the need for a revolver). They complained the lender was going to pull it, citing a "material change in circumstances" clause, an obscure, boilerplate term in most revolving loan instruments. I told them its pretty inconceivable that a bank could successfully argue this, and assured them I could call their lender and straighten it out.Just then, I got my first of many calls from my lending clients - small "mainstreet USA" banks located in the DC area - very small cap. They explained that they were worried about their overnight lending via intercreditor agreements. We quickly realized, if they did not become more liquid ASAP, they would be out of covenant and subject to potential FDIC seizure. The easiest way for them to do that was to call in some outstanding loans, and then it hit me...Oh shit... on the one hand I am telling my borrower clients, they cant take the revolvers away, yet on the other I was telling my lending clients, you MUST take revolvers away! Things got really hairy after that. By the end of the week, we had multiple companies, and probably 5,000-10,000 local jobs on the line. The plan was if the revolvers were pulled, we would try for a temporary restraining order, and in lieu of cutting paychecks, we were going to issue IOUs to employees, telling them we would pay as soon as our LOC was unfrozen.As you can imagine, even the announcement of IOUs is often the death knell of businesses. Employees do not understand credit spreads, intercretitor agreements, liquidity crisises, etc., nor do they really care. All they know is that if they arent getting paid, its time to walk. As it turns out, TARP was passed on a friday, and we had standown agreements in place for most of our creditors and lenders by monday morning. As the TED, A2 P2 eased, parties became more reasonable, and life went on as normal, and all those jobs were saved. Still, by then it was too late for about 10% of our clients as they went into receivership. Since they were fairly solvent, they didnt lose a ton in bankruptcy - however there were hundreds of people who never were hired back. Mine is just one firm. Multiply that by hundreds of similar firms across the USA and you can see how this quickly could become a problem. I never admitted this here because I didnt want to add to the panic, but I really could for the first time see how it was possible the entire financial system could have collapsed within days or weeks.
TBW-It probably depends how you count it. I would also have thought Charlotte and San Fran have more private finance jobs than DC. But if you count assets and the Feds balance sheet counts than DC is probably second to NY.
Robert asked Whoa! I guess you win some and you lose some. This would be one I would like to keep.Was it Texas taxes? Austin corporate incentives? Closer to customers?Interesting that of the 100 largest metros, Austin is the #1 fastest growing and WDC is #2.With Austin you get a blue city with a lot of individuality, respect for others, culture, etc BUT you also get red state taxes and regulation. ;)Maybe also the weather. Maybe they visited Austin, got some warm weather, and then came back here to see a 20" snowstorm. And they were like enough of this.
Also, in case you were wondering, will I say, if TARP was not passed, the world "would" have gone straight to hell? No. In my estimate there is always, even in good times a 0.1% - 0.5% chance the entire thing could collapse due to whatever. However, during that week or two, that risk quickly rose to a 10 or 15% chance that we were headed towards complete catastrophe.Recognize what this means, I think there was an 85 - 90% chance that nothing dramatic would happen. I am not Contrarian. Still a 10-15% risk is UNACEPTABLY high, and needed to be remedied fast. Sorry, but this post hoc talking points logic really burns me. As those economists did (notwistanding the fact that they were complaining about RTC II not equity injections), you can complain all you want about how TARP wasnt perfect. Also you can complain all you want about the stimulus, and other similar measures. However, I will go to my grave thinking we did just about the only thing we could do to at the time. It was an expensive, bitter pill to take, but it was necessary insurance policy to keep the "creative destruction" caused by a recession turning into the wanton, indescriminate destruction of jobs and lives on "main street USA".
CRT-Thanks for posting, your post was a lot more clear and concise than mine. I was trying to hit on too many points at once, plus I mostly am dealing with larger banks so it doesn't get the mainstreet point across as well.
HB - I dont know about more concise. You were able to say the same thing with half as many words and without rambling :)Its far too easy to monday morning quarterback as time goes on and our ability to remember the state of affairs fades. Plus, can you imagine the outcry if that 10-15% chance hit, "mainstreet" did collapse and the government did NOT try to do something to stop it? Revolutions are borne on the shoulders of such events.
Robert quotedAlready, in Northern Virginia, median home prices were up 12 percent in November compared with a year earlier. In Prince William County, which had one of the region's highest foreclosure rates, median prices rose 23 percent.I really wish they'd control for number of foreclosures so we can evaluate that data. Even in a declining market if you lower the number of foreclosure sales versus regular sales the median price will go up.On a side note I suspect PWC prices have gone up on the lower end. Those neighborhoods were becoming less desired because of liar's loans and four families crammed into one home. But ironically the prices were going up while the neighborhoods were being considered blighted b/c the liar's loans were so rampant.I know it will shock some of you that we live in a class-conscious society but people don't want to buy a home in a neighborhood where four poor families afford a middle class home by cramming together into the home. They want to live in a neighborhood where everyone is roughly similarly situated economically.I'm sure HayfieldGrad will now say those people just hated minorities (and probably throw in a claim of people hating the military) and that not liking 10 cars in the driveway and yard was just a front for prejudice.
btw I thought Corey Stewart and the PWC BOS went too far in a lot of their measures. I think they took advantage of a lot of legitimate anger at lax enforcement of zoning violations (and developers/realtors looking the other way when it was obvious that the couple buying a home was going to share the home with many more people.) I just think it's sorta ridiculous that our region ignored the liar's loans and home crowding for so long. If that had never happened we probably would have hit the top of the bubble much earlier.
Sorry I don't know why I brought that topic up. I guess I'm still annoyed that for the millionth time I had to explain why someone might prefer Langley to Lee a few days ago and so expressing some anger at another example of there being a problem but the PC police made everyone shut up about it.I'd delete the comment but that seems to make people more angry than leaving something up. I guess I've always been a direct person and when I see that 90-98% of society feels a certain way I think things are safe topics to discuss. It's sorta shocking to me how easily a select few can guilt everyone into keeping quiet about certain topics. I wish I were normal and knew when it was okay to say Langley is a good school or that it's nice not to have to worry about crime is something people will agree with as opposed to a setting where someone is going to get into a really long argument with you about it. I think most people just shut up and let someone make everyone feel bad for liking Langley, wait for that person to leave, and then say "can you believe him/her?" But I guess my inclination is to wonder why we should feel guilty for expressing what most people would say if they didn't think it was un-PC.
CRT/HB,is the post-TARP banking system less likely to repeat the mistakes? are you seeing enough evidence that they're not making more TAs? does the gov't now have the ability to prevent a sequel? because we all know if the same sh*t hit the fan again they'd just ask for more TARP money. how many such cycles can the country sustain?my 'main street' reaction.
tbw,I'm sure HayfieldGrad will now say those people just hated minorities (and probably throw in a claim of people hating the military) and that not liking 10 cars in the driveway and yard was just a front for prejudice.Sigh. No one wants 10 cars in the driveway. My parents used to have about 6 boarding houses around them, 3 went to foreclosure, 1 was a rental that was sold, 2 remain. Believe me, they and their neighbors are grateful that nearly all of them are gone. Unfortunately for them, their neighborhood resides in Gerry Hyland's district and not Pat Herrity who actual believes in code enforcement.No military families are living with multiple families to a house. Military families are getting on average $2k+ a month in tax free housing allowances so they can afford to rent or buy. Look, tbw, Fx Station neighborhoods didn't like Hayfield because it didn't look like L. Braddock or W. Springfield. Hayfield has had more in common with S. Lakes for decades that it has with L. Braddock or W. Springfield. The Oakton neighborhoods that got re-districted to S Lakes that sued are a lot like the Fx. Station neighborhoods that were assigned to Hayfield.
HayfieldGrad said...The Oakton neighborhoods that got re-districted to S Lakes that sued are a lot like the Fx. Station neighborhoods that were assigned to Hayfield.Or anywhere else in the United States that had something similar done to them. The world for that matter. Welcome to the human race.
tbw,I forgot to mention I know someone who works at Lee. I don't she feels threatened to work there. Btw, Lee High School has a far nicer facility than W. Springfield. W. Springfield is overcrowded, has a whole bunch of trailer classrooms, and has plumbing problems. The most crime-ridden area in Springfield, IMO, is actually behind the Springfield Plaza west of I-95 and near the Richard Byrd library. That's where a major cocaine bust went down last Fall. Yes, Langley is a good school, but why can't it stand on its own merits instead of always comparing it to schools in Southern Fairfax. Not everyone can go to a Langley, some middle class kids are going to have to go to school with what you deem the undesirable kids.
TBW said...#2 in the financial sector? Isn't that Charlotte? Maybe that changed after the fall of Lehman and other places.This is certainly debatable. Chicago and San Francisco are big financial centers as well. But, what will it look like when all the regulations have passed."The federal government has really become a central figure in commerce . . . and we wanted to make sure we're really in tune with them and readily accessible," said Michael Thomson, Lone Star's general counsel and a Treasury official in the Clinton administration. "I predict we'll maintain a presence here (WDC) moving forward. We'll change the way we do business in the U.S.""This crisis has and will fundamentally change the relationship between Wall Street and Washington for decades to come," said Richard H. Clarida, an assistant Treasury secretary under President George W. Bush who is now an economics professor at Columbia University. "It's often said that Wall Street is no longer the financial capital, that it's Washington, D.C., and that's certainly true. I don't think this is destined to change. I think this is going to be a fact of life."But the government has now established itself as never before as the most dynamic actor in the still ailing economy. That prominence is sure to fade as the rescue programs wind down. Yet Wall Street executives say the legacy could be enduring.Only as the recession recedes will it become fully evident how permanently the state's role has expanded and whether, as a consequence, a new, hybrid strain of American capitalism is emerging.One thing is clear: The government is a much bigger force in today's U.S. economy than it was before the financial crisis.Washington is the new Wall Street," Ross said. "No major capital transactions appear to occur without the intervention of Washington.Take Citigroup, which has allowed its general counsel to move his office from Midtown Manhattan to a penthouse atop a historic Beaux-Arts building on Pennsylvania Avenue.Hyperlinks available.
TBW said...The reason we exploded upward so quickly was because the drop to 6500 was idiotic, stupid, behavioral economics people are idiots and were panicking and overestimated how bad things were.I think so, but I can't say it with the certainty you just did.
HayfieldGrad said...Yes, Langley is a good school, but why can't it stand on its own merits instead of always comparing it to schools in Southern Fairfax.How do you know it's a good school?
MM- As of now most banks have been more worried about getting in good shape now rather than worrying about avoiding a similar process in the future. I am pretty sure that the government and banks will pass more laws/rules that will make it less likely something like this happens in the future. The problem is that over time when things are good everyone loosens the rules to try and become more profitable. Every couple of generations the lessons of the last generation are forgotten.So far banks have significantly reduced leverage. This obviously is very helpful. They are also starting to make more compensation through stock that does not vest for several years. This should help keep people interested in the long term rather than the short term profits. All of these will help, but I think the government also should have a plan for how to handle too big to fail banks. The reason they couldn't let Citi fail was they had no plan. If they knew how to cut it up recapitalize it handle the whole process over the a weekend this process could have been very useful. So in short yes we have done a lot to make sure this will not happen in the short term, but our long term memories aren't good so I am sure it will happen again at some point.
"MM said...CRT/HB,is the post-TARP banking system less likely to repeat the mistakes? are you seeing enough evidence that they're not making more TAs? does the gov't now have the ability to prevent a sequel?"In a word...no. This ties into, and I think compliments HB's answer, but in the long term, we are destined to repeat this.I really cant believe I am saying this, and it really makes me want to puke to say this, but I believe the answer is (gulp) more regulation. In my view, the moral hazard was inevitable. Thus to prevent them from indulging in that hazard next time around, the govt has to regulate it and make it such that they cant do it again (such that they cant be bailed out again). I will say, I like the rhetoric out of the powers that be in that we must end to big to fail (TBTF). HB is right in that leverage is being reduced at a good (and far more important "orderly") rate, and this is a good thing. I personally have no idea how you would solve TBTF but thankfully I am not in charge of that. I do think a bit differently about one thing than HB. He/she said: "So in short yes we have done a lot to make sure this will not happen in the short term, but our long term memories aren't good so I am sure it will happen again at some point."Short term, I agree. But long term, im not so sure that our "memories arent so good" that we repeat the problem, as much as its just that we be become more creative about how to get around the existing laws in the first place. So if I had to make a long (20-50 year) prediction, my guess is 1. we pass all sorts of laws just to prevent exactly what happened, from happening again. 2. Fast forward a few years, and someone will read those laws, see what they "didnt" say, and create something that isnt regulated accordingly.3. This new unregulated instrument will initially work, be hailed as a great leap forward in financial instruments, and powers that be will tell the govt to take a "hands off" approach to it.4. Someone in the new industry will push the envelope too far, it will backfire, cause unforseen consequences and (possibly) cause the govt to step in once again to control the downfall.5. Handwringing will be the order of the day on capitol hill, the media will be up in arms, main street will hear the message and wonder why NY and DC were so stupid, congress will respond and hold hearings about the need for more regulation.6. Go to step 1 and repeat as necessary.
HayfieldGrad,If I were a teacher I would be willing to work at Lee HS or a lot of the places I name. I don't think any school in Fairfax County has any problems with students threatening the teachers. You saidNot everyone can go to a Langley, some middle class kids are going to have to go to school with what you deem the undesirable kids.I agree. I can't afford to live in the Langley school district. And I don't cry over it because I'm content with the options I can afford. No military families are living with multiple families to a house. Military families are getting on average $2k+ a month in tax free housing allowances so they can afford to rent or buy.??? Why do you keep bringing up the military? Of course military families are not sharing houses. No one said that.Look, tbw, Fx Station neighborhoods didn't like Hayfield because it didn't look like L. Braddock or W. Springfield. Hayfield has had more in common with S. Lakes for decades that it has with L. Braddock or W. Springfield. The Oakton neighborhoods that got re-districted to S Lakes that sued are a lot like the Fx. Station neighborhoods that were assigned to Hayfield.I do not dispute that is essentially the case. I think the dispute comes at what you think is a middle class school. I think the problem is because Fairfax County has one of the highest median household incomes in the nation and a very well educated populace a run of the mill school has a lot of rich by national standards and a high average SAT score. But I guess I just don't think that makes it Sidwell Friends. We've documented that there are working class kids at almost every school besides Langley as even McLean has one lower income elementary school in the pyramid. I don't think anyone has a problem with that.It's when you start to have a concentration of lower income kids and discipline problems that people start to complain. And I guess I just don't buy that across the nation middle class families (let alone the upper class families living in Fairfax Station) usually want their kids attending such a school. And I guess I just don't get why you find this notable. We don't live in a society where rich people have to send their kids to a school that is 50% FRL. We just don't. You and your parents are welcome to feel differently. You have some allies on this board. I just feel you try to guilt trip people when they feel differently than you and I think that's wrong.I also feel that a lot of people like Robert, me, and others work hard to build up our income and wealth and if we decide a really nice public school is something we want we shouldn't be harangued for it. Maybe I'm being as silly as schools as the person buying a $20k designer handbag. Maybe. But maybe I just have a different feeling about what is important in life than you. Why can't we just agree to disagree?
HayfieldGrad saidBtw, Lee High School has a far nicer facility than W. Springfield. W. Springfield is overcrowded, has a whole bunch of trailer classrooms, and has plumbing problems.That's just a good example of how despite some of the wealth in Fairfax County there's still a middle class feel to it. West Springfield HS is not a ritzy private school. It's just a middle class school dealing with the same issues middle class schools across the country deal with. I'm sure parents would love all those problems to be fixed (and I'm sure a school bond will come to do that) but in the interim I think everyone is happy with the school. It's not the building the people care about but the students, the parents, the teachers, and the community. A state of the art facility is not going to make up for the lower academics that will come if a substantial segment of the student body has to work full or part-time to help the family pay the bills. Or if a significant proportion of the student body is in a gang. Yes the AP/IB classes will be separated from that to some extent but not entirely. And plenty of people have kids who will not be taking AP/IB classes or certainly not in every subject. And there's PE, lunch, and electives.
tbw,Look I don't care where people send their kids to schools. I am just pointing out with my FX Station example that you cannot always get what you want because the school closest to your neighborhood doesn't have room. Those homes were districted to Hayfield from the moment they were built, the people should have done their research better if they only wanted their kids at a school that had the same demographic as their neighborhood. Stuart and West Potomac both have neighborhoods that are upper-middle class and wealthy that have always gone to those two schools. Do you think the school board should find a more demographically appropriate high school for the Lake Barcroft or Hollin Hall neighborhoods even though they are attending the closest high schools?
CRT, HB,One thing I agree on is that, it will happen again & again.What happened to allowing failures and rewarding success. If some banks had to fail, other more responsible banks would have taken over the lending from them. If you think world would have stopped, it wouldn't, it never does.Many responsible small banks got punished by fed/treasury actions by touting TBTF crap. Recessions have come & gone before; businesses have failed and rebuilt. This time isn't different (unlike what they make you believe) - those who took risks & reaped rewards from it - must pay the price. If you don't punish mistakes, they are bound to be repeated at a bigger scale.
tbw,Or if a significant proportion of the student body is in a gangOh yes, where have I heard that before? It seems to me, that if more than 20% of your students are African-American or Hispanic you get labeled as gang-ridden in Fairfax County. I still remember that letter that Lake Braddock mom wrote the paper thanking Hayfield students for not being the dangerous thugs she was led to believe we were and behaving appropriately at a sporting event she had attended at the school. Apparently, a large number of LB parents thought Hayfield was gang-ridden and were not comfortable sending their kids to sporting events at Hayfield because they thought they were be seriously injured or assaulted by all the gang-bangers we supposedly had.My Mom has worked for FCPS for 16 years and she worked at Stuart for 4 years in the mid to late 1990s. People told here that the school was gang-ridden and dangerous, she found that it was not.
"The FDIC has limits set at 250K for a reason they can't afford to ensure the deposits by the big boys. Having them cover deposits would have been far more expensive bailing out the banks."i had no problem with the little guys getting backstopped, i had a lot of trouble with the big guys getting backstopped.Remember Paulsen and bush let a bunch of little old ladies lose their life savings at IndyMac Bankwhile they made damned sure the richat Goldman Sachs got their money.To the people standing in the sun in Irvine and Palm Springs?Their universe just imploded.
Some interesting observations there, TBW and Hayfield Grad.With respect to Stuart and West Potomac, Hayfield Grad is correct that those schools - while they have high percentages of ESOL/FRR students - also draw from upper-income neighborhoods that have long been assigned to those schools and continue to support them. That may be one reason why Stuart and West Potomac continue to have more in-placements from out-of-boundary students than out-placements from in-boundary students, and why homes in Lake Barcroft and the Alexandria neighborhoods like Belle Haven continue to sell for well over a million. It seems that when people do their homework on these areas they conclude that they need not worry about their children finding a cohort of high-achieving students who also will pursue a challenging course of study. I'm not sure how that plays out with respect to Hayfield. I saw some FCPS data that suggests there are very high transfers of students out of Hayfield to other schools. It appears that many of these students transfer to Edison, which has one of the highest number of in-placements of any FCPS school. I don't know why that's the case - I wasn't aware that there were big differences between the two schools, but that's what the data seemed to indicate.
Spider & Pat- This will be my last post on the subject, because it is clear that CRT & I can't change your minds although we have far more experience and understanding of the industry. First I agree TBTF is a huge problem and we need to find a solution for it. As of now we do not have solution ready. The solution was not letting them fail without a plan, because although you refuse to believe it could have caused a problem there was a fairly high chance that the system would have failed. Here is a graph of the TED spread that CRT was talking about. ted spread If you notice the spread was skyrocketing higher every day until exactly when TARP was passed. The spread is the difference between what banks lend to each other at and treasury rates. So basically this is showing that all banks were trying to get at much cash as possible, to help as mini runs on the banks were already occurring. The spread was actually fairly meaningless, because even at the absurd rates banks still would not lend to each other. If you notice right after TARP the rate got cut in half and within a few months it had fallen to the pre Lehman bankruptcy levels. If you want successes to be rewarded and failures to be punished are you also mad that not only are there unemployment benefits, but they were extended? This will be more expensive then the TARP money that went to banks. What about the fact that they gave all moderate income people checks, cash for clunkers, home buyers credit. They are doing a lot of things for the little guys also. Sure none of these things help me in any way, because I can't use them, but I don't complain about them, because the government is trying their best to get us out of this recession. Sure they have made some bad decisions, but sometimes speed is more important than perfection. Also if you really think rich bankers didn't lose tons of money think again. Most bankers have a fairly significant portion of wealth in their companies stock. I am pretty sure bear stern was ~1/3 owned by the employees. So lets think Lehman is worthless, Bears was bought at a ~97% discount to its peak, Wamu is worthless, Indimac is worthless, Citi is down ~95%, BofA is down ~70%. There was also massive downsizing so tons of bankers lost their jobs in addition to all of their savings.Yes a few banks came out very well like JPM and Goldman, but these banks were in very strong shape going in because they had much better risk controls. These banks were only going to fail if there was a systemic collapse. So in a sense aren't they being rewarded for being the best behaved banks in the bunch, which is what you want right?
CRT,Thank you so much for sharing that. You'd hinted at it at the time, but not that extent. It was those hints that made me fully back the TARP. E. Warren was on NPR this morning, decrying that the toxic asset portion still hasn't been dealt with. My opinion is that what TARP showed is that TA themselves were not the problem, a crisis of faith in lending and solvency was. The TA are getting wound down just fine now that they can be spread out over time such that profits from new originations and other profit sources can make up for the continuing losses. Time is the great healer, but time was the one thing we didn't have at the point of the AIG/Lehman crisis.Hayfield,Sorry that one image of the prejudiced LB Mom just made me laugh. Picture if she had lived in our old apartment and seen the cross country team (or football, I don't know what team it was) all running up the hill on Hayfield together! Do you think she would have run and hid? Some people are prejudiced airheads. It's just the way of the world.
Cara-That is correct there is no problem with TA, it was the fact we didn't have time and mark to market rules were very stringent. The only people selling MBS were very distressed and each time the prices fell every holder of similar MBS had to mark the price down on their books. The prices on this things had no bearing on what they were truly worth. Now that we have more information about default rates and loss severity most of these MBS have risen 40+% since March.
Mozart One of the reasons there are so many transfers to Edison is the Edison Academy. It provides technical training for students who aren't going to college. There are 4 or 5 other academies in Fairfax County high schools which do the same thing.
Reecon - Thanks for the potential explanation. FYI - the schools with the most out-of-boundary transfers into the school are Edison (97), Oakton (72) and Robinson (71). I think Oakton is still getting a lot of transfers from families unhappy about the South Lakes redistricting, and Robinson gets a lot of transfers every year from Centreville and Fairfax. The schools with the most outbound transfers are Hayfield (80), South Lakes (76) and Lee (72).
You are welcome Cara. I dont to talk about it much, as it may seem to the layman that I am a kooky alarmist, but that 2 weeks was unlike anything else I have seen in my life. I agree with you it was a crisis of confidence as much as anything. Remember that Monday when it first went for a vote and failed (presumably due to some theatrics by Pelosi)? That was (and I am not kidding here) the scariest day of my life. We all felt it too. One of the most sanguine guys I know and worked with for years said "its probably not a bad idea to buy a gun".At that point, I didnt care if the final bill was anything more than a polished turd. The Chattel market as well as many others markets were looking for something, anything, from the powers that be that said, "were not going to stand idly by while you descend into potential chaos". That TA line was a red herring - political cover for ramming something through. So yeah, it was a crisis of confidence of the first magnitude.
Spider, again, I find that "it wont happen" answer shockingly dismissive. Understand I am thinking big picture here. The experiment that is the US is a mere 234 years old - a blip in time compared to empires that lasted for thousands of years that have now imploded. What make you so certain, and I mean 100% certain that the U.S. as we know it would survive, Mainfest Destiny perhaps?Still, I enjoy a spirited debate, and perhaps you can persuade me why my personal reading of the tea leaves was so wrong?The chattel paper market, one that we have respectable records for about 140 years was peaking like never before. Certainly much worse than the Great Depression and possibly the Long Depression. Can you persuade me that spike was a mere false positive? If so, what about it did you see that makes you so certain it could be dismissed?Also, if the chattel paper market did collapse, what would have been your course of action to pay the hundreds of thousands of US employees who recieve paychecks from the small potatoes businesses that are dependent on this market? And in case you were wondering, Factoring and even Memoing were not viable options for a while. What was the economically viable, legally enforcable, workaround mechanism that guys like me should have done to keep those thousands of employees employed?
CRT, HB, I respect your experience & what you felt at the time. With due respect, I don't see much different reaction from anyone working at a financial institutions - after all it was a fight for their survival. Let me be clear. I am not saying there should have been no steps taken to save the systematic failure. They had to backstop lending institutions to some extent. Increase in FDIC limit was not a bad idea either. There was no need to backstop hedge funds. There was no need to get TA on fed balance sheets at tax payer's expense. Backstopping pure lending operations (not casino ones) and changing MTM should have allowed the banks to carry those assets. There would have been a period where lending would have stagnated or gotten expensive. It would have healed in due time. People go to casino and lose millions. Hedge funds should have been allowed to fail. Debt/Stocks of every single risk-taking institutions should have been allowed to be completely wiped out. I am sure you have seen the news on how GS got paid 100 cents on the dollar during AIG bailout. Does this sound like right thing to do in your opinion? My point is - as a society we have become bunch of crying babies. There is no concept of failure anymore. - I paid too much for my house...please forgive my principal.- I signed contract with interest rate that I can't afford. Please adjust my mortgage. - We made too many cars & pay our employees too much. Please pass CFC & give us few billons that we know we can't return. - We paid millions in bonuses & took risks we never should have. But, now please save us or this will kill the employment.Moral hazard is the biggest risk we are facing now. We lost that opportunities to clean the wall street, which was needed. Now, they won't let any meaningful regulation pass anymore. Now we wait for another disaster.I can go on....let me say - I respect your opinions - I don't agree however.
CRTI think you are mistaking the forest for the trees.yes i was watching A2/P2 peak, and i wrote some cogent articles on why the big banks were broke in 07 on Calculated Risk, The Big Picture, Piggingtons and Dailykos. However, I'm with Spider in thatwe bailed out Hedge funds, f&$^ingbillionaires, and we solely bailed them out based upon how much suck they had with Paulsen and Bernanke.Look, JPMorgan was so broke in 08, they couldn't cash a $40K savings acct of mine for 10 days. Can you believe that?But Jamie Dimon had suck with Paulsen so, he had an unlimited credit line.What you fail to grasp, or at least elucidate is that all banks are bankrupt. The business models of wall street have been in failure since the 1980's. that they have been seeking to tear down regulations so that they can try and generate profits is no different then GM selling all the fire safety gear, stopping putting brakes and airbags in cars...Did you ever read Catch-22?Do you remember the bit where Yossarian rips open the med kit and the morphine is missing but there is a pape share saying "MM enterprises: Everyone has a share"?Milo was selling the drugs and giving out bits of paper. Thats' what wall street has done.Look, their biz models for broker dealers was based upon 1/8 Bid ask spreads. That generated nice fat commissions, and let a bunch of hyper fat guys leap up and down on the floor.when digital trading came in spreads crashed.so what did they do?
They started frontrunning tradesand they opened huge hedge funds of their own.instead of slashing costs, firing the traders, and reducing overhead, theysold their book of stock off, theystopped acting as fiduciaries and they began counterparty trading.then they began bleeding the firm, they went from partnerships to corporations screwing the shareholders too.cmpensation became 50% of revenue?What makes some Fat F&$k on wall street worth 150K, let alone 100 Million? Nothing other then they steal it.they have no economic value add.Would we let GM sell cars without seat belts, doors, brakes, lights, air bags, mirrors? yet if we stripped all that out, GM would sell really profitable cars.yet we did that to wall street.Merril went from having billions in stock just sitting on the books to nothing. that prime brokerage model?It's the model for junkyard scumbag.if we had gone in, put Goldman, JPMand Citi into receivership, wiped out the stock, fired 1/2 the managers, half the people drawing over 200K and litigated for their bonuses, while treasury reopened lines of credit. we might have had something.How come the UK went in and pushed banks into receivership and yet the world didn't end.Lehman went into receivership. Yes the markets went wild, but, for those with cash it was a buying opportunity.trust me, Buffet was sitting waiting to buy franchises cheap.why not have let them get cheap and the ones with cash would have ridden it out.
Spider & Pat - it looks like there is one common element to both your posts in that it relates to the big boys and the powers that be. If it makes you feel better I will say this. If we knew with absolute certainty that the damage would be contained to just the big boys, my philosophy would be screw them all - they made this mess, let them drown in their own blood for all I care. The problem was, it didnt work out that way. One of my old clients was a welder, employed about 700 people. It was a father and son biz and they never missed a payment once in 40 years. Imagine their shock when they were told, you have no money to pay your employees - you probably wont survive the month?They were simple guys, so when I explained the problem was Bank X of Southern Md. Had an agreement with Mid Atlantic Bank Y, who had an agreement with National Bank Z who had an agreement with JPM who was backstopped by AIG...their eyes just glazed over. All they kept saying was, but what does any of that have to do with me & my employees here in little po dunk southern MD?This story was repeated, time and time again by client after client during that 2 week period. And trust me, most were so solvent, assuming the legal framework did not collapse, we would have made a boatload of money guiding them through bankruptcy. Still, we quickly realized they were out of options.So again, facing that sort of situation, knowing we were days if not weeks away from potential catastrophe, what choice did we have?You can rail all you want about the system and the pigmen, and the fraud, and the moral hazard all you want, and going FORWARD, I see combatting those as the best course of action. And as I said before, TARP, as imperfect as it was, was the only bailout package that was absolutely essential. Still, dont tell me that you are certain "nothing big would happen" if that thing did not pass.
CRT/HB,Appreciate your posts/insights.
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