Anyone going to jail? $700B and no legal grounds for prosecution?

[tabs]

I'll go to jail, I'll go to jail...just so I can get fked in the a$$.

[Jim Richards]

So that's what makes tabby "purrrrrrr?"

[911teo]

Put it this way....

WaMu is gone. JPM took over from the FDIC the banking side of the business (deposits etc).

The next time a bank goes down there might not be a JPM to the FDIC rescue.

If that is the case you can kiss goodbye to your savings as the FDIC is no-where near capitalized enough to face a massive run on deposits.

Then it will cost more than $2,500 per head of pure losses (not even looking at the consequences for the whole system).

Is this simple enough?

If nothing is done another bank WILL go. And we'll reach a point where JPM, BoA etc are not going to take them off the hands of the FDIC.

Is the bail out a good thing? No

Is it necessary? YES

Are there alternatives? Well go ahead and call Mr Paulson... I am sure he'd listen to anybody right now.

[911teo]

As per CEO going to jail this is insane.

As John said above catastrophic business decisions need not be illegal.

And as Rick said above let's collect money from whoever made money in the following:
- real estate... if you bought low and sold high givee back 30% of gains or face jail
- stock mkt... see above
- services... with everybodyu making so much money in RE and Stocks you probably were having it too good, give back 30% or face jail
- manufacturing... it is obvious that those naughty bankers were just extending credit to everybody. If they hadn't nobody would have bought your fridges, tTVs, PCs, cars etc. Give back 30% or jail.

Aaahhhh only the poor beggars will be spared... That would be ironic... the winners of the capital game will be the ones who didn't take part....

[911teo]

OK just watch this afternoon Wachovia go down....

Maybe we need a good old 2,700 point collapse on the DOW so people will grasp the gravity of the situation...

[gprsh924]

Originally Posted by nostatic

Why are the officers of the company not held financially responsible? If I'm a small business owner and I drive things into the ground, my stuff gets taken. Why do these people get to keep their stuff?

Because a corporation is a separate legal entity. The owners have limited liability at the expense of double taxation on profits (taxed when earned, then again when distributed).

[Superman]

Of course there are no grounds for prosecution. Investors' portfolios are diversified. Therefore, investors do not suffer the occasional bankruptcy, since the other investments in the portfolio can cover those losses......as long as all those investments are reaching HARD for the highest (riskiest) returns. It is a well-established and well-known principle in finance that investors prefer way more risky behavior than even management does. Our system requires.....legally requires.....management to take unhealthy risks.

You can try to blame a small group of individuals for this current mess but if you really believe that, you don't understand what's going on. America has chosen (allowed) risk and reward to be taken to a ridiculous level. And this current debacle is what you get. It is the other side of the same coin. If you want to avoid this in the future, you will stop supporting this philosophy of investment-finance-risk-unearned income being the most important society value. It is, currently, precisely what defines "America." Not people. Not society. Money. Risk. Over-reaching.

[Superman]

Originally Posted by nostatic

Why are the officers of the company not held financially responsible? If I'm a small business owner and I drive things into the ground, my stuff gets taken. Why do these people get to keep their stuff?

America does not eschew this behavior. Irresponsibility is an actual VALUE here. We adore the longshot risk. Going for broke. It is our way, and it is somewhat legally mandated for management. Plus.......corporations are legally separated from its owners. You know this, Nostatic.

[Drdogface]

Instead of borrowing all this money why don't our (Not So) Esteemed 'Leaders' talk about acutally Saving some....we all know why, of course.

1) No more medical, social, educational services for illegal aliens...30 day lead time...then forced deportation...it's been done before..

2) No more welfare for able bodied people

3) No more welfare for resident aliens

4) Repatriate all illegal or resident alien prisoners

5) Demand that Iraq repay US for their liberation in oil or cash.

6) Cancel the $48 Billion that Bush gave to Africa for Aids

7) Cancel the $1+ Billion Bush promised to Rep of Georgia

8) Eliminate foreign aid, at least to countries who already hate US

9) Charge Mexico for all money spent on their citizens illegally in the US over the past 20 years

10) Withdraw from the United Nations and have them move out of US

This is just a start of things I could think of off the top of my head....Would save US a ton of $$

[jyl]

Originally Posted by Souk

It's OK John. I'm frustrated about the thought of having to help pay for the mess.

So I been reading your other threads and I see you're fairly up to speed on the situ....tell me how something like this can happen with so many smart people at the helm? Is it too much to ask for accountability?

Yeah, sorry.

Okay. Here goes.

- Securitization of mortgages, invented in 1970s, allows 1000s of similar mortgages to be pooled together and the aggregate cash flows sold to investors who buy the mortgage-backed securities (MBS). Many advantages - behaviour of pool can be predicted and a debt rating assigned using historical data about default and prepayment rates, vs unpredictable behaviour of an individual mortgage; single administrator can efficiently service the mortgages and collect/distribute payments; can slice pool into tranches with any defaults hitting lowest tranche first and highest tranche last, thus from a pool of low-quality mortgages can get some valuable highly-rated securities.

- Using MBS allows commercial bank to write mortgages, securitize and sell them, immediately receive back the capital it loaned out plus its profit, and then turn around that capital into writing new mortgages. Thus bank can lend more, in effect tapping the huge capital base of global investors, not just the bank's own capital. Investment banks, ratings agencies, mortgage brokers, etc also profit. And home buyers benefit because more capital means lower interest rates.

- Last housing cycle bottomed in mid 1990s and begain rising. From early 1990s through mid 2000s, economy was relatively stable, only one mild recession. But investors got burned in stock market, and interest on bonds and savings accounts very low. Houses became next hot investment. "Safe as houses", "they aren't making any more land", put 10% down and make money on 90% borrowed, etc.

- Due to stable economy and rising house prices, default rate on mortgages were very low for many years. Who got foreclosed in 2005? When house prices rise 20%/yr, just sell and pay off the bank. Plug those historically low default rates into the models, and MBS looked like great investments. Banks developed more aggressive loans - no-documentation, no-down, ARM, option ARM, teaser rate, etc etc. More and more people could buy houses, second houses, flip houses, refi, pull out home equity, etc. Default rate stayed low, so no problem!

- Govt did not step in to regulate the growing bubble. The govt regulates commercial banks pretty tightly, but most of the risk appeared to be outside of the commercial banking industry, in less regulated places like hedge funds, investment banks, pension/mutual funds, overseas investors, etc. One party pushed less regulation, smaller govt, unfettered free markets, let businessmen run their businesses. The other party pushed more access to loans for low-income families. The president called rising home ownership one of his biggest achievements. The banks relied on MBS to offset profit pressures in an increasingly competitive industry. Everyone liked the bubble.

- In 2003, 2004, 2005, the housing bubble accelerated. Read the "More Bad RE News" thread, start at the beginning, see how many PPOT'ers were housing bulls - including some smart, successful people. Remember the mentality? If you didn't own a house, or two, and hadn't made lots of money on your house, you were pathetic. Renter = loser. And in fact, lots of people did make lots of money - they were right, for several years.

- In 2006, the bubble peaked. Prices had finally gotten where not even the most imaginative loan could make houses affordable. Everyone who could fog a mirror had already bought a house. The first problems were for borrowers who were so stretched that they needed price appreciation to make the monthly payments. They started defaulting. Prices started declining. More borrowers got into trouble.

- Plug rising default rates and falling prices into the model and suddenly the MBS value goes down. Investors got worried.

- In 2007, house prices started falling rapidly, default rates started soaring, foreclosure sales started and banks started having trouble selling the houses for enough to pay the loans. MBS values fell more, investors started buying fewer MBS, banks began tightening credit, house prices fell further, etc. A negative feedback loop.

- Turned out that everyone owned MBS and whole mortgages - not just hedge funds and overseas investors, but also US investment banks and commercial banks. As MBS values fell, bank balance sheets began to suffer. Commercial banks are typically levered 10-to-1, meaning $100BN of assets (loans outstanding) to $10BN of capital (equity). If $1BN of capital disappears (through writedowns of MBS), the bank has to cut lending by 10X that amount or $10BN. Investment banks are even more levered, 30-to-1. If you have $600BN of assets and only $20BN of capital, then a 3% drop in your asset values mean you are insolvent.

- But how much were MBS values really dropping? MBS are very complex securities, and the model inputs (house prices, default rate, etc) were deteriorating faster than anytime in the last 50 years. In such a chaotic market, its hard to figure out fair value. Add in distressed sellers - banks desperate to dump MBS and repair their balance sheets - and prices will undershoot fair value. Add in a discount for uncertainty, and you really have a mess.

- Other things were going wrong too, like CDS and other derivatives on MBS - but let's skip the details, just realize they magnified the underlying MBS problems.

- In March, we started seeing banks and quasi-banks fail or avoid failure only thanks to govt intervention. Bear Stearns, Lehman, FNM, FRE, AIG. These big institutions spiraled down very fast. The credit markets are freezing up. Banks are not making the interbank overnight loans that the system relies on. Big corporations can't sell commercial paper at tolerable rates (IBM was being asked for 8%, normally they'd pay 3%). Credit is being pulled from businesses and consumers. Central banks are pumping huge amounts into the system to keep it afloat - the Fed has loaned banks something like $150BN in just last week. Morgan Stanley almost went under - the #2 investment bank in the US, $1TR of assets. Goldman was in danger - the #1 investment bank, hardly any MBS holdings, among the smartest management in global finance. Citigroup, the #1 US bank, is potentially at risk. Wachovia is in danger. WaMu failed last night. The stock market is a mess, but the credit market is much worse.

- Joe Sixpack has no clue what is going on. He won't realize it until his employer can't roll over its debt and starts laying off. Then he'll get a rude education in how critical a functioning financial system is to the US economy. That point is coming.

- So, to finally answer your questions, how did smart minds not see this coming? Well, how many people were calling for a housing market blow up - and putting their money where their mouth was, by selling their house and renting - in 2002? 2003? 2004? 2005? 2006 doesn't count - by then it was too late. Again, read the PPOT housing threads. Vocal bears were in the minority those years. How many people realized how fast and steep the negative feedback loop would be, back in 2004 or 2005? A vocal few, but not many.

- And where is accountability? So much of the country participated in creating the bubble. Home buyers did it, banks did it, investors did it, govt did it. There will be some accountability - investors' equity in these banks is wiped out, debtholders are losing their money, managements are losing their share wealth which is usually far more than their cash compensation, homebuyers are losing their homes, govt is - well, I guess that bill has yet to be paid.

- Right now, my view is that MBS valuations have overshot to the downside. I hear of senior MBS quoted at 60-65 cents on the dollar and some distressed sellers are getting only 20-30 cents, the default and home price assumptions needed to get there are extremely severe, I think unrealistically severe. But , there are not enough private investors who are able to step in and buy distressed assets. The distressed asset funds being raised are like $3BN here, $5BN there - there are $10TR of mortgages outstanding. Private money cannot turn this around, not quickly enough to avoid a lot of damage. Govt is the only player with the size and strength to make a difference.

- Analogy - private industry didn't stabilize the country after 1929, govt had to step in with public works programs and mortgage support programs. When 400 savings and loans failed in late 1980s/early 1990s, private money couldn't handle it, the govt had to act. That is one of govt's functions - when bad things get just too big, govt has to step in.

- The govt wants to buy up to $700BN of MBS and similar from banks, to stabilize their balance sheets, so that private money will be able to hunt for bargains. If MBS are bought for 70 cents and ultimately worth 60-80 cents, ultimate net cost may be substantially lower than headline $700BN.

- If govt intervention works, will not magically spring back to health. Bank balance sheets have to be repaired, they have to attract private capital, consumer's balance sheet has to be repaired, home prices have to stabilize (I think getting in sight, actually). We are hoping for a normal downturn, the goal is to fend off a very, very severe downturn.

- When dust settles, there will be changes. At minimum, more and better regulation. Started a thread on this, titled "Lessons Learned". Let's deal with the immediate crisis first. We do not have all the time in the world.

[MikeSid]

Originally Posted by jyl

- The govt wants to buy up to $700BN of MBS and similar assets from banks, to stabilize their balance sheets and restore confidence, so that private money will be able to hunt for bargains. If these MBS are bought for 70 cents and ultimately are worth 60-80 cents, ultimate net cost may be substantially lower than headline $700BN.

This is the exact point that I think most people upset about the bailout are missing. The government is buying assets. The default rate on the loans purchased will ultimately determine how much of a loss the government will take.

And consider that the fed controls interest rates....which can have a tremendous impact on the housing market and the ability of borrowers to refinance in the future.

[widebody911]

Nice writeup, jyl

[jyl]

Here is a rough measure of the degree of fear in the credit markets.



Spread between LIBOR and Treasury yield. LIBOR is what banks charge each other on those routine interbank loans. I've heard LIBOR is understated, in reality banks are not lending to each other even at this rate. Regardless, fear level is even higher than in March when BSC went bust.

[MikeSid]

So the TED Spread is higher than when it spiked in 87!! And the market always follows the TED spread.....

What do you think the correction will be? 1500 points??

[jyl]

I don't know. S&P is down about 25% from peak. That is about an average decline, if you look at past recessions.

By the way, here is link to More Bad RE News thread. IMO, one of the best (and longest-running) threads ever in PPOT. Legion started it, back in 2005.
http://forums.pelicanparts.com/showthread.php?t=234129

I know we had RE bubble/not threads before that, but can't recall their titles.

[blk911]

If you want to investigate into wrongdoing, why not start with the heads of Fannie Mae and Freddie Mac. They were implicit with such substantial relaxation of standard credit underwriting guidelines that it is almost unfathomable. I was a mortgage banker back in the late 80's and early 90's. Pretty standard rules and common sense underwriting. Anything outside of that, and you had to get a "portfolio loan" from a local bank. In other words, if the loan was written to Fannie or Freddie standards, it wasn't saleable on the secondary market, the originating bank had to hold it, and even that was governed by various bank governing authorities.

When Fannie and Freddie, under the direction of the Clinton administration, started to relax the rules and come up with all kinds of alternative qualifying parameters, it just opened the gate for problems. The calamity and chaos was not only predictable, but inevitable. The Wall Street wunderkids claimed they had developed logarithms that commensurately adjusted for risk in the pricing. Obviously now they had some flawed assumptions, either mistakenly or intentionally. Add to the fact that Wall Street then began to craft all manner of exotic investments based on this substantially relaxed and irresponsible credit underwriting, the stage is set for ultimate calamity, but not before the investment banks made billions selling snake oil and incredibly risky investments and derivatives based on this new class of mortgages. Again, billions of dollars being made on speculation, Vegas style in fact, without any heed that someday the music would stop and there would not be enough chairs for everyone.

Reckoning day, if not here is close at hand. No single genius can clean this mess up single handedley. Certainly not Paulson, who don't forget headed up Golman Sachs before being tapped for Treasury Sec. Let us not forget that Goldman was the birthplace of CMO's or certificates of mortgage obligation, the basis by which mortgages are securitized and resold many times over for a profit. While I am a capitalist, unchecked and unbrideled greed is the penultimate nemesis of reckless abandon.

Good luck to all. This too will pass. We will come through this, if clear heads prevail.

[sammyg2]

There are tens of thousands of people who reneged on binding legal contracts (mortgages) and their irresponsibility deserves punishment. Throw them in jail, they creates this mess.

Stop trying to blame someone else for the stupidity, greed, and irresponsibility of john Q public.

[jyl]

You are off by a factor of 10.

There are over 1 million households who ceased paying their mortgages and have lost/will shortly lose their houses. Specifically, 770K foreclosures since Apr 2007, plus currently 304K mortgages in some stage of the default-to-foreclosure process.

Most likely there will be another 1 million foreclosures before this is through. That's over 2 million borrowers who have "reneged", or perhaps up to 4 million as many mortgages are signed by husband and wife.

Your proposal to put 2 to 4 million Americans in jail - almost none of whom have committed an actual crime as defined by any penal code - is impractical, pointless, and frankly silly.

Don't let frustration lead to silly proposals based on incorrect facts.

Originally Posted by sammyg2

There are tens of thousands of people who reneged on binding legal contracts (mortgages) and their irresponsibility deserves punishment. Throw them in jail, they creates this mess.

Stop trying to blame someone else for the stupidity, greed, and irresponsibility of john Q public.

[911teo]

Originally Posted by 911teo

OK just watch this afternoon Wachovia go down....

Maybe we need a good old 2,700 point collapse on the DOW so people will grasp the gravity of the situation...

I was 8 hours early.

You could have sold Wachovia above $10 on Friday...

Citi is picking up the pieces....

Who's next?

S&P futs down 4%... DOW down more than 300.... Another 5-6 days like these and both Democrats and Republicans in senate and house will put their country first. Let's hope it is not too late.

[island911]

Jail? Yes. And here is a start (see if you can pick out the scammers)