one of the largest bank failures in American history

Anyone want to comment on what the heck is going on?

Is there an insider's opinion that is presented for dummies?

http://www.sfgate.com/cgi-bin/articl...d=rss.business

http://www.pbs.org/newshour/bb/busin...all_07-11.html

Rob Liberti wrote: Anyone want to comment on what the heck is going on? Is there an insider's opinion that is presented for dummies?

Simple review
The reason you saw such a hesitancy to rescue the defaults was that only a portion of the defaults are actually home owners living in the home that was in default. The vast majority of forecloses were from properties in speculation. In other words playing the real estate market as an investment by flipping house, sometimes on paper only- many times over. When the market crashed people were caught with property they could not sell-some many of them. Hence the large numbers of default. Think of what would have happened had you bought 7 homes and were in process of renovating them for sale and or flipping them. Then the crash began in the construction cycle. You had a more or less frozen asset that needed to be readied for a market that may have forced you to lose all your profit margin. Maybe a business owner would be liquid and could ride the trend. Maybe a mom and pop would hold on to their savings, dump the properties unfinished, or just walk away from the paper
Secondarily you had a lax lending qualification system and how banks handled loans, both in obtaining, or buying and selling bundled mortgages. In many cases people were leveraged beyond their means to buy the home, violating every safe debt /asset ratio normally used. So those people defaulted as well.

The problems always arise when we "feel" sorry for Dick and Jane or some anecdotal couple (Gee let me tell you about my brothers friend)... out of work and losing their home and then cast that net out to a national level and assume all cases are Dick and Jane's case when it isn't that case at all. We need to let the market adjust on its own. There is always a positive side to people's poor investment choices in generational cycles. The housing market will bottom out and younger borrowers will be able to buy homes for less money.
We had a similar trend in the late eighties- early nineties when Insurance companies and small lenders decided to invest liquid assets in the commercial real estate market. They drove the market, developers built, and there was a glut of property. There were not enough businesses to rent space so you had huge failures on the loans. There were spaces previously going for $21 a sq. ft. going for $5. It was also more a regional problem throughout the U.S. Some areas did fine-most didn't. That fall out gave rise to the tax payer funded S and L bailouts.
What came next?
Everyone got skittish and building leveled off and declined to a rate lower than we had seen for decades.
That led to a "market" for new homes and commercial construction in the let 90's. Far to many people got involved, stuck their necks and their wallets out in this new boom, stayed in too long, and got killed.

Now...who here is crying over the hundreds of thousands of investors who got out in time and made fortunes?

The stock market
There was a huge shift in stock market trends when mom and pops decided to start investing in the 80's. The "trends" over the next decade had faster highs and lows, and were similar to using the stock market as a short term savings bank. Should we bail out losers in the stock market? That is a dangerous precedent to set.
Neither should we bail out real estate investors.

I'm much more concerned with our economy shifting to a service related economy rather than manufacturing base. In the long run we are on course to be a new debtor nation, then a new -post Asian boom- third world nation.

Dan Harden wrote: I'm much more concerned with our economy shifting to a service related economy rather than manufacturing base. In the long run we are on course to be a new debtor nation, then a new -post Asian boom- third world nation.

Uuhhhh Dan I hate to tell you this but we've been a debtor nation for a very long time

http://en.wikipedia.org/wiki/United_States_public_debt

I highly recommend reading Greg Mankiw's Blog on a Daily Basis Gentle Readers....Professor Mankiw does a great job of deconstructing economics for the average regular joe and jane.

http://gregmankiw.blogspot.com/

I am pretty good at this stuff myself and without commenting on the rest of this let me just say we are in very bad shape and there is a better than 50/50 chance of a serious recession of a type not seen since our grandparents were born.;

I agree with you Dan in part about us being a service economy instead of a manufacturing economy but lets refine that a bit We are now in large part a financial services economy which very dangerous indeed as most major economists and historians have noted. It's creepy how much we mirror Imperial Britain before the start of the World War. Most of the regulations governing the behavior of both U.S. Banking and Financial Institutions since the 1930's have been shredded...And Consumer and Credit Protection Laws HA HA HA HA HA!!!

You aint seen nothing yet....It may take a generation for folks to come back from the next few years no matter who gets elected. In actuality it's going take a huge national effort to fix the mess being created

Can you imagine if Dubya and the ReBozos like Phil Graham had been allowed to "privuuuhtizzze" social security to invest in the" Freeeuh Mahkeets."

Man..

Welcome Folks....Sustainable living in a age of limits is the new/old paradigm just like Grandpa and Grandma had to do. Save Save Save... Pay only cash.... and stretch that Sunday Roast into next Thursday.

William Hazen

William you are absolutely correct.

Most of the problem was created by the banks lending too much money in the first place, and now we have our current crisis. I was reading how in many cases people were allowed to borrow much more than what their income would normally allow. BUT because the "boom" was happening the banks let it slide, in essence the actual "boom" was nothing more than a lending "boom", and the bubble had to burst sometime. I don't remember the exact figures, but normally people can borrow somewhere around 10% of income, but the banks were letting double and in some cases triple that be borrowed.

And yes, we have just about ALWAYS been a debtor nation, and from the numbers that we are in debt, probably will be far into my generation (I am 25) and my children's children's generation.

we are in very bad shape and there is a better than 50/50 chance of a serious recession of a type not seen since our grandparents were born

The scary part is that a large amount of economists are predicting this as well. We can only hope that it doesn't happen.

Andrew Hanson wrote: Most of the problem was created by the banks lending too much money in the first place, and now we have our current crisis. I was reading how in many cases people were allowed to borrow much more than what their income would normally allow. BUT because the "boom" was happening the banks let it slide, in essence the actual "boom" was nothing more than a lending "boom", and the bubble had to burst sometime. I don't remember the exact figures, but normally people can borrow somewhere around 10% of income, but the banks were letting double and in some cases triple that be borrowed.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

Just my opinion, but I think it would have been better if the government had stayed out of the banks' practices and let them lend to people who could pay. There is a name for people who can't afford a home - "renters". I used to be one.

In addition, I don't feel sorry for the peopl in my area who "flipped" houses without improving them in any way. If they had fixed them up or added garage door openers or other add-ons, I would have some sypathy, as they were performing some sort of service. I feel for honest families that are losing their homes. Buying several houses and putting them right back on the market without even seeing them is another thing entirely. It's playing the game, not attaining the American Dream.

Thes guys are a dime a dozen but this one's advice has made me a few dollars here and there. He's a smart guy and gets his hands dirty checking investments out

We see eye to eye on this. Note he says it "may" get worse in the next few years as the ARM's adjust for inflation ( The real inflation rate is running about 6% right now and could hit low to mid double digits by this time next year)

http://www.bloomberg.com/apps/news?p...O4A&refer=home

William Hazen

James Davis, Jr. wrote: http://en.wikipedia.org/wiki/Community_Reinvestment_Act Just my opinion, but I think it would have been better if the government had stayed out of the banks' practices and let them lend to people who could pay. There is a name for people who can't afford a home - "renters". I used to be one.

I agree, I am a renter!

But what I was talking about were people with stable jobs, who were paying mortgages that were over 10% of thier income, which is USUALLY a red flag for lending institutions. This was allowed because of a "boom", that was, in essence, created by this lending practice, at least in part. This lending practice had little to do with the Community Reinvestment Act, which is only stating that banks have to consider and lend to anyone who is eligible. What the actual eligibility requirements are set at are up to the lending institutions. It was their choice to lend to people who were spending too much of their income, and this applied to people in both poor and rich neighborhoods. I know a lot of people "on the island" in Vero where my parents live that are having problems because of this type of lending practice.

In addition, I don't feel sorry for the peopl in my area who "flipped" houses without improving them in any way. If they had fixed them up or added garage door openers or other add-ons, I would have some sypathy, as they were performing some sort of service. I feel for honest families that are losing their homes. Buying several houses and putting them right back on the market without even seeing them is another thing entirely. It's playing the game, not attaining the American Dream.

I agree completely. The problem is I know more people who are honestly losing their homes than people who are loosing in the flipping game. Not to mention the people that have to refinance about this time and their homes are worth LESS than what they paid.

Unfortunately I don't believe the market is going to correct itself soon enough, and we are headed for some serious problems. Then again, I am a "plan for the worst, hope for the best" type of person.

The "fix n' flip" crowd often simply put a coat of paint on the house, interior and exterior, and replaced the carpet and vinyl. All of a sudden the house they just bought for 40K is now selling a week later for 90K? Is that reality or is there something nefarious going on? Chances are these FNFs are simply a ruse for kicking back large sums of money to the seller (of the flip) via a straw buyer. I have no sympathy for either the buyer or seller in this transaction.

If I could buy a house for 40K, put 5K into it and have a 90K house, something is wrong. It isn't reality. Or am I missing something?

I bought multi-family units and flipped them over about 3 year span of time each. When things are going up, the renters pay the mortgage, and you can get a lot of work done without getting totally stressed out. I made money doing that for sure. Now I'm not so sure what to think about investing in such things. Thanks all who responded. We have some INTERESTING times ahead.

Rob

Rob, there is a big difference flipping over a 3-year period versus the 1-week to 3-month periods that were common for the not so legitimate of flips.

I agree, we are in for some very interesting times.

Rachel Massey wrote: Rob, there is a big difference flipping over a 3-year period versus the 1-week to 3-month periods that were common for the not so legitimate of flips. I agree, we are in for some very interesting times.

Very True Rachel however these transaction represent less that 1/2 of 1% of all housing transactions over the last three years and as someone like Robert Kiyosaki (Rich Dad Poor Dad) points out not a very smart thing to do.

The real issue is the mucking up and non-transparency of most Mortgage Instruments into shady CDO's sold to everyone and thier brothers and sisters.
Another key issue is the reentry of Banks into the Financial Markets as speculators through the process of massive deregulation with the complete collusion of the Bond Rating Firms like Moody's and Standard & Poors (you know the folks who are supposed to provide you... dear reader... With an "objective rating" of how good/secure the bond is that you want to invest in.) and mostly accomplished by the Republican Party over the last 30 years.

Paulson bailed out the MAC's today and saved his Wall Street Buddies while sticking we 200+ Million taxpayers with the bill, and doing nothing to fix the institutional problems. As soon as the dust settles... Watch all the golden parachutes pop up as most of these executives grab what they can and run.

The Gilded Age has nothing on us....

William Hazen

William Hazen wrote: The Gilded Age has nothing on us.... William Hazen

LMAO!!!!

Not Good if even partially true.

http://www.telegraph.co.uk/money/mai...cusdebt116.xml

William Hazen

William Hazen wrote: Not Good if even partially true. http://www.telegraph.co.uk/money/mai...cusdebt116.xml William Hazen

I agree, that is definitely not a fun article to read.

Vladimir Putin, now Russia's premier, has stated repeatedly that his country is engaged in a new Cold War with the United States. It is clear that Moscow would relish any chance to humiliate the United States, provided the costs of doing so were not too high for Russia itself.

Nice, just nice......

As we have said, we here in the states are in for some interesting times. But, the bubble had to burst sometime.

The problem lies with our basic market system of capitalism. When it is regulated too little - or seemingly at times, not at all - the rich get richer and the poor get poorer.

But many of us are to blame. We are to blame for somewhere along the line coming to believe that capitalism defines what the USA was originally conceived of to be.

Capitalism is just a machine. An amoral machine with a voracious appetite. It defines no nation or no people except for those consumed with greed.

And...it doesn't work. Just like 20th century applications of socialism and communism. It doesn't work.

I've long advocated for a system with a basic premise of equal wages for all jobs. The first thing I always hear from detractors when I say this is, "Well what if that guy doesn't work as hard as me and makes the same amount of money"? or "Oh, so a manual laborer should make as much as a highly schooled medical doctor?"

My answer to the first question is, "Why are you worried about the other guy?" and the next question, "Yes, the manual laborer who was on a ladder during a storm risking his life to restore power to the warm and dry library where the pre-med student was studying late into the evening should definitely make as much as a doctor."

How often do doctors and lawyers and stockbrokers and other pencil pushers risk their lives on the job?

The issue with work should not be about compensation it should be about doing what one enjoys and what they are good at.

Equity for all. That is the only system of economics which has ever worked on this planet. It has happened over the eons though usually by accident. Low populations in geographic areas which were abundant in the basic necessities for comfortable life played a huge role.

And we're lucky...we still have that geographic area. It's called Planet Earth. Now if we can just get greed and competitiveness out of the way...

Competition...funny how folks often claim that's what brings the best out in people.

I guess maybe us folks who train in aikido know different. I know I do.

The only victory is self victory.

Well stated Dan, well stated!

I actually had a discussion about capitalism with a fellow graduate student once. It is funny the myths that surround it. Like the myth that if you work hard then you will be fine.... yeah right. Tell that to the millions of working poor, those that work full time, sometimes at two jobs, to still live at or below the poverty line.

One of the saving graces of capitalism though is social mobility, the ability to move between the social classes .... hopefully up. But, again, the problem lies that this is few and far between these days. Most of those that move up make small advances, and are usually from either middle class or upper-middle class to begin with and, like I said, advance small amounts.

I was talking to an economics / poli sci student that I was teaching once, and he brought up a good point as well. Unless the entire world is based off of a capitalistic system, you will always have larger nations taking advantage of smaller ones. Such is the capitalistic way.

Indeed I believe we need a change, but what the future holds will be interesting to see.

The problem with the "should" part of the arguments above, IMHO, is that you can't realize them: there simply aren't enough resources. The best implementation of "should" is what Western civilization currently has. Other attempts have empirically failed to deliver similar results. Political rhetoric like the above may garner support votes, but economics determines the empirical consequences, given the incentives and constraints.

I say, Dan and co, by all means, try it out yourself, and reality will set in as soon as you have no more resources.

Another informative blog that is part of my daily read...

http://bigpicture.typepad.com/commen...omy/index.html

Enjoy gentle readers...

William Hazen

William Hazen wrote: Another informative blog that is part of my daily read... http://bigpicture.typepad.com/commen...omy/index.html Enjoy gentle readers... William Hazen

Ah, a good read indeed. Thank you William!

It is all about greed and lack of self control. The lending institutions wanted to make more money and did not control themselves and the people borrowing the money wanted to have what they could not afford and did not control themselves.

If you work hard, be smart with your money, be patient and live below your means you can avoid problems like what is currently going on.

David

Dan O'Day wrote: I've long advocated for a system with a basic premise of equal wages for all jobs...."Yes, the manual laborer who was on a ladder during a storm risking his life to restore power to the warm and dry library where the pre-med student was studying late into the evening should definitely make as much as a doctor."

the problem is that there are some jobs for which there is a greater need than there is a supply of people willing to do them. Now that wages have gone up, there is an abundance of nursing students waiting to get into nursing school (though the capacity of schools to turn out nurses still lags behind the demand). Who wants to disimpact the bowels of elderly strangers on a regular basis, or mop up the vomit of drunken teens, for $15 an hour? Likewise, there's a good reason that trash collectors make more than cashiers at clothing boutiques in the mall: collecting garbage is a nastier and socially far more necessary job.

The problem comes when non-market forces artificially bid-up or lower the wages - for example, a corporation has far more power in wage negotiation than does an individual employee, especially if that employee is in unskilled work and can easily be subbed by someone else. Likewise, unions can sometimes be more interested in pay raises than they are about the long-term survival of the institution.

How often do doctors and lawyers and stockbrokers and other pencil pushers risk their lives on the job?

I don't know about lawyers and other office workers, but doctors do it on a regular basis. A drug-seeking ER patient picked up a mayo stand and threw it at one of the docs at my hospital about 2 weeks ago, and there's continual risk of picking up a whole slew of pathogens for everybody that works in a hospital. Better than half of the staff (including me) ended up on antibiotics this spring because of an unusually bad flu season followed by bacterial pneumonia.

The issue with work should not be about compensation it should be about doing what one enjoys and what they are good at.

That's a nice idea, but again there are some jobs that nobody enjoys, but need to be done anyway.

Equity for all. That is the only system of economics which has ever worked on this planet. It has happened over the eons though usually by accident. Low populations in geographic areas which were abundant in the basic necessities for comfortable life played a huge role. And we're lucky...we still have that geographic area. It's called Planet Earth. Now if we can just get greed and competitiveness out of the way...

Equity for all on planet Earth will mean that everybody lives somewhere along the lines of a lower-middle-class person in China. No personal cars. No meat to eat on a regular basis. No dishwasher. Etc.

Not that that's necessarily a bad idea, but just be sure that you know what you're advocating.

Wrt the OP, I do agree that this is a perfect example of capitalism run amok. Banks and lenders have been allowed to 'socialize the risk while privatizing the profit,' which is so not-ok that I feel like strangling a broker every time I think about it.

And I second the person who wrote, 'thank god we didn't set up 'private investment accounts' with social security!'

Lorien Lowe wrote: That's a nice idea, but again there are some jobs that nobody enjoys, but need to be done anyway.

Just be careful with this statement. I actually know a guy, there was also an article written about him, who went through medical school, graduated at the top of his class and is now a school janitor because he enjoys doing that more than anything else. Just because we can sit here and say that some jobs suck, doesn't mean that everyone thinks those jobs suck.

Well heck...I've been on a forum that uses web crossing software for years and I'll be darned if I can yet figure out how to quote stuff here without picking up the whole post.

Oh well...in the meantime, as Lorien suggested I do, I will at least endeavor to "be sure I know what I am advocating".

I'm aware of how market forces behave in a capitalist economy. I've been a business owner and operator for over fifteen years. I've been doing it long enough my way to pretty much figure I'm unemployable in a market in which O'Day Construction doesn't exist.

With regard to danger on the job any occupation poses risks just like walking down the street poses a risk of getting hit with a meteorite. Some occupations, however, pose a significantly higher rate of hazard than others. And they tend to be manual laboring type deals.

Equitable living standards across the globe don't necessarily need to be equated with the living standards of a newly industrialized state vying to catch up with the rest of the world. Rather those living standards which prove equitable for all might be something quite different.

I'm not naive. I realize what I advocate requires a quantum shift in thought and perception to materialize. And that, in fact, is what I have always advocated....an entirely different viewpoint.

To think differently. To think away from the positions which were thrust upon us by our forbearers. They did what they were taught to do and so on down the line but you know what...they had it all screwed up.

They were wrong. Dead wrong. And I've always known it.

Now it is up to us, or my kids' generation, to call a spade a spade and say, Hey man! This doesn't work! Your whole idea of success and life on earth is all screwed up and us kids are not going to follow in your eons old rutted tracks.

In my opinion we can kickstart this process by doing all we can to focus economic stimulus on programs of the arts. Yep. $300 billion a year to the NEA. Alot of money but not even close to what has been spent murdering thousands of innocent children and their parents in Iraq and Afghanistan over the last few years.

Art! Not Bombs! Art! Not Bombs!

Dan O'Day wrote: How often do doctors and lawyers and stockbrokers and other pencil pushers risk their lives on the job?

They already gave up their lives, a few years of them anyway, in study while I was out goofing off. That's why they drive Lexuses and I don't.