A tutorial on the financial crisis

snoozy · #1 10/13/08, 11:37 AM

I don't know about you, but I am completely confused by all the banking shenanigans which have led up to the current economic implosion. Here is an article which may help explain it. The full scope of it is still beyond me, but at least there are some definitions, and you can also see that trying to lay all the blame on unsuitable subprime borrowers is way too simplistic.

http://www.indypendent.org/2008/10/0...k-the-economy/

Narshalla · #2 10/13/08, 04:02 PM

Unfortunately, this is an accurate portrayal of how we got to here. It really sucks that those who do things by the rules are the ones who will pay their taxes and thus pay to bail out those who did not.

MorrisonCorner · #3 10/14/08, 08:42 AM

Beyond sucks... absolutely beyond. Especially since I'm one of those ants wired to sock money, provisions, etc away. I can no more yank all my savings and squander them on something than I can stop breathing. I can no more spent to the limits of my income than I can eat air... and I've been at absolute rock bottom. Even at rock bottom I had savings mechanisms. For a while my "savings program" was to put every coin I found on the ground in a mason jar. I am an ant. I can't stop myself.

And I'm going to pay for all my thrift and hard work by having to support people who are grasshoppers. Since grasshoppers don't have to pay for my ant issues, why should I have to pay for their grasshopper issues?

fin29 · #4 10/14/08, 10:20 AM

Glenn Beck irks me to no end, but his "Tickle Me Elmo" analysis--while simplistic--served as my Cliffs Notes so I knew what else to research to understand it better. Sometimes the hardest part of learning about something new is to know what questions to ponder.

http://www.cnn.com/2008/POLITICS/09/17/beck.wallstreet/

snoozy · #5 10/14/08, 06:30 PM

A lot of people who could afford, say, a mortgage payment of $1,000/mo (or whatever they started with), but can't afford an increased mortgage payment -- why don't they just refinance the mortgage to be a 50 year mortgage (or whatever), so they can still have the same monthly payment. They are able to keep their home, the bank gets paid, and taxpayers don't have to bail out the greedy financiers -- even the financiers win because they make all that extra interest.

cathryn · #6 10/14/08, 09:07 PM

Thank you for posting the site. It is helpful.

Peace, Cathryn

65284 · #7 10/14/08, 11:14 PM

Wall Street and the big bankers juggled the books, these slimy snakes slithered around the regulations, while the persons supposed to keep them in check looked the other way, it's as simple as that. Their greed knows no bounds. Why isn't congress and every other law enforcenment agency with authority pursuing these crooks?

Most of these Wall Street Bankers and others who participated in this fraud should be stripped of their assets and jailed..............for a looooong time. But, the big boys own our legislators, so they not only skate away from the mess they created by their avarice untouched, they depart well heeled protected by their platinum parachutes, and we are forced to pay for it.

65284 · #8 10/14/08, 11:34 PM

Quote:

Originally Posted by snoozy

A lot of people who could afford, say, a mortgage payment of $1,000/mo (or whatever they started with), but can't afford an increased mortgage payment -- why don't they just refinance the mortgage to be a 50 year mortgage (or whatever), so they can still have the same monthly payment. They are able to keep their home, the bank gets paid, and taxpayers don't have to bail out the greedy financiers -- even the financiers win because they make all that extra interest.

No need to refinance, had they left those ARM's low where folks could afford to make their payments probably most of this could have been avoided. People would still be in their homes and the banks wouldn't have gone belly up. I suppose raw greed is why they didn't.

Instead they jacked up the interest rates and tried to extract every last cent they possibly could from borrowers and it blew up in their faces, big time. It appears the banks would rather implode than make money in smaller amounts.

fin29 · #9 10/15/08, 06:34 AM

Quote:

Originally Posted by 65284

No need to refinance, had they left those ARM's low where folks could afford to make their payments probably most of this could have been avoided. People would still be in their homes and the banks wouldn't have gone belly up. I suppose raw greed is why they didn't.

Instead they jacked up the interest rates and tried to extract every last cent they possibly could from borrowers and it blew up in their faces, big time. It appears the banks would rather implode than make money in smaller amounts.

The way I see it, if consumers were responsible enough to only borrow what they could afford (or only buy what they COULD afford) instead of extending themselves to the point that they could only afford the interest on a loan, the mess wouldn't have happened.

Buyer beware. Businesses are out to make money, not coddle incompetent home accountants.

I heard last night that US citizens spend 70 billion dollars a year on potato chips. That's 10% of the total bailout plan. That's disgusting.

(BTW, I'm not arguing there weren't a GREAT deal of problems on the part of the lenders, but it's foolish not to accept my above premise...I'll feel a lot better about the whole crisis when I see a group of people have a press conference and claim some responsibility as consumers for the mess.)

tiogacounty · #10 10/15/08, 06:56 AM

Quote:

Originally Posted by snoozy

A lot of people who could afford, say, a mortgage payment of $1,000/mo (or whatever they started with), but can't afford an increased mortgage payment -- why don't they just refinance the mortgage to be a 50 year mortgage (or whatever), so they can still have the same monthly payment. They are able to keep their home, the bank gets paid, and taxpayers don't have to bail out the greedy financiers -- even the financiers win because they make all that extra interest.

Unfortunately, there is a clear answer to the question of why many can't just refinance. Many paid far more than their property is currently worth. Property prices will continue to fall in many areas. Banks have no interest in taking the risk of guessing what the property is currently worth, if it will continue to depreciate, or their ability to find a buyer for the loan. Even if the loan looks good to the mortgage lender, it may not matter. Most loans are resold. Currently the buyers of such loans are few, and running like chickens at a Coyote family reunion.
Twenty years ago I got a home equity loan from a local bank. The manager of the bank was very old school. He did not agree with the concept of home equity loans. He also stated that we have made a big mistake in this country. We were in the process of abandoning a very stable system of local banks, doing business in a local area that they understood. These banks gave mortgages to folks who had a 20% downpayment, and standing in the community. The bank held the loan until the day it was paid off, the money stayed in the community. There were no smoke and mirrors, no slick mortgage brokers, no games. He would be rolling in his grave if he could see the disaster he felt was coming.
I just saw a news report of a community in CA. where there was one family left on a street in a new development, all the other properties were abandoned. They owed $400K on their loan. The other foreclosed, and bank owned, houses were now listed for $180K.
This disaster has one and only one source. Unregulated greed. You can listen to the clowns on the left try to blame everything on Bush. You can listen to the clowns on the right tell you, as always, that Clinton did it. The fact is that they all are responsible. From Greenspan, to Pelosi, they are whores. They let themselves be sold to the banking, security, mortgage and insurance industries, because the naively believed that, as Joe Ely sings, "the road goes on forever, and the party never ends". The party is over, the taxpayer gets to clean up, and ten years from now we will be back into this mess again. McCain's Keating five, Clinton's dot.com bust, Bush's housing crisis, it's all greed, all preventable, and will be repeated. The sad part is that honorable people are perfectly capable of preventing the next one. Unfortunately, as history clearly has shown, there are no honorable people in positions of power that will do so.
Until the system is dismanted this trash will continue.

tiogacounty · #11 10/15/08, 07:18 AM

Quote:

Originally Posted by fin29

The way I see it, if consumers were responsible enough to only borrow what they could afford (or only buy what they COULD afford) instead of extending themselves to the point that they could only afford the interest on a loan, the mess wouldn't have happened.

Buyer beware. Businesses are out to make money, not coddle incompetent home accountants.

.

It's easy to be self righteous. It takes compassion, and a bit of thought, to understand how others got into the mess you find yourself far too smart to fall for. First of all, you need to put yourself in the perspective of somebody living in places where prices are going up 20% a year, housing is in short supply and you want to grab a piece of the American dream before it's too late. As you can imagine I'm not talking about your state. Now you have two good incomes, and are consider yourself to be financially savvy. You are a young professional, married to the same, and have a respectable income. You go shopping for a mortgage at a big name bank, seeking preapproval. The bank tells you that the majority of the loans they currently write are interest only, because it's the only way you can purchase a decent home in a soaring market. It doesn't seem dangerous, since the house your bought is increasing in value by $50-60K annually, and everybody you work with, and meet at the soccer field, is in the same boat. You are all smug and secure in the knowledge that you made a good choice.
I just described Millions, if not tens of millions, of families in this country. Sadly they all were not as "smart" as some of the folks currently digging through the wreckage and declaring them to be fools. Sadly, they were under the mistaken impression that they were doing the right thing for the future of their families. It was always a house of cards. A mirage created by a lot of greedy people and sanctioned by those who should of known better and were in a position to stop it. It is what it is now, and "buying what you can afford" is a small part of the problem. It involves everything from a total lack of regulation, to insane stupidity like allowing home loans to turn into a casino game, using Credit Default swaps and other unacceptable tools to manipulate the system.
It's easy to blame it on people who "should of known better". As is usually the case, the easy place to lay the blame is typically the wrong one.

Judd_s · #12 10/15/08, 07:50 AM

Quote:

Originally Posted by snoozy

A lot of people who could afford, say, a mortgage payment of $1,000/mo (or whatever they started with), but can't afford an increased mortgage payment -- why don't they just refinance the mortgage to be a 50 year mortgage (or whatever), so they can still have the same monthly payment. They are able to keep their home, the bank gets paid, and taxpayers don't have to bail out the greedy financiers -- even the financiers win because they make all that extra interest.

What about the investor that is standing on the other side of the bank? Most likely a pension fund that factored in the rise in interest into their obligations. Are they to restructure and perhaps reduce the pension to some poor sap so this person can stay in their house? Maybe that pensioner needed that money to live.

I believe the evil in all this is the banks, mortgage bankers, rating agency's and even the local mortgage office. Pretty much everyone in the real-estate business is culpable in this. I mean everyone!

If I had any say I would sick the IRS on them and retrieve these ill gotten gains. Just like they do with any other illegal activity. What this industry did was fraudulent. There is an entire group of people to blame for this mess and they should be stripped of all there ill gotten gains and some should go to jail!

My two cents!

fin29 · #13 10/15/08, 08:04 AM

See, I get your frustration, but I see it another way. I guess I try to make financial decisions based on the possibility that my income and assets might go away some day, not based on the premise that it'll continue to increase in value. This isn't the first time a real estate bubble has burst. It's like the homesteading mentality, I think. I don't can food all summer because I can't afford food from the store. I can food just in case I can't afford it later. I agree that the lack of regulation was a big factor, but I'm unwilling to accept that personal responsibility isn't as important as access to the American dream. For every subprime mortgage that was written by a scumbag lender, there was a consumer willing to borrow more that s/he could afford; it was a team effort. When both parties are pointing fingers, there's no opportunity to put those hands to work to fix things. The government will bail these hosers out--and some of the borrowers too, it seems--and we'll just have to wait and see what lessons everyone learns.

MorrisonCorner · #14 10/15/08, 10:35 AM

Here's what I think you're missing Fin29... most people are raised to think (perhaps naively) that banks won't lend more to you than they think you can afford to pay back. Therefore if the bank gives you a $XXXX mortgage, and you think "wow... that's a lot more money than I thought I could afford.." most people's thought processes sort of stop there because banker's are professionals, right? At least in my generation we were raised to believe that it was difficult to get a loan because the bank wasn't going to lend you more money than they thought they were going to get back from you. And how many times have you seen a comment to the effect that banks do not want to foreclose on mortgages? Banks do not want to own property, they want to own paper.

Therefore it is reasonable to conclude that a bank will not lend you more than you can pay back. So the borrower is starting with this preconceived perception of the banker as someone who is a professional and a professional with a duty to their employer, and by extension, to the borrower.

However, some of these loans, refinancing packages, and other vehicles were so complicated even bankers didn't understand them. Or they made the mistaken assumption that they could put a borrower into an unfavorable mortgage now... and in five years when the borrower's financial position had improved (and their home appreciated) the loan could be reworked.

Some were just plain shysters.

Some bankers were honest people who genuinely thought they were doing the right thing by the borrower and bank, some were confused, some were motivated by bonuses.. and some were shysters...

But the "it's the borrower's fault" thing doesn't fly with me. Borrowers are not professionals. The system is based on an expectation by the borrower of the banker understanding the loans, and writing loans which are in the best interest of both the bank and the borrower. We expect the banker to be honest. We do not expect bankers to be in the business of being either incompetent or deliberately fraudulent. And if they are in the business of being incompetent and/or running complex scams... how on earth do you expect the public to protect itself from such a well oiled machine? We're not talking someone in a dark alley showing off designer watches here. We're talking brick and mortar, name brand, very large, highly respected, institutions.

If my expectation going into a bank is to assume the banker is not to be trusted, that he is deliberately flirting creating a situation which will force me to declare bankruptcy, well... to be honest? My brain has a very hard time wrapping around that. Because at this point the list of professionals who aren't to be trusted is very very long:

auto mechanics
doctors
insurance companies
construction companies
bankers...

And I can't reasonably be expected to be an expert in everything. To function in a society where professionals are freely ripping off an ignorant public AND it is the fault of the public when they are ripped off would require advanced degrees in medicine, a current knowledge of construction techniques, a background in auto mechanics, and degrees in finance.

Frankly, I find that absurd. The fault does not lie with the public. The fault lies with the professional who is ripping off the public. The latest trick in auto repair is to stuff the air bag compartment with paper and charge for a new air bag. Are you saying that it is your responsibility to sit with your vehicle to make sure that an airbag you're paying for is properly installed?

No... the fault does not lie with a public who is trusting the professionals to do the right thing. The fault lies with the professional thief.

snoozy · #15 10/15/08, 12:44 PM

Quote:

Originally Posted by Judd_s

What about the investor that is standing on the other side of the bank? Most likely a pension fund that factored in the rise in interest into their obligations. Are they to restructure and perhaps reduce the pension to some poor sap so this person can stay in their house? Maybe that pensioner needed that money to live.

I believe the evil in all this is the banks, mortgage bankers, rating agency's and even the local mortgage office. Pretty much everyone in the real-estate business is culpable in this. I mean everyone!

Yes, it is a complex situation. Although property values are going down now, eventually they will rise again, though hopefully not as "irrationally exuberant" as the recent bubble. It wouldn't be a complete loss like they're making it out to be. Better people do stay in their houses if only so someone will keep the places up. And some people who need to learn it, might even start thinking of their house as a home rather than just as an investment. Might even put down some roots, which would be a good thing in this country where community is hard to find. For instance, I have only owned this one piece of property, this one home, while in the same 10 years, my brother has bought & sold 3 times and is in his 4th house now.

The investors behind the banks, the pension funds and mutual funds and such like, that is unfortunately a risk people take. I think this idea that there is always a return on one's investment, that the market can be trusted, has certainly been blown out of the water. Too many people who invested in the stock market weren't around for the crash of 1929 and of course, most people don't know history to begin with.

"Twenty years ago I got a home equity loan from a local bank. The manager of the bank was very old school. He did not agree with the concept of home equity loans. He also stated that we have made a big mistake in this country. We were in the process of abandoning a very stable system of local banks, doing business in a local area that they understood. These banks gave mortgages to folks who had a 20% downpayment, and standing in the community. The bank held the loan until the day it was paid off, the money stayed in the community. There were no smoke and mirrors, no slick mortgage brokers, no games. He would be rolling in his grave if he could see the disaster he felt was coming."

Banking itself has changed so much -- now your local banker doesn't actually get to make any decisions, experience or knowledge of the local market means nothing, and most people working as tellers only make minimum wage. Really, most banks are like McDonalds. I do think that if banks held the loan until it was paid off, they'd be a hell of a lot more careful to whom they lent. But it ain't "A Wonderful Life" anymore.