A world of Casey Serins
July 11, 2007 5:13 PM Subscribe
What's the link between:
1) the quickly-growing number of American homeowners becoming unable to pay their mortgages after their ARM's reset (a trend nicknamed "ARMageddon" -- applicable in the UK too), which is translating into soaring foreclosure rates, and in turn forcing at least 60 US semi-shady mortgage brokers to go belly-up in the past year (i.e. the "subprime meltdown"), and...
2) the recent implosion and impending financial bailout -- which may become the biggest since the Long Term Capital Management fiasco of 1998 -- of two Bear Stearns hedge funds which dealt in mortgage securities? [more inside]
1) the quickly-growing number of American homeowners becoming unable to pay their mortgages after their ARM's reset (a trend nicknamed "ARMageddon" -- applicable in the UK too), which is translating into soaring foreclosure rates, and in turn forcing at least 60 US semi-shady mortgage brokers to go belly-up in the past year (i.e. the "subprime meltdown"), and...
2) the recent implosion and impending financial bailout -- which may become the biggest since the Long Term Capital Management fiasco of 1998 -- of two Bear Stearns hedge funds which dealt in mortgage securities? [more inside]
Any lender who believed that "subprime" meant anything other than "pretty fuckin' risky" deserves what they get.
posted by furtive at 5:25 PM on July 11, 2007 [1 favorite]
posted by furtive at 5:25 PM on July 11, 2007 [1 favorite]
It's gonna be a mess, to be sure. How big of one, nobody knows.
I'm hoping it happens relatively slowly so we can react and adapt... and of course I'm selfishly hoping housing in LA drops back down to around 1999 levels, so I can actually buy a home here.
posted by zoogleplex at 5:27 PM on July 11, 2007 [1 favorite]
I'm hoping it happens relatively slowly so we can react and adapt... and of course I'm selfishly hoping housing in LA drops back down to around 1999 levels, so I can actually buy a home here.
posted by zoogleplex at 5:27 PM on July 11, 2007 [1 favorite]
Mod note: A little manual more-insidery; that was a huuuuge post, Asparagirl.
posted by cortex (staff) at 5:31 PM on July 11, 2007
posted by cortex (staff) at 5:31 PM on July 11, 2007
Any lender who believed that "subprime" meant anything other than "pretty fuckin' risky" deserves what they get.
Except it's probably us who'll get the bill, just like the last time.
posted by Kirth Gerson at 5:32 PM on July 11, 2007
Except it's probably us who'll get the bill, just like the last time.
posted by Kirth Gerson at 5:32 PM on July 11, 2007
Just to pimp it some more, I thought the entire article was really great, and very helpful to understanding some tricky financial concepts using plain language. Of course, the downside to understanding more and more of the mortgage securities meltdown is that you start to realize how deep in the poop sooooo many funds (even "safe" ones) may be. And these paragraphs in particular, which are about halfway into the article, really took my breath away:
"The picture that is emerging is that the providers of the bank loans became increasingly nervous as US house prices turned down, and they wanted their money. Clearly, there were no cash assets in the hedge funds. So the banks took hold of the CDOs – their collateral – and went to sell them.
The first out of the door, rumored to be Merrill Lynch, mostly got the collateral it was owed, but it exhausted the CDO market of buyers. The rest found no bids and quickly stopped trying to sell for fear of advertising the rock-bottom prices of something which currently sits in many portfolios at funds all over the world.
Worse still, we are advised that the Bear Stearns funds were not actually invested in the toxic waste. They had bought the investment grade bonds. That clearly means the toxic waste and the mezzanine bonds have no value. We do not know who owns these."
If that's true, then oh boy, a lot of other hedge funds could really get hammered...especially if jaw-dropping stories like this one, direct from the mouth of a portfolio manager whose fund is heavily invested in CDO's, are to be believed.
Note that the original article is dated July 4th, so it's already a week old, and yet a number of the things it was talking about are indeed coming to pass this week and, possibly, next week.
posted by Asparagirl at 5:34 PM on July 11, 2007
"The picture that is emerging is that the providers of the bank loans became increasingly nervous as US house prices turned down, and they wanted their money. Clearly, there were no cash assets in the hedge funds. So the banks took hold of the CDOs – their collateral – and went to sell them.
The first out of the door, rumored to be Merrill Lynch, mostly got the collateral it was owed, but it exhausted the CDO market of buyers. The rest found no bids and quickly stopped trying to sell for fear of advertising the rock-bottom prices of something which currently sits in many portfolios at funds all over the world.
Worse still, we are advised that the Bear Stearns funds were not actually invested in the toxic waste. They had bought the investment grade bonds. That clearly means the toxic waste and the mezzanine bonds have no value. We do not know who owns these."
If that's true, then oh boy, a lot of other hedge funds could really get hammered...especially if jaw-dropping stories like this one, direct from the mouth of a portfolio manager whose fund is heavily invested in CDO's, are to be believed.
Note that the original article is dated July 4th, so it's already a week old, and yet a number of the things it was talking about are indeed coming to pass this week and, possibly, next week.
posted by Asparagirl at 5:34 PM on July 11, 2007
I really liked this segment on Bill Moyers Journal about this whole fiasco.
posted by i_am_a_Jedi at 5:44 PM on July 11, 2007 [1 favorite]
posted by i_am_a_Jedi at 5:44 PM on July 11, 2007 [1 favorite]
First of all yes, there are some regulatory problems with hedge funds, but I'm not sure how specific it is to them; the real problem is that most of this debt should have been rated FFF-, paying 25% or something, in the first place, and so much of it was rated so much higher than that. The reason these 2 funds are imploding is that once they finally have to mark their mortgage-backed securities to market, they're going to be in for a rude awakening since values are going to collapse by... who even knows how much? 75%? Lots, anyway. And given how highly leveraged they are, that could actually mean loss of principal several times over.
But secondly, because everyone already seems to understand the "OMG housing market is collapsing" aspect, I'll bring up what an I-banker friend of mine told me a while back. The thing about subprime lending is, it can really increase home ownership if we regard that as a valid goal. The default rate on a lot of these subprime loans, the 5/1 ARMS and other really exotic shit, is well below half overall; I think default rates between 10 and 20% are considered extreme in most places. Which means that 80+% of people who would never have gotten homes under the old system are making it work out.
Better yet, they really have little to lose, conceptually; they're subprime in the first place so they probably already had lousy credit and few assets, so the banks have nothing to come after if the house drops in value and they walk away. And, if the debt market had been working properly, the high risk (20% default rate IS insanely high, after all) would have been placed on parties who were aware of it, desired it, and could handle the swings.
I don't completely buy this - it makes a lot of assumptions about the distributional acceptability of the payment plans they set up, and kind of glosses over the long-lasting credit impact of a default or bankruptcy - but there's something to it as well. If we're going to structure our tax code, among other things, to put such a premium on owning a home, then even people who "can't afford it" are going to want in. Eliminating the sub-prime market is not the answer.
posted by rkent at 5:45 PM on July 11, 2007 [3 favorites]
But secondly, because everyone already seems to understand the "OMG housing market is collapsing" aspect, I'll bring up what an I-banker friend of mine told me a while back. The thing about subprime lending is, it can really increase home ownership if we regard that as a valid goal. The default rate on a lot of these subprime loans, the 5/1 ARMS and other really exotic shit, is well below half overall; I think default rates between 10 and 20% are considered extreme in most places. Which means that 80+% of people who would never have gotten homes under the old system are making it work out.
Better yet, they really have little to lose, conceptually; they're subprime in the first place so they probably already had lousy credit and few assets, so the banks have nothing to come after if the house drops in value and they walk away. And, if the debt market had been working properly, the high risk (20% default rate IS insanely high, after all) would have been placed on parties who were aware of it, desired it, and could handle the swings.
I don't completely buy this - it makes a lot of assumptions about the distributional acceptability of the payment plans they set up, and kind of glosses over the long-lasting credit impact of a default or bankruptcy - but there's something to it as well. If we're going to structure our tax code, among other things, to put such a premium on owning a home, then even people who "can't afford it" are going to want in. Eliminating the sub-prime market is not the answer.
posted by rkent at 5:45 PM on July 11, 2007 [3 favorites]
What I don't see in skimming some of those links is an estimate of the impact - not just that "it's big" but who will be affected. As it turns out, a lot of pension funds and the like have invested in this "sure thing, great returns for little risk" mortgage-backed securities market. If (or perhaps when) those securities end up becoming worthless, a lot of people are going to find that their pension is suddenly a lot smaller than they expect.
But don't worry, the brokers who sold these bonds already got their fat 2005 and 2006 bonuses, which is already invested in Manhattan real estate, so no worries for them.
posted by jellicle at 5:48 PM on July 11, 2007
But don't worry, the brokers who sold these bonds already got their fat 2005 and 2006 bonuses, which is already invested in Manhattan real estate, so no worries for them.
posted by jellicle at 5:48 PM on July 11, 2007
So does mean that stocks and funds outside the scope of this subprime mess will also be affected?
Where is a safe place to put money now?
posted by mert at 5:49 PM on July 11, 2007
Where is a safe place to put money now?
posted by mert at 5:49 PM on July 11, 2007
From a post on that HousingWire blog:
"S&P also said it expects the vast majority of the classes involved “will be downgraded” in the days ahead. Lost in most of the business press on the pending downgrades, however, is S&P’s announcement of a new rating methodology, which according to the rating agency is the result of higher-than-expected loss rates. (Translation: our models haven’t been working very well.)"
Heh. No shit.
posted by rkent at 5:50 PM on July 11, 2007
"S&P also said it expects the vast majority of the classes involved “will be downgraded” in the days ahead. Lost in most of the business press on the pending downgrades, however, is S&P’s announcement of a new rating methodology, which according to the rating agency is the result of higher-than-expected loss rates. (Translation: our models haven’t been working very well.)"
Heh. No shit.
posted by rkent at 5:50 PM on July 11, 2007
As someone who went with a fixed-rate 30yr five years ago (even though it hurt), I can't help but feel vindicated. At the time, everyone -- family, friends, lenders -- was urging us to go with an ARM, since we'd "probably" sell the house within five years. Despite the pressure, it just didn't seem like a good idea, but in that way that lots of things don't seem like a good idea even though "everyone is doing it." I felt the same way about drugs and drinking back in the day, and got vindicated on that as well.
One big vote for the risk-averse personal lifestyle portfolio.
posted by davejay at 5:51 PM on July 11, 2007 [2 favorites]
One big vote for the risk-averse personal lifestyle portfolio.
posted by davejay at 5:51 PM on July 11, 2007 [2 favorites]
Where is a safe place to put money now?
Same place it always is reasonably safe; something guaranteed and insured, or something that's heavily undervalued. The housing market was overvalued, and obviously so, for quite a long time (still is, too); no genius required to get out if you're averse to risk.
posted by davejay at 5:53 PM on July 11, 2007
Same place it always is reasonably safe; something guaranteed and insured, or something that's heavily undervalued. The housing market was overvalued, and obviously so, for quite a long time (still is, too); no genius required to get out if you're averse to risk.
posted by davejay at 5:53 PM on July 11, 2007
a lot of people are going to find that their pension is suddenly a lot smaller than they expect.
Exactly! That's the bigger possible outcome in all of this: it's not just the people going into foreclosure who are affected, it's not just the shutting-down mortgage companies who are affected, it's not just those two Bear Stearns funds (no matter what the SEC says), but now it's also lots of nice respectable funds like pension plans who could get hit. Even though those plans are required to only buy really-good-quality investments, which subprime mortgages are certainly not, they've bought those new "CDO's" on the assumption that they're buying the returns without any of the risk, and because CDO's (because of how they're set up) seem to be highly-rated and thus okay to buy.
Of course, the other possible outcome is that if we're really facing bailouts as big as or bigger than the S&L crisis...well, that one may have led to the 1990-91 recession. I read a news reports that said that one of the gov't bigwigs talking to the press about the subprime meltdown today actually made reference to the "full faith and credit of the US government" backing line...followed by nervous laughter in the room.
already invested in Manhattan real estate
Hey, now, let's not forget Westport and Greenwich!
posted by Asparagirl at 5:59 PM on July 11, 2007
Exactly! That's the bigger possible outcome in all of this: it's not just the people going into foreclosure who are affected, it's not just the shutting-down mortgage companies who are affected, it's not just those two Bear Stearns funds (no matter what the SEC says), but now it's also lots of nice respectable funds like pension plans who could get hit. Even though those plans are required to only buy really-good-quality investments, which subprime mortgages are certainly not, they've bought those new "CDO's" on the assumption that they're buying the returns without any of the risk, and because CDO's (because of how they're set up) seem to be highly-rated and thus okay to buy.
Of course, the other possible outcome is that if we're really facing bailouts as big as or bigger than the S&L crisis...well, that one may have led to the 1990-91 recession. I read a news reports that said that one of the gov't bigwigs talking to the press about the subprime meltdown today actually made reference to the "full faith and credit of the US government" backing line...followed by nervous laughter in the room.
already invested in Manhattan real estate
Hey, now, let's not forget Westport and Greenwich!
posted by Asparagirl at 5:59 PM on July 11, 2007
Where is a safe place to put money now?
A sock under your matress, at least until the market "readjusts" itself.
posted by lekvar at 6:00 PM on July 11, 2007
A sock under your matress, at least until the market "readjusts" itself.
posted by lekvar at 6:00 PM on July 11, 2007
But but but ... surely a free market would take care of this, right? Libertarian roll call, please!
posted by adipocere at 6:06 PM on July 11, 2007
posted by adipocere at 6:06 PM on July 11, 2007
it can really increase home ownership if we regard that as a valid goal.
home debtorship more like. Equity %s have actually gone down over the past decade.
The real estate market is a magical thing . . . it will suck up every excess penny, and more, of everyone's income in the end, since supply is fixed and demand is unlimited every desirable place.
"Affordability" products like the mortgage interest deduction really work to just boost valuations -- and real estate sector profits -- up by the margin of benefit.
Credit Suisse's full report is worth a FPP.
Once I became a converted Georgist ca 2003 I recognized the entire sham the game was, but it's been quite a ride seeing the market do its thing over this decade.
The annual budget deficits since 2001 ($1.6T of publically-held debt) have been overshadowed by the churn in real estate valuations. The trillions of RE-secured debt we've taken on since 2001 . . . $8 trillion dollars IIRC . . . is what has supported the Bush economy lo these years.
posted by Heywood Mogroot at 6:25 PM on July 11, 2007
home debtorship more like. Equity %s have actually gone down over the past decade.
The real estate market is a magical thing . . . it will suck up every excess penny, and more, of everyone's income in the end, since supply is fixed and demand is unlimited every desirable place.
"Affordability" products like the mortgage interest deduction really work to just boost valuations -- and real estate sector profits -- up by the margin of benefit.
Credit Suisse's full report is worth a FPP.
Once I became a converted Georgist ca 2003 I recognized the entire sham the game was, but it's been quite a ride seeing the market do its thing over this decade.
The annual budget deficits since 2001 ($1.6T of publically-held debt) have been overshadowed by the churn in real estate valuations. The trillions of RE-secured debt we've taken on since 2001 . . . $8 trillion dollars IIRC . . . is what has supported the Bush economy lo these years.
posted by Heywood Mogroot at 6:25 PM on July 11, 2007
Fascinating reading, asparagirl. And that PrudentBear article really is as accessible as you claimed. Ordinarily I'd have a hard time following (or at least would nod off while reading) an article once they started talking about derivatives.
posted by JaredSeth at 6:26 PM on July 11, 2007
posted by JaredSeth at 6:26 PM on July 11, 2007
Asparagirl: As someone who grew up in the area, I am sure no one has forgotten westport and greenwich.
Which makes it a nice retirement package for my parents at this point also, as the markets crumble everywhere else, people keep paying more and more there.
posted by mrzarquon at 6:30 PM on July 11, 2007
Which makes it a nice retirement package for my parents at this point also, as the markets crumble everywhere else, people keep paying more and more there.
posted by mrzarquon at 6:30 PM on July 11, 2007
A sock under your matress, at least until the market "readjusts" itself.
Only if the purchasing power of a dollar stays at the same, or goes up. This doesn't seem likely. On the other hand, it doesn't seem likely to reach the "canned food is now money" stage either. Maybe look into foreign investment funds?
posted by aeschenkarnos at 6:37 PM on July 11, 2007 [1 favorite]
Only if the purchasing power of a dollar stays at the same, or goes up. This doesn't seem likely. On the other hand, it doesn't seem likely to reach the "canned food is now money" stage either. Maybe look into foreign investment funds?
posted by aeschenkarnos at 6:37 PM on July 11, 2007 [1 favorite]
Eliminating the sub-prime market is not the answer
Driving the rentiers out of the SFH sector is a necessary evolution IMO.
Eliminating the speculative premium of SFHs, eg. by taxing land a bit more, and improvements a lot less, would go a long way.
True LVTers argue that the LVT is a silver bullet; while I the total cost/benefit picture is still unclear to me, a lot of the Georgist description and prescription makes sense to me, at the philosophical and economical levels.
The wanna-be rentiers/leeches got the bloodsucking opportunity of a lifetime this decade when the lending spigots were opened wide after 9/11.
Casey Serin with his attempt to flip/hold ~8 single-family properties simultaneously was a poster boy, but I saw this activity all over the place 2003-2005. Market failure doesn't quite accurately describe what went on, but whatever it was it was a horrible misallocation of industry and assets.
posted by Heywood Mogroot at 6:42 PM on July 11, 2007
Driving the rentiers out of the SFH sector is a necessary evolution IMO.
Eliminating the speculative premium of SFHs, eg. by taxing land a bit more, and improvements a lot less, would go a long way.
True LVTers argue that the LVT is a silver bullet; while I the total cost/benefit picture is still unclear to me, a lot of the Georgist description and prescription makes sense to me, at the philosophical and economical levels.
The wanna-be rentiers/leeches got the bloodsucking opportunity of a lifetime this decade when the lending spigots were opened wide after 9/11.
Casey Serin with his attempt to flip/hold ~8 single-family properties simultaneously was a poster boy, but I saw this activity all over the place 2003-2005. Market failure doesn't quite accurately describe what went on, but whatever it was it was a horrible misallocation of industry and assets.
posted by Heywood Mogroot at 6:42 PM on July 11, 2007
Come to think of it, investment in publicly-listed auditing firms might be wise. Particularly ones based in Europe.
posted by aeschenkarnos at 6:43 PM on July 11, 2007
posted by aeschenkarnos at 6:43 PM on July 11, 2007
In anticipation of the meltdown, I've had most of my savings in the Prudent Bear mutual fund since Aprilish. I'm down a couple of percent as a result, but hanging in there...
posted by Coventry at 6:51 PM on July 11, 2007 [1 favorite]
posted by Coventry at 6:51 PM on July 11, 2007 [1 favorite]
Reading the article, I'm impressed with the level of innovation that financial institutions have focused into finding new ways to bypass regulations aimed at stopping them getting into this mess.
Regulations successfully bypassed! Mess successfully created! Idiots.
The fence with the "danger!" signs was there for a reason. But the consequences are going to hit the innocent people, not the perps.
posted by -harlequin- at 6:56 PM on July 11, 2007 [2 favorites]
Regulations successfully bypassed! Mess successfully created! Idiots.
The fence with the "danger!" signs was there for a reason. But the consequences are going to hit the innocent people, not the perps.
posted by -harlequin- at 6:56 PM on July 11, 2007 [2 favorites]
"But but but ... surely a free market would take care of this, right?"
That's exactly what's happening.
posted by jperkins at 7:05 PM on July 11, 2007
That's exactly what's happening.
posted by jperkins at 7:05 PM on July 11, 2007
I have a friend who does quant analysis on a Deutsche Bank CMBS bond desk coming to visit this weekend, I can't wait to get into all this over dinner. Thanks for the link pile, I've been meaning to read up a little bit.
I remember him telling me in the late 90s that real estate as a lagging indicator would likely track the steep spike and subsequent decline of the internet boom, as money made in stocks was shifted to bricks and mortar. I wonder exactly how much of this is the final play out of bubble of yore, sort of the last hangover for the after hours party set.
posted by The Straightener at 7:22 PM on July 11, 2007
I remember him telling me in the late 90s that real estate as a lagging indicator would likely track the steep spike and subsequent decline of the internet boom, as money made in stocks was shifted to bricks and mortar. I wonder exactly how much of this is the final play out of bubble of yore, sort of the last hangover for the after hours party set.
posted by The Straightener at 7:22 PM on July 11, 2007
That's exactly what's happening
roust me when the Invisible Hand replaces the millions of sqft of vacant 4/4 McMansion tracts & highrise Luxury Condo Towers with actually liveable SFH communities.
It's going to be awhile, not to mention if the Free Market Fairy has his way he'll pack these suckers with 8 undocumented aliens per.
posted by Heywood Mogroot at 7:38 PM on July 11, 2007
roust me when the Invisible Hand replaces the millions of sqft of vacant 4/4 McMansion tracts & highrise Luxury Condo Towers with actually liveable SFH communities.
It's going to be awhile, not to mention if the Free Market Fairy has his way he'll pack these suckers with 8 undocumented aliens per.
posted by Heywood Mogroot at 7:38 PM on July 11, 2007
Things in the Greenwhich and Stamford (CT_) area are looking up! Joe Lieberman, longtime resident of New Haven just annunced he will be moving to that area to be closer to his grandchildren. Seems that the 40 minute drive is too long for the time when he is not in DC...follow Joe and he follows the money. Adjustable rate mortgage folks hardest hit in Atlanta region since it is faster and easier to forclose there. But the rest of the nation soon to catch up...Except (says NY Times today)_ for very expense homes, which still sell, reflecting of course the widening gap betwen the Haves and the Used to Haves and the Havenots...don't mourn for me, boys. Organize.
posted by Postroad at 7:43 PM on July 11, 2007
posted by Postroad at 7:43 PM on July 11, 2007
Yeah, bale out the lenders, and fuck the home-owners. These idiots (the hedge funds) risked their money and lost, so fuck 'em. Isn't that how capitalism is supposed to work?
posted by delmoi at 7:44 PM on July 11, 2007
posted by delmoi at 7:44 PM on July 11, 2007
jperkins - not exactly, but I get the intended sarcasm. Part of the problem is that the checks and balances that are built in just didn't work. There are a lot of disparate parts in this game that had to work in concert for the whole deck of cards to come tumbling down. Take for example real estate appraisers. They had to keep pumping up valuations, and in many cases were doing so without justification. But, if the appraiser wanted to continue getting business, he had to keep pumping up the values. It's like in the car business: when you trade in a car, the new car manager calls his used car manager and says, "Yo, Bobby - I need ten large for this here trade!" Bobby spouts back, "bullshit! That car ain't worth five!" The new car manager picks up his rolodex and calls his other used car buyers until he finds someone willing to give him the number closest to what he wants. He doesn't care, once the used car is sold to that broker, the new car manager wipes his hands of it.
Same in the housing business, but there were lots of other parts: mortgage brokers who went unregulated properly in most states, buyers who didn't study enough before jumping in and received mortgage product they couldn't afford and/or didn't understand, speculators who jumped in (and failed to get out at the right moment), hell, even HGTV and all their "Flip this house!" bullshit programs primed the pumps of this fallout.
I'm no Wall Street apologist - but I don't really lay the full blame on them. Wall Street did what Wall Street is supposed to do: create financial products, create money and find new places to invest money. They did that, brilliantly. The fault also lies at the other end of the spectrum with the banks, the brokers, the appraisers, the real estate agents and ultimately....the buyers.
Just to demonstrate a small point of how 'dumb' the consumer can be, I was shocked to find out at a recent city council meeting that the majority of people in attendance had *not* completed a home inspection prior to the purchase of their home. Seriously - who the hell takes on $100,000 to $200,000 in debt and doesn't do due diligence??
There are many people at fault in this game, but at heart it was an asset bubble, like the many that have come before and the many that will come in the future.
posted by tgrundke at 7:46 PM on July 11, 2007 [1 favorite]
Same in the housing business, but there were lots of other parts: mortgage brokers who went unregulated properly in most states, buyers who didn't study enough before jumping in and received mortgage product they couldn't afford and/or didn't understand, speculators who jumped in (and failed to get out at the right moment), hell, even HGTV and all their "Flip this house!" bullshit programs primed the pumps of this fallout.
I'm no Wall Street apologist - but I don't really lay the full blame on them. Wall Street did what Wall Street is supposed to do: create financial products, create money and find new places to invest money. They did that, brilliantly. The fault also lies at the other end of the spectrum with the banks, the brokers, the appraisers, the real estate agents and ultimately....the buyers.
Just to demonstrate a small point of how 'dumb' the consumer can be, I was shocked to find out at a recent city council meeting that the majority of people in attendance had *not* completed a home inspection prior to the purchase of their home. Seriously - who the hell takes on $100,000 to $200,000 in debt and doesn't do due diligence??
There are many people at fault in this game, but at heart it was an asset bubble, like the many that have come before and the many that will come in the future.
posted by tgrundke at 7:46 PM on July 11, 2007 [1 favorite]
onto vulnerable would-be homebuyers can trickle upwards to seriously affect the way some very-big-name funds earn (or lose) their money.
Vulnerable buyers? Vulnerable to what? To being told, that yes, they too can afford a $500,000 house on a $75,000/yr income? You know who's vulnerable? All those brats in school who asked why they should have to learn algebra because it was oh so boring. These same people drive new cars, shop at expensive department stores, etc., and carry crippling personal debt. It's called compound interest, and it rules the world.
Here's a little secret, kiddies, housing prices aren't going to fall drastically, because inflation is going to swell those prices right back up. That way you'll believe it when they tell you it was a "soft landing" in the housing market, even though the inflation-adjusted value of the house plummeted.
I've said it before and I'll say it again. Fuck Casey Serin. He should be a lesson to anyone who lets their hubris get the best of them. Did Casey really think it was going to be that easy to become a millionaire in the United States? Lie on the mortgage applications, overstate your income, hey everybody does it, right? Oh, what's that, you went broke, got foreclosed on, and your wife is pissed at you? Welcome to America, motherfucker. In God We Trust, All Others Pay Cash. Don't worry, kid, here we let you sleep on the streets.
It's true that a lot of risk is not priced in to the system. But it almost doesn't matter, because most people are so ignorant they wouldn't change their behavior even if you raised the prices. Credit card interest for most people should be north of 40%, because at 20% a lot of people have negative net worth. But if the card companies raised the interest rate to 90% and printed that right on the card in 72pt type, would most credit card users even know what it meant?
At some point, Americans have to learn (1) that they are for the most part stupid, and (2) to accept they will not ever be able to afford certain things. Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion. Not everyone deserves the "professional-grade" or "deluxe" or "elite" versions of products. Most of us can and should do with ordinary. A product or service isn't "exclusive" if you can buy it. A truly exclusive product is supposed to exclude people like you from it.
posted by Pastabagel at 7:49 PM on July 11, 2007 [32 favorites]
Vulnerable buyers? Vulnerable to what? To being told, that yes, they too can afford a $500,000 house on a $75,000/yr income? You know who's vulnerable? All those brats in school who asked why they should have to learn algebra because it was oh so boring. These same people drive new cars, shop at expensive department stores, etc., and carry crippling personal debt. It's called compound interest, and it rules the world.
Here's a little secret, kiddies, housing prices aren't going to fall drastically, because inflation is going to swell those prices right back up. That way you'll believe it when they tell you it was a "soft landing" in the housing market, even though the inflation-adjusted value of the house plummeted.
I've said it before and I'll say it again. Fuck Casey Serin. He should be a lesson to anyone who lets their hubris get the best of them. Did Casey really think it was going to be that easy to become a millionaire in the United States? Lie on the mortgage applications, overstate your income, hey everybody does it, right? Oh, what's that, you went broke, got foreclosed on, and your wife is pissed at you? Welcome to America, motherfucker. In God We Trust, All Others Pay Cash. Don't worry, kid, here we let you sleep on the streets.
It's true that a lot of risk is not priced in to the system. But it almost doesn't matter, because most people are so ignorant they wouldn't change their behavior even if you raised the prices. Credit card interest for most people should be north of 40%, because at 20% a lot of people have negative net worth. But if the card companies raised the interest rate to 90% and printed that right on the card in 72pt type, would most credit card users even know what it meant?
At some point, Americans have to learn (1) that they are for the most part stupid, and (2) to accept they will not ever be able to afford certain things. Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion. Not everyone deserves the "professional-grade" or "deluxe" or "elite" versions of products. Most of us can and should do with ordinary. A product or service isn't "exclusive" if you can buy it. A truly exclusive product is supposed to exclude people like you from it.
posted by Pastabagel at 7:49 PM on July 11, 2007 [32 favorites]
delmoi: The goal here is to stop a chain reaction. Sadly enough, if you're the last link in the chain (the homeowner), you're going to get screwed with very little effect on the market. If Bear Stearns goes down, it will have significant ripple effects, or so goes their rationale. It's not fair, but that's what they're thinking.
Also, I'd really like to encourage those interested in this to keep reading one of the blogs linked by the post, Calculated Risk. It's pretty much the go-to website for the CDO meltdown, as it predicted not only much of what would happen and detailed explanation of the play-by-play, much of mainstream media is directly getting their news/analysis from this source. I would actually read this over the reports in the WSJ, as this would probably give you the analysis before the innacurate reporter spins or summarizes it.
posted by amuseDetachment at 7:55 PM on July 11, 2007
Also, I'd really like to encourage those interested in this to keep reading one of the blogs linked by the post, Calculated Risk. It's pretty much the go-to website for the CDO meltdown, as it predicted not only much of what would happen and detailed explanation of the play-by-play, much of mainstream media is directly getting their news/analysis from this source. I would actually read this over the reports in the WSJ, as this would probably give you the analysis before the innacurate reporter spins or summarizes it.
posted by amuseDetachment at 7:55 PM on July 11, 2007
Yeah, bale out the lenders, and fuck the home-owners. These idiots (the hedge funds) risked their money and lost, so fuck 'em. Isn't that how capitalism is supposed to work?
posted by delmoi at 10:44 PM on July 11
Read the linked article. Bear Stearns refused to bail out LTCM when it imploded in 98, and is now bailing out it's own hedge fund out of it's own pocket.
posted by Pastabagel at 7:55 PM on July 11, 2007
posted by delmoi at 10:44 PM on July 11
Read the linked article. Bear Stearns refused to bail out LTCM when it imploded in 98, and is now bailing out it's own hedge fund out of it's own pocket.
posted by Pastabagel at 7:55 PM on July 11, 2007
But but but ... surely a free market would take care of this, right? Libertarian roll call, please!
Libertarian here. Mod jperkins up. The free market is taking care of it.
For an example of what happens when you don't let the free market carry away your dead, witness the sleepwalking Japanese economy, ~1990 to the present. All over that country are the rotting corpses of dead companies that no one can bring themselves to bury.
What does the individual do? A sock under the mattress is not the answer, unless you want to lose everything to inflation. Here's what various investment classes do over the long term. What's that? You don't care about the long term, you only care about the next twelve months? That's no investment, that's a crapshoot. Go to Vegas. Or play commodities or something.
I'm investing for retirement, early if I can get it. I've got mutual funds, diversified for investment philosophy (growth, value, allocation) and size of company. Almost half are foreign or global. I'm not worried. The market will go down. The market will go up. Over the medium to long term, the market always goes up. When the market goes down, I get to buy more at lower prices. When it goes up, I make money.
In anticipation of the meltdown, I've had most of my savings in the Prudent Bear mutual fund since Aprilish.
This is a terrible idea. You are trying to time the market. You will almost certainly fail.
In addition, by playing the bear side, you are betting against the long term trend of the market.
Take a good look at the track record of Prudent Bear. Are you sure you want to be in this thing? Now consider T. Rowe Price Capital Appreciation, a conservative stock/bond allocation fund, which hasn't lost money in a calendar year since 1990. Why would you risk your money market timing a bear fund?
posted by Slithy_Tove at 7:56 PM on July 11, 2007 [12 favorites]
Libertarian here. Mod jperkins up. The free market is taking care of it.
For an example of what happens when you don't let the free market carry away your dead, witness the sleepwalking Japanese economy, ~1990 to the present. All over that country are the rotting corpses of dead companies that no one can bring themselves to bury.
What does the individual do? A sock under the mattress is not the answer, unless you want to lose everything to inflation. Here's what various investment classes do over the long term. What's that? You don't care about the long term, you only care about the next twelve months? That's no investment, that's a crapshoot. Go to Vegas. Or play commodities or something.
I'm investing for retirement, early if I can get it. I've got mutual funds, diversified for investment philosophy (growth, value, allocation) and size of company. Almost half are foreign or global. I'm not worried. The market will go down. The market will go up. Over the medium to long term, the market always goes up. When the market goes down, I get to buy more at lower prices. When it goes up, I make money.
In anticipation of the meltdown, I've had most of my savings in the Prudent Bear mutual fund since Aprilish.
This is a terrible idea. You are trying to time the market. You will almost certainly fail.
In addition, by playing the bear side, you are betting against the long term trend of the market.
Take a good look at the track record of Prudent Bear. Are you sure you want to be in this thing? Now consider T. Rowe Price Capital Appreciation, a conservative stock/bond allocation fund, which hasn't lost money in a calendar year since 1990. Why would you risk your money market timing a bear fund?
posted by Slithy_Tove at 7:56 PM on July 11, 2007 [12 favorites]
Yeah, bale out the lenders, and fuck the home-owners. These idiots (the hedge funds) risked their money and lost, so fuck 'em. Isn't that how capitalism is supposed to work?
Well, all of this is, at root, the homeowners' fault! They borrowed more than they could repay and shafted a lot of people by defaulting.
Sure, nobody should've trusted them, but the homeowners had just lived within their means, none of this would've happened.
CMOs are a great idea, if you have sensible homeowners. They create cheap money to get those sensible homeowners into homes, and then those sensible homeowners pay their debts. Everyone's happy.
posted by Mr. President Dr. Steve Elvis America at 7:57 PM on July 11, 2007
Well, all of this is, at root, the homeowners' fault! They borrowed more than they could repay and shafted a lot of people by defaulting.
Sure, nobody should've trusted them, but the homeowners had just lived within their means, none of this would've happened.
CMOs are a great idea, if you have sensible homeowners. They create cheap money to get those sensible homeowners into homes, and then those sensible homeowners pay their debts. Everyone's happy.
posted by Mr. President Dr. Steve Elvis America at 7:57 PM on July 11, 2007
So does mean that stocks and funds outside the scope of this subprime mess will also be affected?
Where is a safe place to put money now?
Heh, all my "retirement money" (a whole $4k) is overseas. I don't know how safe it is but the funds I'm in have been returning 20-30% for the past couple years. JAOSX (which I don't have) has returned like 30-40%.
If you want safe, they still have these things called "banks". HSBC has an online savings account with a 5.05% APR.
In anticipation of the meltdown, I've had most of my savings in the Prudent Bear mutual fund since Aprilish. I'm down a couple of percent as a result, but hanging in there...
Heh. My international stocks have gone up about 5% in the past 3 or 5 weeks, it looks like. Looks like the YTD for Janus Overseas was 17%. And the 1-year was 49%. Three year annualized is 40%. It's not available through my employer's retirement program but some other 'international' stocks are.
Really, I don't know why anyone is investing in the US with Bush in charge.
roust me when the Invisible Hand replaces the millions of sqft of vacant 4/4 McMansion tracts & highrise Luxury Condo Towers with actually liveable SFH communities.
Is it really the square footage though? I mean most of the property value spikes have been in places that didn't have room to build new homes. At least that's what I thought.
posted by delmoi at 7:59 PM on July 11, 2007
Where is a safe place to put money now?
Heh, all my "retirement money" (a whole $4k) is overseas. I don't know how safe it is but the funds I'm in have been returning 20-30% for the past couple years. JAOSX (which I don't have) has returned like 30-40%.
If you want safe, they still have these things called "banks". HSBC has an online savings account with a 5.05% APR.
In anticipation of the meltdown, I've had most of my savings in the Prudent Bear mutual fund since Aprilish. I'm down a couple of percent as a result, but hanging in there...
Heh. My international stocks have gone up about 5% in the past 3 or 5 weeks, it looks like. Looks like the YTD for Janus Overseas was 17%. And the 1-year was 49%. Three year annualized is 40%. It's not available through my employer's retirement program but some other 'international' stocks are.
Really, I don't know why anyone is investing in the US with Bush in charge.
roust me when the Invisible Hand replaces the millions of sqft of vacant 4/4 McMansion tracts & highrise Luxury Condo Towers with actually liveable SFH communities.
Is it really the square footage though? I mean most of the property value spikes have been in places that didn't have room to build new homes. At least that's what I thought.
posted by delmoi at 7:59 PM on July 11, 2007
delmoi: The goal here is to stop a chain reaction. Sadly enough, if you're the last link in the chain (the homeowner), you're going to get screwed with very little effect on the market. If Bear Stearns goes down, it will have significant ripple effects, or so goes their rationale. It's not fair, but that's what they're thinking.
Blah, to hell with that. What the government ought to do is go around and see exactly who suffers. They've got computers these days, you don't need to bail people out at the fulcrum, you can find the edges. So you find those edges, and the ones who really need the money, you bail out. Why the hell should my tax dollars go to protect the investments of the hedge fund managers who got us into this mess in the first place? It would be idiotic, but then, that's been the modus opperandi of our government for some time now, and that's why my money's overseas.
Libertarian here. Mod jperkins up. The free market is taking care of it.
Yeah, until the bailout.
Take a good look at the track record of Prudent Bear. Are you sure you want to be in this thing? Now consider T. Rowe Price Capital Appreciation, a conservative stock/bond allocation fund, which hasn't lost money in a calendar year since 1990. Why would you risk your money market timing a bear fund?
Your link isn't working, but here is the google finance page for BEARX. Three year annualized is 1.7%. Why not just put your money into a high-yield savings account?
posted by delmoi at 8:12 PM on July 11, 2007
Blah, to hell with that. What the government ought to do is go around and see exactly who suffers. They've got computers these days, you don't need to bail people out at the fulcrum, you can find the edges. So you find those edges, and the ones who really need the money, you bail out. Why the hell should my tax dollars go to protect the investments of the hedge fund managers who got us into this mess in the first place? It would be idiotic, but then, that's been the modus opperandi of our government for some time now, and that's why my money's overseas.
Libertarian here. Mod jperkins up. The free market is taking care of it.
Yeah, until the bailout.
Take a good look at the track record of Prudent Bear. Are you sure you want to be in this thing? Now consider T. Rowe Price Capital Appreciation, a conservative stock/bond allocation fund, which hasn't lost money in a calendar year since 1990. Why would you risk your money market timing a bear fund?
Your link isn't working, but here is the google finance page for BEARX. Three year annualized is 1.7%. Why not just put your money into a high-yield savings account?
posted by delmoi at 8:12 PM on July 11, 2007
Libertarian here. Mod jperkins up. The free market is taking care of it.
Yeah, until the bailout.
The only bailout mentioned above was private, wasn't it?
posted by Mr. President Dr. Steve Elvis America at 8:36 PM on July 11, 2007
Yeah, until the bailout.
The only bailout mentioned above was private, wasn't it?
posted by Mr. President Dr. Steve Elvis America at 8:36 PM on July 11, 2007
For now the only bailout is private (for and by Bear Stearns), but if this spreads to other funds -- and it probably will -- then who knows?
posted by Asparagirl at 8:41 PM on July 11, 2007
posted by Asparagirl at 8:41 PM on July 11, 2007
I mean most of the property value spikes have been in places that didn't have room to build new homes
The spike, since its causes were speculation coupled with free-money lending policy (or lack thereof) was nation-wide. I just got back from Vegas a week ago. My god what a disaster area. Current listing ratio of 1:65 people.
It does seem that areas where building has had to be in-fill (like the Bay Area) are holding valuations much better than boom-towns.
don't know why anyone is investing in the US with Bush in charge
Hint: Bush isn't in charge. The markets & the "Pig Men" are. Paulson wasn't selected as Treasury Secretary because of his dapper suits. Pump & Dump is a fun game to play while the cat's away.
posted by Heywood Mogroot at 8:51 PM on July 11, 2007
The spike, since its causes were speculation coupled with free-money lending policy (or lack thereof) was nation-wide. I just got back from Vegas a week ago. My god what a disaster area. Current listing ratio of 1:65 people.
It does seem that areas where building has had to be in-fill (like the Bay Area) are holding valuations much better than boom-towns.
don't know why anyone is investing in the US with Bush in charge
Hint: Bush isn't in charge. The markets & the "Pig Men" are. Paulson wasn't selected as Treasury Secretary because of his dapper suits. Pump & Dump is a fun game to play while the cat's away.
posted by Heywood Mogroot at 8:51 PM on July 11, 2007
then who knows
Congress, specifically, has been making noises about bailouts, but so far only in the millions, not billions, yet.
While I'm enough of a free-marketeer to say let the markets function -- and the guilty/greedy pay for their sins -- I find people who were all for spending $500B (and counting) to "disarm Saddam" but are against a piddly ~$500M bailout to be . . . humorously addle-pated.
posted by Heywood Mogroot at 8:59 PM on July 11, 2007
Congress, specifically, has been making noises about bailouts, but so far only in the millions, not billions, yet.
While I'm enough of a free-marketeer to say let the markets function -- and the guilty/greedy pay for their sins -- I find people who were all for spending $500B (and counting) to "disarm Saddam" but are against a piddly ~$500M bailout to be . . . humorously addle-pated.
posted by Heywood Mogroot at 8:59 PM on July 11, 2007
Heywood, your link is about the possibility of funding a screwed-over-homeowner bailout. I'm talking about the possibility of a fund and industry bailout, which would be much, much bigger.
posted by Asparagirl at 9:03 PM on July 11, 2007
posted by Asparagirl at 9:03 PM on July 11, 2007
I'm talking about the possibility of a fund and industry bailout
"BushCo" (I dislike the term but it's appropos here) kinda shot their wad with the failed attempt to privatize the massive SSTF income streams in early 2005. . . I don't know how this is going to play out over the next year+, but having Barney Frank's gibbering mug in the power seat is certainly entertaining. . . he seems to know where the bodies have been buried . ..
posted by Heywood Mogroot at 9:10 PM on July 11, 2007
"BushCo" (I dislike the term but it's appropos here) kinda shot their wad with the failed attempt to privatize the massive SSTF income streams in early 2005. . . I don't know how this is going to play out over the next year+, but having Barney Frank's gibbering mug in the power seat is certainly entertaining. . . he seems to know where the bodies have been buried . ..
posted by Heywood Mogroot at 9:10 PM on July 11, 2007
Ooooh, and in addition to Barney Frank, don't forget that Chris Dodd is the chairman of the US Senate Committee on Banking, Housing, and Urban Affairs -- and this fiasco fits into the first 2 out of 3 of those categories. I bet he won't want this to go away quietly at all, especially since he could try to stick it to the Bush administration with hearings. Also, he's an (unrealistic) 2008 Democratic presidential candidate, so he'd want to get some good spotlight time.
On the other hand, Dodd is the non-Lieberman senator from Connecticut, home of the previously-mentioned Westport and Greenwich hedge funders, so would he really risk upsetting his past and potential future financial backers?
There are just so many different possibilities for this situation to spin off in interesting angles...!
posted by Asparagirl at 9:44 PM on July 11, 2007
On the other hand, Dodd is the non-Lieberman senator from Connecticut, home of the previously-mentioned Westport and Greenwich hedge funders, so would he really risk upsetting his past and potential future financial backers?
There are just so many different possibilities for this situation to spin off in interesting angles...!
posted by Asparagirl at 9:44 PM on July 11, 2007
Exactly! That's the bigger possible outcome in all of this: it's not just the people going into foreclosure who are affected, it's not just the shutting-down mortgage companies who are affected, it's not just those two Bear Stearns funds (no matter what the SEC says), but now it's also lots of nice respectable funds like pension plans who could get hit.
The whole thing is a giant pyramid scheme. Even tho it's law in Australia, I don't expect to see much of my 9% superannuation by the time I retire. It happened to Barings, and I'm certain it's gonna happen to a major fund manager or three sometime in the next 20 years.
Interesting times. Seeing what cashed-up funds are doing.
/slight tangent there.
posted by uncanny hengeman at 9:58 PM on July 11, 2007
The whole thing is a giant pyramid scheme. Even tho it's law in Australia, I don't expect to see much of my 9% superannuation by the time I retire. It happened to Barings, and I'm certain it's gonna happen to a major fund manager or three sometime in the next 20 years.
Interesting times. Seeing what cashed-up funds are doing.
/slight tangent there.
posted by uncanny hengeman at 9:58 PM on July 11, 2007
Dodd was IIRC first out of the gate with bailout talk, but the problem is really too big for bailouts to work.
The nut of the problem:
"Federal aid of a few billion dollars ``may be a lot less costly' than $164 billion in lost wealth, [Dodd] said."
is that home/land valuations themselves are not real wealth (in the classical sense of goods that satisfy human needs and wants) but actually just debt obligations. The present wealth -- homes, sidewalks, utility infrastructure -- we have will still be present should valuations drop 50%, the only problem is people will find they've signed on for more debt that they can (and/or needed to) repay.
Bad loans are bad loans, however, and there's not going to be a way to get blood (repayment of principal and interest) out of the turnips (underwater buyers) when the resets and recasts start coming.
I've been following the bubble trouble story for almost a year now, and the general pace of events has been a little quicker than I thought, but the scale is about right. The first wave of ARM resets are peaking this summer, with a second wave due next year, and thoughout we will see increasing borrowers hitting their neg-am recast threshholds (115% to 120%) and also being thrown to the wolves.
posted by Heywood Mogroot at 10:39 PM on July 11, 2007
The nut of the problem:
"Federal aid of a few billion dollars ``may be a lot less costly' than $164 billion in lost wealth, [Dodd] said."
is that home/land valuations themselves are not real wealth (in the classical sense of goods that satisfy human needs and wants) but actually just debt obligations. The present wealth -- homes, sidewalks, utility infrastructure -- we have will still be present should valuations drop 50%, the only problem is people will find they've signed on for more debt that they can (and/or needed to) repay.
Bad loans are bad loans, however, and there's not going to be a way to get blood (repayment of principal and interest) out of the turnips (underwater buyers) when the resets and recasts start coming.
I've been following the bubble trouble story for almost a year now, and the general pace of events has been a little quicker than I thought, but the scale is about right. The first wave of ARM resets are peaking this summer, with a second wave due next year, and thoughout we will see increasing borrowers hitting their neg-am recast threshholds (115% to 120%) and also being thrown to the wolves.
posted by Heywood Mogroot at 10:39 PM on July 11, 2007
I used to work on "this sort of thing" -- specifically, I worked on constructing mathematical models for pricing mortgage-backed securities and their options for the now-defunct investment banking firm Drexel Burnham Lambert.
What baffles me is that this is definitely not the first time "this" has happened and not the second time either (for commonsense values of "this").
When I started working on the Street, the market had just suffered a medium-sized meltdown on mortgage-backed securities due to prepayments -- they'd underestimated how readily people would refinance their mortgages when the interest rates dropped (and prepayments really cost you if you own MBS's whose coupons are greater than the current values, because you purchase them at a premium, expecting to get good interest rates, but on prepayment you get your original dollar back, early...)
Then Howard Rubin split a billion dollars worth of mortgages into principal- and interest-only tranches, mispriced them and sold the desirable IOs at a discount -- leaving him with the duration-heavy POs which tanked when the market took a dive. He hid the trading tickets in his desk(*) bought more, expecting it go to bounce -- it didn't -- $377 million down for Merrill-Lynch, OOPS! (Astonishing how this doesn't really appear on the web!)
Then we had Long-Term Capital Management and lesser failures like Askin Capital Management (distinguished to me because he's my ex-boss and definitely saw the Rubin fiasco. A co-worker saw him after this all happened and said he was a broken man. Good -- he was a faker before this happened!)
I'm missing all sorts of CMO meltdowns because I'm a little removed from that field but it's the same thing: convert real debt into abstract "securities" and in a couple of minutes these vastly overpaid managers manage to forget that the securities represent real mortgages with real people behind them who do either very rational or very unexpected things.
So I'm not the slightest bit surprised to see the Street fuck up again. Clearly they'll never learn despite their pretenses to being responsible grown-ups. Our politicians are just the same.
(* yes, we used handwritten tickets back in the day, and yes, we did fuck up sometimes and lose many thousands of dollars because someone misread the bad handwriting...)
posted by lupus_yonderboy at 10:40 PM on July 11, 2007 [8 favorites]
What baffles me is that this is definitely not the first time "this" has happened and not the second time either (for commonsense values of "this").
When I started working on the Street, the market had just suffered a medium-sized meltdown on mortgage-backed securities due to prepayments -- they'd underestimated how readily people would refinance their mortgages when the interest rates dropped (and prepayments really cost you if you own MBS's whose coupons are greater than the current values, because you purchase them at a premium, expecting to get good interest rates, but on prepayment you get your original dollar back, early...)
Then Howard Rubin split a billion dollars worth of mortgages into principal- and interest-only tranches, mispriced them and sold the desirable IOs at a discount -- leaving him with the duration-heavy POs which tanked when the market took a dive. He hid the trading tickets in his desk(*) bought more, expecting it go to bounce -- it didn't -- $377 million down for Merrill-Lynch, OOPS! (Astonishing how this doesn't really appear on the web!)
Then we had Long-Term Capital Management and lesser failures like Askin Capital Management (distinguished to me because he's my ex-boss and definitely saw the Rubin fiasco. A co-worker saw him after this all happened and said he was a broken man. Good -- he was a faker before this happened!)
I'm missing all sorts of CMO meltdowns because I'm a little removed from that field but it's the same thing: convert real debt into abstract "securities" and in a couple of minutes these vastly overpaid managers manage to forget that the securities represent real mortgages with real people behind them who do either very rational or very unexpected things.
So I'm not the slightest bit surprised to see the Street fuck up again. Clearly they'll never learn despite their pretenses to being responsible grown-ups. Our politicians are just the same.
(* yes, we used handwritten tickets back in the day, and yes, we did fuck up sometimes and lose many thousands of dollars because someone misread the bad handwriting...)
posted by lupus_yonderboy at 10:40 PM on July 11, 2007 [8 favorites]
Hmm, speaking of Casey Serin, he's now saying he'll shut down his blog in 24 days and sell the domain this time. Of course, I'm not sure if that will really be possible with all the people trying to sue him. And on top of that his wife will probably dump him at some point anyway.
posted by delmoi at 10:57 PM on July 11, 2007
posted by delmoi at 10:57 PM on July 11, 2007
Extremely interesting reading. Thanks, Asparagirl.
Pastabagel: "At some point, Americans have to learn (1) that they are for the most part stupid, and (2) to accept they will not ever be able to afford certain things. Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion. Not everyone deserves the "professional-grade" or "deluxe" or "elite" versions of products. Most of us can and should do with ordinary."
...and that would be fine and good if stupidity and foolishness were the fault of the foolish and stupid, but it's the duty of the powerful to look to the benefit of the foolish and to instruct them.
Maybe that's you're point, or the source of the bitter tone I detect.
posted by koeselitz at 11:04 PM on July 11, 2007
Pastabagel: "At some point, Americans have to learn (1) that they are for the most part stupid, and (2) to accept they will not ever be able to afford certain things. Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion. Not everyone deserves the "professional-grade" or "deluxe" or "elite" versions of products. Most of us can and should do with ordinary."
...and that would be fine and good if stupidity and foolishness were the fault of the foolish and stupid, but it's the duty of the powerful to look to the benefit of the foolish and to instruct them.
Maybe that's you're point, or the source of the bitter tone I detect.
posted by koeselitz at 11:04 PM on July 11, 2007
Sigh. None of this makes any sense to me. When people talk about money all I hear (and read) is the wah-wah-wah-wah language Charlie Brown's parents speak...which is probably why I don't have much money. But I do have one question: does any of this have much to do with conditions in Canada?
posted by The Card Cheat at 11:10 PM on July 11, 2007
posted by The Card Cheat at 11:10 PM on July 11, 2007
Heh. Casey says he's been contacted by the FBI. Dunt dunt dunnn....
posted by delmoi at 11:12 PM on July 11, 2007
posted by delmoi at 11:12 PM on July 11, 2007
Pastabagel: "At some point, Americans have to learn (1) that they are for the most part stupid, and (2) to accept they will not ever be able to afford certain things. Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion. Not everyone deserves the "professional-grade" or "deluxe" or "elite" versions of products. Most of us can and should do with ordinary."
That's kind of an odd thing to say, after all most americans probably drive a car that is vastly superiour in most ways to a Mercedes from 30 years ago. There is a lot of wealth in this country now, and I would bet that cheaper building processes could give a majority of Americans who move into new subdivisions an opportunity to own a "McMansion" (not that it would be a good thing) in the future.
posted by delmoi at 11:16 PM on July 11, 2007
That's kind of an odd thing to say, after all most americans probably drive a car that is vastly superiour in most ways to a Mercedes from 30 years ago. There is a lot of wealth in this country now, and I would bet that cheaper building processes could give a majority of Americans who move into new subdivisions an opportunity to own a "McMansion" (not that it would be a good thing) in the future.
posted by delmoi at 11:16 PM on July 11, 2007
'splains the out of the blue emails from my broker this morning
thank you for the articles and research asparagirl, very informative and timely. I've been seeing some mention of this on Barry Ritholz blog but nothing like this.
posted by infini at 11:19 PM on July 11, 2007
thank you for the articles and research asparagirl, very informative and timely. I've been seeing some mention of this on Barry Ritholz blog but nothing like this.
posted by infini at 11:19 PM on July 11, 2007
There is a lot of wealth in this country now, and I would bet that cheaper building processes could give a majority of Americans who move into new subdivisions an opportunity to own a "McMansion" (not that it would be a good thing) in the future.
posted by delmoi at 2:16 AM on July 12
The wealth is extremely concentrated among the super-rich. And while you are correct that even a new Chevy is superior to a 30 year old Mercedes, people don't think like that. They want the "best" that is available now, where "best" is most conspicuous.
What you are alluding to is the very easy access to cheap capital that most Americans enjoy, but those days are over. In order to finance the national debt, rates are going to have to rise, a lot.
posted by Pastabagel at 11:30 PM on July 11, 2007 [1 favorite]
posted by delmoi at 2:16 AM on July 12
The wealth is extremely concentrated among the super-rich. And while you are correct that even a new Chevy is superior to a 30 year old Mercedes, people don't think like that. They want the "best" that is available now, where "best" is most conspicuous.
What you are alluding to is the very easy access to cheap capital that most Americans enjoy, but those days are over. In order to finance the national debt, rates are going to have to rise, a lot.
posted by Pastabagel at 11:30 PM on July 11, 2007 [1 favorite]
Pastabagel: ... Most of us can and should do with ordinary.
Spoken like a true Soviet. And how is the dustbin of history these days?
posted by Cool Papa Bell at 11:52 PM on July 11, 2007
Spoken like a true Soviet. And how is the dustbin of history these days?
posted by Cool Papa Bell at 11:52 PM on July 11, 2007
Not every married couple deserves a McMansion
A nice, spacious, well-appointed house costs around $250k to build, which is eminently affordable for anyone, on a 30 year repayment plan.
You're confusing costs of land with costs of capital, and we Georgists think we have the solution to that :)
In order to finance the national debt, rates are going to have to rise, a lot
So? There was a 1:1 correlation with the Bush tax cuts of 2001-2003 and concommitant rise in home valuations (people -- everyone -- had more money to bid up the market).
Whenever you give EVERYONE money the market prices will go UP. Whenever you take money away from EVERYONE, market prices will have to come down (eventually, theoretically).
The average, market-making person bases their home purchase on how much other consumption they're willing (and able) to forego. Should the federal income tax rate double, housing will simply have to come down to more affordable levels.
The market for housing is different from all other markets, given its large component of LAND VALUATION, which is completely orthogonal to the classical concept of wealth.
posted by Heywood Mogroot at 12:04 AM on July 12, 2007
A nice, spacious, well-appointed house costs around $250k to build, which is eminently affordable for anyone, on a 30 year repayment plan.
You're confusing costs of land with costs of capital, and we Georgists think we have the solution to that :)
In order to finance the national debt, rates are going to have to rise, a lot
So? There was a 1:1 correlation with the Bush tax cuts of 2001-2003 and concommitant rise in home valuations (people -- everyone -- had more money to bid up the market).
Whenever you give EVERYONE money the market prices will go UP. Whenever you take money away from EVERYONE, market prices will have to come down (eventually, theoretically).
The average, market-making person bases their home purchase on how much other consumption they're willing (and able) to forego. Should the federal income tax rate double, housing will simply have to come down to more affordable levels.
The market for housing is different from all other markets, given its large component of LAND VALUATION, which is completely orthogonal to the classical concept of wealth.
posted by Heywood Mogroot at 12:04 AM on July 12, 2007
Holy crap, infini, that blog you linked to -- there's a post on there about ARM's with the most amazing infographic in it...!
Some of the comments on that post do take issue with the estimated loss numbers, saying that they may be overblown because they understate the ability to recoup some of the value of the homes, but no one's denying the other numbers, the actual and quite ridiculous percentages of ARM's in negative equity...
posted by Asparagirl at 12:10 AM on July 12, 2007
Some of the comments on that post do take issue with the estimated loss numbers, saying that they may be overblown because they understate the ability to recoup some of the value of the homes, but no one's denying the other numbers, the actual and quite ridiculous percentages of ARM's in negative equity...
posted by Asparagirl at 12:10 AM on July 12, 2007
At some point, Americans have to learn (1) that they are for the most part stupid, and (2) to accept they will not ever be able to afford certain things. Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion. Not everyone deserves the "professional-grade" or "deluxe" or "elite" versions of products. Most of us can and should do with ordinary. A product or service isn't "exclusive" if you can buy it. A truly exclusive product is supposed to exclude people like you from it.
posted by Pastabagel at 7:49 PM on July 11
imho, can you blame the consumer? He/she/it is but a product of three generations or more of carefully constructed, targeted, marketing communications backed by research by good old Vance Packard's "depth boys", the ones who undertook research in the post war boom years to understand the exact buttons that made the poor consumer want to buy. Starting with the "if you don't use deodorant or fluffo, your husband will leave you" to the "you deserve it all, why wait, buy now pay later" messages culminating in the recent furor on this very Metablue about targeting "Transformer" ads to 2 year olds.
Blaming the consumer's carefully created consumption patterns or a society's approach to "disposal, new, throwaway" or even the widespread culture of "buy now, pay later" on the "stupid" is shortsighted and unfair to the benighted human beings who have been unfairly conditioned by television, advertising, magazine articles and other media to do EXACTLY what they've done - Buy! Buy! Save the country, it is patriotic in this time of trouble to Buy!
Then, when they fall and suffer bankruptcy and foreclosure, blame them for being fools. No health insurance, little welfare, no Social security left...
meh.
posted by infini at 12:22 AM on July 12, 2007 [2 favorites]
posted by Pastabagel at 7:49 PM on July 11
imho, can you blame the consumer? He/she/it is but a product of three generations or more of carefully constructed, targeted, marketing communications backed by research by good old Vance Packard's "depth boys", the ones who undertook research in the post war boom years to understand the exact buttons that made the poor consumer want to buy. Starting with the "if you don't use deodorant or fluffo, your husband will leave you" to the "you deserve it all, why wait, buy now pay later" messages culminating in the recent furor on this very Metablue about targeting "Transformer" ads to 2 year olds.
Blaming the consumer's carefully created consumption patterns or a society's approach to "disposal, new, throwaway" or even the widespread culture of "buy now, pay later" on the "stupid" is shortsighted and unfair to the benighted human beings who have been unfairly conditioned by television, advertising, magazine articles and other media to do EXACTLY what they've done - Buy! Buy! Save the country, it is patriotic in this time of trouble to Buy!
Then, when they fall and suffer bankruptcy and foreclosure, blame them for being fools. No health insurance, little welfare, no Social security left...
meh.
posted by infini at 12:22 AM on July 12, 2007 [2 favorites]
Asparagirl . . . this is everyone's favorite infographic on ARMs.
The $64,000 question for me is whether home prices in the South SF Bay Area will remain sticky. I wouldn't bet against it, even with all the doom n gloom in the air.
posted by Heywood Mogroot at 12:33 AM on July 12, 2007
The $64,000 question for me is whether home prices in the South SF Bay Area will remain sticky. I wouldn't bet against it, even with all the doom n gloom in the air.
posted by Heywood Mogroot at 12:33 AM on July 12, 2007
Pastabagel: ... Most of us can and should do with ordinary.
Spoken like a true Soviet.
i had no idea that my parents and grandparents were soviets ... i always thought they were people who got through a great depression and a world war (in my grandparents' case TWO world wars) by learning the value of a dollar, hard work, fair play and various other virtues
their catchphrase? ... "we just coped"
And how is the dustbin of history these days?
it's full of ideas that didn't work ... communism, narcissism, i wantism, me me meism ...
it's a pity you don't understand pastabagel's point ... because when the shit hits the fan, you'll have a rude awakening
in short, spoken like a truly spoiled american
posted by pyramid termite at 1:00 AM on July 12, 2007
Spoken like a true Soviet.
i had no idea that my parents and grandparents were soviets ... i always thought they were people who got through a great depression and a world war (in my grandparents' case TWO world wars) by learning the value of a dollar, hard work, fair play and various other virtues
their catchphrase? ... "we just coped"
And how is the dustbin of history these days?
it's full of ideas that didn't work ... communism, narcissism, i wantism, me me meism ...
it's a pity you don't understand pastabagel's point ... because when the shit hits the fan, you'll have a rude awakening
in short, spoken like a truly spoiled american
posted by pyramid termite at 1:00 AM on July 12, 2007
That prudentbear article is fantastic, Asparagirl. Thanks for posting this and for organizing it all so well.
posted by ikkyu2 at 1:10 AM on July 12, 2007
posted by ikkyu2 at 1:10 AM on July 12, 2007
Also, I was reading down the housingwire.com article you called "jaw dropping," and at the end, it said, "if the end-holders of these tranches find themselves forced sellers to comply with their stated investment goals... better find yourself a tin hat."
Followed by a Flash ad for Viagra. I'll say.
I didn't know whether to laugh or cry.
posted by ikkyu2 at 1:28 AM on July 12, 2007
Followed by a Flash ad for Viagra. I'll say.
I didn't know whether to laugh or cry.
posted by ikkyu2 at 1:28 AM on July 12, 2007
And how is the dustbin of history these days?
it's full of ideas that didn't work ... communism, narcissism, i wantism, me me meism ...
It also keeps the weather out and you can pick them up cheap.
posted by vbfg at 3:13 AM on July 12, 2007
it's full of ideas that didn't work ... communism, narcissism, i wantism, me me meism ...
It also keeps the weather out and you can pick them up cheap.
posted by vbfg at 3:13 AM on July 12, 2007
So far, no taxpayer money has been committed to the "bailout" mentioned by Asparagirl. In my opinion it would be best if no taxpayer money ends up being committed to any "bailout" related to what is generally described as the US "subprime meltdown".
It is natural and desirable for borrowers who take on debts beyond their means to eventually default. It is similarly natural and desirable for banks that made these loans (or investors who purchased these loans) to suffer losses when the defaults occur.
Of course, if laws were broken in the process of originating (or re-selling) some of the defaulting loans then the parties responsible should be prosecuted.
Moments like this are good opportunities for public reflection on the importance of individual responsibility and prudence. Also, to highlight the value of education.
I think if there is a proper role for government related to the issue (other than law enforcement), it is to improve the economic and financial education delivered by taxpayer-funded schools starting at the elementary level.
posted by gbognar at 3:30 AM on July 12, 2007 [2 favorites]
It is natural and desirable for borrowers who take on debts beyond their means to eventually default. It is similarly natural and desirable for banks that made these loans (or investors who purchased these loans) to suffer losses when the defaults occur.
Of course, if laws were broken in the process of originating (or re-selling) some of the defaulting loans then the parties responsible should be prosecuted.
Moments like this are good opportunities for public reflection on the importance of individual responsibility and prudence. Also, to highlight the value of education.
I think if there is a proper role for government related to the issue (other than law enforcement), it is to improve the economic and financial education delivered by taxpayer-funded schools starting at the elementary level.
posted by gbognar at 3:30 AM on July 12, 2007 [2 favorites]
Thanks for all the investment advice, everyone. I'll think about it. It's true, I am trying to time the market. I think this housing issue is going to result in a downturn which I hope to capitalize on.
It does seem to me that none of the alternatives people have suggested would perform well in a severe recession, and a recession does seem likely to me. From that perspective, a bearish mutual fund makes a lot of sense. But I agree that I have no idea when that downturn might strike, if it does at all, and that my assessment of its likelihood is quite subjective and error-prone.
posted by Coventry at 3:58 AM on July 12, 2007
It does seem to me that none of the alternatives people have suggested would perform well in a severe recession, and a recession does seem likely to me. From that perspective, a bearish mutual fund makes a lot of sense. But I agree that I have no idea when that downturn might strike, if it does at all, and that my assessment of its likelihood is quite subjective and error-prone.
posted by Coventry at 3:58 AM on July 12, 2007
And how is the dustbin of history these days?
Crowded, what with all the members of the "American middle class" who are joining us Marxists in the can.
posted by spitbull at 4:31 AM on July 12, 2007
Crowded, what with all the members of the "American middle class" who are joining us Marxists in the can.
posted by spitbull at 4:31 AM on July 12, 2007
> There was a 1:1 correlation with the Bush tax cuts of 2001-2003 and concommitant rise in home
> valuations (people -- everyone -- had more money to bid up the market).
The tax cuts generated some liquidity that had to go somewhere (ghod forbid that anyone should save this small windfall) but there were certainly other liquidity-generating things going on. All the deficit spending, for instance, to name another one that can be blamed on BushCo. But there were also the interest rate cuts put in place by the Fed in hopes of keeping the last popped bubble (the dot.com one of 2000-2001) from turning into a systemic collapse. These were a much more pertinent reason why you could get 3% mortgages for several years.
And you can look further afield for things that neither Bush nor even the United States had any hand in--for instance the yen carry trade. Japan had its own deflationary meltdown several years back. Their interest rate has been essentially zero for some time. Masses of speculators have been borrowing yen at 0% interest and using the money to buy instruments in other currencies that pay much higher interest, and pocketing the difference. But the folks who sold those other instruments into such a ready speculator market got wads of cash when they did so, cash that had to be invested somewhere. More liquidity, massive amounts of it, that's bound to inflate the paper value of whatever it's put into.
Anyone who really wants to point at the villains in all of this is going to need more arms than Krishna. And p.s. I agree with several earlier posters that pretty much everyone presently getting burned or in danger of it needs to save one arm to point at himself.
Pastabagel:
> Most of us can and should do with ordinary.
Is pastabagel really a Soviet for saying this? Well please let me say exactly the same thing, from a perspective well over to the right of anything that passes for Republican these days, let alone Soviet.
posted by jfuller at 4:32 AM on July 12, 2007
> valuations (people -- everyone -- had more money to bid up the market).
The tax cuts generated some liquidity that had to go somewhere (ghod forbid that anyone should save this small windfall) but there were certainly other liquidity-generating things going on. All the deficit spending, for instance, to name another one that can be blamed on BushCo. But there were also the interest rate cuts put in place by the Fed in hopes of keeping the last popped bubble (the dot.com one of 2000-2001) from turning into a systemic collapse. These were a much more pertinent reason why you could get 3% mortgages for several years.
And you can look further afield for things that neither Bush nor even the United States had any hand in--for instance the yen carry trade. Japan had its own deflationary meltdown several years back. Their interest rate has been essentially zero for some time. Masses of speculators have been borrowing yen at 0% interest and using the money to buy instruments in other currencies that pay much higher interest, and pocketing the difference. But the folks who sold those other instruments into such a ready speculator market got wads of cash when they did so, cash that had to be invested somewhere. More liquidity, massive amounts of it, that's bound to inflate the paper value of whatever it's put into.
Anyone who really wants to point at the villains in all of this is going to need more arms than Krishna. And p.s. I agree with several earlier posters that pretty much everyone presently getting burned or in danger of it needs to save one arm to point at himself.
Pastabagel:
> Most of us can and should do with ordinary.
Is pastabagel really a Soviet for saying this? Well please let me say exactly the same thing, from a perspective well over to the right of anything that passes for Republican these days, let alone Soviet.
posted by jfuller at 4:32 AM on July 12, 2007
pyramid termite and jfuller,
I doubt Cool Papa Bell has any problem with "learning the value of a dollar, hard work, fair play and various other virtues". What I suspect he, and myself as well for that matter, find objectionable is the sanctimonious tone and stink of judgment: "should", "spoiled", "narcissism", "brats", "kiddies", "Welcome to America, motherfucker.", "deserves", and "A truly exclusive product is supposed to exclude people like you from it.".
I agree that consumerism tends to add to misery and that most Americans could stand to be far more financially prudent. Wagging your finger like some school marm isn't going to convince anyone. And telling people what they "should" do with their own money and what they really "deserve" is just as insulting as any other authoritarian way of relating to people. I don't think respect for other people and their choices is too much to ask. It's also far more persuasive if someone doesn't denigrate your earlier goals, like a flashy car, when they introduce you to a different set of priorities, like a diversified set of investments.
posted by BigSky at 6:57 AM on July 12, 2007
I doubt Cool Papa Bell has any problem with "learning the value of a dollar, hard work, fair play and various other virtues". What I suspect he, and myself as well for that matter, find objectionable is the sanctimonious tone and stink of judgment: "should", "spoiled", "narcissism", "brats", "kiddies", "Welcome to America, motherfucker.", "deserves", and "A truly exclusive product is supposed to exclude people like you from it.".
I agree that consumerism tends to add to misery and that most Americans could stand to be far more financially prudent. Wagging your finger like some school marm isn't going to convince anyone. And telling people what they "should" do with their own money and what they really "deserve" is just as insulting as any other authoritarian way of relating to people. I don't think respect for other people and their choices is too much to ask. It's also far more persuasive if someone doesn't denigrate your earlier goals, like a flashy car, when they introduce you to a different set of priorities, like a diversified set of investments.
posted by BigSky at 6:57 AM on July 12, 2007
Two words to live by: Buy Value.
My $500 Buick is a mediocre car, and a great value. My $250,000 house is a great house that needs a lot of work, and also a great value. A $100,000 Range Rover is a great car and an awful, awful value.
I guess I'm a Soviet too.
posted by Mister_A at 7:30 AM on July 12, 2007
My $500 Buick is a mediocre car, and a great value. My $250,000 house is a great house that needs a lot of work, and also a great value. A $100,000 Range Rover is a great car and an awful, awful value.
I guess I'm a Soviet too.
posted by Mister_A at 7:30 AM on July 12, 2007
What I suspect he, and myself as well for that matter, find objectionable is the sanctimonious tone and stink of judgment:
because calling someone a soviet and snarking about the dustbin of history shows compassion, fairness and intelligence, right?
posted by pyramid termite at 8:34 AM on July 12, 2007
because calling someone a soviet and snarking about the dustbin of history shows compassion, fairness and intelligence, right?
posted by pyramid termite at 8:34 AM on July 12, 2007
good points, jfuller. I should have mentioned that the tax cuts themselves, being up to 10% of income, or ~$7000/yr per household (depending on the child tax credits and capital gains), weren't the only, or the largest, booster on this rocket.
$500/mo of extra pocket money does translate into another $100,000 ($200,000+ with voodoo loans) of "affordability" though.
posted by Heywood Mogroot at 9:28 AM on July 12, 2007
$500/mo of extra pocket money does translate into another $100,000 ($200,000+ with voodoo loans) of "affordability" though.
posted by Heywood Mogroot at 9:28 AM on July 12, 2007
I read a very interesting article on how the 'fiat' money system on which world economy is based has to, eventually, come crashing down around our ears. Would all this foreclosure on loans and mortgages be the signal for the end? Probably not, as we'll be boughed up by china's expansion, but in the long run?
An experiment in France in the 1700s with paper money ended in disaster, the world economy only lasting longer due to greater resources available. But hell, people will keep spending funded by hundreds of personal loans to choose from egged on by advertising and consumerism stressing they need to buy things to be happy.
In preparation, horde gold!
posted by MarkeD at 9:29 AM on July 12, 2007
An experiment in France in the 1700s with paper money ended in disaster, the world economy only lasting longer due to greater resources available. But hell, people will keep spending funded by hundreds of personal loans to choose from egged on by advertising and consumerism stressing they need to buy things to be happy.
In preparation, horde gold!
posted by MarkeD at 9:29 AM on July 12, 2007
It's also far more persuasive if someone doesn't denigrate your earlier goals, like a flashy car, when they introduce you to a different set of priorities, like a diversified set of investments.
posted by BigSky at 9:57 AM on July 12
See, a flashy car isn't a goal. Why do people want flashy cars? To impress others, or project status, or convince themselves of something, like that they are rich and successful, that they aren't sure they believe in the first place. The problem is not the car, the house, the mortgage, or the professional grade whatever. It's the psychology behind desiring those things above and beyond one's need for them.
Let me be clear, when it comes to the Casey Serin's of the world and the people who bought into his story, there's no stink of judgment, it's outright judgment. What amazes me is that people thought that this guy, a relatively recent immigrant with no credit history, was able to buy 8 houses entirely on loan without lying to the banks.
Most of us can and should do with ordinary.
Spoken like a true Soviet. And how is the dustbin of history these days?
posted by Cool Papa Bell at 2:52 AM on July 12
Yeah, I'm a true Soviet. It's pretty crowded, what with personal responsibility and the American work ethic being crammed in here.
Read Trading Up. Here's a little mental exercise for you. This thread is about money, so let's focus on wealth for a second. Consider all the things you own, not investments, but things like bed linens, electronics, cars, houses etc.
Assign a value of zero to those things, because they are worth nothing. If you factor in the cost of your time spent trying to sell your used whatever for a few bucks, it's a net loss. You save more by giving it away by leaving it on the sidewalk.
So all these things have zero value. So how wealthy are you? Add up your cash and liquid investments, subtract your debt. That's how wealthy you are. Every time you buy something, you take money from your pool of wealth and flush it. The things that surround you do not enter into the equation.
Now look at those things that you bought. Why did you buy that particular one? Not why did you buy a bar of soap, but why did you buy that brand? Do you even remember? Does it still meet that psychological need, or satisfy that desire that initially drove you to purchase it? If you bought $5 luxury soap instead of $0.33 Ivory, the answer "it keeps me clean" is not satisfactory, because that isn't the only reason you bought that brand at that time. Ivory keeps you clean too.
Yes, we all can and should do with ordinary. Unless you specifically require the superlative features of some product, to buy that products is to waste money. Happiness is not found in things. It's found in people and experience and memory.
posted by Pastabagel at 9:34 AM on July 12, 2007 [21 favorites]
posted by BigSky at 9:57 AM on July 12
See, a flashy car isn't a goal. Why do people want flashy cars? To impress others, or project status, or convince themselves of something, like that they are rich and successful, that they aren't sure they believe in the first place. The problem is not the car, the house, the mortgage, or the professional grade whatever. It's the psychology behind desiring those things above and beyond one's need for them.
Let me be clear, when it comes to the Casey Serin's of the world and the people who bought into his story, there's no stink of judgment, it's outright judgment. What amazes me is that people thought that this guy, a relatively recent immigrant with no credit history, was able to buy 8 houses entirely on loan without lying to the banks.
Most of us can and should do with ordinary.
Spoken like a true Soviet. And how is the dustbin of history these days?
posted by Cool Papa Bell at 2:52 AM on July 12
Yeah, I'm a true Soviet. It's pretty crowded, what with personal responsibility and the American work ethic being crammed in here.
Read Trading Up. Here's a little mental exercise for you. This thread is about money, so let's focus on wealth for a second. Consider all the things you own, not investments, but things like bed linens, electronics, cars, houses etc.
Assign a value of zero to those things, because they are worth nothing. If you factor in the cost of your time spent trying to sell your used whatever for a few bucks, it's a net loss. You save more by giving it away by leaving it on the sidewalk.
So all these things have zero value. So how wealthy are you? Add up your cash and liquid investments, subtract your debt. That's how wealthy you are. Every time you buy something, you take money from your pool of wealth and flush it. The things that surround you do not enter into the equation.
Now look at those things that you bought. Why did you buy that particular one? Not why did you buy a bar of soap, but why did you buy that brand? Do you even remember? Does it still meet that psychological need, or satisfy that desire that initially drove you to purchase it? If you bought $5 luxury soap instead of $0.33 Ivory, the answer "it keeps me clean" is not satisfactory, because that isn't the only reason you bought that brand at that time. Ivory keeps you clean too.
Yes, we all can and should do with ordinary. Unless you specifically require the superlative features of some product, to buy that products is to waste money. Happiness is not found in things. It's found in people and experience and memory.
posted by Pastabagel at 9:34 AM on July 12, 2007 [21 favorites]
telling people what they "should" do with their own money and what they really "deserve" is just as insulting as any other authoritarian way of relating to people
Yes, how dare you insult the entitled idiots whom by their own hands have ruined themselves. At least you could have added an emoticon at the end of your castigation. :)
posted by billysumday at 9:35 AM on July 12, 2007
Yes, how dare you insult the entitled idiots whom by their own hands have ruined themselves. At least you could have added an emoticon at the end of your castigation. :)
posted by billysumday at 9:35 AM on July 12, 2007
Happiness is not found in things
My philosophy is 170deg off yours. IMV, wealth is physical goods which satisfies our human needs and wants. It is the non-leaking roof over our heads, the down comforter that keeps me cool in the summer and wam in the winter, the sidewalks I walk to work on, and this spiffy iMac I am using to type this missive.
Money in the bank -- savings -- is not wealth, but deferred consumption. It is a claim to other people's wealth that in our system I can cash out in the future. The government has founded a quasi-independent institution to monitor and manage this money supply, which is also monkeyed with by all the other financial institutions around the globe.
I do agree one should learn and live by the difference between one's needs and wants.
But happiness is where you find it, I would think.
posted by Heywood Mogroot at 10:25 AM on July 12, 2007 [2 favorites]
My philosophy is 170deg off yours. IMV, wealth is physical goods which satisfies our human needs and wants. It is the non-leaking roof over our heads, the down comforter that keeps me cool in the summer and wam in the winter, the sidewalks I walk to work on, and this spiffy iMac I am using to type this missive.
Money in the bank -- savings -- is not wealth, but deferred consumption. It is a claim to other people's wealth that in our system I can cash out in the future. The government has founded a quasi-independent institution to monitor and manage this money supply, which is also monkeyed with by all the other financial institutions around the globe.
I do agree one should learn and live by the difference between one's needs and wants.
But happiness is where you find it, I would think.
posted by Heywood Mogroot at 10:25 AM on July 12, 2007 [2 favorites]
wam?
posted by Heywood Mogroot at 10:25 AM on July 12, 2007
posted by Heywood Mogroot at 10:25 AM on July 12, 2007
(Money in the bank can also be capital -- wealth that used to make more wealth . . . I think that is where my & PB's viewpoints meet . . . it behooves one to collect and preserve capital and not blow it all on consumption)
posted by Heywood Mogroot at 10:36 AM on July 12, 2007
posted by Heywood Mogroot at 10:36 AM on July 12, 2007
I use aloe vera Ivory soap, because regular Ivory leaves my skin dried out. Am I down with the pastabagel program? Did you really need a computer with an Internet connection? Most of the world doesn't have either, nor do they have Ivory soap.
While I can certainly agree that far too many people are way too often into getting the swankiest things available, that "upscale" has become so commonplace as be an absurd term, I can tell you that having my first stereo system in more than 15 years, and one with giant (by my past standards) full-range speakers and surround sound and all makes me quite happy, at least momentarily. And I love movies and music, they're a big part of my life and work past and present, so shoot me. I try to live modestly, but I'm not going to live like a monk, thanks.
Meanwhile, you and others are missing out on the fact that many people who've used interest-only loans are economic nomads of a sort. In Georgia a couple of years ago, half the new mortgages were interest-only, largely as a result of home purchases in the Atlanta area. And press reports had it that many home buyers took the option due to expectations of being transferred, of only being in some pod suburb there for a year or two.
And if this news gets worse, getting it all right will be that much harder, even for the best people. There's a bit of evangelical upbringing in me that says, "Bring on the day of reckoning! We have it coming!" Other times I think the nation doesn't remotely deserve the best after what we've done internationally in the past few years, that we have it coming. But then I remember that the worst people may come out of the reckoning ahead, and recall that the voice inside my head calling for such reckoning is full of shit.
People, memories and events? People can ruin other people's lives, memories can involve accidents, disaster and war and general bad treatment and leave you with a legacy of anxiety or depression or both, experiences can be negative or positive or some combination thereof. Who needs that? And when has happiness been anything but fleeting? Aim for self-actualization instead, and do the best that you can for yourself and others, and your environment, without beating yourself up about failing. Leave the judgment to the universe, or God, Allah, whoever. And pay attention to the performance of that mutual fund!
posted by raysmj at 10:55 AM on July 12, 2007 [1 favorite]
While I can certainly agree that far too many people are way too often into getting the swankiest things available, that "upscale" has become so commonplace as be an absurd term, I can tell you that having my first stereo system in more than 15 years, and one with giant (by my past standards) full-range speakers and surround sound and all makes me quite happy, at least momentarily. And I love movies and music, they're a big part of my life and work past and present, so shoot me. I try to live modestly, but I'm not going to live like a monk, thanks.
Meanwhile, you and others are missing out on the fact that many people who've used interest-only loans are economic nomads of a sort. In Georgia a couple of years ago, half the new mortgages were interest-only, largely as a result of home purchases in the Atlanta area. And press reports had it that many home buyers took the option due to expectations of being transferred, of only being in some pod suburb there for a year or two.
And if this news gets worse, getting it all right will be that much harder, even for the best people. There's a bit of evangelical upbringing in me that says, "Bring on the day of reckoning! We have it coming!" Other times I think the nation doesn't remotely deserve the best after what we've done internationally in the past few years, that we have it coming. But then I remember that the worst people may come out of the reckoning ahead, and recall that the voice inside my head calling for such reckoning is full of shit.
People, memories and events? People can ruin other people's lives, memories can involve accidents, disaster and war and general bad treatment and leave you with a legacy of anxiety or depression or both, experiences can be negative or positive or some combination thereof. Who needs that? And when has happiness been anything but fleeting? Aim for self-actualization instead, and do the best that you can for yourself and others, and your environment, without beating yourself up about failing. Leave the judgment to the universe, or God, Allah, whoever. And pay attention to the performance of that mutual fund!
posted by raysmj at 10:55 AM on July 12, 2007 [1 favorite]
I don't think respect for other people and their choices is too much to ask
huh? I generally respect the right to make choices, but I don't see any reason "respect" teh Stupid -- the people, mindsets, predation, naivete, greed, panic, and its ongoing effects -- so abundantly evident over the twin dotcom and RE boomtimes.
posted by Heywood Mogroot at 10:59 AM on July 12, 2007 [1 favorite]
huh? I generally respect the right to make choices, but I don't see any reason "respect" teh Stupid -- the people, mindsets, predation, naivete, greed, panic, and its ongoing effects -- so abundantly evident over the twin dotcom and RE boomtimes.
posted by Heywood Mogroot at 10:59 AM on July 12, 2007 [1 favorite]
Maxed Out is also worth watching, by the way, for it addresses the personal responsibility angle around the margins, especially as it relates to the housing market, but strongly points out (via the commentary of Harvard law prof Elizabeth Warren) that middle-class Americans are spending much more on average for health care and other basic needs than previous generations were. Most middle-class people, she argues, are not out buying Prada shoes and Viking ranges and whatnot.
posted by raysmj at 11:10 AM on July 12, 2007
posted by raysmj at 11:10 AM on July 12, 2007
Pastabagel,
My own preferences for spending money match yours, but more fundamental is my belief that each person values some object according to their desire. There is no objective value for anything. Isn't this one of the central distinctions between a decentralized economy and one where some bureaucratic board sets the price? When you start telling people what they should do and what they really deserve you are setting values not just for yourself but across the board. Maybe I'm getting into this more deeply than a tossed snark merits but that's why I thought the name 'Soviet' applied. It also raised my hackles because while I think many would benefit from being more prudent, when you use the kind of pointed personal language I quoted it doesn't persuade people to change the goals they set. It just makes them more defensive and likely to tune you out. And a status symbol very much is a goal. The fact that you don't consider it a worthy goal has little bearing on how they orient to it.
I don't know if there's a good explanaton for why I respect choices that seem poor to me. Perhaps it's that insulting and denigrating them seems a bit indulgent. I don't see how it can be productive, assuming that you have their best interests at heart as well. Besides, the best arguments for capitalism focus on uncertainty, risk and individual difference. To me, these are also good arguments for humility and and a hesitation to judge. But Casey Serin won't get much of a defense over here though either.
posted by BigSky at 11:33 AM on July 12, 2007
My own preferences for spending money match yours, but more fundamental is my belief that each person values some object according to their desire. There is no objective value for anything. Isn't this one of the central distinctions between a decentralized economy and one where some bureaucratic board sets the price? When you start telling people what they should do and what they really deserve you are setting values not just for yourself but across the board. Maybe I'm getting into this more deeply than a tossed snark merits but that's why I thought the name 'Soviet' applied. It also raised my hackles because while I think many would benefit from being more prudent, when you use the kind of pointed personal language I quoted it doesn't persuade people to change the goals they set. It just makes them more defensive and likely to tune you out. And a status symbol very much is a goal. The fact that you don't consider it a worthy goal has little bearing on how they orient to it.
I don't know if there's a good explanaton for why I respect choices that seem poor to me. Perhaps it's that insulting and denigrating them seems a bit indulgent. I don't see how it can be productive, assuming that you have their best interests at heart as well. Besides, the best arguments for capitalism focus on uncertainty, risk and individual difference. To me, these are also good arguments for humility and and a hesitation to judge. But Casey Serin won't get much of a defense over here though either.
posted by BigSky at 11:33 AM on July 12, 2007
My own preferences for spending money match yours, but more fundamental is my belief that each person values some object according to their desire.
Value <> Price. As you say, value is subjective, but price isn't.
Whether one values a thing enough to pay its objective, market price is of course a matter of personal choice, and I'm not dictating people's choices for them. I am saying that the same consumption oriented mindset of the last twenty years, that drives people to demand top-end in everything across the board is precisely the same mindset that leaves them vulnerable to interest-only mtges and similar traps.
In other words, it's not only that they want the house, it's that they want to think they can afford it, and it is a matter of shame or embarrassment to them to admit they cannot. That's why, I think, so many people are willing to briefly forget the maxim "There's no free lunch".
It seems that there is a cognitive dissonance at work here - people want things on one hand and recognize the objective state of their finances on the other, but they refuse to reconcile the two.
posted by Pastabagel at 12:08 PM on July 12, 2007
Value <> Price. As you say, value is subjective, but price isn't.
Whether one values a thing enough to pay its objective, market price is of course a matter of personal choice, and I'm not dictating people's choices for them. I am saying that the same consumption oriented mindset of the last twenty years, that drives people to demand top-end in everything across the board is precisely the same mindset that leaves them vulnerable to interest-only mtges and similar traps.
In other words, it's not only that they want the house, it's that they want to think they can afford it, and it is a matter of shame or embarrassment to them to admit they cannot. That's why, I think, so many people are willing to briefly forget the maxim "There's no free lunch".
It seems that there is a cognitive dissonance at work here - people want things on one hand and recognize the objective state of their finances on the other, but they refuse to reconcile the two.
posted by Pastabagel at 12:08 PM on July 12, 2007
when it comes to the Casey Serin's of the world and the people who bought into his story, there's no stink of judgment, it's outright judgment.
Casey was 22 when he obtained the first of these no-doc loans. His credit and that of his wife are ruined for life. He's being investigated by the FBI, and will probably go to debtor's prison. Your thinking poorly of Casey doesn't matter - in the grand scheme of things he's got much bigger problems. Our society is about to permanently ruin his financial future and send him to prison. He will be punished severely for being a dumb kid who thought he could get ahead by listening to loan officers.
Meanwhile, the guy in the article who is sitting in a Park Avenue office, buying and then offloading equity and mezzanine tranches, goes home with $2.5 million last year and maybe this year too. Without the avid speculation of this guy and his cohorts, there would have been no market in this worthless paper. There would have been no incentive for New Century and Novastar and CountryWide and WaMu to ever drag some poor slob like Casey into this situation at all.
This guy, about Casey's age but with an Ivy education and good Wall Street connections, will not be going to prison. He may have to pay $500,000 or so in legal bills. That leaves him with more money out of the last couple of years than Casey will ever see in the rest of his entire life. While Casey is rotting in prison, his marriage broken and all his dreams of financial freedom permanently shattered, this guy is going to be at Smith and Wollensky drinking a martini.
I'm pleased, Pastabagel, to see that in your view, the dumb, middle class kid from Sacramento gets crucified and my old Harvard buddies get off scot-free. I'd hate to think that my class of people would ever be blamed for anything that went wrong in the world we own and operate.
posted by ikkyu2 at 12:21 PM on July 12, 2007 [4 favorites]
Casey was 22 when he obtained the first of these no-doc loans. His credit and that of his wife are ruined for life. He's being investigated by the FBI, and will probably go to debtor's prison. Your thinking poorly of Casey doesn't matter - in the grand scheme of things he's got much bigger problems. Our society is about to permanently ruin his financial future and send him to prison. He will be punished severely for being a dumb kid who thought he could get ahead by listening to loan officers.
Meanwhile, the guy in the article who is sitting in a Park Avenue office, buying and then offloading equity and mezzanine tranches, goes home with $2.5 million last year and maybe this year too. Without the avid speculation of this guy and his cohorts, there would have been no market in this worthless paper. There would have been no incentive for New Century and Novastar and CountryWide and WaMu to ever drag some poor slob like Casey into this situation at all.
This guy, about Casey's age but with an Ivy education and good Wall Street connections, will not be going to prison. He may have to pay $500,000 or so in legal bills. That leaves him with more money out of the last couple of years than Casey will ever see in the rest of his entire life. While Casey is rotting in prison, his marriage broken and all his dreams of financial freedom permanently shattered, this guy is going to be at Smith and Wollensky drinking a martini.
I'm pleased, Pastabagel, to see that in your view, the dumb, middle class kid from Sacramento gets crucified and my old Harvard buddies get off scot-free. I'd hate to think that my class of people would ever be blamed for anything that went wrong in the world we own and operate.
posted by ikkyu2 at 12:21 PM on July 12, 2007 [4 favorites]
You paint an overly generous picture of Casey I think. Casey wasn't listening to loan officers but RE Seminar Gurus who taught him how to game the system. The loan officers were his partners in crime, attempting to pass off these unwise loans to bag-holders down the line. IOW the line of corruption started at Casey and went right through to Greenspan.
posted by Heywood Mogroot at 12:40 PM on July 12, 2007
posted by Heywood Mogroot at 12:40 PM on July 12, 2007
ikkyu2, I think your very valid point would have been much better served if you'd picked somebody -- anybody - other than Casey Serin to serve as your example, like some average Mr. and Mrs. J. Schmoe who legitimately got suckered into a 2/28 ARM on a would-be flip of a second house in some "hot" area. Serin's activities were motivated by greed, ego, and a breathtaking disdain for the law -- and, a real plus in the Internet age, a bizarre need to document all of his behavior on his blog and in his weekly podcasts, with no apparent filter or sense of self-preservation. His actions are beyond merely overtly criminal and are now arguably into sociopath territory, particularly with his behavior towards his wife and family and his unauthorized abuse of their credit.
While those mortgage companies' profit-inspired "see no evil" blinkers may have enabled his bad behavior, they did not cause it; the guy was also running online pyramid schemes at age 14, for example, and his blog is full of repetitive, creepy bullshit about his neverending quest for "sweeeet passive income" instead of becoming a "W-2 wage slave" like the rest of us "drones". In short, the financial environment that promoted unrealistic dreams of ownership and easy success for people who should never have been handed the keys is a factor, but you can't rule out the "bad seed" possibility either.
Nonetheless, I still agree with your point, just not your choice of poster boy. I was an Ivy brat too, and I know of quite a few classmates, relatives, and friends of the family who could get steamrolled by this as it picks up speed -- some undeservedly, but some probably not.
posted by Asparagirl at 1:03 PM on July 12, 2007
While those mortgage companies' profit-inspired "see no evil" blinkers may have enabled his bad behavior, they did not cause it; the guy was also running online pyramid schemes at age 14, for example, and his blog is full of repetitive, creepy bullshit about his neverending quest for "sweeeet passive income" instead of becoming a "W-2 wage slave" like the rest of us "drones". In short, the financial environment that promoted unrealistic dreams of ownership and easy success for people who should never have been handed the keys is a factor, but you can't rule out the "bad seed" possibility either.
Nonetheless, I still agree with your point, just not your choice of poster boy. I was an Ivy brat too, and I know of quite a few classmates, relatives, and friends of the family who could get steamrolled by this as it picks up speed -- some undeservedly, but some probably not.
posted by Asparagirl at 1:03 PM on July 12, 2007
pastabagel: Please read the article and the link to the film I posted above. The "across the board" part is false.
posted by raysmj at 1:03 PM on July 12, 2007
posted by raysmj at 1:03 PM on July 12, 2007
Asparagirl, let me tell you why I don't completely agree with you.
Casey's a nutcase. He's stupid, and as you pointed out, also greedy. His level of disdain for the law and for reality is, to my mind, so severe that it seems likely he has a personality disorder. He's also young and has no experience how the business world works. I think we'd probably both agree that he's absolutely the last person who should have been allowed to obtain the loans he obtained.
His crazy wish to publicize every detail of his foolishness, I agree, is crazy, and it's going to wind up being to his detriment. But it's useful for folks like you and me, I think - folks who are not likely ever to be in his position - because we get to learn what happened to him. I find his story interesting even apart from the crazy.
Let's carve up Casey into little slices. Let's do a craziness tranche on him, shall we? The narcissism, exhibitionism, denial, and passive-aggression we'll file under "toxic waste" and not think about any more. But let's take his honest desire to own a home, to live in a home he owns with his wife, to get ahead.
Can we agree that Mr and Ms. J Schmoe shares some qualities with Casey? Namely: they're totally unqualified to be receiving the loans they received; they're completely unable to estimate quantitatively the effect of the confusing loan they were suckered into buying; and, they wanted to buy a house that would appreciate and that their family could live in, because that's the American dream.
Now when you look at the old model of loaning, a bank gives some money to Mr J Schmoe when they think they can make an attractive amount of interest on the money. If they think Mr J Schmoe is going to default, the thought in the mind of the bank director is "Well, I don't think I want to give you my money." This is called responsibility or prudence.
The series of middlemen - trading synthetic derivatives, God love 'em - do away with responsibility or prudence. Instead, they view themselves as in the business of 'pricing risk'. They know quite well that if they can get some sucker hedge fund or pension apparatus with a lot of free capital to buy their tranches - by any means necessary - that they get a rich! rich! bonus at the end of the year. They get paid extremely well for this. Society values this guy higher than a neurosurgeon.
Mr J Schmoe, and Mr Casey Serin, may not be morally pure of heart, but I am quite sure that neither of them ever woke up and thought "Today I'll defraud a pension fund by creating misleading mathematical models and complicated synthetic derivative instruments which will cause the pension fund to systematically understate the amount of risk involved in lending to me." They thought, "I am going to the bank hoping they'll loan me money buy a home today."
The way the middleman makes the market is to turn this normal human motivation into "I need to get 100 suckers like the Serins and the Schmoes into WaMu and Countrywide offices this month so that I have a set of sweet tranches to pawn off on LittleOldLady Pension Funds A through F next month." Incentives to loan officers go through the roof and responsibility and prudence are quite frankly shitcanned. And these guys - at the highest level, some of them really do understand the kind of risk they're speculating in - they get to walk away scot-free, because they have created an entire new, unregulated market in which they cannot be held responsible for any of it.
Warren Buffett's right - these kinds of derivative markets, especially the ones that do wheel financing, are inherently toxic and immoral. They need to be regulated out of existence pronto. It needs to get back to the transaction that both material parties think they're engaging in: "I want some money from the bank to buy a house - I'm intending to pay some interest for the privilege - and you, Mr Bank, understand that I'm able to pay it back."
Short version of the above: go long Fannie Mae. They invented asset securitization and they're still profiting handsomely from it nearly 40 years later.
posted by ikkyu2 at 2:19 PM on July 12, 2007 [7 favorites]
Casey's a nutcase. He's stupid, and as you pointed out, also greedy. His level of disdain for the law and for reality is, to my mind, so severe that it seems likely he has a personality disorder. He's also young and has no experience how the business world works. I think we'd probably both agree that he's absolutely the last person who should have been allowed to obtain the loans he obtained.
His crazy wish to publicize every detail of his foolishness, I agree, is crazy, and it's going to wind up being to his detriment. But it's useful for folks like you and me, I think - folks who are not likely ever to be in his position - because we get to learn what happened to him. I find his story interesting even apart from the crazy.
Let's carve up Casey into little slices. Let's do a craziness tranche on him, shall we? The narcissism, exhibitionism, denial, and passive-aggression we'll file under "toxic waste" and not think about any more. But let's take his honest desire to own a home, to live in a home he owns with his wife, to get ahead.
Can we agree that Mr and Ms. J Schmoe shares some qualities with Casey? Namely: they're totally unqualified to be receiving the loans they received; they're completely unable to estimate quantitatively the effect of the confusing loan they were suckered into buying; and, they wanted to buy a house that would appreciate and that their family could live in, because that's the American dream.
Now when you look at the old model of loaning, a bank gives some money to Mr J Schmoe when they think they can make an attractive amount of interest on the money. If they think Mr J Schmoe is going to default, the thought in the mind of the bank director is "Well, I don't think I want to give you my money." This is called responsibility or prudence.
The series of middlemen - trading synthetic derivatives, God love 'em - do away with responsibility or prudence. Instead, they view themselves as in the business of 'pricing risk'. They know quite well that if they can get some sucker hedge fund or pension apparatus with a lot of free capital to buy their tranches - by any means necessary - that they get a rich! rich! bonus at the end of the year. They get paid extremely well for this. Society values this guy higher than a neurosurgeon.
Mr J Schmoe, and Mr Casey Serin, may not be morally pure of heart, but I am quite sure that neither of them ever woke up and thought "Today I'll defraud a pension fund by creating misleading mathematical models and complicated synthetic derivative instruments which will cause the pension fund to systematically understate the amount of risk involved in lending to me." They thought, "I am going to the bank hoping they'll loan me money buy a home today."
The way the middleman makes the market is to turn this normal human motivation into "I need to get 100 suckers like the Serins and the Schmoes into WaMu and Countrywide offices this month so that I have a set of sweet tranches to pawn off on LittleOldLady Pension Funds A through F next month." Incentives to loan officers go through the roof and responsibility and prudence are quite frankly shitcanned. And these guys - at the highest level, some of them really do understand the kind of risk they're speculating in - they get to walk away scot-free, because they have created an entire new, unregulated market in which they cannot be held responsible for any of it.
Warren Buffett's right - these kinds of derivative markets, especially the ones that do wheel financing, are inherently toxic and immoral. They need to be regulated out of existence pronto. It needs to get back to the transaction that both material parties think they're engaging in: "I want some money from the bank to buy a house - I'm intending to pay some interest for the privilege - and you, Mr Bank, understand that I'm able to pay it back."
Short version of the above: go long Fannie Mae. They invented asset securitization and they're still profiting handsomely from it nearly 40 years later.
posted by ikkyu2 at 2:19 PM on July 12, 2007 [7 favorites]
Let's carve up Casey into little slices. Let's do a craziness tranche on him, shall we? The narcissism, exhibitionism, denial, and passive-aggression we'll file under "toxic waste" and not think about any more.
That was an wonderfully apt turn of phrase, given the subject matter. Well done, good sir!
posted by Asparagirl at 3:45 PM on July 12, 2007
That was an wonderfully apt turn of phrase, given the subject matter. Well done, good sir!
posted by Asparagirl at 3:45 PM on July 12, 2007
I remember him telling me in the late 90s that real estate as a lagging indicator would likely track the steep spike and subsequent decline of the internet boom, as money made in stocks was shifted to bricks and mortar.
Real estate tends to go in more or less regular cycles, and this last one seems to have had a little extra tailwind. But the question is, where does your friend think the money goes next?
Re: NYC, Greenwich and Westport real estate- a hedge fund acquaintance of mine says that the hedgies do not own those places outright and will have to vacate when the markets go against them. Easy come, easy go, and they get to live in a cool house for a while. He could be right. Million dollar Greenwich houses in 1928 could be picked up for as little as ninety thousand in 1929.
posted by IndigoJones at 5:58 PM on July 12, 2007
Real estate tends to go in more or less regular cycles, and this last one seems to have had a little extra tailwind. But the question is, where does your friend think the money goes next?
Re: NYC, Greenwich and Westport real estate- a hedge fund acquaintance of mine says that the hedgies do not own those places outright and will have to vacate when the markets go against them. Easy come, easy go, and they get to live in a cool house for a while. He could be right. Million dollar Greenwich houses in 1928 could be picked up for as little as ninety thousand in 1929.
posted by IndigoJones at 5:58 PM on July 12, 2007
Oh, Serin just sold his blog for $20k + 50% of the revenue for a year. He also settled his lawsuit for $1.5k and his book rights.
posted by delmoi at 7:39 PM on July 12, 2007
posted by delmoi at 7:39 PM on July 12, 2007
I read a very interesting article on how the 'fiat' money system on which world economy is based has to, eventually, come crashing down around our ears.
Absurd.
And anyway, I hate to sound like an apologist for consumer culture, but a "soviet" change in consumer attitudes would have nearly the same effect as actual communism. If stopped carrying about Wiis and iPhones and BMWs, rather then saving they would simply work less. Unless they really love their jobs (and who does?) they'll simply work less. The truth is the vast, overwhelming amount of wealth creation in this country is labor, and the U.S. has (I think) the highest productivity per capita of anywhere. But if people worked less, that productivity would drop greatly.
People need to be motivated to work, and dying with a huge bank account doesn't do it for most people
posted by delmoi at 7:46 PM on July 12, 2007 [1 favorite]
Absurd.
And anyway, I hate to sound like an apologist for consumer culture, but a "soviet" change in consumer attitudes would have nearly the same effect as actual communism. If stopped carrying about Wiis and iPhones and BMWs, rather then saving they would simply work less. Unless they really love their jobs (and who does?) they'll simply work less. The truth is the vast, overwhelming amount of wealth creation in this country is labor, and the U.S. has (I think) the highest productivity per capita of anywhere. But if people worked less, that productivity would drop greatly.
People need to be motivated to work, and dying with a huge bank account doesn't do it for most people
posted by delmoi at 7:46 PM on July 12, 2007 [1 favorite]
Casey's a nutcase. He's stupid, and as you pointed out, also greedy. His level of disdain for the law and for reality is, to my mind, so severe that it seems likely he has a personality disorder. He's also young and has no experience how the business world works. I think we'd probably both agree that he's absolutely the last person who should have been allowed to obtain the loans he obtained.
Stop it. He has this disorder and that problem and has every excuse under the sun for his situation EXCEPT that he intentionally lied on his loan applications for the purpose of securing a mortgage he knew he would have been denied had he been truthful?
He has every right to get a mortgage that anyone else does.
The difference between your Ivy League Wall Streeter and Casey? It isn't clear that the Wall Streeter is breaking the law. The arrangements may be complex, they may be risky, they may even be irresponsible, but I don't know that they are illegal.
the U.S. has (I think) the highest productivity per capita of anywhere
It doesn't. France with it's 39 hour work weeks and mandatory 6-week vacations has higher productivity (GDP/labor hour) than the US.
raysmj - By and large, the huge levels of personal debt that many people carry is not because of health care or unfortunate circumstances. It's because they buy things they can't afford and don't need. I don't really think I'm saying anything revolutionary here.
posted by Pastabagel at 8:41 PM on July 12, 2007
Wow, I hadn't seen anything on Casey Serin since he shut the blog down- I assumed it was gone. Damn, that kid is dumb.
posted by ThePinkSuperhero at 8:58 PM on July 12, 2007 [1 favorite]
posted by ThePinkSuperhero at 8:58 PM on July 12, 2007 [1 favorite]
By the way, I'd like to point something out. I'm called a Soviet because I suggest that maybe we would all be able to survive with a maytag stove rather than a Viking, but this comment is rife with class pandering and elitist guilt:
This guy, about Casey's age but with an Ivy education and good Wall Street connections, will not be going to prison. He may have to pay $500,000 or so in legal bills. That leaves him with more money out of the last couple of years than Casey will ever see in the rest of his entire life. While Casey is rotting in prison, his marriage broken and all his dreams of financial freedom permanently shattered, this guy is going to be at Smith and Wollensky drinking a martini.
Because we all know that only fat cats and the portly fellow from Monopoly dine at S&W. And it's brandy and cigars, not martinis.
The problem in this whole thread is that everyone is falling for the industry gimmick. "Subprime" borrowers? Subprime=deadbeats. Chronically late on bills, have judgments against them bankruptcies, etc. These are people you would never lend a penny to.
The dirty secret is that you need trader guys out there in the first place if you want subprime borrowers to ever have access to capital. Somebody has to buy these loans from the banks in order for the banks to offer them. The package them and sell them on in turn, round and round, like hot potato. The same thing happened in the dot-com boom of the nineties. Crap stocks skyrocketed purely on the assumption that someone else was there to buy them. People, daytraders, personal investors, bid Pets.com up to $230 a share. Online pet toys at $230? You know what the industry term was for people who bought pets.com at $230? "Suckers."
Somebody has to be willing to take risks to lend money to high risk borrowers if high risk borrowers are to be able to borrow money. If as ikkyu2 seems to suggest with "They need to be regulated out of existence pronto", these people should not be able to borrow money except at exorbitant interest rates, then you need to be prepared to deal with the consequences of an underclass whose position at the bottom is institutionalized.
posted by Pastabagel at 9:05 PM on July 12, 2007
This guy, about Casey's age but with an Ivy education and good Wall Street connections, will not be going to prison. He may have to pay $500,000 or so in legal bills. That leaves him with more money out of the last couple of years than Casey will ever see in the rest of his entire life. While Casey is rotting in prison, his marriage broken and all his dreams of financial freedom permanently shattered, this guy is going to be at Smith and Wollensky drinking a martini.
Because we all know that only fat cats and the portly fellow from Monopoly dine at S&W. And it's brandy and cigars, not martinis.
The problem in this whole thread is that everyone is falling for the industry gimmick. "Subprime" borrowers? Subprime=deadbeats. Chronically late on bills, have judgments against them bankruptcies, etc. These are people you would never lend a penny to.
The dirty secret is that you need trader guys out there in the first place if you want subprime borrowers to ever have access to capital. Somebody has to buy these loans from the banks in order for the banks to offer them. The package them and sell them on in turn, round and round, like hot potato. The same thing happened in the dot-com boom of the nineties. Crap stocks skyrocketed purely on the assumption that someone else was there to buy them. People, daytraders, personal investors, bid Pets.com up to $230 a share. Online pet toys at $230? You know what the industry term was for people who bought pets.com at $230? "Suckers."
Somebody has to be willing to take risks to lend money to high risk borrowers if high risk borrowers are to be able to borrow money. If as ikkyu2 seems to suggest with "They need to be regulated out of existence pronto", these people should not be able to borrow money except at exorbitant interest rates, then you need to be prepared to deal with the consequences of an underclass whose position at the bottom is institutionalized.
posted by Pastabagel at 9:05 PM on July 12, 2007
In a sane world renting wouldn't have the stigma (or opportunity cost) it has now.
As for people willing to take risks with high-risk borrowers, the structural problem 2003-2006 was a bubble mania mentality, with the principals not willing (or necessarily needing) to accept the music stopping eventually, plus more sophisticated financial instruments that effectively masked who the bagholder(s) were going to be.
The non-bagholders in the food-chain made out like bandits. ~100 institutions may have crashed on the rocks, but nearly all their buccaneering crewpeople escaped with their ill-gotten loot.
Systemic fraud is not a social service, and giving free money to anyone who can fog a mirror will not make housing more affordable.
posted by Heywood Mogroot at 9:41 PM on July 12, 2007
As for people willing to take risks with high-risk borrowers, the structural problem 2003-2006 was a bubble mania mentality, with the principals not willing (or necessarily needing) to accept the music stopping eventually, plus more sophisticated financial instruments that effectively masked who the bagholder(s) were going to be.
The non-bagholders in the food-chain made out like bandits. ~100 institutions may have crashed on the rocks, but nearly all their buccaneering crewpeople escaped with their ill-gotten loot.
Systemic fraud is not a social service, and giving free money to anyone who can fog a mirror will not make housing more affordable.
posted by Heywood Mogroot at 9:41 PM on July 12, 2007
I'm called a Soviet because I suggest that maybe we would all be able to survive with a maytag stove rather than a Viking
You've taken your own statement out of its own context. I tossed out the original Soviet bon mot as a reaction to you saying "Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion."
Where you fly off the rails is where your (otherwise sound) economic ideas start sounding like social programming. The assertion that we need to lower our standards, lower our aim, and "settle" for some imaginary "good enough" standard set by ... set by ... well, I guess, set by you, or some other enlightened elite.
It's one thing to say, "maybe we should review lending rules to ensure fairness." It's quite another to say, "you dumbass fuckers don't deserve the best, get back in your cage."
Spoiled American that wants too much out of life? I should just hang it up and wait to die? Bite me. I still believe in the American dream. You think this letter on my head stands for France?
posted by Cool Papa Bell at 11:27 PM on July 12, 2007
You've taken your own statement out of its own context. I tossed out the original Soviet bon mot as a reaction to you saying "Not every thirty-something deserves a BMW or a Mercedes. Not every married couple deserves a McMansion."
Where you fly off the rails is where your (otherwise sound) economic ideas start sounding like social programming. The assertion that we need to lower our standards, lower our aim, and "settle" for some imaginary "good enough" standard set by ... set by ... well, I guess, set by you, or some other enlightened elite.
It's one thing to say, "maybe we should review lending rules to ensure fairness." It's quite another to say, "you dumbass fuckers don't deserve the best, get back in your cage."
Spoiled American that wants too much out of life? I should just hang it up and wait to die? Bite me. I still believe in the American dream. You think this letter on my head stands for France?
posted by Cool Papa Bell at 11:27 PM on July 12, 2007
[waves two small American flags, one in each hand, for CPB]
posted by Heywood Mogroot at 11:57 PM on July 12, 2007
posted by Heywood Mogroot at 11:57 PM on July 12, 2007
he intentionally lied on his loan applications for the purpose of securing a mortgage he knew he would have been denied had he been truthful?
He has every right to get a mortgage that anyone else does.
See, you're suckered in by the American dream thing, too. Casey lied on the no-doc loan, sure. Casey's bad. I agree.
But in a sane world, a loan that never had any chance of being paid back wouldn't get made in the first place. That's because it's sure that someone's going to lose money on such a loan. What if Casey had been blogging his whole story, not after all these loans got made, but before? You and I would have looked at it while it was happening and thought, "Nope, these loans are bad. Shouldn't get made. Going to end up screwing everyone over."
In addition to no-doc loans like the ones Casey got, there are other kinds of loans - loans where the loaning agencies intend to hold the paper, where they check up on Casey's credit report. They call his employer and make sure he's really working for XYZ Corporation, receiving the salary he says he's receiving. Those kinds of loans are good and people like Casey can't get them. And that's a good thing, because it avoids the whole thing with Casey going to jail, a house sitting empty in foreclosure, and a lender failing to receive the return on capital that they were expecting.
Getting a loan isn't a "right." Life, liberty and the pursuit of happiness - but not loans. If X loans money to Y, the transaction makes sense when X thinks he's going to get paid back. If X does not think he's going to get paid back, X should not make the loan.
The current system provides a money incentive to strip X of this basic tenet of fiscal prudence. The people getting rich off this are ruining peoples' lives. Look at Casey - he will never get another loan, even if he gets a decent job. Is that fair? What's hard to understand about that?
posted by ikkyu2 at 12:45 AM on July 13, 2007
He has every right to get a mortgage that anyone else does.
See, you're suckered in by the American dream thing, too. Casey lied on the no-doc loan, sure. Casey's bad. I agree.
But in a sane world, a loan that never had any chance of being paid back wouldn't get made in the first place. That's because it's sure that someone's going to lose money on such a loan. What if Casey had been blogging his whole story, not after all these loans got made, but before? You and I would have looked at it while it was happening and thought, "Nope, these loans are bad. Shouldn't get made. Going to end up screwing everyone over."
In addition to no-doc loans like the ones Casey got, there are other kinds of loans - loans where the loaning agencies intend to hold the paper, where they check up on Casey's credit report. They call his employer and make sure he's really working for XYZ Corporation, receiving the salary he says he's receiving. Those kinds of loans are good and people like Casey can't get them. And that's a good thing, because it avoids the whole thing with Casey going to jail, a house sitting empty in foreclosure, and a lender failing to receive the return on capital that they were expecting.
Getting a loan isn't a "right." Life, liberty and the pursuit of happiness - but not loans. If X loans money to Y, the transaction makes sense when X thinks he's going to get paid back. If X does not think he's going to get paid back, X should not make the loan.
The current system provides a money incentive to strip X of this basic tenet of fiscal prudence. The people getting rich off this are ruining peoples' lives. Look at Casey - he will never get another loan, even if he gets a decent job. Is that fair? What's hard to understand about that?
posted by ikkyu2 at 12:45 AM on July 13, 2007
The difference between your Ivy League Wall Streeter and Casey? It isn't clear that the Wall Streeter is breaking the law.
You know, this is really worth addressing, because it's the heart of the whole matter. We have really lax financial regulation here in the U.S. Mostly that's good. Mostly, we have self-policing, open markets.
But every so often, there is a LTCM, or an Amaranth, or a Global Crossing or Qwest or Enron, and people sit up and think, "Hm, volatility arbitrage needs to be regulated. Hm, maybe we should regulate the amount of margin for commodities derivatives. Hmm, maybe GAAP doesn't go far enough when a corporation can hire a legion of lawyers and accountants to exploit its loopholes. Maybe we need a Sarbanes-Oxley." That's because there's a monetary incentive to create and exploit things that the regulators haven't gotten around to regulating yet.
If you think subprime lending practices aren't next on the regulator's short list, you're really not paying attention.
posted by ikkyu2 at 12:50 AM on July 13, 2007 [1 favorite]
You know, this is really worth addressing, because it's the heart of the whole matter. We have really lax financial regulation here in the U.S. Mostly that's good. Mostly, we have self-policing, open markets.
But every so often, there is a LTCM, or an Amaranth, or a Global Crossing or Qwest or Enron, and people sit up and think, "Hm, volatility arbitrage needs to be regulated. Hm, maybe we should regulate the amount of margin for commodities derivatives. Hmm, maybe GAAP doesn't go far enough when a corporation can hire a legion of lawyers and accountants to exploit its loopholes. Maybe we need a Sarbanes-Oxley." That's because there's a monetary incentive to create and exploit things that the regulators haven't gotten around to regulating yet.
If you think subprime lending practices aren't next on the regulator's short list, you're really not paying attention.
posted by ikkyu2 at 12:50 AM on July 13, 2007 [1 favorite]
Also, Smith and Wollensky makes fantastic martinis. You drink those before dinner. The cognac and cigars are for after dinner.
posted by ikkyu2 at 12:51 AM on July 13, 2007
posted by ikkyu2 at 12:51 AM on July 13, 2007
so, how does fractional reserve lending fit into this picture, anyway? Say WFC made a $400k 100% IO no-doc loan to our friend here. They've now liquidated the REO for $200k, and have 1099d Casey the $200k loss. The question is did WFC "lose" anybody's money in this deal? Their reported earnings are going to be $200k less, resulting in tax savings of $40k. With 1:10 reserve ratio, they also lost $40k of somebody's money (perhaps their own). But the $360K that magically appeared in their ledgers . . . doesn't that just get deleted? I don't think WFC has to pay the Fed back $360k -- even tho there's now $360K of extra money floating around in the economy -- right?
posted by Heywood Mogroot at 1:07 AM on July 13, 2007
posted by Heywood Mogroot at 1:07 AM on July 13, 2007
Summary: when interest rates are low for years, all the people with good credit who wish to borrow do so.
The banks that make their money by flipping loans rather than holding them are now out of luck - there's no one left to loan to.
So they then look for new loan markets, namely riskier borrowers, and allow them to borrow as much as the original good credit borrowers, in order to have a large number of high-value loans to flip.
Repeat the previos step several times until loan officers are giving loans with no background check to random 22 year olds.
Unsurprisingly, this does not end well.
posted by zippy at 1:33 AM on July 13, 2007 [1 favorite]
The banks that make their money by flipping loans rather than holding them are now out of luck - there's no one left to loan to.
So they then look for new loan markets, namely riskier borrowers, and allow them to borrow as much as the original good credit borrowers, in order to have a large number of high-value loans to flip.
Repeat the previos step several times until loan officers are giving loans with no background check to random 22 year olds.
Unsurprisingly, this does not end well.
posted by zippy at 1:33 AM on July 13, 2007 [1 favorite]
What I haven't seen yet is a breakdown of how many people are in trouble because they bought oversized, ridiculous McMansions, versus how many people are in trouble because they tried to buy some sort of housing at all, no matter how humble. If a typical person can't buy a home, are we doomed to be a nation of renters? Shady mortgage bankers or shady landlords--take your pick.
posted by gimonca at 6:14 AM on July 13, 2007
posted by gimonca at 6:14 AM on July 13, 2007
It doesn't. France with it's 39 hour work weeks and mandatory 6-week vacations has higher productivity (GDP/labor hour) than the US.
Higher per hour, maybe, but not higher per year.
Wow, I hadn't seen anything on Casey Serin since he shut the blog down- I assumed it was gone. Damn, that kid is dumb.
It came back up under pressure from the guy who he sold his book rights too. Then he decided to screw the publisher again and shut it down with three weeks warning to his advertisers. He is really flakey. I feel bad for him
As far as lying on his loan apps, look, any lender who would give someone a mortgage without doing a credit and employment check is asking, literally asking to be lied too. They don't want to know the truth, they just want to sell the house and sell the mortgage on.
posted by delmoi at 10:38 AM on July 13, 2007
Higher per hour, maybe, but not higher per year.
Wow, I hadn't seen anything on Casey Serin since he shut the blog down- I assumed it was gone. Damn, that kid is dumb.
It came back up under pressure from the guy who he sold his book rights too. Then he decided to screw the publisher again and shut it down with three weeks warning to his advertisers. He is really flakey. I feel bad for him
As far as lying on his loan apps, look, any lender who would give someone a mortgage without doing a credit and employment check is asking, literally asking to be lied too. They don't want to know the truth, they just want to sell the house and sell the mortgage on.
posted by delmoi at 10:38 AM on July 13, 2007
The assertion that we need to lower our standards, lower our aim, and "settle" for some imaginary "good enough" standard set by ... set by ... well, I guess,
what we can afford to buy? ... yes, what a SHOCKING, commie idea THAT is
posted by pyramid termite at 11:02 AM on July 13, 2007
what we can afford to buy? ... yes, what a SHOCKING, commie idea THAT is
posted by pyramid termite at 11:02 AM on July 13, 2007
...versus how many people are in trouble because they tried to buy some sort of housing at all, no matter how humble.
*meekly raises hand*
posted by ShawnStruck at 9:54 AM on July 14, 2007
*meekly raises hand*
posted by ShawnStruck at 9:54 AM on July 14, 2007
Higher per hour, maybe, but not higher per year.
The French are still more productive during the time they are working.
Enough so that they can take the extra time off as a break well-deserved.
Meanwhile, fools elsewhere keep their nose to the grindstone and burn out.
posted by five fresh fish at 10:30 AM on July 14, 2007
The French are still more productive during the time they are working.
Enough so that they can take the extra time off as a break well-deserved.
Meanwhile, fools elsewhere keep their nose to the grindstone and burn out.
posted by five fresh fish at 10:30 AM on July 14, 2007
Myself, I have a suspicion that the collapse of the US housing market has been brought about quite deliberately as a means of concentrating wealth.
Pump and dump.
posted by five fresh fish at 10:41 AM on July 14, 2007
Pump and dump.
posted by five fresh fish at 10:41 AM on July 14, 2007
Pastabagel -- Consider all the things you own, not investments, but things like bed linens, electronics, cars, houses etc.Assign a value of zero to those things, because they are worth nothing. If you factor in the cost of your time spent trying to sell your used whatever for a few bucks, it's a net loss. You save more by giving it away by leaving it on the sidewalk.
Huh? I follow you regarding the small-ticket items where the time required to sell them negates the return of doing so, but that does not apply to houses, and probably not cars. This is a lot of hand waving you're engaging in here.
posted by NortonDC at 2:45 PM on July 14, 2007
Huh? I follow you regarding the small-ticket items where the time required to sell them negates the return of doing so, but that does not apply to houses, and probably not cars. This is a lot of hand waving you're engaging in here.
posted by NortonDC at 2:45 PM on July 14, 2007
Heywood Mogroot, they absorb the full loss out of their earnings for the year. The guy who sold the house to Casey got paid $400K. That money came out of WFC's coffers. Presumably they didn't borrow it from the Fed; if they did, they'd have the obligation to repay it to the Fed, with interest derived from continuing operations. That obligation doesn't get written down because Casey defaulted.
If the bank loans out more than it takes in and it can't meet the reserve requirement for a period of time, the FDIC steps in, stops the operation of the bank, and pays the depositors up to the insured limit. That and the tax loss carry-forward are the only way that the bank loss gets underwritten by the Federal Government.
5ff, that's one way to look at it. Basically if the float of a fiat currency is managed by a central bank, accomplishing the goals of the central bank will produce side effects. If the goals of the central bank are purely transparent and predictable, the market can predict the action of the central banks, fully price them out, and negate them. So the central bankers have to be obscure about what they're trying to do. That's why people spend so much time listening to the comments of the Federal Reserve governors, who are probably de facto the 12 most powerful people on the planet.
In this case, the popular wisdom is that the Fed lowered rates nearly to zero in the wake of the 9/11 attacks to forestall a massive worldwide recession. Making cheap credit available to employers and entrepreneurs assures that jobs will continue to be available and that goods and services will continue to be produced and consumed. One of the side effects of this is to jack up the real estate market because the demand (number of potential buyers) increases dramatically. That bubble's bursting. As usual, as with any change, the wealthy seem better poised to take advantage.
posted by ikkyu2 at 2:53 PM on July 14, 2007
If the bank loans out more than it takes in and it can't meet the reserve requirement for a period of time, the FDIC steps in, stops the operation of the bank, and pays the depositors up to the insured limit. That and the tax loss carry-forward are the only way that the bank loss gets underwritten by the Federal Government.
5ff, that's one way to look at it. Basically if the float of a fiat currency is managed by a central bank, accomplishing the goals of the central bank will produce side effects. If the goals of the central bank are purely transparent and predictable, the market can predict the action of the central banks, fully price them out, and negate them. So the central bankers have to be obscure about what they're trying to do. That's why people spend so much time listening to the comments of the Federal Reserve governors, who are probably de facto the 12 most powerful people on the planet.
In this case, the popular wisdom is that the Fed lowered rates nearly to zero in the wake of the 9/11 attacks to forestall a massive worldwide recession. Making cheap credit available to employers and entrepreneurs assures that jobs will continue to be available and that goods and services will continue to be produced and consumed. One of the side effects of this is to jack up the real estate market because the demand (number of potential buyers) increases dramatically. That bubble's bursting. As usual, as with any change, the wealthy seem better poised to take advantage.
posted by ikkyu2 at 2:53 PM on July 14, 2007
I'm thinking more along the lines of "we loosen the rules, pocket big money in fees and penalties, let people over-extend themselves, let the banks over-extend themselves, make the whole thing churn money to the top. Then when it all collapses in on itself, we let insurance pay it all off, let the taxpayers pay off all that insurance loss, and retire to Dubai.
posted by five fresh fish at 3:32 PM on July 14, 2007
posted by five fresh fish at 3:32 PM on July 14, 2007
Man, I used to read these threads looking for analyses of the housing market which I could follow. Apparently, my cohort has given up on the lot of yez, as have I.
It really looks to me like you are describing mutual conditions of unreality to me, much moreso than similar threads about much less objectively valuable things six years ago.
As a dystopian who appreciates a Marxian collapse scenario, this whole housing market collapse thing is just not doing it for me anymore. You're boring me! Could you please shift to, oh, peak oil or war finance threads?
posted by mwhybark at 10:26 PM on July 14, 2007
It really looks to me like you are describing mutual conditions of unreality to me, much moreso than similar threads about much less objectively valuable things six years ago.
As a dystopian who appreciates a Marxian collapse scenario, this whole housing market collapse thing is just not doing it for me anymore. You're boring me! Could you please shift to, oh, peak oil or war finance threads?
posted by mwhybark at 10:26 PM on July 14, 2007
What I haven't seen yet is a breakdown of how many people are in trouble because they bought oversized, ridiculous McMansions, versus how many people are in trouble because they tried to buy some sort of housing at all, no matter how humble. If a typical person can't buy a home, are we doomed to be a nation of renters?
There's some chicken-egg syndrome you're missing. Part of the reason why people need to take out huge mortgages is because the home prices have skyrocketed in the last fifteen-twenty years, not because of natural increases in labor cost or materials, but because the huge wads of money lenders are willing to hand out. More info in a previous MeFi comment.
posted by Civil_Disobedient at 5:55 AM on July 15, 2007
There's some chicken-egg syndrome you're missing. Part of the reason why people need to take out huge mortgages is because the home prices have skyrocketed in the last fifteen-twenty years, not because of natural increases in labor cost or materials, but because the huge wads of money lenders are willing to hand out. More info in a previous MeFi comment.
posted by Civil_Disobedient at 5:55 AM on July 15, 2007
Speaking of Casey, things have heated up over there recently.
posted by telstar at 11:35 PM on July 15, 2007
posted by telstar at 11:35 PM on July 15, 2007
There is money to be made even as the sub-prime market tanks
posted by patricio at 1:37 PM on July 16, 2007
posted by patricio at 1:37 PM on July 16, 2007
I've been enjoying reading the mortgage lender implode-o-meter, a sort of fuckedcompany for mortgage lenders, today. I especially enjoyed this linked article about the hedge fund practice of valuing subprime derivative assets by marking to model.
posted by ikkyu2 at 5:00 PM on July 16, 2007
posted by ikkyu2 at 5:00 PM on July 16, 2007
This thread is crazy educational, yo.
See, I say that because my life is soooooo far removed from all this. Really. I'm from the US, but don't live there, and I live WELL on $1500 a month. I mean we're talking 2-3 vacations a year, working 10 hours a week at a job that I love every minute of surrounded by people who respect me and listen to what I have to say, I drive a badass motorcycle, rub noses with some of the world's most famous and most creative people, rent a 1000 square foot apartment for 15% of my income, have a wonderful group of friends who invite to all their parties (and they're awesome parties), an amazing girlfriend who actually comes to my house to cook, clean, and deliver medicine so she's sure I'm living healthy (she worries and has the spare time to do that), my kitchen is full of the food I love (DORITOS), my closet has more clothes than I'll ever need, and my brother lives with me and we check lolcats every few days to see what new photos there are. I don't mean to go Thoreau on y'all, but isn't this enough?
"Subprime" is how I grew up. Not really impoverished, because we had everything we needed, but the anxiety over money made me, a little kid, physically sick sometimes. I have no idea what my parents went through, juggling around debt like that for so many years. They still do it. And I will never, ever, do that again. The only people I owe money to are my friends, and then it's only what it takes me two hours of work to earn. My phone time, electricity, gas, furniture, internet, and transport are paid for, in advance, in cash, and owned solely by me. Call me nuts, but I'm proud of that.
I'm also scared, because one slip-up, one accident, and I'll lose it. I've spent a long time accumulating all this, and it's only been in the past year that I have enough that I can think about how to take care of it and keep it. And to do that, in our society, it takes letting some of your own means out of your control. It takes stepping out of this tent of ascertaining and responding to immediate needs for consumption. Cash under the mattress isn't safe.
So what now? At the moment, I have everything I need but long-term security (and a couch for the empty corner in my room). If there's anything I've learned from my parents and their mortgages, it's that owning a house sure as shit won't give me that. A network of friends with comfortable couches, a varied marketable professional skill set, and a decent-sized clump of diversified, carefully managed liquid assets seems lots safer than scraping and saving so I can pay more taxes on a fixed asset with such a variable value for the rest of my life. My kitty goes in stocks and a savings account.
posted by saysthis at 10:44 PM on July 16, 2007 [1 favorite]
See, I say that because my life is soooooo far removed from all this. Really. I'm from the US, but don't live there, and I live WELL on $1500 a month. I mean we're talking 2-3 vacations a year, working 10 hours a week at a job that I love every minute of surrounded by people who respect me and listen to what I have to say, I drive a badass motorcycle, rub noses with some of the world's most famous and most creative people, rent a 1000 square foot apartment for 15% of my income, have a wonderful group of friends who invite to all their parties (and they're awesome parties), an amazing girlfriend who actually comes to my house to cook, clean, and deliver medicine so she's sure I'm living healthy (she worries and has the spare time to do that), my kitchen is full of the food I love (DORITOS), my closet has more clothes than I'll ever need, and my brother lives with me and we check lolcats every few days to see what new photos there are. I don't mean to go Thoreau on y'all, but isn't this enough?
"Subprime" is how I grew up. Not really impoverished, because we had everything we needed, but the anxiety over money made me, a little kid, physically sick sometimes. I have no idea what my parents went through, juggling around debt like that for so many years. They still do it. And I will never, ever, do that again. The only people I owe money to are my friends, and then it's only what it takes me two hours of work to earn. My phone time, electricity, gas, furniture, internet, and transport are paid for, in advance, in cash, and owned solely by me. Call me nuts, but I'm proud of that.
I'm also scared, because one slip-up, one accident, and I'll lose it. I've spent a long time accumulating all this, and it's only been in the past year that I have enough that I can think about how to take care of it and keep it. And to do that, in our society, it takes letting some of your own means out of your control. It takes stepping out of this tent of ascertaining and responding to immediate needs for consumption. Cash under the mattress isn't safe.
So what now? At the moment, I have everything I need but long-term security (and a couch for the empty corner in my room). If there's anything I've learned from my parents and their mortgages, it's that owning a house sure as shit won't give me that. A network of friends with comfortable couches, a varied marketable professional skill set, and a decent-sized clump of diversified, carefully managed liquid assets seems lots safer than scraping and saving so I can pay more taxes on a fixed asset with such a variable value for the rest of my life. My kitty goes in stocks and a savings account.
posted by saysthis at 10:44 PM on July 16, 2007 [1 favorite]
an amazing girlfriend who actually comes to my house to cook, clean, and deliver medicine so she's sure I'm living healthy
Marry her now and devout your life to treating her just as well. Your world will be heaven.
posted by five fresh fish at 10:58 PM on July 16, 2007
Marry her now and devout your life to treating her just as well. Your world will be heaven.
posted by five fresh fish at 10:58 PM on July 16, 2007
An update: I wrote in my original comment: "The second and larger of the two Bear Stearns funds will have its estimated bailout costs made public this Monday, July 16th."
Well, more details are supposed to be forthcoming in a Bear Stearns statement later tonight, but the Wall Street Journal wrote this today:
"Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds' investors that the portfolios' assets are almost worthless, according to people familiar with the matter.
The assets in Bear's more-levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations were not immediately available, but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million..."
To reiterate things said up-thread, these two hedge funds were not even holding the really "toxic waste" kind of CDO's, but rather the highly-rated investment-grade kind. Many other funds are holding CDO's, of various types. They are not selling them right now, though, because they're stuck in a kind of "prisoner's dilemma" where any one fund who admits the CDO's are worthless and tries to dump them will trigger the avalanche of everyone else needing to do it ASAP too -- thus wiping out everyone's possible partial salvage. Of course, they can't all stick together forever...
posted by Asparagirl at 4:17 PM on July 17, 2007
Well, more details are supposed to be forthcoming in a Bear Stearns statement later tonight, but the Wall Street Journal wrote this today:
"Weeks after the meltdown of two prominent Bear Stearns Cos. hedge funds that bet heavily on the market for risky home loans, the brokerage has told the funds' investors that the portfolios' assets are almost worthless, according to people familiar with the matter.
The assets in Bear's more-levered fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, are worth virtually nothing, according to people familiar with the matter. The assets in the larger, less-levered fund are worth roughly 9% of the value since the end of April, these people said. The April valuations were not immediately available, but in March, before their sharp losses, the enhanced leverage fund had $638 million in investor money, while the other fund had $925 million..."
To reiterate things said up-thread, these two hedge funds were not even holding the really "toxic waste" kind of CDO's, but rather the highly-rated investment-grade kind. Many other funds are holding CDO's, of various types. They are not selling them right now, though, because they're stuck in a kind of "prisoner's dilemma" where any one fund who admits the CDO's are worthless and tries to dump them will trigger the avalanche of everyone else needing to do it ASAP too -- thus wiping out everyone's possible partial salvage. Of course, they can't all stick together forever...
posted by Asparagirl at 4:17 PM on July 17, 2007
Although, it turns out that the assets weren't worthless, it's rather that the proceeds were enough (more or less) to pay back the Bear Stearns loan which then left little else for holders in the fund itself. The prices on the assets may be better than the headlines suggest.
A copy of the letter to investors
posted by patricio at 5:27 AM on July 18, 2007
A copy of the letter to investors
posted by patricio at 5:27 AM on July 18, 2007
the U.S. has (I think) the highest productivity per capita of anywhere
Seconding Pastabagel, no - neither on a per-capita hourly basis, nor on a per-year basis (when using GDP as a proxy). The US does well, especially for such a large, aggregate territory - it's in the same upper-level group as Iceland, Ireland, Luxembourg, Norway, and Switzerland (per-capita annual), and Belgium, France, Ireland, the Netherlands, and Norway (per-capita per-hour). Of course, the US has small regions of Luxembourg- and Ireland-like productivity excesses, but it also has huge swathes of net-unproductive and marginal territories and low-grade, under-employed workers similar to many of the recent eastern European accession states within the EU.
I'm always impressed by the readiness of USians to attribute exceptionalism to their metrics. Here are some trends.
posted by meehawl at 7:08 AM on July 18, 2007
Seconding Pastabagel, no - neither on a per-capita hourly basis, nor on a per-year basis (when using GDP as a proxy). The US does well, especially for such a large, aggregate territory - it's in the same upper-level group as Iceland, Ireland, Luxembourg, Norway, and Switzerland (per-capita annual), and Belgium, France, Ireland, the Netherlands, and Norway (per-capita per-hour). Of course, the US has small regions of Luxembourg- and Ireland-like productivity excesses, but it also has huge swathes of net-unproductive and marginal territories and low-grade, under-employed workers similar to many of the recent eastern European accession states within the EU.
I'm always impressed by the readiness of USians to attribute exceptionalism to their metrics. Here are some trends.
posted by meehawl at 7:08 AM on July 18, 2007
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You can pair the article I mentioned with this CNBC video clip from two weeks ago for a more illustrated examination of the problem.
Despite reassurances from the SEC today that the mortgage securities/CDO mess (as exemplified by the two Bear Stearns funds) can be contained, it is likely to be only the tip of the iceberg, as even the FDIC chief has started to publicly worry about the exposure of US banks. Analysts on the Street have started saying "this is going to be worse than the dot-com bubble" and using terms like "fire sale" and "death warrant for the subprime industry". Most significantly, yesterday ratings agency S&P downgraded $12 billion in mortgage bonds, and Moody's cut another $5 billion. The second and larger of the two Bear Stearns funds will have its estimated bailout costs made public this Monday, July 16th.
posted by Asparagirl at 5:18 PM on July 11, 2007 [3 favorites]