1930's Redux on Mortgage Foreclosures.

This is an excellent post as it gives perspective on our issue from the other side of the pond. Our press is mired in positive spin -- eg interviewing a few select brokers about how foreigners are buying trophy apts in NYC. I talked to a RE developer in Australia over the holidays and he said his colleagues and the press there were predicting a double dip for the US.

I read somewhere that the Banks always anticipated massive defaults; they lent knowing that a high percentage would end in foreclosure. And, they knew that the gov would bail them out & they didn't care about the borrowers being squooshed like bugs. Nor did they care about bnkrpting the national coffers.

In view of today, I suppose I have to agree with the above but, the inherent short sighted evil of the scheme makes me want to suspend my disbelief.

Banks are nice and I don't like when people say mean things about them.

Alan,
Suspect you'd do anything for a free toaster!

"I read somewhere that the Banks always anticipated massive defaults; they lent knowing that a high percentage would end in foreclosure. And, they knew that the gov would bail them out & they didn't care about the borrowers being squooshed like bugs. Nor did they care about bnkrpting the national coffers."

Seriously? You didn't already KNOW that before having to read it "somewhere"??

The banks may have known the loan packages were going to deteriorate, but not to the extent they did. We'll be seeing more foreclosures. Banks probably know they would over-whelm the market if they liquidated all at once. Wtih that in mind and their zero cost of carry they are probably "managing" the liquidation pipeline. Think of the delinquent owner as a free night watchman. They're probably doing a NPV analyiss on the portfolio of non-payers and deciding who to foreclose on first.

Matt,

Have been having difficulty believing the banks intentionally flushed us down the toilet because the implications are massive. I am most disturbed by the sheer evil of it.

Riversider,

Do you think it was stupidity & hubris or an intentional scheme?

"Have been having difficulty believing the banks intentionally flushed us down the toilet because the implications are massive. I am most disturbed by the sheer evil of it."

You don't get down to Wall Street much, do you?

I understand that the Bankers always anticipated massive bonuses; they lent knowing they would get higher bonuses and that a high percentage of them would get big bonuses. Honestly I don't think most of them gave a thought to the macro implications.

Hubris mixed with arrogance on the part of some, Stupidity on the part of others and Greed just about across the board. I don't believe the banks were engaging in reckless activity under the assumption they were getting bailed out(although now the top six banks have been put in the category of too big to fail).

The problem with all the CDS, Off shore balance sheets, counter-party exposure was that nobody was sure where the risk was. Goldman believed they had fully hedged their exposure, but it's pretty widely acknowleged now by everyone but Goldman that G.S. would have failed without government intervention.

"Honestly I don't think most of them gave a thought to the macro implications."

I would have to agree with this, only because most Wall Streeters don't know how to give a thought beyond their immediate little fiefdom, and next year's bonus.

I think we give "Wall Streeters" waaaaay too much credit. They're not economists -- they're glorified casino operators. They actually make the thing work.

Your average "Wall Streeter" understands about as much as how the economy works as your average construction day-laborer understands the overall engineering of the building he's working on.

"I don't believe the banks were engaging in reckless activity under the assumption they were getting bailed out"

Why the hell would you NOT think this?

"Moral hazard" is written directly into U.S. banking law.

Dwell, You may want to read up on Hyman Minsky and the financial instability hypothesis. Best theory out there on what occured. I do think that some companies were the victims of malfeasance by their senior officers, but that probably doesn't explain the Bears, Lehmans, Citi's.

Thanks malthus. So, you'd say unintentional.

Matt:
The sarcastic 12 yr old girl persona is wearing a bit thin. It's a new decade, maybe try a new look.

Thing is I have many Wall St friends, some from GS & I never detected evil intent. Yeah, IMO, some of them were delusional in their ivy league, ivory tower explanations/support of risk management, monte carlo, derivitives, etc. But, wouldn't say they intentionally intending to bring down the system for their own personal gain.

"Thing is I have many Wall St friends, some from GS & I never detected evil intent. Yeah, IMO, some of them were delusional in their ivy league, ivory tower explanations/support of risk management, monte carlo, derivitives, etc. But, wouldn't say they intentionally intending to bring down the system for their own personal gain."

Dwell, re-read the CONTENT of my posting, rather than your perceived tone of it. I never said they were intrinsically evil. I said they're fundamentally stupid.

There's a huge difference.

Thanks Riversider, I'll check it out.

The few big guys at the top of each firm set the ground rules, Reward and ignoring behavior to suit their puposes. At it's worst its called control fraud. William Black wrote a great deal on this. Goldman for all its problems did set out to manage risk, AIG probably in the William Black category. The average trader,managing director, just a foot soldier reacting to the incentives laid out for them.

Not only unintentional. I think many would do it again in that they don't see much wrong in what happened. Theirs is not to reason why.

"Dwell, re-read the CONTENT of my posting, rather than your perceived tone of it. I never said they were intrinsically evil. I said they're fundamentally stupid. "

matt:
re-read my content: I asked whether it was stupidity or intentional evil.

"Not only unintentional. I think many would do it again in that they don't see much wrong in what happened. Theirs is not to reason why."

And THAT is even more disturbing than the event itself.

That's why you have to change the incentive system.

"And THAT is even more disturbing than the event itself. "
Well, we agree there, sister!!

Thanks, all. Good to hear it was greed & stupidity & there was no intentional scheme to turn the world into a fiefdom.

"That's why you have to change the incentive system."

Change it to what? Being good stewards of the economy? Where's the profit incentive to that?

The problem is, at its most fundamental level, Wall Street doesn't *produce*. It doesn't *create*. What it does is shift wealth from people who have it to the people who want it more, and have the cunning wherewithal to obtain it.

It's basically Atlantic City with OUR money (pension funds, mutual funds, 401(k) funds, etc.).

"Good to hear it was greed & stupidity & there was no intentional scheme to turn the world into a fiefdom."

Don't speak too soon.

There was no "intentional scheme to turn the world into a fiefdom" ... in THIS case.

The overall scheme, however, continues.

Ever hear of the Bilderbergers?

Seems on Wall Street the reward risk and reward function are not integrated. The people making the money are not equally responsible for the risk they take. It's pretty much a seperate team who may or may not fully understand that risk. There's supposed to be a board member in charge of the risk committee, but when the CEO throws huge bonuses at him based on company performance the incentives subvert the process.

Matt, that tin foil hat looks GREAT on you!

"The people making the money are not equally responsible for the risk they take. It's pretty much a seperate team who may or may not fully understand that risk."

River,
I think you really nailed it. Supposed to be a chinese wall? Also, think the CEOs didn't know or understand what their underlings were doing.

Matt just entered the race for top conspiracy theorist on SE. Take a look into that moon landing while you are at it.

At Merill Lynch , UBS & Citi I doubt the very top truly understood the risk being undertaken in their units. Stan O'neal(doubt it)

Close your minds at your own peril, and continue to smile politely while you eat the warmed-over shit that's being spooned onto your plate.

I meant a chinese wall bet analysts & bankers so that the analysis doesn't become PR promo material. But, agree there's gotta be big picture integration.

Dwell: It's also the separation of ownership from control, which is a danger in all public companies but a big problem when the honey pot is so sweet and the firms pose systematic risks. Most of them were partnerships 15 years ago.

Honestly , I don't see why anyone would want to be a shareholder of a bank(say Goldman), the amount of compensation turned over to traders as a percent of earnings is rediculous.

Malthus brings up an intersting point. Would the financial blow up have occured if wall street was still parnership run. Personally I doubt it.

Yes, so many things need to be corrected, don't know if it'll happen. But, malthus, if they just used common sense & integrity, wouldn't really matter if it was a corp or a pship. They could still make boatloads of $ without destroying so many people. Dream on, right?

Process starts with shareholders and the board of directors. But since so few own stock directly , we have this form of Agency Shareholder Capitalism. The board of directors probably believest they represent the management and not the owners.

The corp vs. pship issue really goes to my question of intent. They don't care about screwing their SHs, but, they'd act more responsibly if their own buts are on the line: that's intent

Intersting how the biggest screwups were in publicly traded companies and not the hedge funds. Wasn't it supposed to be the opposite?

Good point, River. They cover their owns asses & screw their investors.

Dwell I see a difference. Sure hedge funds charege 2/20 structure, which can be very expensive for the clients, but they often eat their own cooking, so I don't believe they are incentivized to fail.

"incentivized to fail" : that's what's gotta be changed.

"But, malthus, if they just used common sense & integrity, wouldn't really matter if it was a corp or a pship. They could still make boatloads of $ without destroying so many people."

As you said, as long as their butt isn't on the line, the incentive is to make as much profit as possible.

For the banks, the ironic part is the solution is fairly obvious but the political will not there.
1) Break up banks that are too large to fail which would also increase competition
2) The gov't only ensures those institutions which are purely commercial. Trading is not the
same as underwriting loans to small and medium sized businesses

SEC fines for certain transgressions should be to be passed on to the shareholders, whihch is like punishing them twice. There needs to be some individual accountability.

The Federal Reserve window should not be a tool used by a Goldman Sachs to finance trading desk. inventory

There's something really wrong, when a company official is caught for doing something wrong, and the SEC solution is to fine the company and the shareholders, especially for blatantly illegal acts. Sometimes these very acts were against the shareholders, arguably what happened with BAML.

River,
the system is so broken & I doubt the right changes will be made & if changes are made, there probly won't be sufficient enforcement. Good discussion, but gotta go now

"Most of them were partnerships 15 years ago." Really? In 1995? Other than Goldman and Lazard, which ones?

As long as you have a Wall Street insider (Geithner) running the show, don't expect major changes to this very broken system.

Geithner will be gone after mid-term election. He's damaged goods.

That's nice.

But in the meantime, he can do a lot of damage over the course of a year.

With help from his arrogant buddy Larry Summers and Congressman Frank.

you all:i have a mortgage.i read and understood its terms .i wanted that mortgage.i knew that real estate,like any undertaking is a risk.i wanted to take that risk.i was grateful at the time for the bank's being there for me.whatever has happened,is happening or will happen regarding my venture ,is fully my responsibility.is there not anyone who sees things like i do?

"i have a mortgage.i read and understood its terms .i wanted that mortgage.i knew that real estate,like any undertaking is a risk.i wanted to take that risk.i was grateful at the time for the bank's being there for me.whatever has happened,is happening or will happen regarding my venture ,is fully my responsibility.is there not anyone who sees things like i do?"

Sure.

WE do.

But banks don't. They get to take risks AND have the government bail them out.

Where is the "bailout" for the rest of us?

MY bank provides me a return free risk on my savings account every month. Woohoo!