Business Loan Settlement A Huge Resource Stuffed with Interesting Info
Business Loan Settlement A Huge Resource Stuffed with Interesting InfoMany feel that having multiple credit cards is being sophisticated but only a few realize that it is a sure pat…

Seems there <a href=”http://www.guardian.co.uk/business/2007/dec/31/subprimecrisis.creditcrunch”were some consequences for the bank execs:

As the mortgage crisis spread, Wall Street bosses began dropping like neatly lined-up dominoes. Stan O’Neal was forced out at Merrill Lynch and Charles Prince was ousted from the world’s largest banking group, Citigroup. The most powerful woman on Wall Street, Zoe Cruz, lost her job at Morgan Stanley when the bank recorded losses of $3.7bn. Another Wall Street bank, Bear Stearns, suffered the first loss in its 84-year history.

So I stand corrected (but who didn’t think O’Neal shoulda been out at Merrill a LONG time ago?) about what I wrote above. The Countrywide bonus to its COO was apparently something of an exception.

If the banks want to continue to engage in risky lending practices that expose themselves to too much risk, that’s should be their option — and they’ll pay for it.

but they’re not paying for it. In fact, several of these nice bank executives got nice bonuses while this whole thing was going on. Countrywide gave its COO a $2.67 million dollar bonus in January; two weeks later, Countrywide’s stock fell off a cliff.

But worse, you seem not to understand the biggest problem happening right now. Bond insurers have given great credit ratings to these subprime-backed securities. Since these securities are now essentially worthless (see the billions downgraded by Citibank just last week), confidence in the bond raters is dropping like a stone. Check this out from Bloomberg:

For more than 20 years, the safety of insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. Now, mounting downgrades on insured bonds backed by assets such as mortgages are raising doubts about the stability of the guarantors. Armonk, New York-based MBIA, the world’s largest, has a 28 percent probability of default, and Ambac’s is 40 percent, prices of derivatives show.

…

When home sales soared this decade, insurers increased their guarantees of securities created from mortgages, including subprime loans to people with poor credit and home-equity loans.

They now guarantee almost $100 billion of collateralized debt obligations backed by subprime-mortgage securities as of June 30, according to an Aug. 2 report by Fitch. CDOs are created by packaging debt or derivatives into new securities with varying ratings.

The biggest problem isn’t these individuals who shouldn’t have signed contracts they didn’t understand, it’s that bond insurers have been rating these subprime debts as AAA when they weren’t. Indicators of a coming credit crunch were already two years old, but the banks ignored the shouting, since their insurance companies kept the bonds rated higher than they were. Now that confidence has fallen out, the two solutions are:

1.) immediate influx of cash to the banks, which is happening, though this money is coming from foreign governments (not individual investors) like China and Singapore;

2.) Have the U.S. Treasury back the bonds and eat the loss when they pay out (at taxpayer expense).

Number 2 is the bad one, and will cost taxpayers MUCH MUCH more than just bailing out individuals, which we can only do in a very limited way due to the new bankruptcy laws anyhow.

This is advanced economics, of course, and not readily visible to the general public. That’s where you guys need to come in. I suggest you guys really get a handle on what this is all about and the potential problems with it. We all pay when the banks do risky things like this, because the numbers are so huge, and the consequences so large.

The “free market ideal” you embrace is too quaint to really grasp the problems with what’s going on out there.

If, however, you mean the government forcing them to make up for poor decisions made by consumers (or, in the case of the NYT piece I link to above, fraudulent actions on the part of criminals), then no, I wouldn’t go along.

Both banks and consumers deserve some blame for poor choices. Sometimes these risks may have seemed reasonable or justifiable at the time; other times not. Either way, though, there’s no reason to further regulate the industry. If the banks want to continue to engage in risky lending practices that expose themselves to too much risk, that’s should be their option — and they’ll pay for it. The government shouldn’t be in the business of propping them up, just as it shouldn’t be in the business of propping up poor decisions made by consumers. The article you link to in the LAT actually reinforces this:

Joan Olsen is an example of someone who took out a mortgage she couldn’t afford. A retired welfare worker, she said she didn’t fully understand the loan terms when she refinanced her San Diego condominium 15 months ago with an option ARM.

Hers is an unfortunate case, but it’s not the bank’s fault she took on a loan without understanding it, and nor is it the job of taxpayers to bail her out. Doing so would only promote further risky behavior. The best way to get rid of poor practices, by both banks and consumers, is not to insulate anyone from the consequences of their own decisions.

Thought the mortgage meltdown was just a sub-prime affair? Think again. There’s another time bomb waiting to explode, experts say: risky loans made to people with good credit.

So-called pay-option adjustable-rate mortgages, or option ARMs, were the easiest and most profitable home loans for lenders and brokers to make for much of this decade. Last year, they accounted for about 9% of the volume of all mortgages made in the U.S. and were especially popular in California, Florida and Nevada — states where home prices rose the most during the housing boom and are now falling most sharply.

…

more than 75% of option ARM borrowers have been making only the minimum payments, analysts at Standard & Poor’s Corp. said last week. As a result, the delinquency rate on option ARMs already is jumping and is likely to keep rising sharply, S&P said. Because option ARMS went only to “prime” borrowers, they aren’t eligible for a much-publicized interest rate freeze that is part of a White House-backed plan to stem sub-prime foreclosures.

What’s so “innovative” about a business model that leaves the companies open to fraud and waste?

Once again I’m disturbed by your refusal to hold the mortgage companies and banks accountable for entering into these disastrous relationships to begin with without providing safeguards for themselves.

For some reason, you guys refuse to even ask a simple question: What were the banks doing issuing these subprime mortgages to begin with? Instead, you’re more eager than ever to make sure you blame anyone but the banks.

Real “grassroots” of you there…