Maybe Chicken Little Was Right

The Wall Street types are but one piece of the puzzle. So please don?t start by saying everyone else looses sleep if someone making millions of dollars is a bit taken aback by the horrible job these companies have been doing in regards to the mortgage crisis. People have to work. Its that simple. They may have big houses but are those houses made of cards?

I feel sorry for the back office, IT, clerical, etc.. staff of BS. God help the ones that had their retirement money positioned in company stock. Hopefully, they saw the tsunami coming in time to get their money into safer investments.

I work for JPMC and ironically, this potential buyout/merger could guarantee me a couple of years more work.

It always makes me laugh when old school Montclair types bemoan the fact that there are so many lawyers and Wall Street types "now" in town. "Oh, in the good old days, my street was full of artists . . " Bla bla bla. Yeah, and your house has appreciated in value 4 times precisely because those types are willing to pay it.

The only thing to be afraid about is more government bailouts which leave the already stressed taxpayer on the hook. Bear Stearns should have been allowed to fail (just like Northwest and Delta should have been allowed to fail post 9-11 and poorly managed S&L?s during the 80?s / 90?s.) This restores equilibrium to the market and from a LONG term perspective builds trust in the system.

Want to know why oil is $110 / barrel? B/c the dollar has been allowed to fall to unseen levels (thanks to preposterously low rates.) No wonder money is looking for better (and safer) returns in all sorts of commodities . . .

The time for Monetary policy is over . . . it?s time for strong Fiscal policy . . . long-term tax cuts to spur investment and a new era of fiscal responsibility (i.e no bailouts for consumers or companies that took inordinate risks ? had their risks paid off, would they have shared the proceeds?) The only thing worse right now than a Bush economic team would be an Obama or Clinton economic team (god forbid, imagine a Kerry economic team?!)

I'm shocked that the economy goes up and goes down, then goes up, then down.

Shocked!

And you mean companies go out of business... Then new ones get created...

This is unlike anything that has ever happened before......

I agree with this guy:

http://www.youtube.com/watch?v=T1_Yo2BGdUk

Honest question; maybe someone can explain the answer to me:

Why should the government bail out people who stretched themselves too far financially? I keep hearing that the government has to help people who have houses in foreclosure. Well, if we had taken out some ridiculous balloon interest only (or whatever the schemes are) we, too, could have purchased a much larger house. But we were prudent, have a mortgate we can afford and a house that's really too small but with comfortable payments that we can manage on one salary. Why should my tax dollars go to bail out people who screwed up? I mean, is the government going to reward me(us) for being fiscally responsible and help me trade up to a larger home? No. My thanks is to stay in a small house with a fixed rate mortgate and probably higher taxes to bail out people living in twice or three times the square footage. And then, because that's so expensive, they'll cut financing for state universities, and I'll have two college tuitions to pay that are a lot more expensive than I anticipated (and saved) for.

Where is the justice?

I realize and admit that I'm not global-economy-savvy and I have a "very small picture" but it's my picture. I didn't create this mess; why should "my" taxes go to fix it?

Well said rchanin...does our Democratic Congress get a pass on this? Probably...this is Demontclair!

The use of the term the "self-satisfied briefcase-toting Wall Streeter" is quite unfortunate, and is the sort of typification usually offered up by someone who knows nothing about economics.

Really, Deb, I expected better from you there. I definitely did not expect to confuse you for even a second with lasermikey.

Avid,

You do understand that "we" pay for things we don't like, behavior we don't support and mistakes others make.

So if yours is a real question, the answer is because we always work to bail out folks who are in dire straits.

Think Katrina. Did you feel the same when those folks didn't leave? Or even chose to live below the water line? Why should we bail out their bad decisions?

Or the S&L crisis.

Or Chrysler.

Or, well you get the picture.

But understand, I agree that some smart people made really bad choices and should be left to them. But some folks were flat out lied to re: mortgages, they deserve a helping hand.

Yes, it's a serious question.

Please explain how people were flat out lied to about their mortgages?

Seriously, how stupid does someone have to be to take an interest-only mortgage? I guess I'm just too old and too conservative to understand that mindset.

My husband works, I've worked part time but primarily have been a "housewife". We live modestly and saved for retirement and our kids' tuitions.

I see pundits on TV talking about the tax rebate (whatever it's called) and saying it's being given to people who don't really need it. Huh? I can sure use $1200! Milk is $4/gallon!

I agree with you to some extent, Prof, but I don't think it's our job to be bailing out greedy bankers.

There is a big difference in Katrina victims then people who bought houses they could not afford. I have friends in the second group and they signed on the dotted line. No one gave NO residents the same option.

The Feds don't bail out the bankers because it's just, they bail them out because otherwise we'll all sink down the same drainpipe.

I agree with your comments, Avid. I have little sympathy for those who knowingly live so far beyond their means. It's one thing if you have very little money and are therefore forced to spend more than you have b/c you have so little, but there is no reason for people to be buying million dollar homes if they can't afford it. If you only have $5,000 and need a car, take out a small loan and get a Civic, not a Mercedes.

hrhppg,

I didn't realize the Gov make NO folks live there. My mistake. (A joke yes, but you get my point: choices all.)

(Side note as I wait for Obama's "Race" speech-- he's DONE!)

MM: If only the money with Bears Sterns were that of "greedy bankers" I'd agree, but you do understand that they managed money of the non-greedy too. So by bailing them out, the non-greedy were helped too.

Avid: If you have to ask about the lies, changes and bait and switches that were pulled on some folks with their mortgages, you haven't been paying attention.

"If only the money with Bears Sterns were that of "greedy bankers" I'd agree, but you do understand that they managed money of the non-greedy too. So by bailing them out, the non-greedy were helped too."

Bear Stears was/is an investment bank, not a mutual fund and not a commercial bank . . .

"If you have to ask about the lies, changes and bait and switches that were pulled on some folks with their mortgages, you haven't been paying attention."

I agree with other posts, this has been greatly overstated . . .

As for the impact on the Bville economy, Roberta Baldwin is giving us the standard line, nothing more. Yes, of course people will always need homes. (Were she not a Barista friend and advertiser, this line would not be worth quoting.) The operative question is, when you're ready to flee the empty nest and cash out of your high priced Montclair home, who would you rather see on your doorstep: a banker who just got a gazillion dollar bonus? Or, say, a cop?

Walleroo is right, of course. Overall financial collapse which begins with the fall of an "institution," like Bear Stearns, or Northwest or Delta or Chrysler, has long been viewed by economists as a economic illustration of the "domino theory."

And for those who wonder about mortgage holders and suchlike, it'd prove much, much worse for them too if we didn't endeavor to bail out a much bigger guy like Chrysler, honest. (There's good reason why economics has long been called "the dismal science.")

If the government lets one bank go under it is a problem. Can you imagine the run on cash deposits if another one experiences financial problems? People will all be withdrawing their money based on fear which could then topple other banks for no valid reason. This is how a recession gets to be a depression. This was smart intervention on the part of the government. As far as bailing out "greedy bankers", they were hardly bailed out. The company went from $170 per share a year ago ($30 last Friday) to the purchase price of $2. The only thing the government did was to float some cash to allow BS to stay afloat while the purchase took place. Smart use of taxpayer money for a change.

"The only thing the government did was to float some cash to allow BS to stay afloat while the purchase took place. Smart use of taxpayer money for a change."

That's not exactly what the Fed / Treasury did . . . as collateral to entice JPM they also took ownership of all of BS's positions, some of them very tenuous . . . It was more an asset transfer to stave of a BK filing where the Govt got left with a lot of mortgage backed securities that JPM never would have taken . . .

rchanin,

You do understand that "Investment" banks by name, invest.

Where do you think the money comes from?

Some from rich folks, but a lot comes from pensions... which are usually made up of regular folks, not "greedy bankers."

"Some from rich folks, but a lot comes from pensions... which are usually made up of regular folks, not "greedy bankers.""

I know of no pension fund (CALPERS, etc) that would take a position in securities such as these . . . after Orange County CA (I believe?) went BK in derivative transactions, most states have passed laws dictating the investment vehicles these funds can use . . . same is true of endowments . . . gotta run . . .

It is very unfortunate that so many first time homeowners went for these stupid mortgages. Particularly minorities, poor whites, and other people trying to realize the American dream of home ownership. These people have heard their whole lives about how owning a home is the way to financial independence in our country. And it has been for a very long time. But the risk in these products was well-publicized and talked about a lot. Not just in the Wall Street Journal but on the local news and the local papers. The fact that your payments were going to go up over time were plain to anyone with any intelligence. Lots of blame to go around here as usual. But the banks did force anyone to come in and fill out a mortgage application.

(Bored with Obama who seems to be giving a conlaw lecture. And yes, he threw his grandmother under the bus.)

rchanin, I hope you read this when you return. You are confused here. (Some) pensions are managed by investment banks.

I for one would like to know if the greedy and perhaps unscrupulous mortgage brokers will be held accountable for writing mortgages to people who clearly could afford them.

Hubby's business took out an interest only mortgage for just over a year only for construction purposes, and though it was useful at the time, it also cost a huge pile of money in broker's fees and other nonsense. Plus the negative amortization hurt a lot at the end since the "payments" represented only 1/2 the total monthly interest. Had we not had a short-term purpose for it, the terms would have been beyond outrageous, and in my opinion, borderline usury/fraud. (This is why I have always gone directly to a bank for my personal mortgage and not to a broker.)

So, if greedy brokers were stuffing people who weren't qualified into questionable mortgages in the first place, why aren't they being investigated or at least held partly responsible?

"self-satisfied briefcase-toting Wall Streeter" - such an unfortunate stereotype. Most of the Wall Streeters I know don't carry brief cases any more.

Prof

You are obviously not in the finance department.

The problem with Bear Stearns is that they have huge concentrations in mortgage backed securities, including financial derivatives such as credit default swaps. It is these "hard to trade" holdings that the Fed has agreed to back, should the value of the securities continue to drop causing the bank to become insolvent.

rchanin's (correct) point was that the large pension funds have restrictions on the types of investments/securities that they can hold based on the risk level of those holdings. While investment banks might be managing a portion of any given pension portfolio, that portfolio will be spread across a number of investment vehicles and securities with different risk/return profiles. Not every security or investment vehicle being managed by an investment bank is in trouble.

And let's be clear. The Fed did not bail out the shareholders of BS (30% of which is owned by employees). Additionally, many of the employees of BS will lose their jobs, so many of them will not be saved by the Fed. What the Fed did accomplish was preventing a run on BS which would have led to its insolvency and failure. After that, the next likely candidate for a run would be Lehman and next Merrill Lynch. If you want to imagine a grim scenario, try to picture what might happen to our local economy if 3 of the largest financial institutions in NY collapsed within a few weeks of each other.

Couple of points:
It always depended on where you lived in Montclair whether you had an artist or a banker next to you.
Still does...(although less and less)
I don't know why people generalize that idea so much...but that said...the tone of the community has definitely changed just in the last 10 years.

I also don't know why the pundits keep bringing up the comparison of the bailout of a financial institution to bailing out personal loans and homes.
Didn't they take basic economics in college?
The financial institutions go under...we all go under.
Personal loans are a "personal choice".. most of which that should have never been taken out to begin with...so in the end the fault lays with the individual.
Sure the lender should not have given them the loan..but in the end it was a personal choice to take it....so why should the government be required to bail you out for your personal mistake?
Big difference.
(I'm not referring to disaster situations)

Avid -

re: "Why should the government bail out people who stretched themselves too far financially". Your question is a good one. In my house we are also miffed that people who took unreasonable risks are getting bailed out, while we kept things pretty conservative and are in essence paying for those who stretched too far. Doesn't seem right.

I would say that the answer to your question falls into the category of "If you owe me a dollar, it's your problem. If you owe me a million dollars, it's my problem". As the head of PIMCO recently said in an interview, yes, it seems wrong to bail out people who made bad decisions. But you also have to consider the alternative. A financial system in free fall, housing marketing being decimated - these are things that would arguably cause more damage to more people across the country (and world) than a simple bailout of foreclosures would.

And to think, wartime economies are supposed to boom, right Professor W?

This crap happens every 7 years. Its a natural cycle. I'm putting more money in the stock market and then I'll buy your house that will be 1/2 the value in 3 years.

"wartime economies are supposed to boom.."

Usually, yes. But here we have other factors at play, i.e., the foreclosure crisis, too much borrowing by our government, that have had an effect on our economy.

Wow, I agree with you, cathar. It seems that I have more in common with you than just a love of Friday Night Lights.

My hubund is one of those "self-satisfied" types that Ms. Galant refers to. And self-satisfied is one of the last adjectives I'd ever use to describe him. I wouldn't have been able to be one of those no-good good-doers career-wise and live in this fine community if he wasn't part of the evil financial empire. (Well, I guess I would, but it wouldn't make any sense to throw that amount of money into property taxes.) Of course, I'd just go live in a fine city like Pittsburgh if my salary was of any importance. Anyway, those stereotypes are just so, well, what's the word-I need a thesaurus-platitudinous? But, they are fun! And most importantly, easy!

But my understanding, as explained to me by my very tired husband, is that there is plenty of blame to go around re: the subprime mortgage crisis. Who is the most fun to blame, though? The mortgage brokers? The guys who rate the securities? The people who saw their chance to seize upon the American dream and buy their first house? It's most fun, I guess, to blame the self-satisfied messenger bag toting (much more current than a briefcase) Wall St. guys.

To me, the scariest aspect of the recent lending practices was the ease with which people could get loans for 100%+ of their purchase price. As real estate values fall in some regions, home owners are sitting on hundreds of thousands of dollars of negative equity with absolutely none of their own money at risk. Many of these homeowners are making what amounts to a rational economic decision by handing the keys to the house back to the bank. It doesn't matter how much you tinker with the interest rates in these cases - people who walk away from the loans are not forced into bankruptcy and are willing to trade 7 years of bad credit in order to get out from under the negative equity. Previously there was an enormously negative stigma associated with foreclosures. Now, you have literally millions of people who have walked away from a mortgage. Since this is an increasingly large pool of people, some of them are still able to get smaller credit facilities (like credit cards), albeit with a pretty short leash.

Spicoli,

I suppose I could comment on your reading comprehension and all the drugs you took back at RHS, but I won't.

Understand, you make my point, to say bailing out Bear Sterns is bailing out "greedy bankers" is wrong. That they manage(d) $ for working people puts the bailout out of the "greedy bankers" scenario.

(And Perlstein, where can I pick up one of those straw men you're so fond of producing here.)

Sorry, Prof, I don't catch your drift. Since when do past economies qualify as a "straw man"?

Sorry, Prof, I don't catch your drift. Since when do past economies qualify as a "straw man"?

"The Feds don't bail out the bankers because it's just, they bail them out because otherwise we'll all sink down the same drainpipe."

Bingo. Once again the pithy, pouch-ed one hits the nail on the finger. When "The House That Jack Built" is financed with "The Mortgage That Gordon Gekko Finagled," we are all getting screwed. The Feds might as well help make it better.

I understand Bear Stearns had a debt to equity ratio of about 97%, and I was just wondering how Exxon and Haliburton looked on their balance sheets recently.

Any ideas, Prof.?

(JP: check your "wartime" economy comment for the straw man....)

But I'll play, so JP, what are factors do you want to use as a measure of "wartime economies"?

% of GDP? GDP? Or something else?

the Prof gave me a homework assignment!

It's a trick though, using GDP you will find that the "cost" of Iraq as a % of it is very low, but that is marred by the borrowing.

Oh, well.

I don't fret over the US economy. As I wrote above, it goes up, it goes down.

Does the trillions in new debt worry you?

prof - my response was to your assertion that rchanin was wrong when he was correct.

Your position that the bailout helped the little guy whose money was managed by Bear Stearns (as if the Fed was stepping in to protect Ma and Pa Kettle's pass book account) is not correct. This is not the same as the S&L bailout. The Fed was ensuring that counterparties continued to trade with BS. I think this discussion is above your level of finance knowledge, but I don't have the time to get into it any deeper.

As I understand the subprime mortgage mess - & I'll say right here that I don't understand it very well, but someone tried to explain it to me a month ago & I think I picked up this much - it was made possible because a trading market developed for the little buggers. Mortgage brokers had an incentive to issue adjustable (and that's the real issue, "subprime" shifts the emphasis away from the reality) mortgages that had low initial rates without verifying that the mortgagees could afford such mortages because they were able to turn right around & sell the mortgages to someone else, thereby skimming a quick profit on a deal with virtually no risk to them.

I'm still unclear on who would buy these mortgages, & why - there's a piece of this story that's yet to be told, or at least that I haven't found yet.

When we bought our house 17 years ago we had to provide the bank with all sorts of documentation of our income to get our loan. I presume that they verified what we gave them before OKing the loan (an adjustable, BTW, which has worked out just peachy). Somewhere in the last decade or so, the whole income verification thing fell by the wayside.

I never went on the do-not-call list so, along with the notices that I've won free trips to AC & FL and the warnings that the warranty on my 16-year-old car "may be about to expire," I'm still getting 4-5 phone calls a week offering me subprime mortage refinancing. Yep, even as the bubble is bursting, the scoundrels are still at it. I guess it's all quite legal, if not entirely comprehensible & perhaps even not ethical.

Same here, Crank. We moved into our home in November and I am STILL getting mail from all kinds of lenders wanting me to refinance. No dice.

I guess the kind of people who would be attracted to a subprime deal would be people sold on the American dream of owning a home but who were not good credit risks. I can't fault them for wanting to own a home (I waited 50 years!) but there's an old adage that states: If it sounds too good to be true, it probably is."

Sure, I could have bought a home with no money down years ago but I didn't want to go that route. I didn't want to be strapped with a monthly mortgage payment that would take over my life. Glad I waited.

This entire thing just seems to get more confusing by the day.

Is it a good time to buy or should people stay in their apartments? If the FED rate and housing prices are in such a nose dive, I would think that would be a good thing for a buyer.

But, with the economy apparently going up in flames (to my 27 year old eyes, anyway), I'm also weary about dumping my hard-squireled away savings on something like a house when any of our jobs could just fizzle away at a moment's notice!

/frustrated ramblings

Spicoli,

No need to get testy. Do you have the munchies friend?

And while it's clear your financial knowledge is superior to all, your reading level is not.

I only said of B/S that "they managed money of the non-greedy too."

Too, as in also.

So to say this was to help "greedy bankers" does not paint an accurate picture.

Likewise, you should re-read friend and you'll see that no one compared this to the S&L, only that the Gov has "bailed out" other private entities.

I hope you put down the weed long enough to realize that, like Perlstein, you may have been arguing against something that was never said.

Oh well. It's fun, I know....

(GNM, you messed up my trifeca! Damn you!)

Um, I'm sorry?

(confused)