A Good Look at the Subprime Mess

Here is an excellent article on how the sub prime mess was created, how it is playing out, who is winning, who is losing, and who is pointing fingers.

formatting link

-- Doug

Reply to
Douglas Johnson
Loading thread data ...

...when you rely on the underwriter and the rating agencies to do all your homework for you, you don't have safety. You have only the illusion of safety.

Right, like I'm going to be able to divine the risks better than either Moody's or S&P.

Reply to
Daniel T.

Here's another one, with a bit of a different take.

formatting link

Reply to
bondguy1824

Had the credit ratings agencies assigned proper ratings to these loans, the market for them would have dried up when the first package of collateralized loans failed to sell. Robert Reich speaks to the credit rating agencies role in this mess:

formatting link
JOE

Reply to
joetaxpayer

There's probably enough blame to spread around, starting with the borrower who thought he could make a killing with the appreciation of housing. What is it they say? Bulls make money, bears make money, but pigs get slaughtered.

Elizabeth Richardson

Reply to
Elizabeth Richardson

"Douglas Johnson" wrote

formatting link

The most troubling point to me is that Goldman was in the business of selling junk mortgages (in whatever package) and simultaneously hedging them. The more Goldman pushed junk mortgages and promoted a bubble, the more it stood to gain from its hedging. Were its analysts really not savvy enough to recognize that home prices would not keep going up? Was Goldman "working" investors, promoting a product in which Goldman really did not believe?

Also worrisome is how Moody's and S&P would pay heed only to short term performance of junk mortgage borrowers. So much of the investment industry relies on these credit rating agencies. This blunder should cause a loss of confidence. Could Moody's and S&P been so swept up by the rises in home prices that they bet this was no bubble?

Our education system is failing, with instant this, instant that failing to ground younger people that nothing good comes easily, except by luck?

Reply to
Elle

How about a one or two pararagraph synopsis?

-HW "Skip" Weldon Columbia, SC

Reply to
HW "Skip" Weldon

The "borrower's" didn't think they could make a killing. They saw the cost of real estate soaring beyond what they would ever be able to afford. Then a lender tells them "of course you can afford it" and in desperation they bite. It seemed like a now or never scenario for them. The blame is almost entirely the lenders. Thumper

Reply to
Thumper

Neither can I, but this stuff was being sold to major institutions. They should be able to do their own due diligence or invest in something they can understand.

However, some of this stuff is getting so complex, that no one can understand it. At least part of the troubles is caused by the rating agencies' risk models that were untested against the real world, particularly the real world as it was at the time with foolishly lax lending standards.

Now none of that excuses the culpability of the ratings agencies. I hadn't thought of it, but they are paid by the investment banks to do the ratings. So there is more than a small conflict of interest.

-- Doug

Reply to
Douglas Johnson

Don't be ridiculous. Nobody forced these people to borrow money they couldn't afford to repay. These were 2nd mortgages because the people didn't have enough money to purchase the houses in the first place and they were buying more house that they could actually afford. Houses have gotten way too large. I grew up in a slightly upper-class neighborhood, and our house was 1450 sf, but lots of custom stuff for the times (1950s). Plenty big enough for a family of 5. Few home buyers these days would even look at a house that size. Greedy, keep up with the Jones' attitude is just as much to blame for this fiasco as anything. These borrowers couldn't figure out how to live below their means, on of the first principles of financial planning.

Elizabeth Richardson

Reply to
Elizabeth Richardson

"Elizabeth Richards>Don't be ridiculous. Nobody forced these people to borrow money they

In my mind, the structural issue is that the actual lenders (the people that bought the CDOs and other mortgage paper) were disconnected from the actual borrowers and associated risks. Everyone in between had more incentive to make loans than not make loans, because they got paid on loan volume, not loan quality.

Given all that, the rest is human nature. The lenders were getting high returns on "AAA" rated paper, so they pushed money into the system (or at least eagerly bought the paper when offered). The investment bankers were paid for creating the paper, the mortgage brokers were paid for creating the loans. No one cared whether the loans were any good. The lender is normally the one who cares, but the paper is AAA, right?

The borrowers' share of the blame? It's all over the map. There are some speculators, some greedy fools, and some ordinary fools. We have all commented on the degree of financial illiteracy in the world. We've seen posting on this group from people who clearly did not understand their mortgages.

By the way, this is just a variation on the 80's S&L mess. There, the actual lenders were buyers of government guaranteed CDs issued by the S&Ls. Their money was safe, no matter what happened downstream. The S&Ls were paid to make loans, so they did.

At least the taxpayers will not be on the hook for the current mess.

-- Doug

Reply to
Douglas Johnson

The buyers still have responsibility, even if they weren't trying to speculate or flip the house.

Some time ago, I picked up a brochure from a mortgage broker. And the sales pitch looked really tempting. You know, about the "dream" of owning my own house. And how they "know how to make it happen." And how they will work with me. And even some very interesting things like, "100% Finance" and like, "No Proof Of Income."

And I will admit to having a certain emotional reaction to that. For about thirty seconds.

And then, I jolted myself back to reality. And started asking myself questions. The kind of questions that weren't in the brochure.

About interest rates. And what can happen to them. And fees. And the real estate price bubble that my area is experiencing. With jargon like, "Upside Down On The Mortgage." And that whole, "Getting In Over One's Head" concept. Plus the consequences if I were to be, shall we say, "overly optimistic" in stating my income.

It's kind of like walking past the pastry or deli case in the supermarket. And feeling tempted by the yummy instant gratification.

And then jolting myself back to the reality of the potential long-term consequences of eating the fat, sugar, etc.

It is MY responsibility to take a hard, honest look at those impulses, and to restrain myself.

Reply to
Usenet2007

Excellent analogy. A large part of the current health care crisis is in the size of our collective bellies. Are we blaming the grocers for selling potato chips, salami, and chocolate cake? Same goes with the sub-prime crisis.

Elizabeth Richardson

Reply to
Elizabeth Richardson

People should be responsible for themselves, I agree there. But you give them more credit than they deserve. That you can navigate the investing required to manage your own retirement doesn't prove it's easy, just that you are smart. That you (and I) knew to not get sucked in by the allure of the low teaser rate may be confirmation of our financial savvy, but little more. The mess we are in was foreseeable and avoidable. The people who borrowed the money, the broker who wrote it up, the bank the packaged it, the companies that sliced it up for resale, and the ratings companies. I miss anyone? JOE

Reply to
joetaxpayer

Oh please, the lenders were practically throwing money at people. They were loaning money to people who were known credit risks without having any idea how much money they made, or even if they were employed.

I'm just cynical enough to believe that the banks knew that if things worked out, they would make a mint, and if things fell apart, the government would help them out of the hole they dug.

Reply to
Daniel T.

Of course they will.

Reply to
Daniel T.

Does it take financial savvy to know how much you make and, therefore, how much you can afford to spend? I don't understand ARMS or other fancy mortgages. I've said before my first mortgage was a fixed 13-7/8%, in a time of very high interest rates. Was that stupid? Perhaps. So getting a lower fixed rate loan when interest rates dropped to 6-3/4 was smarter. My sister always talked about ARMs, and I thought she had 3 heads. Why would anyone in their right mind, get a mortgage that you don't know how much it's going to cost you 6 months from now, when you're already spending near your max and you probably have little chance of increasing your income? And let's face it, these are probably the same people who are paying the minimums on their credit cards. They already knew they were in trouble.

That just about covers it.

Elizabeth Richardson

Reply to
Elizabeth Richardson

formatting link

One thing that has always puzzled me. U.S. Treasuries -- backed by the full faith and taxing power of the largest/strongest economy in the world -- are rated AAA. How on earth can S&P or Moody's give that same rating to a mortgage-backed security and then investors just swallow it hook-line-sinker?

Reply to
wyu

And then the greedy, get richer still attitude of the lenders came into play and turned the greedy, keep up with the Jones' attitude of the borrowers to their own advantage.

Reply to
Don

"Elizabeth Richardson" wrote

I think one really has to ask why these folks were "not in their right mind."

How can the financial literacy of people be improved, particularly with the overwhelmingly low educated masses? That is, some 80% of the age-eligible population do not have a 4-year college degree. A large fraction of those foreclosed or facing foreclosure come from cultures of historical poverty, and so less education is communicated at the dinner table...

Simply compla>> The people who

One interpretation of the Robert Reich article you cited seems to me to be that the federal government did not do enough to preclude conflicts of interest in the work of credit rating agencies. (Doug Johnson re-iterated this conflict of interest here.) It makes me wonder a little whether government officials purposely looked the other way, so as to enrich their more wealthy supporters further.

Reply to
Elle

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.