Quantitative "Analysts" & the Bubble

Maybe next time we should just let them go under, as we should've. Now it's too late to complain about the spilled milk after giving them an allowance without any responsibility, just a vague sense of thanks for their campaign contributions.

Maybe. Yet I wonder if it is really fair to judge the bailout of these banks and investment houses as misguided. I do not know what would have happened to the economy if we had let the many banks and investment firms go under. Did the bailouts rescue the little guys and gals? Maybe. I guess time will tell more.

What Goldman Sachs was doing though stinks to me.

I don't think we should wait until 'next time.' I've written letters to Congressmen. That we should let these jerks walk, but also cover their bonus packages is just criminal negligence on our part. We're not talking enough about literally hundreds of millions of dollars to CEO's who either a) never understood what they were doing, or b) knew it was destined to collapse, and c) in either case lied about it to shareholders. We're also not talking enough about a Congress that contaged "The Rapure of the Risk" and facilitated what amounts to completely fraudulent reporting to the SEC. Goldman Sachs is still around simply because it is "slicker" than the rest.

The destruction to the financial system in the 'banking crisis' had to be repaired - most have grown accustomed to some form of civilization, capitalism, and free markets. So the need to repair is not in question. How it was done, has some unanswered specifics attached. The aftermath is still with us: Zero interest rates have severely crimped many retirees who relied on interest income, and the market crash turned portfolios down in a big way.

The widespread volume of arrogance and stupidity of MBA's and PhD's is truly staggering. It is a contagion in corporate America, IMO, and extends to markets that used to be available to all, and now are not: municipal issues, IPO's, small successful companies; all of these are being bought up in markets "cornered" by large institutions and corporations, often just to 'flip' IPO's and loot corporations of cash.

Ultimately - and also very, very practically - the long-term solution is the assumption of individual responsibility. Whether you call it a code of honor, or a test of faith, or common sense and decency, one must maintain one's own level of ethics, and not get sucked down into the whirling cesspool.

In our rush to castigate the bankers let's not lose site of the most culpable players of all, namely the rating agencies. The bankers could not have gotten started without those bogus AAA ratings. Virtually no one has bothered to criticize the rating agencies let alone suggest meaningful changes to the system. For the number one bad guys it is business as usual, therefore, you can be certain that something similar will happen again in the future.

Bill,

You're right - the scale of what happened and the depth of it makes it all a bit challenging to calmly sort out, for those of us (like me) who are rather easily aroused. Real estate agents and appraisers also played a role in this mess.

I genuinely wonder what happened to the American values of honesty and knowing when enough is enough. Did things begin to deteriorate when the Gordon Gecco character announced "greed is good" or are we revisiting the age of the robber barons, or are we trying to enter a new era in which values are set and stabilized? A bit off topic, but this is something that has touched almost everyone, and perhaps worthy of a brief discussion.

P.S. Merry Christmas :-)

Dapperdobbs.

You are both absolutely right. Also, two more culpable groups to add to the mix: mortgage brokers and home inspectors. Many mortgage brokers help people with bad credit, insufficient down payments, etc., get loans for which they would not ordinariy be qualified at higher interest rates than they can afford. Home inspectors tend to go along with the real estate agents and the appraisers by ignoring or downplaying some defects, structural faults, etc. that might turn away buyers. The focus of all the players is to make the sale happen.

But let's not forget that while there is plenty of blame to go around, at the bottom of it all was the unbelievably poor judgement exercised by home buyers. Their greed is what created the demand for all the nonsense we saw.

In the same way that drug user's poor judgement (demand for drugs) drives the drug trade, would-be homeowner's poor judgment (demand for the American Dream without regard for ability to pay) is what drove the financial problems of the current recession.

I have no pity for them and resent like heck what they've done to the rest of us. All they had to do was ask.

That is quite true. And it is legendary that con men are most successful when the person being conned is hoping to get away with conning someone else.

I am very much in favor of people owning their own homes, but that American Dream need not be a monster structure beyond the person's ability to pay. While we are at it, lets also bring in the greedy developers and contractors who put up those structures trying the satisfy the greedy buyers who are trying to keep up with the Jonses and get ahead of the Jonses.

I would distinguish between real estate investors (whose goal was to flip houses) and the relatively uneducated masses buying their first and what would be their sole home. Some months ago I remember a study was mentioned here showing that it was speculators that mostly drove the housing bubble. Plus I cannot castigate the uneducated masses before castigating lenders. For one, I believe it is now well known that lenders frequently falsified the financial details of applicants' situations.

I could not disagree with you more. You are ascribing a level of financial acumen to first time home buyers that the majority do not have. Yes, most first time buyers can figure out the maximum monthly payment they can afford and that is all they understand. They don't have the ability to understand what will happen to their affordable monthly payment because they have been sold an ARM with a teaser rate. To get the facts when a mortgage broker is intentionally trying to conceal the truth you have to know what questions to ask and a very large percentage of the first time home buyers caught in the mortgage mess do not have that knowledge.

I have spent a lot of time over the last 40 years working with shop floor level people in both manufacturing and service organizations and

99% of them are honest people trying to do a good job and take care of their families. They are not trying to con anyone. They are only guilty of not having the education and experience to spot someone trying to con them. Personally, I have a lot of sympathy for those who were sold mortgages they could not understand by brokers who deliberately concealed the facts to line their own pockets.

Ouch! I think I twisted my ankle when I jumped off my soap box.

I got taken somewhat by the real estate bubble by buying home builder stocks such as Pulte. I got out before the market totally collapsed making a profit, but not as much as I could have by pulling out early.

My mistake was in not realizing that much of the assets of the home builders were in vacant lots which the builders needed to get economies of scale. The supply of lots is low in many areas because of roadblocks to development in an effort to stop "urban sprawl". That low supply sent lot prices too high inflating housing costs. When the demand was reduced, lot prices fell creating a financial burden on the home builders.

-- Ron

The US had 2 central banks before the FED. All instances has resulted in massive volatility and losses. Central Banking has been a net negative. Persons need to vet their banks and only invest in what the person understands, not what the broker suggests. But most people are sheep. So fat chance. US is going down.

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on 12/25/09 7:37 PM Elle said the following:

"I would distinguish between real estate investors" That would be "real estate speculators".

on 12/24/09 2:40 PM Bill said the following:

It was collusion. The investment banks knew full well the ratings were bogus. In fact, they worked together to tweak the models to give a AAA rating when many knew the risky tranche could blow up like it eventually did. CROOKS!!!

on 12/24/09 11:30 AM Augustine said the following:

After the credit bubble burst, all the players said the CDO objects were too complicated to value properly. If so, how the hell did the bonds issued from the CDOs get a AAA rating? Ergo -> Massive fraud!!!

Add local governments that loved the inflated property tax revenue! Condo Craze!!!

on 12/25/09 8:14 PM Bill said the following:

Since everyone dreams of a home, the buyer was easily taken advantage of. There is some culpability but the major rests with the players who architected the scam plumbing.

snip

Soapbox or not, unfortunately you are right on target. The difference in the payment required in the interest-only payment at the teaser rate, vs the fully indexed rate was outrageous. A financial time bomb. There are endless stories of people caught in the crossfire but the most heartbreaking to me start with, "We had a 5% 30 year fixed mortgage, but the broker showed us how we could free up $500/mo by going to...." And once that new product fully adjusted, they had a payment far higher than when they started. No, I've come to accept the fact that most people are not savvy enough to know what questions to even ask. That's the unfortunate thing. I consider the option ARM scam to be no different than all the other scams otherwise bright people get caught up in. Joe

I don't think anyone is trying to argue that there are not people who tried to scam the scammers as you describe and, like you, I have little sympathy for them. They should not gamble if they cannot afford to lose. My contention is that you can split the home buyers who got caught in this mess into two groups; lets call them the gamblers and the ignorant. All I am saying is that the ignorant comprise a very large fraction, possibly or even probably the largest fraction, of the total and they simply got lied to with no means whatever of detecting the lie. I have a lot of sympathy for them.