This is a call for information (or an RFC if you like)
I’m not too terribly knowledgeable about the minutia of how our financial crisis began and then brought us to this situation that we are in now. I’m sure others more knowledgeable than myself can provide information or links to information that will bring me up to speed. I have my own link, which I received in an e-mail:
Has any one seen this video/show and agreed/disagreed/had no opinion with it? If so, what side of the fence are you on, if you’re on a side at all? If you disagree, is there any information that was witheld that could make this meager piece of information I was passed be a little more useful to me in forming an opinion and if this affects my voting in November? If you agree, is there any information that would help support your stance.
I’m not asking because I’m lazy, but I just am not sure with all of the information out there with regards to the finances of our country right now, and google knows there’s a hell of a lot, where to start. If I had just a starting place that is at least pretending to be unbiased (not turning it into a partisan issue) then I’d be happy to read.
The story gives one piece of the puzzle certainly. The derivatives gave people an incentive to encourage failures of a particular type. When people in charge of the assets were allowed to get into the betting, that went way over the line. I compare it to allowing police departments to keep a percentage of the property they seize under drug statutes. It encouraged overzealous seizures. This is far from the whole story, however.
A lot of the sub-prime mortgage crisis occurred because congress threatened lending institutions that did not make loans to people with bad credit, job history, etc. Basically, the government said “Make loans to people who can’t afford it, or we’ll force you.” This could not help but result in more defaults. The problem became magnified when banks and other financial institutions started bundling these loans and selling them. Congress and the regulatory agencies basically gave a pass to the process because they didn’t want to tighten up credit on the poor and because they were receiving large amounts of donations from lobbyists for these organizations. Fannie Mae and Freddie Mac were big contributors. If you look on the web, you should be able to find stories from 2003 with Republicans declaring that a crisis was looming and at least some Democrats saying everything was fine. Not surprisingly, these democrats were the ones benefiting the most from the donations of lobbyists.
[Translate]
Well…I think it’s true of many politicians regardless of party that lobbyists create a real issue with the judgement.
So then, I’m going to preface this portion of my comment with the possibility that I am particularly dense. I know that banks are required to do certain things such as being required to make a certain percentage of their loans in depressed areas, and are required to prove that they are not discriminatory in lending. I do not think that this accounts for certain aspects of the lending issue. For instance, the very large time period of granting 125% LTV loans, or loans without verification of income, and purchasing portfolios blindly. Or does it? I’m not sure. I have a hard time believing that the financial situation we have today was created by ‘normal’ lending practices. Many banks that followed the same laws as the other banks didn’t end up in financial ruin or extreme deficit did they? So, can it really be true that by following the laws that were set up for equal opportunity loans would have created such a problem for the economy world wide? If so, aren’t there auditors that should have been seeing this and then acting upon it?
Some time back, the FBI, I believe it was arrested something like 140 people linked to predatory loan practices. Did you hear about that? Was that kind of behavior going on in such vast quantities of institutions and no one acting on it that our economy was pushed into the situation it is now, contrary to the laws in place for banking institutions?
I’m readin’..so I’ll refrain from further speaking out of ignorance for the time being. Thanks for the info!
[Translate]
“Many banks that followed the same laws as the other banks didn’t end up in financial ruin or extreme deficit did they?”
No, a lot of banks did not. Refer back to the part of my previous post where the term “bundled” was used. Very few banks these days hold on the mortgage loans they make. I think my mortgage has been sold three or four times at least in the fifteen years I’ve lived at my current address. The problems of individual loans became intensified as financial institutions sold blocks of mortgages and other loans with “sub-prime” status.
From a realistic standpoint, the term “sub-prime” should have been a tip-off that there was an increased chance that the loans could default. Enter greed, politics, and lack of oversite. As mentioned in the 60 minutes story, congress granted the exemption for the mortgage derivatives which gave the potential for some people to profit from failing loans. At the same time, congress had a vested interest in keeping those mortgages in play because that was their major fix for discriminatory lending practices. They were also receiving kickbacks from lobbyists who benefited from them.
Congress wasn’t the only group who was benefiting of course. Financial groups were picking up large bundles of the sub-prime mortgages. The SEC, the group who was charged specifically with rating the bundles, was getting pressured by congress on one side for political reasons. On the other side, Fannie Mae and Freddie Mac (and probably others) were engaging in outright bribery to keep their investment rating high when it should have basically been junk-bond status. This kept the banks writing more mortgages because they knew that they would be approved with high ratings.
Things might have gone on like this a bit longer, but other parts of the economy turned south. Lots of people in areas with very high real estate turnover saw housing prices plummet. In California and several other areas, the practice had been to get a house with a huge mortgage that you could not realistically afford. Lots of times you would get it with a balloon payment after five years. The payments were really low for the first five years, and then the banker dropped the national debt on you. The idea was that you could sell the house at a huge profit after three or four years, so you didn’t care. But when prices started to drop, that scheme couldn’t work. So now you had lots of people with very high loans that they could not or could barely meet and a house that was worth less than they owed on it.
Rather than struggle up hill, many people decided to default. Add this to the flock of sub-primes which had already been inflated, and banks that were heavily invested in mortgages were in possession of some very bad paper. When the payments stopped coming in, they started running out of money. Since the SEC was way behind on rating institutions, no one was sure who was solvent and who wasn’t, so other financial institutions would not give them loans, and those banks who did have money were going to be looking very carefully at anyone looking to borrow money, hence credit crisis.
Were there other effects involved? Almost certainly. But if congress and the SEC had been doing there jobs, then the exemption for derivatives would not have been granted, Fannie and Freddie would have been put on track years ago, and the SEC wouldn’t have let the rating system be gamed. I’m not saying that corporate banks and officers were not greedy. I am saying that I don’t pay them to watch my interest. I pay congres and the SEC. They let me down.
As for predatory lending, that’s a debate in itself. My wife and I are great believers in charity. We practice it often, but we do it with our own money. But we expect our bank to make decisions based on sound business judgement. Period. If someone comes in and the bank has good reason to expect that they can’t repay a loan, they shouldn’t get the loan. They have no business playing Santa Claus with other people’s money, and congress has no business making them do so.
[Translate]
“No, a lot of banks did not. Refer back to the part of my previous post where the term “bundled” was used. Very few banks these days hold on the mortgage loans they make. I think my mortgage has been sold three or four times at least in the fifteen years I’ve lived at my current address. The problems of individual loans became intensified as financial institutions sold blocks of mortgages and other loans with “sub-prime” status.”
Ah hah! Noted, and processed into a better grasp of the situation now. Thanks!
“When the payments stopped coming in, they started running out of money. Since the SEC was way behind on rating institutions, no one was sure who was solvent and who wasn’t, so other financial institutions would not give them loans, and those banks who did have money were going to be looking very carefully at anyone looking to borrow money, hence credit crisis.”
This, I was aware of and saw in action. I came into “the know” at about this point. The issues leading up to it were the critical piece I missed. Further investigation lead me to some of the information you’ve provided for me here (at 2:30am because I don’t sleep, by the way you get up early do you go to bed early?). So thank you for the stop gap.
“if congress and the SEC had been doing there jobs, then the exemption for derivatives would not have been granted, Fannie and Freddie would have been put on track years ago, and the SEC wouldn’t have let the rating system be gamed. I’m not saying that corporate banks and officers were not greedy. I am saying that I don’t pay them to watch my interest. I pay congres and the SEC. They let me down.”
Fannie and Freddie sound like an old couple that tortured people in their basements and needed some therapy way back when. This has been most enlightening, I mean the banking situation and the credit crisis. We can always count on the government to do the right thing!
Obviously, it’s more than that and this was a serious exception, I don’t believe it to be necessarily the rule.
What it boils down to is that multiple parties were being highly irresponsible with other people’s money and they got caught making poor decisions that hurled us into where we are today. A series of unfortunate events as it were.
My mortgage has yet to be sold. However, they did screw up my escrow account and I spent three days resolving the insurance fiasco because someone from the mortgage company didn’t do their job (more likely they were laid off and someone didn’t get their paperwork properly) yay me.
Thanks for the information, I’ve had fun times reading up on this.
[Translate]
As a follow up. It seems I was not completely incorrect about my statement regarding many banks avoiding the financial crisis. The relevant word being many, some would have been a more appropriate word. Also, I think it’s important that I distinguish real banks from the investment firms that have fallen into the crisis. In a sense, we’re not dealing with _real_ banks, we’re dealing with large investment firms (this was a hindrance to my understanding before). These businesses don’t do just banking, they do various other activities which helped land them in this trouble as well. As you pointed out.
NPR had a piece on this, regarding local banks remaining largely insulated from the misfortunes of world banks being completely hosed. This is largely due to no sub-prime lending, just as you indicated. Meaning they were following the letter of the law a little more rigidly, or were they being regulated a little more properly? I couldn’t say I don’t suppose.
Also, this piece concerning Canada (which, granted is unrelated to our local banks) being largely bypassed by the world financial crisis. Specifically , they mention better regulation as well as having all of their top banks being regional. Meaning their top banks have a presence in all of the provinces. If the economy in one province goes south, then the other regions can shift money around to support that area until the economy turns around. This causes me to ask the question, why don’t banks here in the states have such a structure; the answer I think is because the US is freakin’ huge? http://www.washingtonpost.com/wp-dyn/content/article/2008/10/15/AR2008101503321.html
That’s all. Just some thoughts as I was reading up on local banks and the global economy.
[Translate]
This is a guess, but based on what I know I believe it is a good one:
I beleive that most of the larger US banks would qualify as “regional” under the definition applied by the TV story in that they have offices covering large swaths of territory. All of the branch offices are part of the same bank though, meaning that the entire system has to have the required minimum reserve (a percentage of what is deposited) available to cover transactions and withdrawls. Banks hate to keep any more than that minimum reserve on hand, however, because that’s money that isn’t working for them. So what they tend to do is try to loan out the excess to other banks or finanical institutions. Sometimes the loans are very short term (as in overnight). In this way, the excess deposits of a great many banks are cross connected.
Banks used to be limited to very sound investments, but they were deregulated to allow them to assume more risk. So if the bank was counting on a certain return on an investment at a given time, and the investment doesn’t come through, then all of the sudden they don’t have the required reserves and they are in deep trouble. If the bank they lent their excess funds to suddenly goes bankrupt, they are in very deep trouble.
I would say that more than the insulation by region in Canada, limiting the type of investment and raising reserve requirements are probably the reason why Canada was largely spared.
As for your other point above, to the best of my knowledge all banks have basically the same regulations. Some financial managers at banks are more conservative in how much risk they are willing to assume. This gives the bank a very low chance of going defunct. However, it also limits the profitability of the bank when economic times are good, which may cause people to take their business elsewhere.
[Translate]
Thanks for that! All useful and pertinent information to me.
[Translate]