[Guest]

If any of you have watched the news or have been on anything like that then you would know about this... my question is will it actually work?

[Guest]

I think it’s sad. The greedy thieves knew what they were doing. They sat back sucking up bad mortgages and making millions. 5 years ago it was easier to get a home loan than a car loan. They took advantage of a housing bubble and exploited it. It is said that the bailout would cost taxpayers on average $2000. It would allow banks to be able to loan again, but what is it going to do for the people who are bankrupt or in foreclosure because of “creative financing”? Why should I have to suffer financially for people who recklessly assumed a mortgage they couldn’t afford and banks they gave it to them? I think something needs to be done, but I don’t believe this is it. I would like to see a stimulus package for tax payers attached to the proposal, and maybe an investigation on the income of the bank upper management. If we bail them out, what is going to stop them from mismanaging again? I think this is going to cost taxpayers in the future. Yep, I’m not happy about this mess. Just my 2¢.

Wow, I guess I had something to say about that.

[Brandonb]

Here's a short paper I wrote recently for Xtra credit that helps explain the situation a little better than the news has:

For the past ten or so years, the largest banks in the US have been playing “hot potato” with various bad mortgages and various other loans. As one may recall, only two years ago, seeing commercials constantly popping up on television offering “No down payment, No credit check” loans. It doesn’t take a rocket surgeon to realize that an offer like that would certainly warrant extremely high risk from the borrowers. Especially when compared to borrowers that made an appropriate down payment and passed a rigorous credit check. “…homeowners making $50,000 who thanks to creative mortgage finance… moved into homes once occupied by people making six-figure salaries–should have known something was up” (Lawrence A27). So why were these loans made? The answer lies on the other end of the loan, with the lender.

Borrowed money is a liability for the person who must pay it back. However, the institution that loans the money sees the transaction as an asset. It’s a promise to get the money back, and earn interest on it, so it potentially has a great deal of value. Now comes the question, if the value of these loans is solely based on the likelihood that the borrower will payback the funds, then why would anyone ever make high risk loans? The answer is that the interest rates were much higher than the low risk loans, and the interest rate was often variable, so the payback was also potentially much higher. Not only that, but mortgage brokers made very generous commissions for getting such high interest loans. These mortgage brokers worked to make as many high risk loans as possible and then bundle them with low risk loans, so that they could sell them to whoever would buy the bundle.

By making high risk loans, and immediately selling them off, those mortgage broker companies soon became renowned for their fast return on profits. So like any good business, many other financial institutions jumped on the bandwagon to gain a piece of the profit pie. Various big names began buying up these mortgage loan bundles, and sitting on them temporarily, then selling them off to other companies. Thus began an epic game of “Hot Potato,” or as the market lingo calls it “Musical Chairs.” “Peter Weiler, head of global sales at brokerage Abel/Noser Corp., said he had a short position on Lehman shares… ‘It’s blood money,’ he said” (Levitz A8).

As expected, over the past few years many of those variable interest rates began to rise, and likewise, those high-risk borrowers began to default on paying back their loans. Soon the music stopped and the mortgage market began to turn sour. Everyone holding a bundle of bad mortgages now had to pay for playing the high risk game. Then in July, the predictions of negative profits in the 2nd quarter in 2008 sent a panic through Wall Street. The artificial mortgage bubble burst, and the chips began to fall. By June, the finance reports were out and these major institutions were forced to reflect that these loans assets had become astonishing liabilities. Again, a panic swept through the stock market as investors scrambled to pull their money out of these institutions before the values of their stocks plummeted. This in turn caused the stocks to plummet even more. Within hours the effects of a decade’s worth of bad loans all hit Wall Street and echoed throughout the markets of the entire World. Now the Federal government of the US has declared that it will cover the cost of these bad mortgages… but that’s a different story.

Despite whatever the results of the rescue, the damage has been done. The bad decisions of these institutions will be affecting many families in many different ways. “For some it has meant, putting off retirement or long planned moves. For others it meant moving their money out of stocks and bonds and into foreclosed homes, gold, livestock or even just having a good time” (Levitz, A1). As for the high-risk people that were able to take out those high interest loans, they are never going to get an opportunity like that again. Or at least, let’s hope not.

-the quotes came from various WSJ articles.

So, the damage was not done so much by these massive financial banks as it was smaller mortgage brokers. Most of them have since gone out of business or packed up their stuff and tried to burn as much of their trail as they can. So punishment will not hardly befall these people, in fact, the whole "federal investigation" being launched is really not doing anything but burning even more taxpayer $. So now that the situation has occurred, where do we go from here? Well, there really was no option for bailing out AIG, it had to be done since they cover alot more than mortgage default insurance. But what about the banks? I say let them fail. The money would be better spent on giving the share holders 20cents on the dollar to help cover those who had their retirement funds invested in these banks. (If you have that much money riding on something, you should have an idea about what BS they are pulling, and as far I as I am concerned the people should have known better.) In addition, we need to reinstate the regulations that were repealed many years ago. "Bundling" mortgages should not be a legal practice, and it needs to be stopped.

The end....

?

OK, back to class

[Guest]

Very well written Brandon. You explain the situation well.

I agree that the smaller banks were taking bad risks, but I also believe the big banks knew what they were buying. My loan changed hands 5 times in a year. Yes, they knew. <_<

Edited September 24, 2008 by Alyanna

[Brandonb]

Very well written Brandon. You explain the situation well.

I agree that the smaller banks were taking bad risks, but I also believe the big banks knew what they were buying. My loan changed hands 5 times in a year. Yes, they knew. <_<

Thank you

Yeah, they certainly knew what was going on. It was a big gamble for them. I think the big banks were taking worse risks than the small ones. Smaller mortgage brokerage banks normally take mortgages on an individual basis. So they assess the loans well and try not to take too many big risks. However, the "bundled" mortgages were for the big boys. From what I have heard, these bundles held hundreds of mortgages each, and they were selling these things for billions. These bundles had good and bad loans in them, but remember, the good ones make payments over time, but the bad ones go totally in debt pretty much instantly. So the bad easily outweighs the good even if the bundle hold a ratio heavily in favor of low-risk loans. Anyways, yeah they new what they were doing. And they should suffer because of it. And the other banks that spring up to take their places need to have the old regulations reinstated so that it doesn't happen again.

[Guest]

Tis all very confusing for me... HA! Just to think most of the people in the US dont even know about this! When they do they will panic and take their money out of the banks will make the situation worse. Ah dont you just love our economy?

[Guest]

Tis all very confusing for me... HA! Just to think most of the people in the US dont even know about this! When they do they will panic and take their money out of the banks will make the situation worse. Ah dont you just love our economy?

Wow, I can't imagine anyone in the US not knowing about this. It's pretty scary really.

[itachi-san]

Nice article Bb!

I have a couple questions to pose:

1) What, if any add-ons should be incorporated onto the bill for the bailout?

2) Do the shareholders bare some of the blame for not attending share-holders meetings for the companies they have invested in?

3) What do people think about Bush basically forcing Obama to go to Washington?

for 1, I think there should be a comprehensive reform on Federal oversight of these companies to prevent future mistakes. Also, I think the "golden parachute" should be eliminated. No CEO should get money for failing in their job and bringing a company down. I'm not sure what to say about getting the mortgages involved on the bill. I think that would make it too complicated for Congress to handle.

for 2, I think the shareholders are not really to blame because those shareholders' meeting are usually held in Northern Maine or somewhere purposefully inconvenient to go.

for 3, I think it was funny and that he messed up McCain's hero plan. McCain set himself up to "suspend the election and go fix Washington" like Superman or something. And now Bush totally blocked him. Funny stuff and I don't quite get it.

[Brandonb]

Nice article Bb!

Thanks Itachi! Though this one is not really an article because will never be published, it was just something I did as xtra cred for a class.

1) A couple things come to mind:

- Illegalizing the bundling of loans.

- Remove the pressure on mortgage brokers to make subprime loans (this was another large part of the problem that I failed to mention. Several years ago there were lots of complaints about mortgage companies 'discriminating' against people who did not have a decent income. There were a few law suits over this issue, and the brokers were always the resounding losers. So the Federal Legislature repealed many regulations, and threated to pass laws to force those companies to make bad decisions with their loans. So the companies responded by making those now-infamous balloon interest loans to high-risk borrowers. These companies are in business to make money, not to lose it all for a few bad loans. The original decision to make bad loans was forced upon them.) It was because of government intervention that these companies were not allowed to do normal business... Now look at what has happened. The same people that created the problem are going to make it worse while trying to make it better, that's normal business for them.

2) Not so much for not attending the meetings, that's not a big deal. However, if you have your savings invested in companies that were doing bad business, then yeah, you lose your money. If you play in the stock market and you're not paying attention, you will get burned. There are losers and there are winners, and it's not like there wasn't plenty of notice about these upcoming problems over a year ago. The housing bubble burst on those falsely skyrocketing home values, and people went upside down in their mortgages and began walking out of their homes. What was supposed to happen to the companies holding those bad mortgages? Yeah, the shareholders need to go down for not pulling out their money sooner. Though like I said, using the "bailout money" to pay non-corporate officers 20cents on the dollar for their shares, and letting the companies fail sounds good to me. Personal responsibility... not much of that going around anymore.

3) I honestly haven't been paying attention to the race since the financial crisis on wall street. It immediately turned into a "he did it!" "no he did it!" "no he did it!" childish fight about through the baseball that broke the parent's car windshield. I heard a few things about McCain making the 'selfless' move (which was a very good self-promotion <_< ) to suspend his campaign. Your mention is the first I have heard about Obama being force to go back. Frankly I think it's a waste. Obama doesn't vote on critical issues anyway, he just votes 'present" so why bother forcing him to go back? He's not going to do anything anyway. Because of that, it seems that Bush just wanted to level the campaign playing field.

I was also trying to figure out if there is some way to regulate how often debts could be sold back and forth between banks. Though the more I think about it, the less it seems possible. Because those debts are assets to the banks, and therefore it is their right to buy and sell their property as they choose to raise and low their cash holdings. By preventing or limiting the transactions, it would kill their ability to really do any business at all. Well, now come to think of it... the trading between the banks was never even part of the actual problem. So I guess that's why I can't get anywhere with those thoughts.

If it aint broke, don't fix it. (I think that should be tattooed on hands of every politician in the country)

[Brandonb]

Hey, I just thought of something else that should go into the bill. Of course it would never be added, because it implies punishment for those responsible

This originally goes back to two things.

1- Law suits by people who historically make bad decisions that say they are being 'discriminated' against because they make bad decisions (those with bad credit). Of course they are being discriminated against. Discrimination is only fair if it is based economic decisions. That's how business is done. Law suits involving 'economic discrimination' should be illegal.

2- Congressmen should be held responsible for when they pass bad legislation. Everyone who voted in favor of repealing those rules and regulations that (once repealed) caused the financial crisis, need to have their private holdings significantly taxed (50% sounds good to me) and in return each receive a swift kick in the teeth. Hopefully they will think things through next time.

Ok, I'm serious about #1, but #2... I dunno, they really do need to individually suffer financial repercussions for causing these problems.

[Guest]

The thing that bugs me the most is that when the company goes down then all the CEO's of the company get 5-10 million dollars!! Just for being laid off... and instead of the people working there all their lives who are 60-65 and are just on the verge of retirement cannot do what they want because they got fired. That really pisses me off...

Makes me want to kill the CEO's and the president for even thinking such a thing -.-

but of course i would never do that.

[Brandonb]

Makes me want to kill the CEO's and the president for even thinking such a thing -.-

but of course i would never do that.

Hmm.... what if.... *begins to devise a new version of Mafia....

[itachi-san]

Hmm.... what if.... *begins to devise a new version of Mafia....

lol, but the Bush Administration would be invincible. The Karl Rove character would just hypnotize everyone each day and night That would make for a sweet Mafia game though, but when it comes to Politics, I can't seem to think of any Innocents...

[Prof. Templeton]

It's not the bundling of loans that was the problem, it was how it was done. I think the system can be re-tooled so that the risk is evident and transperant. Everyone involved was paid by the number of loans pushed through, including evaluation companies, so even worthless loans got the green light. There must be a way to properly catagorized even sub-par loans so that thier true value is known. IMO.

[Guest]

In a lot of cases, I don't think the smaller firms were even checking peoples financial status well. They knew that the larger firms would buy them anyway. The loan application process would have to be better regulated first. IMO.

[Guest]

Nice article Bb!

I have a couple questions to pose:

1) What, if any add-ons should be incorporated onto the bill for the bailout?

2) Do the shareholders bare some of the blame for not attending share-holders meetings for the companies they have invested in?

3) What do people think about Bush basically forcing Obama to go to Washington?

for 1, I think there should be a comprehensive reform on Federal oversight of these companies to prevent future mistakes. Also, I think the "golden parachute" should be eliminated. No CEO should get money for failing in their job and bringing a company down. I'm not sure what to say about getting the mortgages involved on the bill. I think that would make it too complicated for Congress to handle.

for 2, I think the shareholders are not really to blame because those shareholders' meeting are usually held in Northern Maine or somewhere purposefully inconvenient to go.

for 3, I think it was funny and that he messed up McCain's hero plan. McCain set himself up to "suspend the election and go fix Washington" like Superman or something. And now Bush totally blocked him. Funny stuff and I don't quite get it.

Of course you dont get it. We all are getting it, screwed that is.

When my partner and I bought our home we were shocked at how hard it was to get a loan from reputable lenders.

Once we got one the ads started pouring in... refinance!!!! They Knew where we got our loan and for how much!

My partner and I are safe and I dont feel all that sorry for others who took out those bad loans.

All the people involved knew what they were getting into. They all thought they were getting a great deal by being sneaky!

Its a bit like changing price tags before you get to the counter.

Now mcCain is blowing off the debate! Wheres his courage now? Why not send palin in for him? Oh wait.. that would be real stupid.

Watch this.. http://www.bestweekever.tv/2008/09/25/icym...avid-letterman/

He says it so well.

So what about the regulations that were supposed to stop this from happening? Oh yeah, McCain voted against them.

His vp cant even think of a time in the last 20 yrs that he voted for regulations!

And who says were not a socialist country?

So what is it folks? A pretty lie or an ugly truth?

Edited September 25, 2008 by crazypainter

[Brandonb]

It's not the bundling of loans that was the problem, it was how it was done. I think the system can be re-tooled so that the risk is evident and transperant. Everyone involved was paid by the number of loans pushed through, including evaluation companies, so even worthless loans got the green light. There must be a way to properly catagorized even sub-par loans so that thier true value is known. IMO.

Right. Though it was the bundling that has made the true value on these loans unknown. If there were strict regulations that said that only like-risk loans could be bundled together, then maybe it would be ok. Though I still don't like the practice in the first place. It sounds too much like what congress does to the bills they pass. They start off with a few good things in it, then throw in a bunch of self-serving crap last minute before they pawn it off up the line.

[Guest]

It's a shame we are in this mess and cannot do anything about it. I mean who are we to Congress and the Senate? It should be Julias Caesar all over again

Who wants to take the first stab?