Treasury sells $4.5 billion in AIG stock

mogur · Sep 8, 2012

Grin, you are right, home loans became a casino gamble. The decades of 'banks won't loan money to those who can't afford it', became 'we don't care if you can pay us back, because we are going to offload your lousy loan to other unsuspecting people', and 'we make money from quantity, not quality of loans'. Yeah, it was unscrupulous borrowers that were the problem. Just like it is unscrupulous buyers that are shipping jobs overseas, because all they can afford is Walmart. Micheal Jordan makes more than the entire Indonesian workforce of 7500 people making Nike shoes each year, and before you say that is also off-topic, what exactly is on-topic? Playing to the greed of consumers is okay, but being suckered is 'personal irresponsibility'?

myp · Sep 8, 2012

mogur said:
Grin, you are right, home loans became a casino gamble. The decades of 'banks won't loan money to those who can't afford it', became 'we don't care if you can pay us back, because we are going to offload your lousy loan to other unsuspecting people', and 'we make money from quantity, not quality of loans'. Yeah, it was unscrupulous borrowers that were the problem. Just like it is unscrupulous buyers that are shipping jobs overseas, because all they can afford is Walmart. Micheal Jordan makes more than the entire Indonesian workforce of 7500 people making Nike shoes each year, and before you say that is also off-topic, what exactly is on-topic? Playing to the greed of consumers is okay, but being suckered is 'personal irresponsibility'?

Being naive is not an excuse. It just isn't. I don't know how you can argue it is. If someone shot a person and then claimed they didn't know the gun would kill them, would you be okay with that too because they were naive and victims to the gun companies?

It might be unsettling to accept- but those who took loans that they could never pay back are at fault ALSO. Why does the responsibility fall completely on the lender? And yes, for those people it was a casino gamble- they gambled that their houses would increase in value enough for them to pay off their payments in equity. Those with adjustable rates also gambled that rates would stay as they were. They are both very risky speculations.

Consider this: a situation where a person has adequate money and income to buy a house. Heck, let's say he has 100% of the money in the bank but wants to take a mortgage out anyway. I'm sure you'd agree that that is a good call by the bank to lend him the money in that case. If he decides to blow all that money on penny stocks the next day and those stocks crash and he ends up defaulting and losing the house, is it solely the banks fault?

Nemo · Sep 9, 2012

It was speculation run rampant. At the height of the housing boom, the banks were making "NINJA" (no income, no job or assets) loans - cooked them up like hotcakes! - and sold the mortgages as CDO’s. What’s particularly troublesome is that most of these bad loans were made in "nonrecourse" states. Anti-deficiency protection alone would demand a sufficient equity cushion in the property to protect the bank in the event of default and foreclosure; but in the rush to market the mortgage-backed securities, the banks turned a blind eye to the assumed risks and probable consequences. (Their counterparties were more circumspect, demanding the execution of "repurchase agreements" with "cash collateral"; which derivative contracts are exempt from bankruptcy of the bank’s parent holding companies that stood as guarantors.) The derivative contracts do not provide "liquidity" - to the contrary they are secret liens to conceal "leverage" as they are traded "over the counter" and carried "off balance sheet." Such transactions violate every rule of financial accountability for banking entities, and should be prohibited both directly, or indirectly through so-called "shadow banking" affiliates.

mogur · Sep 10, 2012

Nemo... you know what happened, thank you for sharing your knowledge. My knowledge is much more modest, but I will share my opinions anyway...

The American dream was largely buying a house. For the entire history of this nation, it has been the scenario where you had to come up with 20% down to even think about buying a house, thereby putting it out of the reach of all but those who earned enough to save a considerable sum of money. Those are the people who qualified. Those are the people who seldom defaulted.

Now, take that scenario and change it so that banks can bury toxic loans by off-loading them as 'derivatives'. They are now making money off volume, irrespective of the quality of their loans. They are insulated all of a sudden from the responsibility to qualify loans.

Okay, now look at the same scenario from the buyer's perspective. They have been saving meager amounts of money as best they can in pursuit of the American dream. A slimy banker now tells them that they no longer need a 20% down payment, they no longer need even a good work history, and often, they no longer need any employment at all.

Who got hurt by this situation? The irresponsible borrower? No, he simply went back to his meager existence. The banker? No, he got a golden parachute, and went on to upper management. The real people that got hurt were those that were personally responsible, got buried under the housing collapse, and now are under-water. THOSE people were hard-working middle class Americans that made a large down-payment. Those were the ones that had a job, were not irresponsible, were not stupid. Many were even upper middle class that were sand-bagged by this banking/realty collapse.

Myp, you really think that everyone involved should take responsibility equally? Obviously, you escaped the carnage. I'm happy for you. You must either be lucky, rich, or clever. Maybe all three. Congrats.

Nemo · Sep 11, 2012

There is nothing wrong with subprime loans per se. Virtually every VA and FHA loan is subprime. The same is true with most commercial loans guaranteed by the SBA. Likewise, financial assistance programs for low-income housing has been around for some time at the federal, state and municipal level. These loans are not a problem provided that they are serviced in house by the bank where they can be regulated with proper government oversight. The problem was the unregulated wholesale marketing of such loans as debt securities. The question is whether banks should be allowed to do this. The answer is no because of the risk exposure; and, as I pointed out previously, allowing banks to deal in these high-risk, secret transactions is against all rules of bank accountability. (Even to this day the government does not know where all the TARP money was spent; nor has JP Morgan Chase accounted for how many billions were lost in its unauthorized trading.)

How did this happen? It was Congress that bowed to the bank lobbyists; it was a Congress that lifted the restrictions on banks making a market in mortgage-backed securities; and it was a Congress that enacted the exemption for financial derivative contracts that immunized the speculative trading resulting in the economic crash of 2008. Who was hurt by this? We all were; and we will all be paying for it - either directly in financial loss, or indirectly in a depressed economy. Who is to blame? President Clinton had nothing to do with it; President Bush did nothing to prevent it; President Obama did to too little too late to fix it; and, if Mitt Romney is elected, we can rest assured he will undo what little that has been done, and it will be back to business as usual.

What is the answer? There cannot be unregulated business and finance. There has to be ground rules that apply to all parties; and not special exemptions for certain players. There should be no safe harbor for derivatives under the bankruptcy laws; which should apply to all contract rights and their counterparties. In order to maintain the integrity and stability of the banking system, there must be transparency and accountability. There must be a clear dividing line between banking transactions (e.g., mortgage lending) that are insured, and market trading (e.g., sale of mortgage-backed securities) that are not. Unto this last, there must be active oversight of market activity that provides a level playing field and promotes fair trading and investment in financial securities.

myp · Sep 11, 2012

Nemo said:
It was speculation run rampant. At the height of the housing boom, the banks were making "NINJA" (no income, no job or assets) loans - cooked them up like hotcakes! - and sold the mortgages as CDO’s. What’s particularly troublesome is that most of these bad loans were made in "nonrecourse" states. Anti-deficiency protection alone would demand a sufficient equity cushion in the property to protect the bank in the event of default and foreclosure; but in the rush to market the mortgage-backed securities, the banks turned a blind eye to the assumed risks and probable consequences. (Their counterparties were more circumspect, demanding the execution of "repurchase agreements" with "cash collateral"; which derivative contracts are exempt from bankruptcy of the bank’s parent holding companies that stood as guarantors.) The derivative contracts do not provide "liquidity" - to the contrary they are secret liens to conceal "leverage" as they are traded "over the counter" and carried "off balance sheet." Such transactions violate every rule of financial accountability for banking entities, and should be prohibited both directly, or indirectly through so-called "shadow banking" affiliates.

NINJA loans are not only the fault of the lender, but also the borrower. After all, no one put a gun to the heads of the borrower either.

As for derivatives, they, like any securities provide liquidity by making the underlying assets easier to trade and by allowing hedging strategies.

The issue here was that the makers of the derivatives had access to too much leverage and were in a morally hazardous position- both which come back to the Fed, Fannie/Freddie, and the government. (and not just to Glass Steagall since shadow banking worked around that before it was partly repealed anyway)

The fraud, etc. that might have happened, no one is standing up for. I think it seems like I am downplaying the role of Wall St. in this crisis, but I am not- they were irresponsible and a vital part of it all, but the government, the borrowers, etc. also hold blame too- a part that I think you two are downplaying.

Nemo · Sep 11, 2012

No, MYP, derivatives don't provide "liquidity," they conceal "leverage." See Post# 63, supra. And, yes you are right, there's plenty of blame to go around; but then it is not difficult to apportion it between the predators and their prey.

myp · Sep 11, 2012

Nemo said:
No, MYP, derivatives don't provide "liquidity," they conceal "leverage." See Post# 63, supra. And, yes you are right, there's plenty of blame to go around; but then it is not difficult to apportion it between the predators and their prey.

Derivatives make it easier to trade assets. Everyone can't or don't want to buy individual and physical mortgages, oil, corn, whatever. Derivatives makes it so they can trade them as financial assets. Having more traders and greater volume increases liquidity.

Leverage can be a concern with derivatives, but I've said that and we agree on that. My point is it was the leverage that is the greater issue- the existence of derivatives isn't. And when it comes to reducing leverage, the government failed greatly (in fact, they encouraged it).

As for who's at fault, I am not saying Wall St. doesn't hold a greater blame (I agree that they do), but just that you can't see those who took loans they'd never be able to pay as victims either. They aren't victims. They are part of the problem.

Edit: I wanted to add that with the issue of derivatives, we saw some fishy ones in this crisis, but that is not an argument against derivatives, but more just an example of borderline fraud (when it came to misrepresentation). A spoiled egg doesn't mean all eggs are bad.

mogur · Sep 11, 2012

myp said:
NINJA loans are not only the fault of the lender, but also the borrower. After all, no one put a gun to the heads of the borrower either.

I guess you don't agree with my previous posts about slimy bankers. So be it. You probably think that bait and switch, false advertising, infomercials, and corrupt pharmies are okay, because victims are so stupid that they deserve thalidomide babies. Trust is not the code word for big banks. Stupidity of buyers is your mantra, and no, no one put a gun to the head of innocent pregnant women, either. But big pharma did. And yes, that is an extreme example, but I think you need to think about it before you defend purveyors at any cost.

myp · Sep 12, 2012

mogur said:
I guess you don't agree with my previous posts about slimy bankers. So be it. You probably think that bait and switch, false advertising, infomercials, and corrupt pharmies are okay, because victims are so stupid that they deserve thalidomide babies. Trust is not the code word for big banks. Stupidity of buyers is your mantra, and no, no one put a gun to the head of innocent pregnant women, either. But big pharma did. And yes, that is an extreme example, but I think you need to think about it before you defend purveyors at any cost.

Your tendency to generalize all business as synonymous and seemingly as "big and bad" regardless of company, industry, and case and on the other other side pooling everyone else together tells me that you are making a purely political argument and frankly, I am not interested in such opinion. You might think corporations are evil, and people are like bugs under the corporate shoes, but that doesn't mean anything in the realm of logical or scientific discussion (and it isn't true...)

Nemo · Sep 12, 2012

I don't have a problem with derivative contracts, provided that they are not exempt from the federal bankruptcy laws. It is this exemption under the current law that is the problem with these secret liens, as illustrated in the MF Global Holdings Ltd. bankruptcy now pending in the United States Bankruptcy Court for the Southern District of New York. As for the "scope of corporate personage" and the abuse of the corporate franchise, the recent memorandum opinion provides an amusing example:
http://www.nysb.uscourts.gov/opinions/mg/221394_526_opinion.pdf

myp · Sep 12, 2012

Nemo said:
I don't have a problem with derivative contracts, provided that they are not exempt from the federal bankruptcy laws. It is this exemption under the current law that is the problem with these secret liens, as illustrated in the MF Global Holdings Ltd. bankruptcy now pending in the United States Bankruptcy Court for the Southern District of New York. As for the "scope of corporate personage" and the abuse of the corporate franchise, the recent memorandum opinion provides an amusing example:
http://www.nysb.uscourts.gov/opinions/mg/221394_526_opinion.pdf

I think ideally mostly everyone would have liked to utilize the bankruptcy system for the mortgage derivatives, but the issue was that the losses would be too great for the firms that held them to the point where those firms would fail and start a contagion. Of course in the case of AIG, the credit default swaps were a big hit too.

I haven't been following the MF Global issue much, so I am not too familiar with that, but did I address the point you were trying to make?

If I understand you correctly, I think I would agree with you that bankruptcy should be the way to go in the future- but first we need to do something about the leverage (which has come down somewhat but probably not as much as it should) and systemic risk so that it is feasible.

mogur · Sep 13, 2012

myp said:
Your tendency to generalize all business as synonymous and seemingly as "big and bad" regardless of company, industry, and case and on the other other side pooling everyone else together tells me that you are making a purely political argument and frankly, I am not interested in such opinion. You might think corporations are evil, and people are like bugs under the corporate shoes, but that doesn't mean anything in the realm of logical or scientific discussion (and it isn't true...)

And you are all scientific and logical. Excuse me while I puke. You are a corporate whore. Good bye and good luck. I am done.

Nemo · Sep 14, 2012

deleted off topic

myp · Sep 14, 2012

Thomas Hoenig (formerly of the Fed) brings up some interesting points in terms of international guidelines that could have been better (and still can): http://blogs.wsj.com/deals/2012/09/14/fdics-hoenig-wants-simpler-rules-than-basel-iii/

I don't agree with everything he proposes, but the idea that those rules are still too complicated is an interesting possibility. I'd take it further and say that even a lot of domestic policies that are too complicated end up blurring market signals for a lot of firms/people which allows for bigger/longer bubbles and possibly busts.

Nemo · Sep 17, 2012

What is needed is more transparency in financial markets. All other commercial transactions require disclosure. For example, a loan secured by a mortgage is required to be recorded in order to perfect the security interest in the property, and protect the lender from loss of lien rights by a bona fide purchaser or encumbrancer for value. The same is required for commercial and consumer loans secured by personal property. The holders of the liens are required to give notice by recording their secured interests by law. It is only financial derivative contracts that are excepted from this requirement, which special exemption lies at the root of the problem in regulating financial markets. As I have said before, Congress needs to repeal the "safe harbor" provisions for derivative contracts. This will promote transparency and value over speculation. Without the exemption for anonymous creditors, the counterparties to these derivative contracts will be forced to disclose their agreements in order to protect the priority of their secured interests - just like everyone else. Then everything will be aboveboard; and, at least, there will be a level playing field where all can compete in the market fairly.

Treasury sells $4.5 billion in AIG stock

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