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stoney321I figured we'd need the distraction after the first portion of this post. Also, I promised ![[livejournal.com profile]](https://www.dreamwidth.org/img/external/lj-userinfo.gif)
turnonmyheels my workout mix, and it's taken me forever to get it organized and uploaded. (Sorry!)
"Joe Sixpack's" Guide to The Economic Crisis
Did y'all watch 60 Minutes last night? I know it's geared for the AARP set, but it's mostly just Andy Rooney that sucks (and who I won't mourn when he finally kicks it.) Anyway, they did a better job of explaining the real situation behind the scenes, and unfortunately, I'm intimately familiar with those types of business practices.
After my divorce, I got into IT during the Dot.Com explosion. I worked for a company called "First Plus," who did (surprise!) sub-prime loans. They made their money in SELLING these loans. Here's how it worked: you own a house, we'll say it's a 200K house. You've only got 50K in equity and need a loan. A NORMAL bank would start at the 50K equity, and determine how much of that you could reasonably get in a refinance situation. If you have a credit rating of 650-750 (upper end) you'd most likely get up to 45K. You wouldn't get the full 50K. Think of a teeter totter with the bank on one side and you on the other. They want to be on the ground with more money in their pockets, in case something happens to you up there. (Short: they'd rather lose 30K than 50K.)
Now, First Plus would start off at 125% of your equity. So they didn't start the process at 50K knowing it would never be that much, they started off at 62.5K. So you could feasibly get in a loan more than you had to back it up. First Plus would then take your paperwork for your exorbitant loan, and those of others, package them up as a "security" and sell them to other people. This means they weren't servicing their own loans. They were giving money to (general) you, selling the deal to another business for hopefully a slightly higher amount than they originally loaned, then leaving the whole "collecting" process to the guys that bought the package.
And let's hope people can pay off their loans, right? First Plus didn't care, because it wasn't up to them to try and collect anymore.
The company made money hand over fist. Anytime I was sent in to work on the top exec's computers, it was like entering another world. Their secretaries had private memberships to workout facilities, because they had to look a certain way. The secretaries were driving corvettes. The execs? Lotus, Ferraris, etc. The President had 8 private planes - 20 seaters, all leather, and so on. I found more coke in desk drawers... (I would write down new passwords, etc. and stick them in their drawers for privacy. Whoops. Guess they forgot their blow.) I was told once to not go into one of the VP's offices, even though we had a strict appointment. He was banging someone on his desk. Classy.
And then one day, no one wanted to buy their loans from them. No one wanted to continue servicing (collecting monthly payments) these risky loans anymore. And First Plus was stuck holding the bag. The stock price went from 72 bucks to 44 cents in 24 hours. The doors closed in two weeks, and surprisingly, no one went to jail.
This was 1999.
Guess what the Lehman Brothers and Goldman Sachs and Bears and Sterns and AIG were doing? The same thing. But, with an extra special twist! Anyone understand the futures market? It's a lot like craps, honestly. You're betting that something will or won't be a certain amount, roughly. The FL orange crop is going to be a robust market, which means a lot of product and security, buy in, because when it rolls around, money for everyone. Huge freeze in FL, dump your futures, because they don't have one, that sort of thing. (Trading Places, while crude, actually does a good job of explaining how it works, even though Eddie Murphy didn't know what the hell he was doing in the pit. I digress.)
(Side note #2: there's an insurance futures market, which is why prices rise and fall in impending bad weather, like hurricanes. Nice and disgusting, right? People MAKE MONEY off of massive destruction. Welcome to Wall Street!)
There's another element to the futures market called OPTIONS. You buy - for a percentage of a share - the option to ACTUALLY buy the future. Confusing? Yes. It's a smaller amount, essentially. If gold futures are 100 a share, a gold option would be closer to 10 bucks. And here's the important part: you don't have to BUY the actual future. You can just trade your options, because they go up and down in tandem with the actual future's price. People can make a good amount of money on options trading as you don't need as much up front to get going. Instead of buying at 100 and selling at 130, you buy and sell at 10 to 13. Smaller profit margin. Unless you buy in the hundreds of thousands, which is what serious market players do.
Now, back to the failed investment banks. They made an OPTIONS MARKET on those risky loans. I didn't know they had done that, I thought it was just the same as First Plus: making bad loans, and selling the work to collect the loans to other people. Well. They basically had the original bet of selling risky loans for a profit going, then added the side bets of options. Like rolling a Hard 8 on a craps table, no lie. If you win a hard 8, you get 10 times your bet amount. But if you lose, it's gone for good.
Also: they sold the bad loans TO EACH OTHER. Then, then,they created an options market (they called it a "swap" to avoid - here's the important part - FEDERAL REGULATION, because insurance is regulated, but swaps aren't) to make more money. They sold options to people over seas, again, to each other, and most importantly to the American People: they bundled these bad loans into a "security" and slipped them in to loads of mutual funds, one of the safest investments for the common guy in the market, which is what a lot of people's 401Ks are made up of, and a lot of people's pensions, incidentally.
So when those fail, because they will, because they gave money to people who couldn't not give it back, especially not with interest, anyone with a portfolio with a mutual fund is going to be affected. Instead of a steady 3-5% growth that the average mutual fund provides (not sexy, but it's money you didn't have, you know?) they're losing money. Like, all of them. Thanks, greedy assholes!
You know how you can hock something to a pawn shop? Let's say you hock a watch that costs 100 bucks, but the guy at the counter gives you 25 bucks. That means to get it out of hock, you have to give them back 25 bucks and a small percentage. Either way, they make money off you, right? But here's what the banks did (they're the pawn shops): They took your watch to the pawn shop down the street and sold it to them for 26 bucks (they made a dollar!) and then that pawn shop went to another pawn shop and sold that watch for 26.50. (they only made fifty cents, but they only had to hold the watch for an hour, so it's easy money.) And on and on and on.
Here you come to get your watch back, and it's not there. And they point you to another place, and they don't have it. And on and on until you give up, you don't want the damn watch, now, anyway! So that last pawn shop, that ended up taking it for 32.25 doesn't have anyone that can buy it back. No one wants those kind of Seiko watches now. So they thought they'd sell it for 35 and make money, they told the Mafia guy strong arming them that they'd sell it, sure sure, boss, and now they're screwed. Because now they have to give their own money up or lose a limb.
So, instead of 35 bucks, make that 35 TRILLION. We, the average Joes of the world, are that last pawn shop left having to foot the bill.
I'm not exaggerating when I say that these bankers make Enron's leaders look like angels. They took the philosophies of the Enron guys and built on THAT. A house of cards, indeed. It may not happen immediately, but I'll tell you this much: some of these guys are going to jail. And if not, I say revolution, people, because this is about as shifty as it comes.
And didn't anyone teach these guys about gambling? THE HOUSE ALWAYS WINS.
For a while now, I've been meaning to post about this, saying that we Americans need to shoulder a large portion of the blame with the current economic crisis. We need to accept that a lot of us thought we were getting something for nothing. A bigger house that we never thought we could afford, the hope of flipping a piece of real estate because of inflated house prices (I'm looking at you California and Arizona) or we lived on credit because why not? Yeah, you'll have to make payments for years, but who cares? You want a new plasma, a new car, new clothes all the time, etc. We got greedy. Is it any wonder that the banks did, too? Or did we get greedy because of the banks greed? I'm more inclined to go that last way, because the American public doesn't have trillions in personal debt, THE BANKS DO.
They TOLD YOU you could qualify for a 300K mortgage when you could only pay a 200K mortgage. If the banks, the money guys, are assuring you of this - and make no mistake, this is not the simplest of math - why wouldn't you believe them? For God's sake, George W. Bush told the American public that the way for each of us to show patriotism and to make our country stronger was to BUY THINGS WE DIDN'T NEED. (Incidentally, I love Suze Orman.)
So while you should have listened to that nag on your shoulder (again, general you) that told you to wait until you could afford something, let's not forget that Mom and Pop (who the current government thinks they are, and we their stupid kids) said it would be alright to go ahead and get it.
And here's an amazing factoid: Wall Street got Nobel Prize winning mathematicians (for economics) to write up complex formulas for the banks to use in packaging, breaking up, and re-selling these bad loans. It looked great on paper. Because math is awesome. Know what? PEOPLE ARE NOT MATH. We don't follow laws and proofs. Weather happens. Deaths happen. Unexpected accidents, layoffs, births, etc. happen and can't be properly predicted. Actuary math is close to precise, but the math Wall Street was using wasn't actuary math.(*cough* note the date on that article, incidentally. 1999.) It was economic math intended to fool others into investing. For shame!!
What a f*cking mess. If there's any advice I can give you: spend CASH ONLY. And build up a year's supply of things you need, no lie. At least have in your savings (or get to where you have it) two month's expenses. That means food costs, bills, mortgage/rent check, car payments, and incidentals. If that means no vacation, there you go. If that means no going out on weekends, or you cut back on clothes and restaurants and smokes and liquor and Starbucks, that's what you need to do. Putting things on the card is no longer a viable option. GET OUT OF THAT HABIT. If only because the days of low percentage rates are OVER. [ETA]swmbo linked me to an even SIMPLER explanation of our mess. It's a thing of beauty and stick figures.
In other words: I'm buckling down for the zombie 'pocalypse. The time is nigh. ;) (Ugh, and this is now too long for music, which means I'm going to spam your flists later today with a music post, but that'll all be behind a cut so you can scroll. *g*)
turnonmyheels my workout mix, and it's taken me forever to get it organized and uploaded. (Sorry!)"Joe Sixpack's" Guide to The Economic Crisis
Did y'all watch 60 Minutes last night? I know it's geared for the AARP set, but it's mostly just Andy Rooney that sucks (and who I won't mourn when he finally kicks it.) Anyway, they did a better job of explaining the real situation behind the scenes, and unfortunately, I'm intimately familiar with those types of business practices.
After my divorce, I got into IT during the Dot.Com explosion. I worked for a company called "First Plus," who did (surprise!) sub-prime loans. They made their money in SELLING these loans. Here's how it worked: you own a house, we'll say it's a 200K house. You've only got 50K in equity and need a loan. A NORMAL bank would start at the 50K equity, and determine how much of that you could reasonably get in a refinance situation. If you have a credit rating of 650-750 (upper end) you'd most likely get up to 45K. You wouldn't get the full 50K. Think of a teeter totter with the bank on one side and you on the other. They want to be on the ground with more money in their pockets, in case something happens to you up there. (Short: they'd rather lose 30K than 50K.)
Now, First Plus would start off at 125% of your equity. So they didn't start the process at 50K knowing it would never be that much, they started off at 62.5K. So you could feasibly get in a loan more than you had to back it up. First Plus would then take your paperwork for your exorbitant loan, and those of others, package them up as a "security" and sell them to other people. This means they weren't servicing their own loans. They were giving money to (general) you, selling the deal to another business for hopefully a slightly higher amount than they originally loaned, then leaving the whole "collecting" process to the guys that bought the package.
And let's hope people can pay off their loans, right? First Plus didn't care, because it wasn't up to them to try and collect anymore.
The company made money hand over fist. Anytime I was sent in to work on the top exec's computers, it was like entering another world. Their secretaries had private memberships to workout facilities, because they had to look a certain way. The secretaries were driving corvettes. The execs? Lotus, Ferraris, etc. The President had 8 private planes - 20 seaters, all leather, and so on. I found more coke in desk drawers... (I would write down new passwords, etc. and stick them in their drawers for privacy. Whoops. Guess they forgot their blow.) I was told once to not go into one of the VP's offices, even though we had a strict appointment. He was banging someone on his desk. Classy.
And then one day, no one wanted to buy their loans from them. No one wanted to continue servicing (collecting monthly payments) these risky loans anymore. And First Plus was stuck holding the bag. The stock price went from 72 bucks to 44 cents in 24 hours. The doors closed in two weeks, and surprisingly, no one went to jail.
This was 1999.
Guess what the Lehman Brothers and Goldman Sachs and Bears and Sterns and AIG were doing? The same thing. But, with an extra special twist! Anyone understand the futures market? It's a lot like craps, honestly. You're betting that something will or won't be a certain amount, roughly. The FL orange crop is going to be a robust market, which means a lot of product and security, buy in, because when it rolls around, money for everyone. Huge freeze in FL, dump your futures, because they don't have one, that sort of thing. (Trading Places, while crude, actually does a good job of explaining how it works, even though Eddie Murphy didn't know what the hell he was doing in the pit. I digress.)
(Side note #2: there's an insurance futures market, which is why prices rise and fall in impending bad weather, like hurricanes. Nice and disgusting, right? People MAKE MONEY off of massive destruction. Welcome to Wall Street!)
There's another element to the futures market called OPTIONS. You buy - for a percentage of a share - the option to ACTUALLY buy the future. Confusing? Yes. It's a smaller amount, essentially. If gold futures are 100 a share, a gold option would be closer to 10 bucks. And here's the important part: you don't have to BUY the actual future. You can just trade your options, because they go up and down in tandem with the actual future's price. People can make a good amount of money on options trading as you don't need as much up front to get going. Instead of buying at 100 and selling at 130, you buy and sell at 10 to 13. Smaller profit margin. Unless you buy in the hundreds of thousands, which is what serious market players do.
Now, back to the failed investment banks. They made an OPTIONS MARKET on those risky loans. I didn't know they had done that, I thought it was just the same as First Plus: making bad loans, and selling the work to collect the loans to other people. Well. They basically had the original bet of selling risky loans for a profit going, then added the side bets of options. Like rolling a Hard 8 on a craps table, no lie. If you win a hard 8, you get 10 times your bet amount. But if you lose, it's gone for good.
Also: they sold the bad loans TO EACH OTHER. Then, then,they created an options market (they called it a "swap" to avoid - here's the important part - FEDERAL REGULATION, because insurance is regulated, but swaps aren't) to make more money. They sold options to people over seas, again, to each other, and most importantly to the American People: they bundled these bad loans into a "security" and slipped them in to loads of mutual funds, one of the safest investments for the common guy in the market, which is what a lot of people's 401Ks are made up of, and a lot of people's pensions, incidentally.
So when those fail, because they will, because they gave money to people who couldn't not give it back, especially not with interest, anyone with a portfolio with a mutual fund is going to be affected. Instead of a steady 3-5% growth that the average mutual fund provides (not sexy, but it's money you didn't have, you know?) they're losing money. Like, all of them. Thanks, greedy assholes!
You know how you can hock something to a pawn shop? Let's say you hock a watch that costs 100 bucks, but the guy at the counter gives you 25 bucks. That means to get it out of hock, you have to give them back 25 bucks and a small percentage. Either way, they make money off you, right? But here's what the banks did (they're the pawn shops): They took your watch to the pawn shop down the street and sold it to them for 26 bucks (they made a dollar!) and then that pawn shop went to another pawn shop and sold that watch for 26.50. (they only made fifty cents, but they only had to hold the watch for an hour, so it's easy money.) And on and on and on.
Here you come to get your watch back, and it's not there. And they point you to another place, and they don't have it. And on and on until you give up, you don't want the damn watch, now, anyway! So that last pawn shop, that ended up taking it for 32.25 doesn't have anyone that can buy it back. No one wants those kind of Seiko watches now. So they thought they'd sell it for 35 and make money, they told the Mafia guy strong arming them that they'd sell it, sure sure, boss, and now they're screwed. Because now they have to give their own money up or lose a limb.
So, instead of 35 bucks, make that 35 TRILLION. We, the average Joes of the world, are that last pawn shop left having to foot the bill.
I'm not exaggerating when I say that these bankers make Enron's leaders look like angels. They took the philosophies of the Enron guys and built on THAT. A house of cards, indeed. It may not happen immediately, but I'll tell you this much: some of these guys are going to jail. And if not, I say revolution, people, because this is about as shifty as it comes.
And didn't anyone teach these guys about gambling? THE HOUSE ALWAYS WINS.
For a while now, I've been meaning to post about this, saying that we Americans need to shoulder a large portion of the blame with the current economic crisis. We need to accept that a lot of us thought we were getting something for nothing. A bigger house that we never thought we could afford, the hope of flipping a piece of real estate because of inflated house prices (I'm looking at you California and Arizona) or we lived on credit because why not? Yeah, you'll have to make payments for years, but who cares? You want a new plasma, a new car, new clothes all the time, etc. We got greedy. Is it any wonder that the banks did, too? Or did we get greedy because of the banks greed? I'm more inclined to go that last way, because the American public doesn't have trillions in personal debt, THE BANKS DO.
They TOLD YOU you could qualify for a 300K mortgage when you could only pay a 200K mortgage. If the banks, the money guys, are assuring you of this - and make no mistake, this is not the simplest of math - why wouldn't you believe them? For God's sake, George W. Bush told the American public that the way for each of us to show patriotism and to make our country stronger was to BUY THINGS WE DIDN'T NEED. (Incidentally, I love Suze Orman.)
So while you should have listened to that nag on your shoulder (again, general you) that told you to wait until you could afford something, let's not forget that Mom and Pop (who the current government thinks they are, and we their stupid kids) said it would be alright to go ahead and get it.
And here's an amazing factoid: Wall Street got Nobel Prize winning mathematicians (for economics) to write up complex formulas for the banks to use in packaging, breaking up, and re-selling these bad loans. It looked great on paper. Because math is awesome. Know what? PEOPLE ARE NOT MATH. We don't follow laws and proofs. Weather happens. Deaths happen. Unexpected accidents, layoffs, births, etc. happen and can't be properly predicted. Actuary math is close to precise, but the math Wall Street was using wasn't actuary math.(*cough* note the date on that article, incidentally. 1999.) It was economic math intended to fool others into investing. For shame!!
What a f*cking mess. If there's any advice I can give you: spend CASH ONLY. And build up a year's supply of things you need, no lie. At least have in your savings (or get to where you have it) two month's expenses. That means food costs, bills, mortgage/rent check, car payments, and incidentals. If that means no vacation, there you go. If that means no going out on weekends, or you cut back on clothes and restaurants and smokes and liquor and Starbucks, that's what you need to do. Putting things on the card is no longer a viable option. GET OUT OF THAT HABIT. If only because the days of low percentage rates are OVER. [ETA]
swmbo linked me to an even SIMPLER explanation of our mess. It's a thing of beauty and stick figures. In other words: I'm buckling down for the zombie 'pocalypse. The time is nigh. ;) (Ugh, and this is now too long for music, which means I'm going to spam your flists later today with a music post, but that'll all be behind a cut so you can scroll. *g*)
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2008-10-06 03:28 pm (UTC)no subject
Date: 2008-10-06 03:36 pm (UTC)Make sure you have shotgun shells a'plenty for the zombie 'pocalypse!
no subject
Date: 2008-10-06 03:36 pm (UTC)And man, yes, the economic thing is a nightmare. I am with you in that I think that the blame is portioned out - but the real bad guys are the banks. Because they are the reason that it's affecting *everybody*, not just individuals - and yes, in many cases, they are the reason it's affecting individuals.
no subject
Date: 2008-10-06 03:38 pm (UTC)Ack, shame on these guys. Meanwhile, I'm continuing my fortification for the inevitable dead rising, hungry for braaaaaaaiiiiins.
(no subject)
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From:(no subject)
From:(no subject)
From:no subject
Date: 2008-10-06 03:45 pm (UTC)Do you really think anyone will actually wind up going to jail? I'm very pessimistic about that. It *should* happen. But will it?
no subject
Date: 2008-10-06 03:51 pm (UTC)Incidentally, I went to Ikea yesterday, getting ideas for how to get more efficient storage in my laundry room so I can build up a proper food storage. :D (I'm going to build a platform for the W&D to sit on, all the laundry supplies go in that, then all the shelves are for food - no mixing of chemicals/edibles! I'm such a dork for efficient storage. You should see the changes I've made since you were last at my house!)
(no subject)
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From:no subject
Date: 2008-10-06 03:48 pm (UTC)It's scary, all this. Jayzus.
no subject
Date: 2008-10-06 03:53 pm (UTC)And honestly, I think these guys bank (har) on the average person not paying attention to all the back deals, which is how they've gotten away with it for these past 8 or 9 years.
Go to cash, I'm telling you. We're doing it for a solid six months, then re-evaluating things after that. It helps to be married to a financial analyst, I'll tell you what. :D
(no subject)
From:no subject
Date: 2008-10-06 03:50 pm (UTC)And the mortgage thing ... I remember 10 years ago reading articles in the Washington Post about people buying foreclosures in the suburbs -- they got a great price on a great house, but then they couldn't pay the property tax because of the actual value of the home. They had no understanding of that going in, they just qualified for the mortgage which was lower than the value but more than they could really afford. Add in the taxes and they were screwed. (Or here with the condos -- you qualify for a $200k loan but that doesn't account for the $500/mo condo fee on top of the mortgage.)
It bothers me that there are real estate agents and mortgage bankers who don't really explain things to their clients. When Chris and I bought our first home our agent was great. She sat down with us with a worksheet and helped us figure out what we could actually afford so when we went to get a loan we weren't bamboozled by the "we'll qualify you for XXX dollars". But we knew her personally whereas a lot of people don't already know their agent and the agent wants her commission and so does the mortgage broker. And I don't blame them wanting their commission -- they've got their own bills -- but I just wish there was more honesty, more in your face "this what's realistic for you."
no subject
Date: 2008-10-06 03:57 pm (UTC)What a GREAT agent you and Chris had! If only they were all so clean and worthy, you know? And here's something else I didn't address: a lot of real estate houses were getting BONUSES from the investment bankers (Countrywide, Citigroup, AIG) based on sale price. So if they sold a 300K house, they got more than a 200K house. And around and around we go.
I'm with you on wishing there was more honesty. It may be brutal to hear someone tell you "you can't afford this" but that's easier to hear than "We own it and you have 30 days to vacate."
(no subject)
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Date: 2008-10-06 04:03 pm (UTC)no subject
Date: 2008-10-06 04:11 pm (UTC)(no subject)
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From:no subject
Date: 2008-10-06 04:10 pm (UTC)Do you have any idea how many people I knew [back when I worked in a bank and manually filed checks by hand for minimum wage] who would call to ask why their checks bounced because they thought they still had money because they still had checks? Or that the money in the ATM was theirs no matter how much money they actually had?
It's NO WONDER the average person was tricked into thinking they could afford more house than they really could. DO NOT get me started on all the deregulation and bundles and options and futures on things that had no business ever being traded in the first place.
MUSIC!! ::is greedy::
no subject
Date: 2008-10-06 04:14 pm (UTC)Oh, laws! "I still have checks, so I still have money." Some people are too stupid to be free, I tell you what.
The deregulation issues have led to almost ALL of our current crises, from environmental to economics. Thanks, Reagan for rolling that ball!
Music is coming! I'm so so sorry it's taken me so long.
(no subject)
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From:no subject
Date: 2008-10-06 04:18 pm (UTC)no subject
Date: 2008-10-06 04:23 pm (UTC)(no subject)
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Date: 2008-10-06 04:23 pm (UTC)no subject
Date: 2008-10-06 04:39 pm (UTC)Mexico is having a tremendous economic crisis of their own, which is frightening given that Latin communities as a whole have been doing well for a few fiscal years, now. Why? People coming to our country from Mexico, for example, are no longer able to find work. Which means they aren't able to send money home. And our immigration rates are dropping significantly (here in Texas especially) because why bother coming here? And it's not like there's work in Mexico in the first place. Ay carumba!
There needs to be more visibility with what bankers are doing - there needs to be more straightforward language, too. The bankers aren't even reading their own documentation! (Your comment makes sense, absolutely. I'm jumping all over the place, myself, but this is such a huge topic with such far reaching results!!)
no subject
Date: 2008-10-06 05:37 pm (UTC)no subject
Date: 2008-10-06 06:14 pm (UTC)no subject
Date: 2008-10-06 05:42 pm (UTC)As I said in another flister's post on this earlier.
That said one of the problems in this country is that people are not taught about about money and don't understand their own money. In my work have seen so many people who have no idea how to manage their money, or prepare for retirement, or save. This makes me sad because these are usally the people who are most in need of money and most often taken advantage of by bankers, and brokers. People don't like to talk about money and that is part of the problem. We need to stop making how much you have or don't a have a reflection of your value as a human being, and start educating people about personal finance. If you can't control and understand something as vital to your survival as money, if you are dependent on the honesty of people and institutions not screw you over, how safe and secure can your be? I think we need more transperancy and more education. /rant. Didn't mean to go off, but I have seen to many people struggle and suffer, despite all their hard work for want of understanding.
no subject
Date: 2008-10-06 06:16 pm (UTC)I was talking to someone else about how I was taught basic economics in high school as a required class, and I don't know why that's not pushed nowadays. it's absolutely imperitive that people know what to do with their own money, from balancing a checkbook to how to get ahead, for Pete's sake!
(no subject)
From:no subject
Date: 2008-10-06 06:00 pm (UTC)Thanks for writing such a great explanation for those of us who have been doing what we are told by people who know better than us, but don't know why.
Oh, and I do have one of those buckets in the storm cellar as well...
no subject
Date: 2008-10-06 06:24 pm (UTC)(Those buckets are great, right? *G*)
no subject
Date: 2008-10-06 06:06 pm (UTC)This problem is hugely complex. But that doesn't mean that everyone shouldn't spend at least a little time trying to get a handle on it, so it doesn't happen again. And yes, kids should be taught how to balance a checkbook, what a mortgage is, all of that.
Full disclosure: The only debt I have is my fixed-rate 30 year mortgage, which was affordable to start with and I've paid down over 1/3 in 3 years, and which I hope to pay off in the next 3. I never have credit card debt and I have ~4 months of salary stashed away in my local credit union (which is actually a credit union, it hasn't converted to a credit bank.) I've always been conservative this way though. My 401K is shot to hell, but at least I'm not looking to retire for a while.
no subject
Date: 2008-10-06 06:27 pm (UTC)And good for you on your savings. May we all be as prudent!
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Date: 2008-10-06 06:39 pm (UTC)Its not even the fact that people are not math. Its that when making these mathematical models, they were required to assume certain things in order for the computations to be useful. When those assumptions failed, the model failed, and the banks no longer had a way of valuing the derivative because the underlying assets in the derivative were millions of pieces of millions of different loans. In creating these models, the rocket scientists assumed that minor problems would come up, but no major catastrophe would occur. They essentially assumed that the housing market wouldn't fall more than 13%, and when the housing market DID fall more than 13%, the models were no longer useful. They're like a seatbelt that works great for fender-benders, but when you really need it to work--when a semi is about to smash into you--they fail. They took into account that one house, or maybe even a whole neighborhood could burn down, but they neglected to factor the act-of-God / nuclear explosion into their computations, so that when the act-of-God / nuclear explosion happened, the models were no longer useful.
So, now you have a bunch of assets, that have some value, but no one can figure out how to value them. Instead of being liquid, those assets are now solid masses of toxic junk, weighing down the institutions that are holding them. Only 3% of homes in the United States are currently in foreclosure, and while that is a historical high, its not that huge of a number. The problem is that those failing mortgages were packaged with great mortgages, and now banks have no way of valuing the packages because the one way to value the packages were the economic models and the economic models are shit because they depended on assumptions that are no longer true. And, because the underlying assets are in a messy jumble, its not as if you can just make an assessment of the status of Suzy Homemaker's loan. Now, you have to make an assessment of Suzy Homemaker x1,000,000,000.
Add all of the factors you highlighted throughout your post, including the fact that Suzy Homemaker can no longer refinance her loan with her original bank, and including the fact that the banks preyed upon people and gave them these shitty mortgages, when they qualified for better mortgages, and its one giant clusterfuck.
My mind. It boggles.
Also, if you're interested, I went to a lecture on this last week. Its streamed online, you can find out more information about it here (http://jennem.livejournal.com/349269.html). Its about an hour and a half, but I thought it was a really great lecture.
Anyway, thank you so much for the great post. Not that you need the affirmation, but my genius law professor pretty much gave the exact same advice--I believe his exact words were, "I hear CDs are great ways to invest your money." Ha.
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Date: 2008-10-06 07:52 pm (UTC)In math, you have nice, static figures (theoretical math that overlaps physics being a completely different field of study) that have meaning and solid definitions. But people cannot be thought of in the same terms, but that wouldn't help their sales guys push this to various banks and lenders, who like to bank on insurance up to a point. They got clever and created the "swap" definition and everyone thought the problem (because let's not forget these guys knew there would be a problem back in 1999) would fall on anyone NOT them.
Such assholes. And hahaha - I'm a BIIIIG believer in CDs. They're the most stable investment right now. That is, if you have the capital in the first place! :D Thanks for that link - I'll def. listen to that later tonight.
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Date: 2008-10-06 06:51 pm (UTC)I'm also mean enough to say that all those loan officers, brokers, real estate agents, and anyone else who told a borrower "don't worry. It'll be all right" and swindled them out of their money should have to pay back all their comissions. I've had loan officers in CA tell me that they work 30 min a month and make a cool mil every month. Give that money back...to the people!
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Date: 2008-10-06 07:53 pm (UTC)It's just scandalous, isn't it? Bah.
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Date: 2008-10-06 08:20 pm (UTC)I have not been able to wrap my head around this mess until this post. Thank you, Stoney, for being smart, charming, and comepletely the awesomest translator of Big, Complex Issues ever.
A.
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Date: 2008-10-06 09:09 pm (UTC)no subject
Date: 2008-10-06 08:35 pm (UTC)I was Nostradamus for years! I knew it! I freaking KNEW.
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Date: 2008-10-06 09:10 pm (UTC)(But essentially you're a cash only person with a debit card, so you're still in the smart column. T called today and bitched into my ear for 30 minutes then had to go. FUN!)
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Date: 2008-10-06 08:49 pm (UTC)no subject
Date: 2008-10-06 09:11 pm (UTC);)
Hell, I'd even pay to jump out of a plane, but then, I'm broken inside.
(no subject)
From:no subject
Date: 2008-10-06 09:29 pm (UTC)I always thought that our government was setting a piss-poor example by running the country on debt and no one is calling for basic accounting classes as a requirement for high school graduation.
I had a brief fling with a former stock broker who made him money by betting against the stock market and definitely got involved with the sub-prime mortgages. I'm sure he's hurting now given that I know the mortgage business collapsed (he worked with/for my mom's good friends). But in the "good days," his home was the party house.
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Date: 2008-10-06 09:54 pm (UTC)If you've not read "The Smartest Guys In The Room" I highly recommend it. It's the "how they did it" to Enron's debacle, and honestly, it translates to the current housing crisis, too.
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Date: 2008-10-06 10:43 pm (UTC)Understandably, lots of people are confused and angry about the entire financial crisis. It's complex and not being well explained by the media or the government. However, I tend to fall on the side of it's not all the bank's fault.
To preface, I spent over 5 years as a mortgage processor, broker and, finally, branch manager. Now, before anyone starts in on what horrid people we all are/were, I'd like to point out that I was a damn good mortgage broker. My clients knew what they were getting into. They knew what their property taxes were going to look like at full valuation. They knew what would happen to ARM payments after adjustment and what steps to take to make sure they wouldn't see that day come. They knew the rates, the calculations, the costs for fees and everything involved. The first rule for every single client I worked with - and for my employee's clients when I managed - was this: If the loan is not a benefit for the client, then that loan won't be done in my office. Period.
And do you know what happened time after time after time?
When I was honest and didn't tell the people what they wanted to hear, they went to Joe Blow down the street who did swindle the living shit out of them.
And, then what happens to me? Well, let's just say that in that type of market, the nice girl does not finish first.
So, while I agree that the practice got more than out of hand in the industry overall, there are still those of us who ended up in the dumpster while doing the right thing. And, more people than most are willing to acknowledge landed right there with me due to their own choices.
And, you're perfectly right to say that people got greedy. I turned away clients that were refinancing every year or two just to cash out the equity on their homes so they could pay down their credit cards, pay off the boat or car and would then start all over again. That's insane! But, these people didn't know how to live without the extra cashflow. Their buying, in their minds, was a necessity.
On the other hand, it's also insane that as a college student who worked part-time, I had almost $60k in credit at my disposal. (Yeah. I wasn't so smart way back then, either.) Is it the credit card company's fault for offering the credit or my fault for accepting it? Well, I tend to fall on the idea of it being my fault. I knew better, but I did it anyway. My fault. Period.
And, for the last part of my ranty!reply, I have to say that all of the above doesn't even begin to take into account that the people who "play" the stock market forgot that it's essentially a nationally legalized form of gambling. There's never a guarantee of a profit. Add that to the people playing with the big money by short selling, investing almost everything on margin, etc., and it's a mess! But, who got them there? They did!
So, I feel that the US - me included - needs a nice strong dose of reality. Credit is not money. People have forgotten that.
*steps off soap box feeling much, much better* :)
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Date: 2008-10-07 05:48 am (UTC)I'm grateful that the Canadian banking system has been much more stringently regulated, and so far we're weathering this financial storm better than the USA. Still, I'm not overly optimistic that we won't see some very difficult times, so I'm glad I've paid off my credit card debt, and am now debt free. I'm retired, on a pension, rent my apartment, and own my car; I have always believed that if I can't afford to pay for something now, I can't afford it. If I use my credit card, I try to pay it off immediately.
Thanks for the very informative post. I think I have a better understanding of the whole financial mess after reading it.
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Date: 2008-10-07 08:57 am (UTC)no subject
Date: 2008-10-07 03:53 pm (UTC)no subject
Date: 2008-10-07 04:24 pm (UTC)(I really wish complex issues were explained in simpler, more efficient terms for everyone to get. It's possible, they just don't do it in the media, huh?)
(no subject)
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