August 12, 2012

Ways To Part Greater Fools From Their Money

Readers suggested a topic on financial innovation. “What exactly is ‘Financial Innovation.’ Volcker’s attempt to lump the ATM under the umbrella of financial innovation got me thinking (the ATM is of course, a technological innovation, not a financial one).

As I see it, ‘Financial Innovation’ consists of two things:

1) Creating ‘virtual products’ - stocks, bonds, derivatives, various flavors of insurance policies, etc - and having people ascribe value to them. Then creating a system - a market - by which these virtual products can be bought and sold.

2) Figuring out ways to entice people to take on more debt and pay more interest.
2a) Figuring out ways to separate the lender and loan originators from repayment risk.

Anything else?

A modern American financial innovation came from Lee Iacocca, and his ‘56 for 56′ deal. Back in 1956, with a 20% down payment, and a 56 dollar monthly payment for three years, he’d sell you a car. It was a huge hit. A prime example of enticing the individual to take on debt. It was a huge hit because it was a debt level the individual could and would service.”

A reply, “2b) Figuring out ways to part greater fools from their money.”

The Guardian. “If you want to see House budget committee chairman Paul Ryan sanctimoniously excuse himself and his friends for missing the most predictable economic crisis in the history of the world, you now have the opportunity. In a YouTube video produced by his staff, Ryan tells viewers that the crisis called by the collapse of the housing bubble caught ‘us’ by surprise.”

“Ryan should apply a variation on the sanctimonious lines in his video to himself: ‘Imagine being warned about an economic crisis that would throw more than 10 million people out of work and cause millions to lose their home and doing nothing. Imagine that our politicians in Congress and the White House chose to do nothing while there was still time, because it would have been bad politics to upset the Wall Street banks who were making so much money. They, instead, chose to ignore the warnings. That is immoral.’”

From David Dayen. “The important moment in the forthcoming book by Neil Barofsky, the former Special Inspector General of TARP, shows how HAMP’s faulty design led to all sorts of problems, with trapped borrowers, extended trial payments, no-doc modifications, and eventually unnecessary foreclosures. Barofsky mused that Treasury didn’t care about the suffering of borrowers under HAMP, and the issue came up in a meeting with the Treasury Secretary, which was also attended by Elizabeth Warren, then the head of the Congressional Oversight Panel, another TARP watchdog.”

“Warren asked Geithner repeatedly about HAMP. After several evasions, Geithner said about the banks, ‘We estimate that they can handle ten million foreclosures, over time… this program will help foam the runway for them.’”

“As Barofsky says, HAMP was not separate from the bailouts, it was part of them. It squeezed a few extra payments out of borrowers and then allowed banks to do with them whatever they wanted. It stretched out the foreclosure crisis, by design. In fact, by the end of this, HAMP may not help even the borrowers secure in permanent modifications. Not only are the modifications of inferior quality, and not only have they led to high re-default rates already, but most of the permanent modifications are not permanent at all. Barofsky notes in the book that they have five-year time limits, with interest rates rising and payments returning to their original size at that time. “




Bits Bucket for August 12, 2012

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