Hedge Funds, Banks And The Housing Bubble
Readers suggested a topic surrounding hedge funds and the housing bubble. “In light of Bear Stearns’ and other subprime investing hedge fund failures, did we fail to recognize the benevolent Robin Hood like qualties of the subprime lending industry?”
“From one vantage point, it looks like the financial industry levered money from the super wealthy and transferred it to those who would not otherwise be able to acquire the American Dream. On the other hand and in light of rising foreclosures and falling home prices all across the country, it looks like both sides got hosed.”
A reply, “Yes, at the end of the day everybody except for those (realtors, brokers etc.) who made more money from the larger number of transaction loses in this game.”
One asked, “What should be done about hedge funds? Or private equity? These are unregulated entities that have WAY too much influence on markets, even globally, affecting entire populations, even prudent folks.”
A reply, “This one can unfortunately be laid of the feet of Bernanke and the Fed. With such loose money policy, there is WAY too much liquidity sloshing around trying to find new ways to get itself in trouble.”
One pointed overseas. “European and especially German financial authorities have been trying to get some regulation of hedge and private equity. The Fed and Treasury have resisted fiercely since those are key parts of the credit machine they used to pump up the economy since 2002. Because of the global nature of the business, nothing effective can be imposed without (at least) the Euro area, US, UK and Japan agreeing.”
From MarketWatch. “Subprime mortgage concerns grew earlier this week after Bear Stearns told clients that two of its hedge funds were worth almost nothing, having lost more than $1 billion partly from leveraged bets in the market for low-end home loans. Other hedge funds, including Basis Capital, United Capital’s Horizon funds and UBS’s Dillon Read Capital, have warned of similar trouble or shut down.”
“Investment banks are exposed to subprime mortgage risks in several ways, according to analyst Bart Narter. After such loans are offered to less creditworthy home buyers, they’re packaged up into mortgage-backed securities and sold into the asset-backed securities market.”
“Investment banks do the bundling and get paid for the service. They also usually keep a small portion of the loans on their own books, Narter explained.”
“The value of some of these subprime mortgage assets has dropped sharply in recent weeks as rating agencies downgraded some securities and some market participants were forced to sell positions to meet margin calls.”
“These assets are tough to value, partly because they don’t trade much. If there’s no clear market price or few trades, banks have to work out the value of the assets based on their own models, Narter said. ‘The concern is that they’ve been very conservative with their estimates and when they actually come to sell these assets, the value will be much lower,’ Narter explained.”
“Even if they don’t have to sell, events such as the collapse of Bear’s hedge funds, will put pressure on other banks to re-value their assets too, Narter and others said this week. ‘The news will likely not improve the perception that brokers are overvaluing mortgage assets,’ said Douglas Sipkin, senior analyst at Wachovia.”
“Third-quarter results, not the second-quarter earnings currently being reported, will be the real test, Sipkin added, noting that Bear’s warning and downgrades of subprime mortgage-backed securities by Standard & Poor’s and Moody’s didn’t happen until July.”
“Banks also lend money to hedge funds that trade mortgage-backed securities. If these hedge funds get in trouble, they can default on those loans.”
“One of Basis Capital’s hedge funds missed margin calls earlier this week. Its lenders declared the fund in default, tried to seize its assets and could end up selling the collateral at ‘distressed’ prices, the firm warned.”
“Barclays Plc, once an investor in a now worthless Bear Stearns hedge fund that bet on subprime securities, is now considering its options for recovering $400 million it invested in the fund, the Wall Street Journal reported on Saturday.”
“Barclays is now considering its options for recovering $400 million that it invested in the fund separately from the loan, the Journal reported, citing people familiar with the matter. The possibilities are a negotiated settlement or litigation.”
“The High-Grade Structured Credit Strategies Enhanced Leveraged Fund, in which Barclays invested, is worth nothing, while there is ‘very little value’ left for investors in the larger, less leveraged High-Grade Structured Credit Strategies Fund, based on estimates at the end of June.”
The Boston Globe. “That so many homeowners are having such trouble meeting their mortgage payments could very well mean your own home’s value has dropped, that you may not be able to get a home-equity loan, or that your retirement savings will grow more slowly than you planned.”
“Conceivably, it could even mean that the global financial system, and by extension the economy and even your job, is threatened.”
“The current mortgage mess has many causes, but none is more important than the abuse of an arcane process called securitization. In recent decades, creative bankers developed financial securities whose value was derived from homeowners’ mortgage payments.”
“This parsing out of risk allowed more investors to provide more credit to more households. And the results, at least at first, couldn’t have been more positive. Many low- and middle-income households gained the ability to purchase homes, and US homeownership soared to record levels. So did house prices in many communities.”
“But the picture changed after the Federal Reserve began raising interest rates in 2004. Higher mortgage rates plus soaring house prices made housing less affordable, potentially shrinking the market for new mortgages. Rather than allow their lucrative business to shrink, lenders and bankers got creative again, devising new loans with looser terms and lower credit standards.”
“By late last year this had produced a kind of credit frenzy.”
“Some 2.5 million homeowners, 5 percent of all mortgage holders, are expected to default on their mortgage loans this year and next. This is a record percentage that will mean a whopping $400 billion worth of defaults and $100 billion in losses to investors in mortgage securities.”
“Home values will sink. Loans will be tougher to get, meaning fewer families will qualify for mortgages. Foreclosure sales will put more properties on the market at steep discounts. Less housing demand and more supply add up to lower prices.”
“What is to be done? Policy makers should not bail anyone out, not borrowers, lenders, nor investment bankers. Easing the financial pain could encourage even more aggressive risk-taking in the future.”
‘Jim Kelsoe, a top-ranked junk bond fund manager since 2000, dropped to last place this year because of losses tied to mortgages for people with poor credit.’
‘The $1.1 billion Regions Morgan Keegan Select High Income Fund run by Kelsoe fell 4.2 percent from the beginning of 2007 as defaults on subprime home loans reached a five-year high. The mutual fund had 15 percent of its assets in the subprime market and at least the same amount in other mortgage debt in May.’
‘Kelsoe said that, like fund managers drawn in by Internet stocks at the start of the decade, an ‘intoxication’ with high-yield subprime investments kept him from pulling out completely.’
BTW, since there are a lot of new visitors coming from the Yahoo link, I should explain that these topics are taken from ‘weekend topic sugestions’ thread I post first thing every Friday.
So this top-flight, sophisticated finance professional was still subject to emotional investing. Somebody explain to me again why I should hire someone to do my investments for me? I’m having a Charles Schwab moment…
I ignore financial shills who suggest you should get a financial planner. All one needs to do is read financial publications, invest on their own, and learn lessons - then keep perfecting along the way.
Here: I’ll save someone thousands of $ in fees: Dollar cost average, allocate your assets according to your risk tolerance, pick fund families with the lowest expense ratios, focus on stock index funds for your equities since they have the lowest expense ratios.
That’s it in a nutshell. You can send me a check at
The television channel CNBC reported on Friday that investors were planning to sue Bear Stearns as early as Monday, alleging misrepresentation of the risks involved in the fund.
Investors demand high returns and they know it equates to high risk. When they don’t make a fortune and lose their shirts (risk) they then sue. Sounds relational to what we see from Realtors and mortgage Bankers suing that they had no clue what mortgage they were getting into even though they owned 5 homes a piece. Get REAL!
Did I tell ya that this is why BSC had to jump in right away to “bail out” these funds? My guess is they don’t want lawyers poking into the compensation of the managers of these funds and the firm itself because my guess is, they paid themselves bonuses at year end last year based on the “mark to market” values of these underlying securities when any idiot will be able to look at the documentation and see there is no way they were “worth” the ascribed values.
Testify, sistah!
“based on the “mark to market” values of these underlying securities”
Don’t you mean “based on the ‘mark to MODEL’”? It was the (fictitious) “mark to MODEL” that gave them the misleading value of the securities held.
Marking to MARKET is what made them realize how little value the securities actually had (on the open market).
Again, “Mark to model” is valuing the security based on what your mathemagical model tells you they *should* be worth. “Marking to market” is valuing the securities at what the market is actually paying for them.
right.
Except the partnership agreement certainly says that they are allowed to use whatever measure they did use to calculate their compensation for the year. These things are air tight. I saw a presentation at a conference I spoke at this year. You’d never sign the thing unless you were “sure” that the returns were going to be spectacular, but hedge funds lock up their ability to take their fees.
Since only sophisticated investors are allowed to buy in, no one can claim they didn’t understand.
The only possible basis for a law suit is that they lied about something.
“The only possible basis for a law suit is that they lied about something.”
I think that wording might be a bit strong. Fraud and misrepresentation are probably the most likely allegations in a suit from an LP, but the GP does have certain fiduciary duties in managing the partnership. The management entity does the day-to-day management, and that entity’s responsibilities are described in the management agreement. But another entity is usually created to serve as the GP of the partnership. This entity is usually itself an LLC or LP for liability reasons, but the principals are usually the same as for the management company. The general partner of any limited partnership has fiduciary duties to the limited partners that could lead to causes of action other than fraud or misrepresentation. The question is whether there are any assets in that entity worth going after.
Always funny how they structure these things and you see the same people in control at many different levels : ). I wonder if you can prove fraud at one level if you it is easier to prove at many since the same partners are involved?
Wall Street and many hedgefunds have profited hugely on the way up in the credit bubble; I’m sure most of the losses will end up with the average non-wealthy citizen in the form of government bailouts, high inflation, huge losses in pension funds etc. Wall Street writes the rules of the credit economy, they know what is good for them and their friends on Capitol Hill will be happy to help them.
Poole from the Fed was pretty clear about letting these guys eat their losses. You may notice the bailout talk from congress died pretty quick. And Mr. Zandi is singing a new tune in the Globe editorial.
Now, will mutual funds, etc, take a hit? IMO, yes and everyone should look into their 401k to see what kind of exposure they have.
“Now, will mutual funds, etc, take a hit? IMO, yes and everyone should look into their 401k to see what kind of exposure they have.”
This is the side of the bubble that worries me. I’ve done everything right thus far… can we make a list of “bubble investments” that I should inquire about? That would be really useful.
Yup. Poole was clearly signalling that only the banks will be bailed out. The investors are on their own.
Funny isn’t it? That the Bear Stearns funds had just enough money left to pay back the banks while completely wiping out the investors. Quite a lucky coincidence.
This is no different from the lack of “bailout” for retail stock investors/traders after the bust of ‘00. In fact, the SEC changed the margin rules to make it even more difficult for ordinary people to “day trade”.
And no different from the Savings and Loan scandal.
There is some difference. Based on recent FED testimony, subprime hedge fund investors are being told you are on your own; hedge funds are unregulated.
It’s possible this is the way things were and are expected to unfold. After all, the new unregulated system was designed to parallel and piggyback the old one.
No regulation
No FDIC
No Bailout
I’m sure our Dutch pension funds have loaded up on those toxic CDO’s, Fanny/Freddy stuff and US mortgage paper. Even last week they were boasting in the newspapers about their stellar returns last year on US real estate investments. We still don’t know who is on the hook for most of the CDO damage.
I don’t think there will be a direct bailout but I’m sure Bernanke is going to spend lots of helicopter money to bailout as much of them as he can. We will probably see most of the bad funds being purchased by JPM and big investors from the Cayman Islands.
“And Mr. Zandi is singing a new tune in the Globe editorial.”
He was singing that tune on the Nightly Business Report, too.
Who needs a bail-out? Silicon Valley RE never goes down, right? Here is the latest snapshot of what the faithful are willing to pay:
http://www.viewfromsiliconvalley.com/id345.html
Thanks!
“It’s the system, stupid!” It all can be laid at the feet of our reserve-based, Fed-intervening system of money and credit.
You guys might get a kick out of a comic I did that spoofed Bernanke’s recent meeting with the House Financial Service Committee - check it out:
Fed Chairman has run-in with Ron Paul, befriend Barney Frank
http://www.bernankepanky.com/comic/bp2-1.php
LOL………GOOD WORK……….
Thank you! It shows economic socilialsts for what they are. It shows libertarians for what they are. The first is for obfuscation and vote-getting. The second is for the free market.
The bailout talk has died down, but has the bailout? FHA has refinanced over 100,000 conventional mortgages into FHA in the last year, up from maybe 20,000 a year two years ago. Presumably almost all of these are subprimes. And while the whole “FHA Reform” package seems to be stuck in neutral, the Senate is going ahead with a standalone bill to raise the FHA loan limit. So long as no one labels this a bailout it seems to be on track.
P.S. sorry if mentioned before on this blog, but what should we think of this article from Morgan Stanley. Is this another try at bailout?
Better Mortgages for a World of High House Prices
http://tinyurl.com/2pyl72
especially the last line is interesting:
There are strong reasons to believe that innovation will come because indexed mortgages create financial assets that should suit investors — as well as creating very big benefits to borrowers.
That looks like an article about shifting the structure of future, not current mortgages. As with ARMs, it’s just another step in shifting risk from banks to consumers.
I agree, not a bailout for current mortgages, but maybe a bailout for the housing bubble? It looks to me like a trick to get more people into housing and stabilize current high prices by using low initial payments and increased future borrower risk (while history shows that many homebuyers cannot absorb more risk). Maybe some FB’s could walk from their home and buy something else with this new type of mortgage?
It could certainly be used to bail out the bubble overseas. It’s too late here. Americans no longer believe in the con needed to sustain market confidence. Like every bubble in history, once confidence is lost, there is a rush for the exits. That’s why they had to inflate the housing bubble when they did - tranfer confidence from failing stocks to inflating housing. With a full-blown credit bubble now infecting everything, there’s nowhere left to go.
I may have missed this one from yesterday’s discussions, but it looks like China hiked their interest rate yesterday. This is from a Yahoo Finance link.
China seeks to control its blazing economy by Joan Feng
Sun Jul 22, 12:09 AM ET
BEIJING (AFP) - China is expected to take more steps to slow its galloping economy, a key engine of global growth, after hiking borrowing costs in a bid to stop the boom giving way to a bust.
ADVERTISEMENT
China’s central bank raised its benchmark interest rate by 0.27 percentage points Saturday. The main bank lending rate rose to 6.84 percent and the deposit rate increased to 3.33 percent.
The move was…
“These assets are tough to value, partly because they don’t trade much. If there’s no clear market price or few trades, banks have to work out the value of the assets based on their own models, Narter said.
However, their MODEL did not include FRAUD! A la California Strawberry Pickers buying their part of the American Dream @ 700k for a home.
“These assets are tough to value, partly because they don’t trade much.”
Sounds like the problem faced by homeowners trying to sell into a declining value market. How do you know what the market will bear when nothing much is selling?
I was thinking the same thing. Maybe Dutch auctions will become popular.
“Some 2.5 million homeowners, 5 percent of all mortgage holders, are expected to default on their mortgage loans this year and next. This is a record percentage that will mean a whopping $400 billion worth of defaults and $100 billion in losses to investors in mortgage securities.”
“Home values will sink. Loans will be tougher to get, meaning fewer families will qualify for mortgages. Foreclosure sales will put more properties on the market at steep discounts. Less housing demand and more supply add up to lower prices.”
“What is to be done? Policy makers should not bail anyone out, not borrowers, lenders, nor investment bankers. Easing the financial pain could encourage even more aggressive risk-taking in the future.”
Was anyone saying ‘No bailouts’ back in 1930, the way so many free marketeers are currently talking?
Was anyone saying ‘No bailouts’ back in 1930, the way so many free marketeers are currently talking?
My gut feeling is “no.” I think there was a lot of ignorance of the field of economics in those days.
the new deal was a 10 year bailout
There were private attempts to stop the collapse - similar actions helped to stem the Panic of 1907. A modern analogy would be the banking syndicate bailing out Long-Term(sic) Capital in 1998. These kind of actions didn’t work in 1929. The Hoover Administration was ideologically opposed to bailouts and the government back then was much smaller.
Roosevelt attempted many measures, including the outright siezure of all gold in private hands to force Americans to use paper. None of it worked, as proven by the fact that the Depression lasted for another 7 years under FDR after 3 years with Hoover.
“None of it worked, as proven by the fact that the Depression lasted for another 7 years under FDR after 3 years with Hoover.”
And even then did not end until after WWII with 50 million dead and Europe and Asia in smoking ruins.
Anyone care to guess what’s going to happen this time around?
That’s what I’m afraid of crisrose. How will the various political leaders react to stressful military/political situations when large portions of their constituents feel they’ve got nothing to lose or live for. Should make for interesting times.
React? How about creating military situations as a distraction? “Peak Oil” could be the excuse to raid more than a few countries and/or confront China.
For some reason the words China and lebensraum keep echoing in my head.
“China and lebensraum”
Scary thought. Having fouled their own nest to make bank, they now hold enough reserves to buy what they want, anywhere.
Got clean water?
Had to look that one up (Wikipedia):
Lebensraum (German for “habitat” or “living space”) was one of the major political ideas of Adolf Hitler, and an important component of Nazi ideology. It served as the motivation for the expansionist policies of Nazi Germany, aiming to provide extra space for the growth of the German population, for a Greater Germany. In Hitler’s book Mein Kampf, he detailed his belief that the German people needed Lebensraum (”living space”, i.e. land and raw materials), and that it should be found in the East. It was the stated policy of the Nazis to kill, deport, or enslave the Polish, Russian and other Slavic populations, whom they considered inferior, and to repopulate the land with Germanic peoples. The entire urban population was to be exterminated by starvation, thus creating an agricultural surplus to feed Germany and allowing their replacement by a German upper class.
It’s also a fact there was a severe recession in 1937, right in the peak of the “New Deal.” Ah, socialism!
Tax rates were vastly lower then. People that worked had a heck of a lot more of their own money in their pockets. Therefore they needed less of a bailout.
What exactly was the Reconstuction Finance Corporation then? It was created during the Hoover administation. It was there to make loans to failing firms. And if my memory is correct, that included Banks. That sounds like a bailout to me.
CDOs: Financial Alchemists tried to turn lead into gold. It didn’t work.
CDO = collapsed debt obligation
CDO = Cents(on the)Dollar Obligation
how about
Concealed
Default
Obligations
Yeah, and when they ran low on lead, they tried using dung. With predictable results. The end result is something soft, unable to hold its form, and rapidly decaying.
Maybe they should call ‘em Turd Rockets.
It always was, is, and will be financial sausage. Bits and pieces of end meat, connecting tissue, and scraps from the floor, with spices added, ground up and put in a casing, and displayed next to the “other” gourmet meats.
And with financial sausage, like with most sausage, people didn’t think to ask what’s in them.
These assets are tough to value, partly because they don’t trade much. If there’s no clear market price or few trades, banks have to work out the value of the assets based on their own models, Narter said.
————————
Hmmm. Highly illiquid assets + massive leverage = begging for trouble.
Add in crowded trades with everybody taking similar positions and potential for widespread margin calls = looming train wreck.
You guys see this?
http://www.latimes.com/business/la-fi-petruno22jul22,1,7574629.column?coll=la-headlines-business&ctrack=2&cset=true
and the best snip from it:
“You cannot model [a bond for] the effects of fraud,” said Andrew Lahde, head of Santa Monica-based Lahde Capital Management, which has been betting this year that mortgage bonds would plummet. “Fraud by definition is deception.”
Remember the one-time poster on here in the winter who said that they (his hedge fund/quants) had accounted for everything BUT fraud? Cripes, how could you miss the fraud? It was being chronicled right here EVERY DAY!
You have to be registered to read the story, but I get the idea. Fraud is indeed deception. But people (as in some hedge fund managers) who are involved in fraud find it difficult to see it in others. Like in The Sting.
You *can* model fraud…set a historically accurate baseline, and include a variable portion that increases as the payoff for fraud goes up and/or the chances of getting caught go down (both of which happened during the housing boom).
This is akin to the ratings guys (Fitch, Moody’s), not having a variable in their models for credit defaults as their models assumed that housing prices would always go up…
Now wait a second. If you assume that house prices always goes up then isn’t it impossible for an RMBS to have a loss? Doesn’t the collateral always cover the principle?
No wonder that everything was rated AAA in their models.
The only way a home purchase will be a responsible financial decision again (i.e. downpayment and no more than 3x gross income) is for home prices to decline until they are once again in line with income.
Yes, recent buyers in all the bubble areas will get a smack down. People who bought before the boom will be okay, unless they’ve HELOC’d their equity away. But that’s not anyone else’s problem. Neither is choosing to go massively into debt just to say you’re a homeowner.
…unless they’ve HELOC’d their equity away.
Well, that covers the majority of them.
On the issue of banks (and mortgage originators), many of us agree that part of the problem causing the downfall of subprime (and soon alt-a) lending was the prevalence of “stated income” (aka “liar”) loans. In many (most?) areas of California, prices have gotten so high that many buyers can’t afford to qualify for their loans without “stating” (lying about) their income. Some of the brokers on Brokers Outpost are getting concerned that the Federal Governemnt might go as far as stop these no document/low document type loans for people that *should* be able to verify their income (through tax returns, w-2s, etc.):
http://forum.brokeroutpost.com/loans/forum/2/143984.htm
KevLamb: “”My understanding is that in the near future subprime will be full doc only, 580 or better credit score, max ltv 85-90%. For the long timers this will be like sub prime of the past.”
megalith: “…The market IS correcting itself already, the problem is they are going to prevent the market from functioning in its usual free flowing fluid fashion by FORCEFULLY eliminating these loan products. This abrupt cut off of these types of products will lead to major a disruption in the economy. This combined with the rising foreclosures will push us into a recession. They are literally playing with fire that could burn the entire US economy…”
Everybody who is a citizen or permanent resident of the United States can verify income with a tax return. There are a couple of problems. If you don’t include all your income on the return, you don’t qualify for the loan you would otherwise qualify for (as well as risking the wrath of the IRS). And you probably can inflate your income on the return, but that means you have to pay taxes on money you never got. People lie on tax returns just like anything else.
REAL verifiable income is the income that other people report that they paid to you on W-2’s, 1099’s etc.
The real question is why were these products used for anyone who was a wage earner being paid on the books at all? OK, yeah, I know, fraud. But seriously, when the model makers claim they can’t predict fraud you have to laugh. ANYONE who says they work for a corporation that pays them wages that are reported to the IRS has easily verifiable income. Most of what is reported above that is fraud (yes, a few people have side businesses and some people get significant money from tips, but the rest is fraud). It is easy to predict.
Significant money from tips is still taxable. If deductions are made for business expenses, then that money is just that– a business expense! i.e., not your money that you can pay a mortgage with. If you can’t go tax returns and you can’t go bank statements and you can’t prove seasoned funds, it sounds like you’re done! NO LOAN FOR YOU! COME BACK, ONE YEAR. Save some money in the meantime.
Maybe when they say they can’t predict fraud, maybe they just mean they can’t predict a crackdown on fraud or the elimination or fraud-enabling programs. You can discount for the price-effect of a constant amount of fraud, works fine in math. But when fraud is shockingly non-linear your model’s going to be in a lot of trouble.
But tips aren’t verifiable unless they are all put on credit cards or are pooled together and doled out by the employer. I never said anything about business expense deductions. I just meant that most people with full time work don’t make significant, reliable income from a side business.
My guess is that back when banks used to hold the loans as their own assets, they refused to assume that someone with a small business would have a steady income from year to year - an attorney with an individual office making $50K last year and the year before wouldn’t have been able to borrow as much as a marketing guy working for IBM making the same $50K. The banks would have rightly assumed that they weren’t experts in the demand cycle for every small business in town, but the guy working for the big corp had a steady job. (Wow, that really was what the world was like when I was a kid. Amazing.)
I also would guess that liar loans started out as real “no doc” loans with the person’s income pretty close the amount that was stated on the paper - motivated by increased employee “productivity.” Even the 5-10 minutes it takes to look over a W-2 and a few 1099’s kept the mortgage brokers from cranking out the paper to feed the Wall street beast. And the borrowers didn’t want to go through their overpacked houses to find the right papers. The real organized fraud would have emerged out of the realization that no one really cared that the papers were no docs and that no auditors were on their way to check up on things.
Hey polly, my reference to deductions was just in general answer to folks that think axing stated will kill self-employed borrowers. Hey, I can’t think of a reason why they wouldn’t already be 4506ing ALL stated and no-doc deals, period.
On stated vs no-doc, I completely agree. It’s apparent that some dirty mortgage brokers preferred stating a fraudulent income over going no-doc because “you’re just screwing the borrower on rate. It’s the same borrower either way, so they’ll be less likely to default on the lower rate loan.”
Hey, I can’t make this stuff up.
You are supposed to report tips, as well. If not, FRAUD. Basically, if you can’t produce IRS documentation, I can’t see any case where it isn’t fraud.
IRS used to audit wait staff by doing a “lifestyle” audit. They looked at your lifestyle and if your declared income didn’t match it, they estimated an amount of undeclared tips and added it to the income. Burden on you to prove they were wrong. They aren’t allowed to do that anymore. Funny, with so many people doing all their transactions by debit and credit card, it would be a much more accurate process right now.
And the employer got nailed for its share of the unpaid FICA taxes. That is one of the reasons that so many restaurants switched to pooled tips. If the employer pools and distributes the tips, it os just part of declared and documented income.
I never said it wasn’t tax fraud to not declare tips. It is. It is just one of the relatively few places that an average Joe (or Josephine) could fail to declare some portion of received income and not always get caught.
Well, what exactly is to be done about hedge funds? Perhaps they should be treated like atomic bombs. You just don’t want these in the hands of certain people. Too much damage can be done to too many people. I think, if Long Term Capital Management had not been bailed out years ago, the term “hedge fund” would have become synonomous with criminal gang activity. I know some people howl about regulation and how we shouldn’t have regulation. OK, maybe so, but we also shouldn’t have bailouts at the expense of the taxpayer. One way or another, it always comes down to the taxpayer. Had LTCM been allowed to fail, to trash the economy, then we wouldn’t be seeing what we’re seeing today.
Ironic that Bear Stearns declined to join in the bailout of LTCM. Therefore, when Jimmy Cayne passed around the collection plate pleading for help to bail out his toxic hedge funds the request feel on deaf ears. Payback is a b!tch!!
It will be an extremely interesting game of musical chairs as this train wreck begins to derail. Most likely it will be the little people (losing money in pension funds, toxic mutual funds) who end up as the primary bag holders when all is said and done. The REIC & Wall Street will have long since collected their financial rewards.
J6P - don’t expect much help from the friendly Fed or government in easing your pain. They will do what they always do - what is in the best interests of their Wall Street overseers.
It may come down to proving they have the wherewithall (i.e., reserves) to be a legitimate counter-party to these trades. Most aren’t, and would never survive that requirement.
I expect the free market to make quick work of most of them in the coming year or so.
Talking about the hedge funds,- “These assets are tough to value, partly because they don’t trade much..”, also applies to the individual houses themselves which since there have been no recent sales they are difficult to valuate using comps.
And here in comes the rub for the homeowners and investors with a couple of homes they cannot cash flow on, and on which they are being financially bled to death. So the “investors”, with $0.01 in his bank account and who doesn’t know where his next meal is coming from goes to the bankruptcy judge with his list of assets and debts. The judge then tells him, “I am sorry Vestor, but you do not qualify for bankruptcy as you have more assets than debts, the equity in your homes is $500,000 according to the appraised valuations on them, you have well enough assets to pay off your debts, I suggest you sell your homes and pay your debts Sir.”
And here comes an intimate knowledge of the folly of investing in an illiquid asset. This poors gasoline on the fire of people suddenly wanting the valuations of their homes tied to the true market value.
Once people figure out that they cannot sell at the dream price and they are going under then they will push for lower valuations so that they can declare bankruptcy and/or get their tax right offs at least on their investment losses.
What is most disturbing is the ever increasing “do anything for a buck” mentality of everyone in the RE industry, government, and the population in general.
We have become a society of schemers, scammers, gamers, and get rich quick artists who all want to retire quickly and live a life of luxury without breaking a sweat…
The only hope left is a complete and total collapse with brutal and harsh consequences for all involved in fueling this mountain of greed…
Seattle, I feel your pain, but I don’t necessarily agree that “We have become a society of schemers, scammers, gamers, and get rich quick artists”. It seems that way, given what we see around us and in the media. People who are jerks want others to be painted with their own tarrry brush.
” People who are jerks want others to be painted with their own tarrry brush.”
Ooops, didn’t mean you, Seattle. I was referring to the bums who consider themselves elites. They set a really crappy example.
You said it Seattle Moose .I think the mentality you speak of goes a long way to explaining how this whole RE mania got out of control .
“We have become a society of schemers, scammers, gamers, and get rich quick artists”
Please speak for yourself.
My parents were from the midwest. I inherited their frugal values. My parents were ripped off by fraudsters in the 1970s. I was ripped off by a fraudster in 2004 (albeit a small percentage of my net worth). I agree with SeattleMoose.
What really burns me is that we are at once the most fervent religious nation in the developed world and the most litigious and fraudulent society. I won’t make connections
and leave that to the reader.
I take issue with the words “we have become”. None of this is new. As long as money has existed, there have been schemers, scammers and get-rich-quick artists.
I think these clowns should of accounted for no down/low doc sub-prime loans to be the most risky paper a investor could purchase without insurance, the PMI insurance companies wouldn’t go on those low down junk loans they made anyway ).
Another model that the risk rating system didn’t seem to account for is that short term investor buying is not a stable market, and those short term investors would become distressed sellers if they couldn’t sell within a certain time .
Another model that is pure BS is the concept that a teaser rate should be the qualifying rate on a long term loan .
Yes, the fraud factor was high ,but anybody with half a brain should of know that borrowers without any skin in the game will walk if the gamble doesn’t pay in the short term .What model could ever allow 40 % appreciation rates on appraisals in six months or a year in a area ? What a joke .
“down/low doc sub-prime loans to be the most risky paper”
No/low down + no doc/low doc (”liar loan”) = no willingness or ability to pay in a down market.
Now/low down and no doc/lo doc applied not only to sub-prime, but Alt-A as well…that’s why we are far from seeing the end of the mortgage industry downturn and credit tightening.
I agree that Alt-A is almost as risky as sub-prime junk .
“Looks like the Lender Implode forum members watch Broker Outpost threads quite a bit. It’s pretty obnoxious and actually quite pathetic how much they “celebrate” the demise of the industry on that forum. The deterioration of the mortgage and real estate market will affect nearly every American in some negative way. Yet a bunch of uneducated and immature posters feel the need to get excited and celebrate it. Pathetic.
http://www.autodogmatic.com/forum/viewtopic.php?t=837
Might need to copy/paste the above link to a new browser window.
jasonkels
246 Posts
Posted - 07/21/2007 : 3:36:07 PM
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I will be able to help most that end up in foreclosure due to Ben’s actions!!!
nevets
182 Posts
Posted - 07/21/2007 : 4:43:23 PM
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only time will tell the story.”
Looks like the blame game is heating up.
Screw them. They screwed the financially responsible citizens for the past decade almost. Every time you see some DBag Mortgage Broker or Realtor running around in their MBz or Beemer, that’s where the value of your savings went in the past five years…into their pockets. I will dance upon the grave of this current RE market for what has happened in the last several years.
Add to the list of vehicles this one: The obnoxious piggish Hummer with some RE brokerage business painted all over it. Ugh! I would love to see a mallot swung against such piggishness.
Here’s a scary post from that AutoDogmatic link:
“It would be interesting to see nationwide stats on full doc loans originated last year as compared to SISA, SIVA, No Ratio and No Doc’s. I know what my stats are and Full Doc is dead last.”
“I know what my stats are and Full Doc is dead last”
He/she must do a lot of California loans…
Not sure if this posted:
On BrokersOutpost:
Comment by,
dstout
“Looks like the Lender Implode forum members watch Broker Outpost threads quite a bit. It’s pretty obnoxious and actually quite pathetic how much they “celebrate” the demise of the industry on that forum. The deterioration of the mortgage and real estate market will affect nearly every American in some negative way. Yet a bunch of uneducated and immature posters feel the need to get excited and celebrate it. Pathetic.”
Response:
Jasonkels,
“I will be able to help most that end up in foreclosure due to Ben’s actions!!!”
The blame game heats up.
I saw a funny sign this weekend in Simi Valley, CA at the corner of L.A. Ave. and Stearns St. It said, “Realtor… will work for Food! Call Jeff.” Maybe a joke but it sure looked serious.
Hey, have you been to the grocery store recently? Prices are way up. Give how long it takes for houses to sell these days, that could be serious money!
LATimes
Wall Street can’t cage its mortgage monster
http://tinyurl.com/36ufzz
“Today’s version of Frankenstein turning on its creator is the mortgage loan mess. Wall Street in recent years has taken a simple concept — bundling mortgages and selling them to investors as interest-paying bonds — and concocted an alphabet soup of securities so incredibly complex they defy understanding by all but a handful of PhDs.
That complexity now is coming back to haunt the buyers of those securities, who for the most part are hedge funds and other big investors, not individuals. If you aren’t sure what it is you own, you can’t be confident about the thing’s value. And in financial markets, if confidence dies, little else matters.”
From Zandi and The Boston Globe: Second, policy makers should encourage lenders and investors to cut homeowners some slack. Many hard-pressed homeowners deserve a chance to work through their financial problems and stay in their homes.
Some investors are not going to like this idea.
“Investment banks are exposed to subprime mortgage risks in several ways, according to Bart Narter, a senior analyst with Celent, a Boston-based financial research and consulting firm.”
It’s called Subprime Supernova.
Perhaps the government _wants_ hedge fund investors to get burned. Right now, the hedge funds are a huge financial market beyond the reach of the regulators. And, they are politically powerful enough to avoid regulation. But, if the investors get burned, then they will scream for regulation and drown out those who want to prevent regulation. And, then the regulators get to grow their empire.
OK, I agree this is pretty cynical. But, more regulation is needed and maybe this is best the political path.
Slightly off topic,but just read article in this week’s Barrons. Lead story is ” Where’s the little guy” referring to the lack of participation in the stock market by retail investors. The article goes on to say that once the little guy appears the rally will be over. To me that just epitomizes just how out of touch Wall Street has become. The truth is the ” little guy” isn’t coming back because they have no money to come back with. The vast majority of Americans are tapped out. When will Wall Street realize that they have squeezed as much blood out the turnip as they are going to get.
Yep, a good parasite doesn’t go so far as to kill the host.
Good point.
I think the way to look at the last 20 (or more) years is just as one ever-inflating credit bubble. Stocks crashed 2000 to 2003, but overall, the important bubble has just kept on inflating. Without a credit bubble, a society can only have so much wealth disparity before the poor overwhelm the rich (in anger) politically. But with the magic of debt, both classes can feel like they’re getting richer, even though they both really own claims to the same future revenue streams! (They don’t see it that way, of course, because they’re projecting future returns that are unrealistic.)
So I agree, the little guy in stocks stepped aside and won’t return for years. But the big guys found an even larger class of even littler guys to screw over, using housing. The question now that housing is busting is, can even greater wealth disparity be created by lending to an even larger and more naive class of investor? The only possible route for that I can imagine is to turn emerging market nations into huge debtors, for example by lending them money backed by their stocks and real estate. I don’t see this as very likely though, because they’re already growing at near top speed; in other words, they’re already sucked into the credit bubble. So, game over. The Great Credit Bubble has nothing to do but deflate for years (which doesn’t mean currencies will deflate; but in real terms, we’ll get negative growth). From here we get Great Depression II, and the little guys are going to be so angry, we’ll be lucky to avoid communism, IMO.
There are two types of “little guy” in stocks, though. I’m talking about daytrading retail investor types, as you are. But there’s also the 401k, dollar cost averaging and mutual fund types, and they never really left the stock market. This contrasts sharply with the mid 70s bear market, when they abandoned mutual funds in droves. That exodus will happen in the next big down leg of the stock market, IMO.
This contrasts sharply with the mid 70s bear market, when they abandoned mutual funds in droves. That exodus will happen in the next big down leg of the stock market, IMO.
Instead of “IMO,” you mean “I hope?” Don’t you?
Capitalism is not the culprit. Greed is the culprit for most of the problems we see. The top financial planners suggest that 20% to 30% of equities should be international stocks to lower the risk. I’m not worried about my 401ks and IRAs. I’ll keep pouring money into them. I assume you’ll continue to hide your money under your mattress. I expect stocks to drop 20% to 40% in the next few years, but I will continue to buy more. Folks like you thought I was an idiot in 2002 and early 2003.