Banking today in its most basic form is a really really simple idea. A bank takes in $1.00 in deposits, and is allowed to lend (this is approx) $0.30 of that dollar to the public. The rest has to sit in the bank vault as capital, just in case there are, ahem, problems. (See "It's a Wonderful Life", for George Bailey's version of this explanation.)
As banking evolved, and I mean very recently, banks decided that they could make more money if they sold those loans (all the 30 cents' they lent) to someone else, so they could then lend out that same amount to someone else and make the fees on it, again. So they'd sell the loan at a discount to other firms, say investment firms or government-sponsored firms, creating what everybody on Wall Street loves, liquidity. Liquidity is simply exactly the same as that moment when you pay down your credit card, you're available credit goes up, you therefore have more liquidity, meaning you have more options. It's a good thing.
So the banks have more liquidity, they lend again and again, always selling the loan quickly. Nothing wrong with this. Yet. Then along comes the day when someone realizes if they lend to folks who have a lower chance of fully paying back the loan, they can take a bigger fee upfront and justify it saying, hey you might stiff me. Now we're making some cash! And we're still selling those less secure loans off the books to other financial companies...think Fannie, Freddie, Lehman, etc.
But it didn't stop there. The next step was someone saying let's change the traditional type of loan, call it an adjustable rate, a lot more people will qualify for loans now, yay! People will own homes, interest rates will be low, well at least until they adjust, and home prices will soar because everyone will want to be a homeowner. It'll create a seller's market. And these loans will still being sold to other financial companies. The prices of homes soared.
This is like the Ginzu knives commercial. But wait, there's more. Then a few really edgy characters in the banking community decided to focus on subprime, the industry term for ‘weak-borrowers-that-probably-won't-pay-us-back-but-we're-not-scared-because-we'll-just-take-the-house-back-and -re-sell-it-and-recoup-our-loses.' And they lent them using the adjustable rate, so even if the economy stayed constant, once these mortgages adjusted to the higher rate, these borrowers were likely to default anyway. Oh, and these loans continued to be sold to other financial companies.
I'm not going to even try to pinpoint the exact moment when the music stopped; suffice to say somewhere in 2006, some of these loans started going bad. Losses were accumulating, and here's where things really got sticky. The other financial companies decided to stop buying the loans from the banks making them.
Oh, boy. The first jolt of panic was felt. Many banks had already started reigning in their lending to the subprime, but, they didn't shut it off! And that was critical. Countrywide and WaMu were most notable for this.
So remember that $1.00 of deposit, and .30 cents can get lent, then rest in the vault just in case. When the ability to sell off these loans dried up, banks were left with more than they could hold on their own books, so that .30 cents became .50 cents, and senior executives went, holy shit, we have to raise capital to cover the .20 cents. They all went out and borrowed from each other, a very standard practice, and some even raised capital to cover it. Remember WaMu raised $7 billion back in the beginning of the year.
Okay, phew. The banks raise the capital they need, and cross fingers that it isn't as bad as all that. Meanwhile the economy is going bad, the ability to sell loans made on houses has dried up, so banks scaled back all jumbo lending as well as subprime; jumbo loans is a defined term for all house loans over approx. $430,000. Why? Fannie and Freddie were still buying conventional home loans (loans under $430,000) from the banks, so the banks could still sell them and make money. That's when homes in the $400,000 to $900,000 started losing value. Not only had we hit the stall point, we tipped over and we started crashing.
Home prices started falling fast in most places in the country. And the above cycle started to pick up tremendous speed. The velocity with which defaults were occurring, foreclosures were happening, was so fast and rapid, no one could even comment on how big the problem was...still can't.
The final straw, in my opinion, the proverbial dagger through WaMu's heart, came the beginning of September, when consumers seemingly en masse decided to withdraw huge sums from the bank, a kind of organized run on a bank. Almost $17 billion dollars gone in about 15 days, and remember that means they have to either raise capital to cover the loans they have outstanding, or they get seized.
They got seized. And then they got sold. Game over. Wachovia is now in the hot seat. Bank of America owns Merrill Lynch and Countrywide, and JP Morgan Chase owns WaMU. We are well on our way to having 4 or 5 national banking institutions as some speculate that Citibank will take Wachovia.
Bottom line, liquidity has dried up from our markets. Only the truly well capitalized now have the money, the liquidity, to keep lending.
Editor's note: Here is Part Two of this article: Financial Crisis 101: What Can We Do?
Learn more about the author, Kelleen Griffin.
Thank you for explaining the cause of the financial crisis in plain English.
Liquidity has dried up and caused banks to fail. $700 billion bailout plan is to have each tax player to fund $2300 for the banks’ failure. Will that work or more crisis to come?
Thanks, great question. In my opinion, it could work. But there are a number of variables and the biggest is still consumer reaction. If we continue to panic and pull money from less well capitalized banks, there will be more bank failures. And the tab for the fix goes up.
The $700 billion is a PR nightmare. By calling this a 'bailout', it gave the impression that these banks are fine as soon as we pony up the cash. Not so. Very few banks will get through this unscathed. Bankers have been let go in droves. The people who sold those loans to the 'other financial institutions' I mentioned above, they've been fired as well.
Case in point, the head of Treasury from WaMU was fired eight months ago. All the people who worked at Lehman who sold the loans, laid off. The company filed bankruptcy. Thousands of people have lost their jobs, many because they were just following orders from someone at the top.
So a bailout? Wrong word. The $700 billion is a placebo, the amount of estimated liquidity that right now, now, the market (US and Around the Globe) needs to know is there just in case. This amount will go up and down over time. The point is to reassure the rest of the market that we are sound, that our system of banking still works. Then the market makers will calm down, the media will see that the market makers are calm and then they'll ease off. Over time, then, you and I will feel as if the worst has passed, and a fledgling confidence will be restored. Congress will pass new laws in the banking industry to prevent this from happening again, etc. That's what I foresee as the road ahead, if we can establish some stability right now.
Thanks for a great question and this is just my two cents. Others?
Great article Kelleen! A needed the Banking 101 primer. Thank you!
And great question Huan-Hua ... Looking forward to Part Two.
In the meantime, prayers now being applied
I had a feeling you'd take your commentary and compose something for us. Great read, can't wait for the sequel and I hope the final article in the trilogy is how the market stabilized. ;-)
It's sad when irrational fear combined with media over attention and mal-reporting on top of a poor government proposal sure has made this divot harder than it should have been.
I thought banks required reserve ratio was 10% not 70% and that's why this problem is so sevre. Basically, it's exactly what you describe, but I believe it's even more leveraged.
The "bail out" (which is the worst term for transaction, should be called stabilization or investment) helps free up the banking system by not only injecting capital as Kelleen describes in her great article, but getting all these mortgage off the banks books. Suddenly banks not only get cash they also remove these loans and recapitalize themselves so they can loan money again.
The "bail out" won't work though unless it inspires some confidence in the American economy. Businesses right now are maxing out their lines of credit and holding it in cash because they fear they won't be able to access the credit in the near future. This combined with people withdrawing money from banks creates a vaccuum of cash available.
The only thing that matters in a capitalist economy is how fast money moves from one person to the next. How fast my dollar when I buy a product, is spent to buy inventory by that company, deposited in a bank and lent out for someone to buy a house. Right now, it might still be making it out of my pocket, but it's not making it all the way back to a bank. My fear is that hoarding cash is going to quickly work it's way back down the chain and the economy is really going to suffer.
Some action needs to be taken to encourage some confidence in the banking/lending sector so the entire economy doesn't freeze.
Great article. No matter how many times I try to read what has happened it gets confusing! You explained it very well!
My accountant also said the last straw for WaMu was that people panicked and pulled their money out...a big no, no and it was what finally pulled WaMu under.
Am curious to see what future safeguards will be put in place to prevent something like this from happening again...or are there any...safeguards that is?
@Leta, I'm with you. Prayers needed! Thanks for commenting.
@Andy, The Trilogy, I love it! The Lord of the Rings, I mean Flies, I mean Bankers...haha.
@Seth, you may be right about the exact leverage, maybe someone here knows for sure. I would offer a slightly different take on the "only thing that matters in a capitalist society is how fast money moves." While what you say is what I was taught in my MBA, I can't help but want to believe that the innerpreneurs, the creative capitalists, that Tara's article spoke about will find another solution, or at least offer up an alternative to the consumer focus system we currently have. Tara's article for those who haven't read them, is called Are you an Innerpreneur? Great read...same with the follow up article.
@Rebecca - safeguards. Yes, there's one big one I can think of...This mess got really really bad when we packaged up those home loans and sold them off to a bunch of other financial institutions, who then packaged them up again and sold them off as, here's the financial term, a securitization!
This type of security has it's roots in the Michael Milliken junk bond debacle...this was the lurking time bomb that killed the Smartest Guys in the Room, otherwise known as Enron! You'd think our regulators would go, hey, this seems to NOT work so well. Let's stop doing these financial instruments. But no, this is a way for some people to take what ordinarily is crap and turn it into a gold mine. Sow's ear into a silk purse. I bet others have a lot of thoughts on what can be done? Care to share?
Kelleen, Good article explaining a complicated issue. So from one of your comments, are you suggesting the 'bailout' is more psychological than anything else? To reassure the markets and create stability through knowing the government is involved? Let's hope it works...if it passes!
Thank you! This makes it a lot easier to understand, especially when dealing with buyers and seller in the Real Estate Market.
Boo hoo, Kelleen; I've been Wamu-ed! I didn't panic, I trusted! Now I am smarter, thanks to you!
Andrew :)
I love articles like this, great understandable summary of the mess...
Kelleen, I continue to be impressed by you. Bravo - Bravo!
Thank you for being another calming rational voice in this time.
Cheers
Great article, it make more sense now. Thanks!
Thanks for the article!
Kelleen,
Great Article! Thanks for the easy to understand synopsis! I was working in the national real estate syndication market when a similar thing happened in the 80's.....I call it increasing value through fictions. In the 80's this happened when the commercial real estate market was falsely inflated because investors recieved huge paper tax losses and kept investing to get more paper tax losses even though the value was not there....eventually the bottom fell out...remember October 1987? At that time interest rates sky rocketed to the high teens but people kept investing in real estate to get tax losses rather than basing their decisions on sound economics...and then the bubble popped! Here we go again...but this time it is based on lending packages that do not make economic sense...and the values keep rolling higher based on a fiction...this time it really snowballed and the individual homeowner is getting hammered. This is a "prime" example of what happens when greed takes over.
Kelleen, As a recovering banker, you did a great job in describing the complexity of where we are now. Too bad our congressional leaders haven't had the benefit of your clarity...
Risk! Successful lending and borrowing depend on accurate estimation of risk. Irrational, highly volatile markets make accurate estimates impossible. Actuarial models depend on the future behaving like the past. Regulators offer stopgap remedies when markets become chaotic and look for a way to limit revenue swings. When unbridled individual rights collectively leads to catastrophic consequences, social unrest, panic and potentially violent acts may ensue. Other than that, things will work themselves out. Blame it on global warming. Don’t forget to vote.
Greatly appreciate the article. Thank you for breaking it down and the analysis!
As far as Bailout/Schamilout....I still can't figure out whether it is a good thing for the US (and beyond) :-(
Great Article- however people need to understand how this all started. The american companies- have pumped so much money into the Chinese economy- they invested that money in our bond market. That created all the money- for these banks to lend. Hence why so much- sub-prime lending occurred. These public companies are under so much pressure from Wall Street- to drive earnings- they did drive earnings- without proper business management in place- and look what happened.
Please contact your Congress people-- the regulations (enacted in 1934)- need to be updated to prevent this crisis from happening again. Congress needs to update the regulations- and re- craft the bail out plan in their new session. Americans- get informed and get involved- by urging Congress to pass tougher legistlation - to help the US successfully and profitably operate in this global economy.
Mi comentario. No deseo ser 'agua fiestas' pero el empleado del FMI (Fondo más infame) Cartens, dice que 'el pedo' financiero gringo no le hace cosquillas http://www.el-mexicano.info/nota.aspx?idNota=320469&esSecc=true y practicamente afirma que 'sé la Pérez Prado con musica de Agustín 'Carstens' Lara' . El pinche panzón de mierda se traga diario de 200 a 500 dólares de comida y Paulson, el Secretario del Tesoro de los USA, posee una fortuna personal de ½ billón de dólares. Los gringos pretenden abrir el cofre del tesoro para salvar a banqueros y plutocracia envuelta en este 'fraudeicidio' (dijera Trespatines o Chivichana) de la orgía del enriquecimiento. Entre otros malos habitos, crearon la burbuja inmobiliaría, a la gente, les hicieron creer que las propiedades; casas, terrenos, etc., valían 'un huevo y la mitad del otro', les vendieron a ese costo de 'easy oven eggs' y cuando vino el golpe -éste golpe anunciado- el comprador se quedó con 'equidad' (equity) negativa. Es decir, compró a un costo elevado, firmó un credito altísimo... y ahora la casa -por decir- vale la mitad, pero el debe 'el huevo entero y la ½ del otro' ¿el fraude? allí está... les vendieron 'alto' y las ganancias se fueron para los que hoy quieren el 'Bailout' o en castellano FOBAPROA, y obvio que con el 'rescate bancario como sucedió en México gracias -entre otros- a Calderon el espurio de mierda, los mexicanos estamos pagando lo que los banqueros y la elite 'se chingó'. Eso va a pasar en USA ¿será? En los Estados Unidos, Henry Paulson el Tesorero mencionado y que estuvo años anteriores como cabeza del WALL STREET BANKING SYSTEM y con una fortuna que ya se los mencioné arriba, es él junto con 'el Jorge Bush' (¡otro Jorge! Pero éste de Tijuana tiene un grupito táctico que abrió fuego contra el penal en La Mesa, aplicaron 'sentencia de muerte' a casi 30 y 200 desaparecidos) –sigo-, estos dos, Henry y George quieren ahora sacar los billetes del contribuyente, 'rescatar' al Wall Street y que Viva la vida loca. Es decir, son juez y parte, tal y como sucedió en México. La plutocracia protegiendo a la plutocracia. Gobierno de plutocratas, ¡ la derecha pués!
Cómo dijera Nikolaus Piper in the Süddeutsche Zeitung; es como si contrata a los carteles de la droga para consultoría del problema de drogas. Asi la cosa o usted ¿qué opina?. Saludos cordiales, Silverio quiebra el mayor banco en la historia de EEUU Por MADLEN READ - NUEVA YORK - Septiembre 26, 2008
Good job explaining. Also, here is a great film that explains how money works.
Money As Debt: What Money is and how it is created. http://video.google.com/videoplay?docid=-9050474362583451279
none
The only tougher regulation needed is in the mortgage lending sector.
The toughest regulated industries, Banking, Insurance, Finance, deal with people's money, but somehow mortgage financing (particularly mortgage brokers) are very loosely regulated by comparison.
Yet, they deal with larger sums of money for most people when compared to investments, insurance or bank accounts then the tighter regulated sectors of the finance industry.
Thank you for the great explanation. As a Realtor since 1996 I must say the comsumer must bare some responsibility in this. We have seen byers, lie, cheat and steal to get into a home they could not afford. After showing buyers homes they COULD afford they go on their own to open houses and sit with the sellers agent who gets them a "financing deal". Buyers must be responsible for purchaising over their heads and hoping for the best. I do agree if the lenders were not so "accomodating" many people would not be in this mess.
Bailout means that the loses are going to be public, american people are going to suffer consecuences like in Mexico with the FOBAPROA. Those who earn big buck due to this messssss (Paulson as example) they are ok, they want the bailout so they can re-gain big bucks again... simple. That's the capitalist broke american system. There's no liberal ideas on the table...You must read Larouche proposal about Wall Street solutions. Change to Nader/Gonzalez campaign.
I look forward to hearing the debate tonight to find out what the VP's say about this mess!
They'll say nothing... they create it and they use media to manipulate and confuse people, as everything they do in this (un)government, they are in China because they prefer pay less wages overthere and cut jobs to the american people. They open a war with a huge cost to the american people for oil, big bucks to Shell, Exxon, BP, Sempra< etc.... that's the real problem. Exports are less in size than imports to the country as a consecuence, GPI is less.The VPdebate it isn't a debate, it's only a mascarade -parodia-.
Check out http://www.confessionsofamortgageinsider.com. Denny's book tell's all...
ok, tks.
Thanks for writing this up I have to admit that I really have had not much clue about it.
One thing I am wondering about (as a German national having been living here 4 years) is:
Isn't that a very weird idea for the American Government to step in and interfere in such a way that hey throw out a "placebo" worth 700 Billion of - well our tax money. Just to save some of the Banks (well for how long) and trying to "stabilize the market" (isn't it more to calm down the minds of wall street, business executives, and bankers that are running amok?). To my mind the US is the land of free "capitalism", where businesses (and banks) can make huge profits without much regulation, a lot of short term thinking& attitude is in place, and a "laissez-faire" attitude from the government side.
Usually the government tries hard not to not interfere much and banks make huge profits with - well super risky business! And now that the bankers screwed it up big big big time who is gonna pay ....!!! They (the executives) should stand up to their responsibilities! If that is solved with public money shouldn't we also get our share of the huge profits once they will make them again in some years :) !
I really don't know if it would be a good idea (for the economy in the long term) to leave the banks by themselves and just have them go it alone (thinking "because they usually don't share their wealth with us why should we step in now ...?). Wouldn't it be better to help small people loosing their homes and their jobs instead? Why help executives who screwed it up in the first place? I hope that not one single $ goes to any people that already have a lot of money from this package :) . Unless that is not clear the whole salvage plan is a disaster. Any government interference should be accompanied by strict laws that will prevent that this will happen again in the future (way are so many people in the US against strong preventive regulations - I don't get it). But I guess the government just what s to fix it now and doesn't think much about that it can happen practically any time again.!!! Furthermore the "big heads" on the top of the chain - causing much of this - should be prosecuted and put behind bars for good haha ...
But in general it seems that he government is throwing all overboard what they usually believe in (deregulation, non interference, let them do their thing and have huge profits, unregulated free market economy). Where is the free market economy here ! Cheers Karsten
Can I ask a question? Please forgive me if this seems like a silly ignorant question but I'm having problems trusting the people who got us into this problem to get us out. After all, it seems to me - a totally numb head at finances - that it was the 'new math' that got the financial industry into this mess. It was drilled into my little 'Sunday-school" had not to build a house on shifting sands and not to get into debt and to pay cash for everything that I can. Of course, I have a 'reasonable' loan on my house. But if you cannot pay the mortgage, then you should wait to buy a house.
I think that 'bail out' is kind of a joke (and a really poor one - on all of us!) because the real issue isn't being dealt with. We - as a nation (and our leaders especially)- are more interested in having stuff. We're mega consumers. It's an addiction. I have a deep feeling that that's what needs to be addressed. Not all of us pony up money we can't afford so the banks and start the whole nightmare over again.
You know, as a self employed professional I'm paying 43% of my income in taxes. I have no access to health care, no retirement and very little else - and these people think we're going to pony up more to cover their greed and foolishness. My personal sense is to collect their bonuses, retirements and seize their assets and apply that to the 'bail out' first. Then send the whole freaking lot of them to credit counseling and ban them from working in the industry again.
I used to be proud to be an American but not any more. We need to take the country back from these crazy people. Am I way out in left field?
Thanks for writing this up I have to admit that I really have had not much clue about it.
One thing I am wondering about (as a German national having been living here 4 years) is:
Isn't that a very weird idea for the American Government to step in and interfere in such a way that hey throw out a "placebo" worth 700 Billion of - well our tax money. Just to save some of the Banks (well for how long) and trying to "stabilize the market" (isn't it more to calm down the minds of wall street, business executives, and bankers that are running amok?). To my mind the US is the land of free "capitalism", where businesses (and banks) can make huge profits without much regulation, a lot of short term thinking& attitude is in place, and a "laissez-faire" attitude from the government side.
Usually the government tries hard not to not interfere much and banks make huge profits with - well super risky business! And now that the bankers screwed it up big big big time who is gonna pay ....!!! They (the executives) should stand up to their responsibilities! If that is solved with public money shouldn't we also get our share of the huge profits once they will make them again in some years :) !
I really don't know if it would be a good idea (for the economy in the long term) to leave the banks by themselves and just have them go it alone (thinking "because they usually don't share their wealth with us why should we step in now ...?). Wouldn't it be better to help small people loosing their homes and their jobs instead? Why help executives who screwed it up in the first place? I hope that not one single $ goes to any people that already have a lot of money from this package :) . Unless that is not clear the whole salvage plan is a disaster. Any government interference should be accompanied by strict laws that will prevent that this will happen again in the future (why are so many people in the US against strong preventive regulations - I don't get it). But I guess the government just what s to fix it now and doesn't think much ahead - that it can happen practically any time again.!!! Furthermore the "big heads" on the top of the chain - causing much of this - should be prosecuted and put behind bars for good haha ...
But in general it seems that he government is throwing all overboard what they usually believe in (deregulation, non interference, let them do their thing and have huge profits, unregulated free market economy). Where is the free market economy here ! Cheers Karsten
the free market? ....in their pockets my friend.... Paulson has a ½ billion dolars (dolares) as a private fortune. He was the CEO of Wall Street Banking System before it happens this, don't you get it... they are a thifers, crooks with white collar shirts...
I guess the S&L scandal was not so scandalous if so few people remember the consequences of writing bad loans.
(I also thought the reserve requirement was closer to only 10% needing to be kept to cover deposits.)
The real message of the "bailout" program is that it shows the rest of the world that the US government is happy to put the taxpayer on the line for mistakes made by private companies.
The banks should be allowed to fail. Their assets will bought at a deep discount by investors who have had the ability to protect their capital. Those investors will sort through and find the assets that can generate profit, sell off or revitalize those assets, and the money will start flowing again.
The "bailout," as Kelleen reminds us, only delays the inevitable. Unless the Treasury is going to step in and actually change the management of the failed banks, they will continue to write bad loans, in some form or other and we will be in this mess again. I do not want Treasury to manage the banks, nor do I want the government involved in handling the disposition of their assets (remember, again, how the taxpayers got shafted when the assets of the S&Ls were sold for less than the government paid for them).
Letting the bad banks fail will have ripple effects through the economy, but so will transferring $700 billion (and more) of tax money from the public sector to the private. What programs will be cut to fund the bailout? If none, then the only way to generate the money is through debt – either direct debt borrowed from other countries (China), or indirect debt in the form of inflation. There is nothing in the bailout that benefits the family on Main Street.
Barbara, you are noy fardest left, you are just sit in the reality...
not instead noy
We're being told by government officials and much of the media that Congress must decide between: -Voting NO and allowing the destruction of the global financial system; or -Voting YES and saving the global financial system by empowering the Treasury Department and Federal Reserve to bailout troubled financial institutions up to a cost of $700 billion (more likely trillions of dollars ultimately).
However, the reality is that Congress must decide between: -Voting NO and allowing the free market to liquidate bad debts and unviable companies through allowing market prices to prevail; and -Voting YES and empowering the Treasury Department and Federal Reserve to bailout troubled financial institutions with $700 billion (more likely trillions of dollars) of additional debt, leading to more inflation of the dollar at best and the destruction of the dollar at worst.
I like 'noy'! Has a fun ring to it. :-)
Can I ask another kind of stupid question (please realize that I'm a graphic designer and therefore, always in my right mind...)
Would it really be a bad thing if the banking system failed? OK I just felt everyone on the West coast cringe. But we've entered a new global economy and business is done differently. This banking system has been around for a long time and isn't really functioning properly anyway. Maybe this is the beginning of a more radical change then we realize.
Thoughts?
Thanks for the article, Kellen. I think it is very helpful.
One thing you left out is that the junk bond crisis and this latest debacle was fueled by greed. A lot of people made a lot of money on these bad debts. The "Smartest Guys in the Room" knew what could happen and they did it anyway because they could and they knew they would make a lot of money and the Fed would have to step in, people would be scared, thousands would lose their jobs and homes. Who cares, they got theirs and it was a lot.
This type of financial scandal will continue to repeat itself as long as there are not strict regulations. And we the taxpayers will continue to pay so that the richest can continue to get richer.
Ten Reasons Not To Bail Out Wall Street www.solari.com
by Catherine Austin Fitts and Carolyn Betts, Esq.
(1) Crime that pays is crime that stays.
There is reason to believe that Wall Street and those they represent are holding loans without collateral, multiple loans secured by the same properties, and other fraudulent instruments among the “troubled assets.” Based on the secret “Treasury Conference Call” with 800 Wall Street insiders, we know the deal proposed to be passed by Congress isn’t the real deal promised to Wall Street.
(2) This smells like obstruction of justice.
Bail-out without due diligence of so called “troubled assets” is a perfect way to hide documentation of financial crimes. It is also a perfect means to launder both the past ill-gotten gains and new federal money spent recklessly and without necessary safeguards and oversight mechanisms. Be very suspicious when they tell you “we just can’t tell what’s in these troubled assets.” We can assure you that the federal government has field offices all across the country that deal with significant amounts of real estate and mortgage assets on a dailyl basis. If Treasury refuses for more than a decade to comply with the laws, with approximately $4 trillion missing (and counting), it is not competent to manage $700 billion of taxpayer money while its arm is twisted by Wall Street.
(3) Wall Street owes the federal government money.
We need to get stolen money back from the banks that served as depositories for the US government (including trillions for which the Pentagon and HUD could not account) and punish them, not create another opportunity for them to game the system and engage in criminal enterprises to rob consumers. To the extent there has been regulatory wrong-doing, let’s not let the miscreants leave town with the evidence.
(4) Good guys are shut out.
A bail-out provides no way for honest leaders to come to the fore and use their creativity and expertise to restore balance and integrity to the system or for unproductive and poorly-managed banks that contribute to current over-capacity in the banking system to die a dignified death.
(5) This results in more investment in the “bubble economy.”
Spending massive amounts on non-productive uses (“buying” worthless credit default swaps, mortgages with no collateral and derivatives, which could even include the derivatives used to manipulate the precious metals markets) as opposed to productive uses (repairing infrastructure, creating alternative energy systems, supporting inventing and production of “green” products) is inflationary.
This bail-out will drive prices of food, water and energy up for the people who can least afford it.
(6) Bail-out does not result in capital circulating in healthy ways.
The bail-out of Wall Street and too-big-to-fail banks and insurance companies that are getting bigger by the minute by swallowing up other failing financial institutions (and creating more institutions that are “too big to fail”) does not result in trickle-down to those whose money was stolen in recent swindles (S&L, dot.com, current housing crisis), i.e., the taxpayers/middle class and working poor.
(7) These arrangements will result in more corruption.
Centralized “fixes” are sure to result in black holes, no-bid contracts and other scandals.
(8) The bail-out drains the real economy, rather than invests in the real economy.
The US economy can’t be productive or grow if consumers don’t have jobs and can’t afford to purchase goods and services. Real stimulation of Main Street is accomplished through productive investment, not bail-outs that shift money to unproductive sectors. We should use all of our precious resources to reinvest in our people in the real economy.
(9) It props up sectors that need to downsize and consolidate.
There is significant overcapacity in the financial and banking sectors. Brainpower and talent needs to stop blowing financial bubbles and shift to economic activities that create real value.
(10) It is a temporary “fix” to keep Wall Street afloat until after the election.
Our resources are better invested in permanent, long-term solutions. This bail-out will not fix anything. Rather, it will help the perpetrators get away and ensure that the ultimate day of reckoning is worse.
The Administration wants to drain the real economy to bail out Wall Street. It seems to us that the more appropriate plan would be to require Wall Street to return the $4 trillion plus that is missing and use that to rebuild the real economy.
We think the time has come to reverse the flow. Go to any business school in the country. That is what they teach. Money should move out of unproductive sectors into productive sectors. The bail-out does just the opposite.
“Just say NO!”
Thanks for your insightful, down-to-earth article Kelleen.
Why did banks and other financial institutions continue to buy "bad" loans from the banks that made them? Shouldn't they have known better?
Barbara,
The entire banking system will not fail. The fundamentals of banking are sound.
What caused the "crisis" was, as Kelleen, pointed out speculation on known bad investments - just like the dot-coms, just like the S&Ls, just like the stock market crashes of the 80's and 20's.
When people stop looking at the real value of an investment or a loan and believe they can "beat the system," eventually, they get burned. Which actually proves how effective laissez-faire capitalism really is.
The government gang that is trying to perpetrate the bailout fraud is relying on an equivalent of "The Domino Effect" to try to scare our elected representatives into commiting our money to their "solution."
People and businesses always need to borrow money. Other people and businesses have that money to lend. The underwriting, due dilligence or scrutiny on the borrower will be increased, again, for a while, but hiding your cash under the mattress just doesn't pay, so lenders (individual or institutional) will get money into circulation again.
I am ready to lend to anyone who has a coherent, viable business plan right now. Why not? If what they are going to do with the money shows that they will make a profit, of course I'll want to share in that.
"This type of financial scandal will continue to repeat itself as long as there are not strict regulations. And we the taxpayers will continue to pay so that the richest can continue to get richer."
The Only "regulation" here is to change the american politic system... both, Reps and Demos are the same "shit" Watch this 2:27 minute video and open your eyes. They are both the same!!! http://www.youtube.com/watch?v=u5WiE6MnmCM
Adam,
Good re-post. I'll forward this to Jay Inslee to remind him to vote NO again.
I see the "soccer mom," Sen. Patty Murray shafted her consitutency and voted yes, while the rich gal, Sen. Maria Cantwell, voted no.
Murray's a goner, as far as I'm concerned, but will the Democrats ever let anyone run against her?
And what the heck does this mean,"Murray said the bill was not one she would have written or wanted to support." But she voted for it anyway?
When you vote for something you don't want you get what you don't want. The winner of the vote doesn't care what you wanted - They won!
That's a great summary of the problem. But also the driving force behind it is the world banks. In 2002, there was 70 trillion in world's saving. The people in charge of that money want to grow it and usually do so with safe investments like US Treasuries. But when Greenspan lowered the interest rates they could only make 1%, not the 5-6% they were used to. So they said "Hey, regular Americans are willing to give us 6-7% for mortgages."
Of course, they can't be bothered on this scale to be asking you for your payment every month. So Wall St. got involved and the i-bankers securitized hundreds of mortgages. This was fine when they were still loaning to upstanding people with good credit and 30% down. But when those people ran out, there was still an insatiable demand for mortgages, which drove the downward spiral into subprime lending. Everyone, as you said, was selling their loans so they become like financial hot potatoes. Now whoever is holding them gets burned.
The people with the money backing the investments are so far removed from what was happening or turned a blind eye to it that this, and deregulation allowed these bad loans to happen.
Furthermore, the Treasury will likely have to drive us into hyperinflation, or worse, claim force majeure on its loans and the dollar will become worthless.
Thanks Adam for the post. It's nice to know that there are others out there feeling the outrage AND who have valid reasons to.
And thanks Michael. I think a lot of educated and smart people don't have a clue what the whole banking system is. It's time we really understood this.
Can I ask one more question from left field? Does it seem like interesting timing that all of the hit the fan? I mean just a Bush and his cronies flee office (after filling their pockets)? I'm wondering if he was hoping it would it right after he left, but..
It just feels that the corruption goes even deeper than Wall Street. I just don't trust the entire political institution. I mean the man gets into office without really winning the election (and the state that fouled up was run my his brother?!); then he launches us into a war (right now don't think about it -sound familiar) where now we know there was no cause AND he and his sidekick, Chaney Vader (both of whom have large interests in oil and the whole Haliburton fiasco - which was really dodgy but swept under the rug...) and the list goes on. What's really going on here?
Credit, and in particular money changing, has been a problem since the time of Christ. With all due respect to the banking system explanation the Bail Out has nothing to do with banks, or mortgages, that's just the hook to get the American people to go along. The crisis is in the financial markets. They are global. Money is being lent around the clock, most of it in consumer credit. Today it's every body around the world creating consumer credit. When that unsecured debt was converted into mortgages, or refinances, or second mortgages it seemed like a good bet for the lenders. They were acquiring assets to put on the books to cover a lot of unsecured debt lent for consumer goods, that in turn expanded the economy. It's simple, the paper securities traded hands until there was no more discounting that could be done. The core value of the assets, properties was far below the price. $200K houses selling for, or financed for $500K. The core value became apparent when consumers tried to sell the $500K houses for $550K or $600K to find no buyers. They had to sell because the 2006, 2005, 2004 Adjustable rate mortgages were resetting after the buying season of 2007. Remember the cracks were already getting broader with Bear Stearns (sp?). I could go on with the capitalization of the S&L scandal, but it was also just a warning sign. The real damage, in my opinion was the creation of the Euro, out of thin air. No security was ever established for the currency, it just appeared one day, by a vote of the people it's creation would benefit the most. Again a topic for another day. The Bail Out is bad for everybody. The financial markets should go back to the borrowers to make the best deal they can to pay off the debt.
My friends, it's time to read... The Wall Street bailout and the threat of dictatorshiphttp://www.wsws.org/articles/2008/oct2008/bail-o02.shtml Banking crisis hits Germany with full forcehttp://www.wsws.org/articles/2008/oct2008/bank-o02.shtml Asian stocks tumble after rejection of US bailout packagehttp://www.wsws.org/articles/2008/oct2008/asia-o02.shtml Bradford and Bingley: British government nationalises second failing bankhttp://www.wsws.org/articles/2008/oct2008/brad-o02.shtml
Woah Nellie!
You guys blew the roof off our $150,000 Three Way Race fundraising goal.
And you blew the roof off of our $3 million goal for the end of September.
Thank you, thank you, thank you.
We'll be launching our October drive tomorrow.
With a special premium offer.
So, stay tuned.
But for now, we're back at it, trying to derail the $700 billion Mother of All Bailouts.
The bill will be voted on by the House of Representatives tomorrow.
So, here's what we need you to do now.
Call Congress' main switchboard number at 202.224.3121.
Ask for your member of Congress.
(If the main switchboard number is jammed, you can Google your member's name and find a direct dial phone number. If your member of Congress voted against the first bailout bill, you can find their direct dial phone number on this spreadsheet our staff just cobbled together.)
Tell the person who answers the phone to please take a message for your elected representative.
The message for your member of Congress is this:
Please vote against the bailout bill.
Call 202.224.3121.
Tell your member of Congress:
Please vote no on the bailout.
Let's crank it up.
And get it done.
Onward to November
The Nader Team
PS: We're not sure what will be in the bill that the House will vote for, but we are pretty sure that it will be similar to the Senate bill. Which is the MOB bill -- the Mother of All Bailouts, supported by McCain Obama and Bush. That is -- big relief for the big banks. Little relief for homeowners facing foreclosure. That's one. Two, Warren Buffett recently invested in Goldman Sachs. What did Warren Buffett get in return? Ownership. So, if the American taxpayers are going to inject money into the big banks, why don't we get ownership in return? Three, there is no provision in the bill for cracking down on the corporate criminals that brought us to this point. Why not? Four, the federal government can take action now to prevent foreclosures, to keep homeowners in their homes. Why is the first move to bail out those who engaged in "a sustained orgy of excess and reckless behavior?" (As Dallas Federal Reserve chairman Richard Fisher put it last week.) In sum, it's a bailout bill for Wall Street crooks. Reach for your phone. Dial that there number -- 202.224.3121. Leave a message for your member of Congress. Vote no on the bailout.
I too believe that the correct reserve requirement is 10%. You (the collective you) might want to read
http://en.wikipedia.org/wiki/Reserve_requirement
for a detailed explanation.
Anyone interested in a book that may explain the cyclical nature of these bailouts might enjoy reading "The Creature from Jykle Island" found on Amazon. (And, by the way, NO I am not a conspiracy buff).
Otherwise, your description of horror is right on. There is actually so much more to the story. Bond rating agencies, young buck traders selling MBS with the lie that they were safe because they were backed by the US Govt, which turned out to be true- in a bailout form.
It is really not about banks and reserves. It is about the government wanting a higher owner occupancy rate, about the Community Reinvestment Act- which required lending to less qualified borrowers. Then throw in the banks joy at helping the sub-prime lender meet government goals.
We are experiencing the results of years of neglectful actions and accumulated confoundedness in what had been done.
There is a lot of flippancy in the above. But, there is more complacency and skulduggery than we can imagine.
Good luck to "US" all.
Hi everyone!
Wow, there are some amazing comments here. Thank you all for participating. I want to read each one, because somewhere in here, is a way out. Did you know that Small Business accounts for 66% of the GDP of this country, and if you add Middle Market that jumps to 88%! It's not the big corporates that will find a way through this, it's not the banks, nor even the government, it's all of us, right here.
I can see a theme in these comments and want to encourage some of you to continue: Does the bailout/placebo make sense? What are the Pros and Cons?
I've gotta run...but I'll be back!
Maybe it's time for a nice quiet revolution.
Barbara... you are absolutly right -correcto- "a nice quit revolution" Every body does not want to see this : The War in Iraq Costs $463,013,446,591 http://nationalpriorities.org/index.php?option=com_wrapper&Itemid=182 and this is only the tip of hte iceberg... You american people are loosing you Republic and you lost (2000) your democracy, with it your freedom (Patriot act) and now, the consecuences of all of this, "a bailout" FOBAPROA in Smanish (lol) you are losing "your american way of life."
quiet
Hey Silverio - do you need graphic designers down there?
:-)
lol... yes, but the business is slow slow... no body wants to buy nothing -crisis- but I let you know Barbara. Regards,
Kelleen: thank you for your lucid explanations. I have been attempting to do the same for those around me. Too often, the tendency is to focus on blaming one's pet political obstacle, regardless of the facts involved, or the fact that at this point, we need solutions more than blame, although we undoubtedly need to understand the real causes of this crisis.
Interestingly enough, it is not mainly the consumers who have created this "run" on liquidity, but the investment community. So many sources are responsible for this, but I think I'll point out a few facts not mentioned so far.
Mark to Market Accounting on Not-for-Sale Assets which are Illiquid.
Doubtless, many here know far more about this than I do. As I understand from some intelligent economists, approximately 70% of the current financial crisis is due to this accounting rule, which, although well-intentioned, requires banks to account for their assets (including all the mortgage-backed securities) whether they are trying to sell them or not, at firesale prices.
This is somewhat insane. Most of the properties backing these securities are still there, and are still worth quite a bit, even if they aren't worth what they were worth 2 years ago. The bank isn't trying to sell these securities, and the homeowners of those properties are still paying taxes at high tax-assessed valuations, so, obviously, the city and state also consider the properties to have substantial value. However, if no investors want to buy the securities, and there is zero market, the value of these securities is marked at zero, requiring banks to raise more capital. A temporary, or partial, or somehow limited, suspension of the Mark to Market ruling would have presented a more realistic evaluation of a bank's welfare and might have prevented many bank failures. As it is, such a course of action would probably go a long way to helping out, without requiring taxpayers to foot this bill.
There are additional intelligent ways in which the current situation could be handled without the bailout plan as it stands right now, padded with 450 pages of pet pork added by the House of Reps. and their even worse cohorts in the Senate.
I agree with not wasting time blaming - however we do need to get to the bottom of the real problem - and that means sometimes who did what. You cannot create a solution for a problem that you don't really understand. This is a big problem with lots of slimy creatures hiding in the shadows. Before anyone decides to do anything,we need to get to the bottom of the pile and see what's really happening. I feel that this 'bail out' is being rammed down our throats as a 'solution' by the very people who caused the mess and it's being rushed through as an emergency message so that no one will look too closely at the real problem.
I don't think we're at all blaming the people who wanted to buy a home. They thought they were getting valid information and that they were doing the right thing. The consumer (us) have not been given proper information and some have made decisions on that information that has caused them distress. They are victims and are not really at fault.
Frances, your explanation as to the very low percentage of these loans that are actually in default supports the concept that there's a bigger problem here. If we're all paying our bills on time (as best we can), then we need to look very hard and very closely at what the real problem is. We cannot rely on our politicians to do this. They're taking money to do what the bigwigs want. And when we find the culprits, we need to bring down as much justice on their heads as absolutely possible. This is not the 'blame game', this is consequences for poor choices and criminal activities. And it needs to be done now before there's one more red cent spent on anything.
This comment is for Seth:
As a licensed loan consultant, I would like to protest your statement that we are not regulated. Mortgage brokers are far more heavily regulated than banks who do loans.
Bank loan officers do not have to provide the 20+ pages of disclosures that we provide. And we are being promised even more disclosures in 2009. Banks do not have to license their loan officers in this state, since they are regulated under banking law and not the Dept. of Financial Institutions.
Banks do not have to show their profit items or itemize all of their fees on Good Faith Estimates, and many of them do not follow RESPA regulations as to providing the Good Faith Estimates and T-I-L statements within 3 days of the application.
The main reason I work in brokering loans as opposed to a retail environment is that I enjoy representing the client, and don't want to have to push some product for a bank (This doesn't mean to slam good loan originators who work for banks!). The role of the mortgage broker in the market however is to force the banks to compete against each other, for the benefit of the customer.
Federal and state regulations tend to favor giving business to retail banks as opposed to small-business mortgage brokers. Who do you suppose has the most amount of lobbying influence-large national banks with names of whom you've heard, or mortgage brokers?
Some of the recently-deceased banks are the ones who sold Option-ARM products like candy, regardless of the appropriateness for the client, had cozy preferred-lender arrangements with builders, etc., and did not routinely provide disclosures, even when asked by clients.
There is no way that any mortgage broker who wishes to stay in business would let a loan officer operate like this.
Barbara--I agree with you. I don't like this bailout solution, and I'm especially suspicious because of the haste with which it is being pushed on us. And when I see what has been tacked onto it by our greedy legislators, I'm even more determinedly against it. Hopefully, you saw my comments on the Mark to Market Accounting rule. If it's true that this is responsible for 70% of the current crisis, then it ought to be part of the solution out of it! I'm cutting and pasting here one rational-sounding plan which was emailed to me yesterday:
I. INSURANCE A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.
B. In order for a company to accept the government-backed insurance, they must do two things:
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.
C. This backstop will cost less than $50 billion—a small fraction of the current proposal.
II. MARK TO MARKET a. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.
III. CAPITAL GAINS TAX a. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.
Sorry about the outline format, folks, I didn't write this one.
"This is not the 'blame game', this is consequences for poor choices and criminal activities. And it needs to be done now before there's one more red cent spent on anything."
Barbara... you are absolutly right, and the reality is... the finantial economic US system is in the drain, more than in 1929, any technical explanation of a technocratic citizen is valid, but, out of discution the reality is that roughfly 4 million people facing foreclosure in th US and this bailout type of fraud thing is going to rescue Paulson, George II Bush and his cronies. Homeowners are out of range in this "survival kit" . People in the US it is time to see things for the working social class other wise the coming soft quiet revolution is coming...
I like you, Silverio!
Frances, I appreciate your explanation but I don't really understand a word of it. That's part of the problem. Let's rip out the jargon and get to the plain English of the problem. I've found a whole lot of double talk is hidden in jargon. I wonder if part of the problem is that those of us regular folks have just gone along with the 'experts' spouting jargon because they've told us that they're smarter than us for so long and we don't want to appear stupid. But I'm thinking it's time to get over it and demand clear concise explanations of exactly what's going on - who's going to be left holding the bag - and exactly what's going to change as we move forward. Every single one of us has a stake in this and we deserve clear information before we pay one more cent - even in taxes. Ultimately, these people work for us. When employees do not do their jobs and commit crimes on top of that they are: first, fired and second, brought up on charges and their assets are seized and they go through the justice system. The victims don't pay for the damages and then let them carry on as usual.
Hello!
http://www.youtube.com/watch?v=EQobIUE1zTU
Nice vice president candidate.
Anyone who can kill a bird, can kill a man. The man will fall crying the bird will not cry...
Where is the decency. Are we in a spiritual decadency and only hipocrecy is ok now?
People's Speak Out at U.S. Capitol Building says "Bailout the people, not the banks"
The anger of the people was expressed outside of the Capitol Building in a demonstration called by VoteNoBailout.org. Participants included homeowners facing foreclosure, community activists, civil rights groups, trade unionists and anti-war coalitions. The spirited demonstration received a large amount of media coverage from U.S. and international media.
The organizers said that the big bankers and corporate thieves, working through the leaders of the Republican and Democratic Parties, are bribing and coercing elected officials so that they will vote for the Grand Theft Bailout that gives $700 billion of tax-payers' money to the biggest banks. More than 200,000 letters have been sent through VoteNoBailout.org to Congress. Speakers demanded an immediate moratorium on foreclosures and evictions. The people marched to Congressional offices chanting "Bailout the people, not the banks."
Participants in the People's Speak Out included VoteNoBailout.org, ANSWER Coalition, ImpeachBush.org, Empower DC, NACA (the Neighborhood Assistance Corporation of America) and others.
Thanks Kelleen, great article. This explains the situation better than anything else I've seen.
I had the same initial reaction as some posters here - why should WE bail out the BANKS!? But it seems to me now it's not about the banks, it's more about bailing each other out. I.e., if the banking system fails, we all suffer to some extent, and for some, there may be huge losses (or very long waits for money).
Where is George Bailey when you need him? Surely he could have talked some sense into the panic-ers at the bank.
...one way to another, you are in a bad situation. But do first thing is first, punish to those are gilty of "your situation". As a society, if you don't do the right thing now, you'll continiue in the wrong pad; in this order you were wrong; 2000, 9-11, Afganistan, Irak, Patriot Act, 2004 -others- and then this; "bailout the croocks"? Kate, you say " if the banking system fails, we all suffer to some extent,"... and I see you don't realize your reality, you are trying the cover up (as Palin yestarday) the truth... and the truth is that you have a thieves in government and because that your dolar value -NOW- is fifty cents. Bailing out the fraud does not change anything and 4 millions americans are facing forclosure nowadays, 500 billions in the Irak war, 6000 american boys died, 20000 illnes and now, because this bailout situation, Bush stopped bombing Iran -for a moment-. You need to see out to realise what happen inside... bailout is the tip of a huge problems you don't want to see...
This is ridiculous.
Read, get informed, be involved. We are talking about the credit market. Banks are the store fronts for financial institutions. That's the law. Mortgages are the end result of massive credit manipulation. Giving auto makers money is about credit. It has nothing to do with the bad products they make. Wake Up!
Socialist Equality Party (SEP) vice presidential candidate Bill Van Auken authored an article on the World Socialist Web Site Wednesday (“The Wall Street bailout and the threat of dictatorship”) explaining the connection between the appearance of such openly anti-democratic polemics in the mainstream media and the bill to bail out Wall Street that is being pushed through Congress.
Van Auken wrote, “The furor over the vote in the House serves as a warning that capitalism in crisis will inevitably move toward new forms of rule capable of defendin
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