<p>For those of you who had your sights on becoming an investment banker, I regret to inform you that as of tomorrow there will no investment banks left.</p>
<p>:/ let the fun begin...</p>
<p>The titles will change.</p>
<p>The structure will slightly change.</p>
<p>But we shall prevail.</p>
<p><em>giggle</em></p>
<p>they'll still be doing their investment banking. But with more capital from a commercial side.</p>
<p>You mean... more capital from the taxpayer's side.</p>
<p>^precisely</p>
<p>Don't they have to pay back the loans?</p>
<p>You obviously don't understand the concept of a "bailout", nor have you been reading more than the first two sentences of an article on the subject.</p>
<p>Some people in Washington with less cozy relations to Wall Street are now suggesting the taxpayers get some equity out of the deal. An idea that will hopefully gain traction.</p>
<p>Now if only we can roll back the marginal income tax rates to what they were in the 50s and 60s.</p>
<p>Capital from a commercial bank will not be from tax payer money. Tax money is going for the bailouts where people took out loans they couldn't afford figuring they could just refinance when housing was going strong. Yes, the banks have some blame in this. So do people who spent beyond their means. </p>
<p>Some people are angry that they have to put a few bucks up front to pay for the bailout. I agree we shouldn't have to pay for what some banks screwed up. But what they don't understand is how the failure of more banks could really affect them and the general economic stability of the US. People tend to put a multitude of blame on the CEOs who take home fancy paychecks all for themselves (In general, I think they're way overpaid too), but it's those same people who get angry when they have to give up a few bucks for the general well being of the economics of the US. A bit hypocritical at times.</p>
<p>Gomestar, I must say your naivety towards this whole situation disappoints me. A couple of points you might want to consider:</p>
<p>1) Taxpayer money, one way or another, will certainly be going to re-capitalize the investment banks-turned-bank holding companies. What do you think is happening here? The Treasury is going to pay cold hard cash for these mostly worthless assets at an above-par price.</p>
<p>2) There was certainly a lot of misrepresentation and fraud, not to mention people living beyond their means, that occurred in the housing market over the last couple of years. But to place blame on these actions at same level as what all of the structured finance guys on the Street have done over the same time frame is pathetic. A lot of families simply purchased a house at the peak of the housing bubble and now find themselves significantly underwater with "life" -- divorce, death, job loss, happening to them. Or else they were swindled by a broker, a "professional" they could trust, into being convinced that they could afford that mortgage with a teaser rate. </p>
<p>So who is really to blame here, Joe Sixpack who was told by everybody, even Alan Greenspan, that they could afford a new house, or the investment banks, with its rank and file PhD economists who never gave a second thought as to what might happen if house prices might actually stagnate or decline? Who do you think should be more responsible for "managing risk"? Keep in mind Americans never would have used up all of the easy credit if it wasn't made to them in the first place. Keep in mind it was these very same investment bankers who had been so diligently lobbying Congress over the last ten years not to regulate them any more.</p>
<p>3) Forgive me, but what exactly is hypocritical about bemoaning the fact that probably well over $5,000 per American citizen will go to support the same guys who have already made huge paychecks -- those guys lucky enough to have good health and be in the right place to soak up a bunch of economic rents. Keep in mind, that there are a bunch of us who have been complaining about the need to keep Wall Street in line -- higher taxes and more regulation -- for years now. And I suspect that if our cries were heard we wouldn't have to pony up another $5k per citizen.</p>
<p>this is what we get for having such a "free" market economy. Apparently Adam Smith wanted major conglomerates practicing fraud and earning ridiculous profits, not to mention holding basic monopolies, all to end in a crushing blow to the wallets of the taxpayers. Someone has to clean up this mess, and what kind of a free market would it be if those responsible would have to do it? it has to be the innocent taxpayers of course! Welcome to the cons of Capitalism</p>
<p>cayuga: could one say that us bailing out the banks is no different than bailing out germany after WWI?</p>
<p>"There was certainly a lot of misrepresentation and fraud, not to mention people living beyond their means But to place blame on these actions at same level as what all of the structured finance guys on the Street have done over the same time frame is pathetic."
Fraud is what enron and Worldcom did. Some Bear Sterns people may be in trouble for claiming everything was fine and dandy when it wasn't so was certainly not smart, but it's not the fraud that Worldcom, Enron, Adelphia had to deal with. Still, I'm not sure where the fraud lays with all of the other banks. And to place the blame on Wall st. is rather short sighted: roughly 14 consumer banks have failed, most had no connections to the investment bankers on Wall St. </p>
<p>"A lot of families simply purchased a house at the peak of the housing bubble and now find themselves significantly underwater with "life" -- divorce, death, job loss, happening to them."
Yeah, I'm sure they're the only ones in the US that this is happening to. Job loss has been climbing at a very rapid pace - some people are paying the price for others who lived beyond their means. </p>
<p>"Or else they were swindled by a broker, a "professional" they could trust, into being convinced that they could afford that mortgage with a teaser rate."
This certainly happend. But it's not the investment banks that did this. It was done by brokers who then packaged the loans and sold them off for a nice profit. The brokers knew it wouldn't be their responsibility to follow up on payments, so they just gave out loans w/o much care or consideration. </p>
<p>"So who is really to blame here, Joe Sixpack who was told by everybody, even Alan Greenspan, that they could afford a new house"
Where to lay the blame is the big questions. The banks had some fault taking so much risk (come on, Mr. 30:1 Lehman, how stupid!), the brokers have some fault, the fed has some fault, the consumers have some fault. It's like, who do you blame for the great depression (and I did take Boyer's economics of the depression, so don't even try placing a blame)</p>
<p>"or the investment banks, with its rank and file PhD economists who never gave a second thought as to what might happen if house prices might actually stagnate or decline?"
Nobody knows why home prices suddenly crashed. It was likely to happen sometime, but not as much as they expected without any known trigger. Morgan dropped a huge chunk of their subprime holdings in May of last year, before house prices dunked. Still, they've suffered quite a bit, and the architect of their dealings, Zoe Cruz, was canned last year. </p>
<p>"Who do you think should be more responsible for "managing risk"?"
This I agree should be with the banks. Lehman learned this as did Merril, but most banks do have decently high leverage rates (Goldmas is at 23:1, Citi at 15:1) ... it's a matter of leverage in what, and this is where Lehman blew it. Taxpayers aren't fronting money to help out Lehman, though. </p>
<p>"Keep in mind Americans never would have used up all of the easy credit if it wasn't made to them in the first place."
I agree, but investment banks weren't financing basic homes in middle america. </p>
<p>"Keep in mind it was these very same investment bankers who had been so diligently lobbying Congress over the last ten years not to regulate them any more."
The banks are heavily regulated. Some say they aren't, but they really are. Hedge funds, not so much (and the hedge funds have made a killing by shorting the banks and killing confidence, thank you very much Greenlight Capital). The problem is the fed wasn't regulating the right parts. </p>
<p>"Forgive me, but what exactly is hypocritical about bemoaning the fact that probably well over $5,000 per American citizen will go to support the same guys who have already made huge paychecks -- those guys lucky enough to have good health and be in the right place to soak up a bunch of economic rents."
This was the main point of my post and you skipped right over it. The point is not to help out those who collected huge salaries. And trust me, many of those individuals are going to be jobless, if not already. The point is to stabilize the system that's been causing a major economic blow to this country. The economy tumbled with the banks, the goal is to fix the banks as a way of fixing the economy. </p>
<p>"Keep in mind, that there are a bunch of us who have been complaining about the need to keep Wall Street in line -- higher taxes and more regulation -- for years now."
How much could regulation have really done, though? Would it have prevented more bank failures? Would it have prevented the multi-billion dollar bailout of Fannie and Freddie --- oh, wait, they were already two of the most highly regulated banks in US history. Also, regulation prevented investment banks from merging with consumer banks, something that would have given Lehman, Bear, Merrill the extra capital they desperately needed. It's not about regulation, is about the RIGHT regulation (maybe controlling leverage rates would have been nice), somethere where the fed (not the banks) failed.</p>
<p>"Apparently Adam Smith wanted major conglomerates practicing fraud and earning ridiculous profits"
1. Fraud isn't at fault here.
2. The banks have taken ridiculous losses, not profits. </p>
<p>"not to mention holding basic monopolies"
Where is the monopoly here?</p>
<p>"all to end in a crushing blow to the wallets of the taxpayers."
Again, they complain about CEO's earing millions for themselves, but howl and cry when they might have to pay a little more in taxes to help others in the economy. </p>
<p>"it has to be the innocent taxpayers of course!"
It's not the companies that defaulted on their loans, though. It's those "taxpayers" that lived beyond what they could afford.</p>
<p>Gomestar, please learn how to use quotes to save us all of the trouble of having to sparse your post.</p>
<p>
[quote]
Fraud is what enron and Worldcom did. Some Bear Sterns people may be in trouble for claiming everything was fine and dandy when it wasn't so was certainly not smart, but it's not the fraud that Worldcom, Enron, Adelphia had to deal with. Still, I'm not sure where the fraud lays with all of the other banks. And to place the blame on Wall st. is rather short sighted: roughly 14 consumer banks have failed, most had no connections to the investment bankers on Wall St.
[/quote]
</p>
<p>Fraud is the purposeful misrepresentation of information. Most investment banks peddling the MBS toxic waste failed to provide the rating agencies and the buyers with their own due diligence of the underlying collateral backing these securities. In many cases, assurances were made to institutional investors that these rather exotic mortgages were "bread and butter" mortgages while the IBs rolled in their annual bonus. And you're telling me that there was no fraud on the part of the investment banks?</p>
<p>
[quote]
And to place the blame on Wall st. is rather short sighted: roughly 14 consumer banks have failed, most had no connections to the investment bankers on Wall St.</p>
<p>But it's not the investment banks that did this. It was done by brokers who then packaged the loans and sold them off for a nice profit. The brokers knew it wouldn't be their responsibility to follow up on payments, so they just gave out loans w/o much care or consideration.</p>
<p>Nobody knows why home prices suddenly crashed. It was likely to happen sometime, but not as much as they expected without any known trigger.
[/quote]
</p>
<p>Au contraire, the credit binge can be directly tied back to the investment banks. The Fed lowered rates to historic lows in 2002 and 2003, and the investment banks flush with a lot of cheap money, set about a way to channel all of this money into "low-risk" assets. And the miracle of CDOs and SIVs was born, whereby Wall Street figured out a way to make securities of non-GSE conforming loans appear to have a much lower risk profile than their underling credit characteristics suggest.</p>
<p>And everybody knows why home prices are crashing. We had a huge credit bubble fueled by the structured financing that Wall Street was peddling, because they were making money hand over fist selling these structured products. The ibankers had cozy relationships with all of the subprime lending outfits all over America and were calling them monthly telling them to originate more and more loans because the profit margins were so high. The mortgage brokers, tripping over themselves to appease their Wall Street overlords, quickly started dropping their underwriting standards because Wall Street apparently didn't care what the loans looked like (see the lack of due diligence above).</p>
<p>
[quote]
I agree, but investment banks weren't financing basic homes in middle america.
[/quote]
</p>
<p>Could have fooled me. So they didn't end up with all of these assets, and don't need a taxpayer infusion of capital then? Or if you don't like sarcasm, just read my narrative above.</p>
<p>
[quote]
The banks are heavily regulated. Some say they aren't, but they really are. Hedge funds, not so much (and the hedge funds have made a killing by shorting the banks and killing confidence, thank you very much Greenlight Capital). The problem is the fed wasn't regulating the right parts.
[/quote]
</p>
<p>Commercial banks are regulated by a patchwork of agencies and institutions. Investment banks (R.I.P.) were never nearly as regulated and were allowed much higher leverage ratios and much lower capital controls. I hope that you agree that more effective regulation was required over the last 15 years, but that Wall Street has very deep ties to both parties in Congress, limiting the possibility for said regulation until it was too late.</p>
<p>And please don't tell me that you think the shorts are to blame here. Wall Street dug its own grave. Shorts prove to be a very useful purpose.</p>
<p>
[quote]
This was the main point of my post and you skipped right over it. The point is not to help out those who collected huge salaries. And trust me, many of those individuals are going to be jobless, if not already. The point is to stabilize the system that's been causing a major economic blow to this country. The economy tumbled with the banks, the goal is to fix the banks as a way of fixing the economy.
[/quote]
</p>
<p>I have nothing wrong with having taxpayers help to recapitalize the banks. But I do not think it should be allowed without an overhaul of our regulatory and tax structures in this country. Mainly, a more progressive system of public finance is needed, to say nothing of saner health care, transportation, and urban policies. We did just even better as a country in the 50s and 60s when the marginal rate on earned income over a million dollars was twice as high than what it is now. And, gasp(!), even then the Wall Street executives got to buy their daughters a pony on their tenth birthdays.</p>
<p>The Fed and other regulatory agencies failed because that got to beholden to Wall Street interests over the last twenty years. Many regional Fed Presidents have come from the private sector, to say nothing of agencies like OFHEO. And we haven't had a Treasury Secretary think about the public interest in over 15 years.</p>
<p>The same can be said of Fannie and Freddie. If you hadn't noticed, the GSEs were lobbying vociferously in the early 2000s to ease up on capital controls and underwriting guidelines claiming that they had to do their part to help Bush's Ownership Society. Which all of the prudent people in D.C. was a crock of bull -- they just wanted to make more money.</p>
<p>And don't get me started on why Fannie and Freddie were every privatized to begin with. Fannie worked just fine as an actual government agency. </p>
<p>Sorry, but it was Wall Street who championed all of the deregulation and lack of oversight that allowed people to live beyond their means. That's what created this mess.</p>
<p>Cheer for Cayuga! I wantED to become a banker, but underwent an "epiphany" and wanna become a scientist/farmer. If you really wanna go to Wall Street, get a MBA after undergrad and you're set. I realized that an undergrad degree in business is basically useless unless you don't want to go on for MBA or something else.</p>
<p>Good luck with Wall Street folks. Sigh.</p>
<p>"Gomestar, please learn how to use quotes to save us all of the trouble of having to sparse your post."
No. </p>
<p>"And everybody knows why home prices are crashing."
You've darted around my point. Nobody knows why home prices suddenly fell so flat and so sharp (my original point). I'm not talking about the past year, I'm talking about July 2007. And no, you don't know either. </p>
<p>"I agree, but investment banks weren't financing basic homes in middle america.<br>
Could have fooled me. So they didn't end up with all of these assets, and don't need a taxpayer infusion of capital then?."
They weren't though. I wish I had some fancy way around that, but they weren't. Yes, they bought MBS's from mortgage lenders and other banks. Are you telling me that the brokers were forced by the IB's to give out crappy mortgages? In other words, the brokers who gave out the subprime mortgages have NO fault in this. I guess I learn something new each and every day, you might want to contact the WSJ with this revalation. </p>
<p>"Commercial banks are regulated by a patchwork of agencies and institutions. Investment banks (R.I.P.) were never nearly as regulated and were allowed much higher leverage ratios and much lower capital controls"
but you're crashing over my earlier point - if investment banks weren't nearly as regulated, how come dozens of commercial banks failed?</p>
<p>"I hope that you agree that more effective regulation was required over the last 15 years,"
My point WAS that more effective regulation was needed, not simply more regulation. </p>
<p>"And please don't tell me that you think the shorts are to blame here."
You're blaming one thing. I am not, and I do not think shorts are the reason why the whole thing fell, but they've certainly fueled the fire along. </p>
<p>"I have nothing wrong with having taxpayers help to recapitalize the banks. But I do not think it should be allowed without an overhaul of our regulatory and tax structures in this country."
I agree with this. But this is about politics, not who's to blame for the economic mess. </p>
<p>"We did just even better as a country in the 50s and 60s when the marginal rate on earned income over a million dollars was twice as high than what it is now"
I'm not arguing against this at all. </p>
<p>"Sorry, but it was Wall Street who championed all of the deregulation and lack of oversight that allowed people to live beyond their means. That's what created this mess."
This is the big difference to what we both believe. You think it's ONE thing that tore the economy apart. I believe it's much more complicated and see fault laying in wall st, the lenders, the fed, the consumers, the brokers, etc, etc, etc. Fortunately, I'm not along in this thought (I'm sure you've read major newspapers as well). </p>
<p><strong>And I'm going to go back to my original point - I absolutely agree that the investment banks should pay heavily for the stupid risk they took. They have, big time. The point of the bailout is NOT to reward the banks, but rather to bring stability to the rest of the US economy.</strong></p>
<p>"Good luck with Wall Street folks. Sigh."
Good luck being a farmer.</p>
<p>One more thing:</p>
<p>copy/pasted from CNN:
"The FBI is probing Fannie Mae, Freddie Mac, Lehman Brothers and AIG in a broad look into possible mortgage fraud, sources say."</p>
<p>Again, I don't think this ordeal is all because of investment banks. The lenders, the brokers, and the consumers all played a key part. If the FBI was investigating anybody and everybody on Wall St, then perhaps. But they're not. Wall St. employed about 200,000 - Lehman employed about 24,000 TOTAL employees across numerous cities, states, countries, and even continents. From there, the actual bankers represented only a fraction of this 24,000 with substantial space being taken up by middle office, back office, and then tax, HR, OD, staff, and other professions.</p>
<p>And I'll man up to admit fraud may have occured at the banks. Still, I'd like to wait and see what happens.</p>
<p>And another point:</p>
<p>I went to the Rangers game last night, and on the boards right below their bench reads "AIG: The Strength to be There". That's nothing short of false advertising if you ask me.</p>
<p>
[quote]
You've darted around my point. Nobody knows why home prices suddenly fell so flat and so sharp (my original point). I'm not talking about the past year, I'm talking about July 2007. And no, you don't know either.
[/quote]
</p>
<p>Actually, it is very easy to explain. Anybody and everybody who had refinanced/moved up in the housing market did so by 2004, leaving only flippers and scammers. Prices really plateaued by late 2005. And the Fed was raising rates through the summer of 2006. Consider that it takes 6 months for the monetary policy action to really be settled throughout the economy and that the real estate season doesn't start until April/May of the year, you aren't going to see a significant change in HPI until summer 2007. Chock in the fact that the purchase/rent ratios were really out of whack, the median household income level hasn't budged in close to a decade, and builders were still building to meet invisible supply, and you have set yourself up for a decline. Most sane economists were calling it prior to 2007.</p>
<p>
[quote]
But you're crashing over my earlier point - if investment banks weren't nearly as regulated, how come dozens of commercial banks failed?
[/quote]
</p>
<p>Numbers don't count nearly as much as magnitude. The only bank of any substance that has failed to date has been IndyMac, which was a one trick residential real estate pony. Okay, and maybe add WaMu's pending fail. Still, most of the commercial banks you are referring to are small community-banking outfits that got over zealous with construction loans. But three of the five largest investment investment banks in this country have folded, and we're only in the third inning of the ballgame! I do agree that many more commercial banks are going to be hurting as commercial real estate and other consumer products go belly-up.</p>
<p>
[quote]
Are you telling me that the brokers were forced by the IB's to give out crappy mortgages? In other words, the brokers who gave out the subprime mortgages have NO fault in this.
[/quote]
</p>
<p>Now you're putting words into my mouth. Of course I've already attributed some of the blame to the brokers. But you have to understand that this isn't union politics -- where directive trickles up from the rank and file. This is market capitalism where people follow the cold hard cash from where it descends on high. </p>
<p>Follow the money. When you're a broker and you are told that Wall Street is basically accepting any type of paper you can shove at them, and your co-worker Joe just bought a BMW and his wife just got implants due to all the dough he has been raking in selling this dubious 2-28 Hybrid Arm crap to people who have no business getting a payday loan let alone (funny, that combination of words) a 1% down mortgage, hey you are probably going to jump into the fray too. Especially when little Johnny wants hockey gear and your wife is wondering why she is still driving a 1999 Nissan.</p>
<p>At the end of the day Wall Street was the conduit for this whole business. They were the ones telling the mortgage industry what they could originate and they were the ones telling the institutional investors that everything was 100% risk free because they had a bunch of Princeton PhDs locked in a back-office somewhere. None of it else would have been possible with Wall Street's spin doctoring and market making ability. </p>
<p>Of course, you can ask yourself what else Wall Street could have directed the world's investment towards if it was the country's housing stock, and why didn't it? Well I think Wall Street lobbyists (and their pals at the NAR and the big construction firms) has lubed up the housing industry's machinery over the last 15 years, so when a "free market" administration came into town and Bushie appointed overseers at OFHEO made FEMA look like a well-functioning organization, the spark had already been set.</p>
<p>I don't know why it is so hard for you to see this, perhaps because you're a bit closer to the action in NYC then I am. But it's been painted pretty clearly for any astute observer. Certainly, a lot of parties can be assigned blame, but the bulk really falls upon Wall Street. I was chatting with PhD economists last winter who worked for some now failed investment banks who never even paused to consider what might happen when housing prices fell or when pressed as to what might constitute a housing downturn looked at the defaults associated with the 2000-2002 downturn. Idiots! Six figure making idiots!</p>
<hr>
<p>Look, gomestar, from one ILRie to another, I like you. And I think we probably agree more than we disagree. But take a step back and consider how Wall Street directed the majority of the shots that led us down this path.</p>