[billw55]

I can attest that appraisals were generally a formality, and expected to reflect the value that the bank intended to loan. After a point I wonder why they bothered at all. Even when we refinanced last year to get in on the low rates, the appraisal came back at the exact amount we originally paid - no way that's a coincidence.

I have a friend who works in the mortgage industry. He tells a story about the company he was working for in the mid 2000s. He had concerns about how aggressively they were lending, and brought these concerns to his supervisor. He was told, essentially, "we don't care if the borrowers can afford it in the long run. We just want them to make the first few payments so we can sell the loan." Such was the business then.

[blackshoe]

billw55, on 2013-July-15, 10:01, said:

I have a friend who works in the mortgage industry. He tells a story about the company he was working for in the mid 2000s. He had concerns about how aggressively they were lending, and brought these concerns to his supervisor. He was told, essentially, "we don't care if the borrowers can afford it in the long run. We just want them to make the first few payments so we can sell the loan." Such was the business then.

Or "we deliberately created a flawed financial instrument with the intent of selling to whatever sucker we could find". How is this not fraud?

[kenberg]

blackshoe, on 2013-July-15, 11:03, said:

Or "we deliberately created a flawed financial instrument with the intent of selling to whatever sucker we could find". How is this not fraud?

Your question reminds me of an interview with John Mitchell during Watergate days. I wish I had it on tape but I swear it went something like this:

Interviewer; You stated under oath that you did not do X [I forget what X was], is that right?
JM: Yes
Int: The record now shows that you definitely did do X, is that right?
JM: Yes
Int: Isn't that perjury?
JM: No.

What I get out of it all is that fraud, or perjury, becomes fraud or perjury if you are caught and convicted. Otherwise it is not.

I don't see matters that way, but apparently more than a few do.

[billw55]

blackshoe, on 2013-July-15, 11:03, said:

Or "we deliberately created a flawed financial instrument with the intent of selling to whatever sucker we could find". How is this not fraud?

Agree. There was a lot of this kind of fraud, and a lot of suckers.

[mike777]

y66, on 2013-July-15, 09:25, said:

I posted that story about Warren and McCain teaming up to bring back Glass-Steagall here because this thread came up when I searched for Glass-Steagall and this legislation seems like a good, partial solution to the problem of banks using FDIC insured (?) deposits to make dubious loans. It is heartening to me to see Elizabeth Warren fighting for the middle class and McCain showing signs that he still occasionally remembers what responsible governing looks like.

btw just a quick reminder for those who may not be aware. If you separate the investment banks that may be a very good idea for many reasons but they still get their funding(loans) from the big FDIC banks. This is often in the form of very short term loans, using triple A rated collateral. Yes the same triple A rated stuff from 2008.

Clearly this business model in 2008 was destroyed.

Keep in mind we need investment banks in whatever form you prefer, they provide a very important capital function.

With all of that said we cannot continue down the road with these too big to fail banks.

[blackshoe]

kenberg, on 2013-July-15, 11:36, said:

Your question reminds me of an interview with John Mitchell during Watergate days. I wish I had it on tape but I swear it went something like this:

Interviewer; You stated under oath that you did not do X [I forget what X was], is that right?
JM: Yes
Int: The record now shows that you definitely did do X, is that right?
JM: Yes
Int: Isn't that perjury?
JM: No.

What I get out of it all is that fraud, or perjury, becomes fraud or perjury if you are caught and convicted. Otherwise it is not.

I don't see matters that way, but apparently more than a few do.

Heinlein was right. These are the Crazy Years.

[Winstonm]

mike777, on 2013-July-15, 15:06, said:

btw just a quick reminder for those who may not be aware. If you separate the investment banks that may be a very good idea for many reasons but they still get their funding(loans) from the big FDIC banks. This is often in the form of very short term loans, using triple A rated collateral. Yes the same triple A rated stuff from 2008.

Clearly this business model in 2008 was destroyed.

Keep in mind we need investment banks in whatever form you prefer, they provide a very important capital function.

With all of that said we cannot continue down the road with these too big to fail banks.

Nothing wrong with investment banks gambling - a lot wrong with depositers' banks gambling. Even more wrong with unregulated, opaque commodity trading by banks of any flavor.

[mike777]

Winstonm, on 2013-July-15, 20:22, said:

Nothing wrong with investment banks gambling - a lot wrong with depositers' banks gambling. Even more wrong with unregulated, opaque commodity trading by banks of any flavor.

Yes *I just want to remind many of you that FDIC banks will still be lending billions and billions and billions to investment b anks after you separate with new laws.


FDIC banks will still be as you put it gambling.

btw any commodity trading fdic banks do today have thousands of pages of regulations.


There is much to be worried about.....zero regulation is not the issue.


A much bigger issue is and has been as I have repeated in these forums...over regulation/rules/laws...little enforcement.

----------------


banks by their very nature must gamble ...always...they borrow short term and lend long term....a mismatch of assets and liabilities. You can never I repeat never have banksnot take on risk..lots and lots of risk.
This is step one to understand.
Step two is to have a system that accepts indeed wants failure as an important part of the banking system.

If you keep demanding stability you will just keep introducing long term fragility.

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!

[Winstonm]

mike777, on 2013-July-15, 20:47, said:

Yes *I just want to remind many of you that FDIC banks will still be lending billions and billions and billions to investment b anks after you separate with new laws.


FDIC banks will still be as you put it gambling.

btw any commodity trading fdic banks do today have thousands of pages of regulations.


There is much to be worried about.....zero regulation is not the issue.


A much bigger issue is and has been as I have repeated in these forums...over regulation/rules/laws...little enforcement.

----------------


banks by their very nature must gamble ...always...they borrow short term and lend long term....a mismatch of assets and liabilities. You can never I repeat never have banksnot take on risk..lots and lots of risk.
This is step one to understand.
Step two is to have a system that accepts indeed wants failure as an important part of the banking system.

If you keep demanding stability you will just keep introducing long term fragility.

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!

Wikipedia says:

Quote

The Commodity Futures Modernization Act of 2000 (CFMA) is United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. It was signed into law on December 21, 2000 by President Bill Clinton. It clarified the law so that most over-the-counter (OTC) derivatives transactions between “sophisticated parties” would not be regulated as “futures” under the Commodity Exchange Act of 1936 (CEA) or as “securities” under the federal securities laws. Instead, the major dealers of those products (banks and securities firms) would continue to have their dealings in OTC derivatives supervised by their federal regulators under general “safety and soundness” standards. The Commodity Futures Trading Commission's (CFTC) desire to have “Functional regulation” of the market was also rejected. Instead, the CFTC would continue to do “entity-based supervision of OTC derivatives dealers.” [1] These derivatives, including the credit default swap, are a few of the many causes of the financial crisis of 2008 and the subsequent 2008–2012 global recession.

[mike777]

Winstonm, on 2013-July-15, 21:39, said:

Wikipedia says:

"There is much to be worried about.....zero regulation is not the issue."

I refer you back to my main point:

"If you keep demanding stability you will just keep introducing long term fragility.

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!"

[Winstonm]

mike777, on 2013-July-15, 22:17, said:

"There is much to be worried about.....zero regulation is not the issue."

I refer you back to my main point:

"If you keep demanding stability you will just keep introducing long term fragility.

Much more important is to accept variation, randomness, as part of a long term economy and learn how to benefit from it!"

I'm sorry, but when credit default swap derivatives were sold by parties who could not cover the losses when they occurred, and those devivatives were bought and relied upon by too-big-to-fail banks that ended up having to be bailed out to prevent a total economic meltdown, it is impossible to dismiss the incident as "not the issue".

Credit default swaps are insurance products, and as such should be compelled to hold loss reserves in the same manner that insurance companies must - that there was no such regulation in place and no regulating body to enforce, credit default swaps were a major contributor to the Great Meltdown Recession.

The amazing thing is that no major changes to regulations has taken place since the meltdown.

Totally free markets are like announcing that we are playing a baseball game, but in our game anyone can play at any time, any position they want, and by any rules they want to apply - if they're good at stealing second, they are allowed to wear razor blades instead of cleats; if they pitch well, the mound is only 10 feet from home plate; and if the still lose the game, the viewing public must pay off all losing bets.

To work well, free markets must have boundaries that are established by rules created by a central decision-making apparatus so it applies universally. Once these rules and regulations are in place, free markets have the guidance they need to effectively compete and create.

There are many examples of the market innovations, but those innovations came only after regulations forced change - toilets are a simple example as federal law changes required less water usage, from almost 4 gallons per flush to the now-lawful 1.6 gallons per flush. The power-assist toilet is a direct market-response result of the change in law.

In other words, regulators decided for the good of the many that less water usage was required and created a law that compelled the marketplace to invent and adapt.

[blackshoe]

Winstonm, on 2013-July-16, 07:57, said:

Totally free markets are like announcing that we are playing a baseball game, but in our game anyone can play at any time, any position they want, and by any rules they want to apply - if they good at stealing second, they are allowed to wear razor blades instead of cleats; if they pitch well, the mound is only 10 feet from home plate; and if the still lose the game, the viewing public must pay off all losing bets.

To work well, free markets must have boundaries that are established by rules created by a central decision-making apparatus so it applies universally. Once these rules and regulations are in place, free markets have the guidance they need to effectively compete and create.

I don't think you understand free markets at all.

[Winstonm]

blackshoe, on 2013-July-16, 08:35, said:

I don't think you understand free markets at all.

The market for derivative products called "credit default swaps" is an example of a totally unregulated free market system - what is there about these products and the part they played in bringing about the Great Recession and financial meltdown of 2008 do you not understand?

[barmar]

Where to begin.

We already have plenty of bank and investment regulations. What they're missing is adequate resources to monitor investment firms for compliance.

As mike777 says, all investing is gambling. It's just the case that some investments are more risky than others. But you can't eliminate all risk.

Protecting against investment losses is like fortifying levees or building earthquake-proof buildings. It's only practical to make them so strong -- eventually there will be a flood or quake that's bigger than you planned for, and they'll break.

I'm reminded of a year or two ago when one of the big banks announced that they'd incurred a multi-billion dollar loss on some investment. Did anyone ever mention how much they stood to gain if it had gone well?

Imagine playing craps, and it pays out 1.1:1 on every roll, but if you roll snake-eyes 5 times in a row (60 million to 1 odds against) you lose your entire stash. It's like the reverse of the lottery, and you'd be a sucker not to play.

Much of the cause of the Great Recession wasn't because of lack of bank regulation. It was because most of the experts in the banking industry simply didn't understand what they were doing. Conventional wisdom was that when you package up a bunch of securities, you reduce risk because of diversification. They failed to see how everything was correlated, so instead of some investment losses being balanced out by other gains, they all dropped in lock-step, and there were feedback effects that caused chain reactions of losses (if I default on my mortgage and the bank forecloses, my neighbors' property values also fall, and if they go under water they may decide to abandon the loan, and so on).

There were a handful of economists who saw this coming. But when you buck conventional wisdom, it's hard to get everyone to believe you. And most investors didn't want to hear bad news like that, they were happy as pigs in slop just raking in the dough.

It also seems to have much in common with climate change. Even though the science is credible, many people in the relevant industries, not to mention the general public, cover their ears because it's too painful to contemplate. People like the comfortable life we have when we pretend that we have unlimited, cheap energy at our disposal. And businesses like selling that energy and all the dependent products.

[Winstonm]

barmar, on 2013-July-16, 10:00, said:

Where to begin.

We already have plenty of bank and investment regulations. What they're missing is adequate resources to monitor investment firms for compliance.

As mike777 says, all investing is gambling. It's just the case that some investments are more risky than others. But you can't eliminate all risk.

Protecting against investment losses is like fortifying levees or building earthquake-proof buildings. It's only practical to make them so strong -- eventually there will be a flood or quake that's bigger than you planned for, and they'll break.

I'm reminded of a year or two ago when one of the big banks announced that they'd incurred a multi-billion dollar loss on some investment. Did anyone ever mention how much they stood to gain if it had gone well?

Imagine playing craps, and it pays out 1.1:1 on every roll, but if you roll snake-eyes 5 times in a row (60 million to 1 odds against) you lose your entire stash. It's like the reverse of the lottery, and you'd be a sucker not to play.

Much of the cause of the Great Recession wasn't because of lack of bank regulation. It was because most of the experts in the banking industry simply didn't understand what they were doing. Conventional wisdom was that when you package up a bunch of securities, you reduce risk because of diversification. They failed to see how everything was correlated, so instead of some investment losses being balanced out by other gains, they all dropped in lock-step, and there were feedback effects that caused chain reactions of losses (if I default on my mortgage and the bank forecloses, my neighbors' property values also fall, and if they go under water they may decide to abandon the loan, and so on).

There were a handful of economists who saw this coming. But when you buck conventional wisdom, it's hard to get everyone to believe you. And most investors didn't want to hear bad news like that, they were happy as pigs in slop just raking in the dough.

It also seems to have much in common with climate change. Even though the science is credible, many people in the relevant industries, not to mention the general public, cover their ears because it's too painful to contemplate. People like the comfortable life we have when we pretend that we have unlimited, cheap energy at our disposal. And businesses like selling that energy and all the dependent products.

The primary cause of the housing bubble which led to the Great Recession was non-bank lending - banks had little to do with it other than create and trade in MBS and crdit default swaps.

[kenberg]

I tend to at least begin with the obvious.

It is so, is it not, that in the run up to the crash loan applications were being approved that in previous times would have been rejected? If you bundle a bunch of bad loans then you have a bundle of bad loans instead of several individual bad loans, but you still have bad loans.

Discussion of the past is only useful if it helps with the present or the near future. My application of this experience to current life is that I agree with the tightening of qualifications for loans for college education. Lending money to people who are unlikely to be able to pay it back sounds simply stupid. It was a mistake with the houses, and so it is with college education loans.

Helpiong people is a good idea. Pretending that reality is different from what it is is a bad idea.

[Winstonm]

kenberg, on 2013-July-16, 16:37, said:

I tend to at least begin with the obvious.

It is so, is it not, that in the run up to the crash loan applications were being approved that in previous times would have been rejected? If you bundle a bunch of bad loans then you have a bundle of bad loans instead of several individual bad loans, but you still have bad loans.

Discussion of the past is only useful if it helps with the present or the near future. My application of this experience to current life is that I agree with the tightening of qualifications for loans for college education. Lending money to people who are unlikely to be able to pay it back sounds simply stupid. It was a mistake with the houses, and so it is with college education loans.

Helpiong people is a good idea. Pretending that reality is different from what it is is a bad idea.

Exactly.

[blackshoe]

Winstonm, on 2013-July-16, 09:44, said:

The market for derivative products called "credit default swaps" is an example of a totally unregulated free market system - what is there about these products and the part they played in bringing about the Great Recession and financial meltdown of 2008 do you not understand?

I was right. You don't understand.

More government regulation of the market is not the panacea you seem to think it is.

[dwar0123]

blackshoe, on 2013-July-16, 17:17, said:

I was right. You don't understand.

More government regulation of the market is not the panacea you seem to think it is.

I would think that largely depended on the regulations?

No one is suggesting that random regulations, made for no reason, are a solution to anything; an absurd statement. Just as absurd as your point of view, that all regulations, made for any reason, has never solved anything.

[mike777]

Winstonm, on 2013-July-16, 15:28, said:

The primary cause of the housing bubble which led to the Great Recession was non-bank lending - banks had little to do with it other than create and trade in MBS and crdit default swaps.

That is far from clear that a housing bubble caused a great recession.

It may be true that the great recession caused the real estate market to crash.

One possible theory for the cause of the recession is a decrease in the future value of labor.

Another theory is that a credit bubble, from the fed to the banks to etc, created the recession..

An open debate.
---


In any case rent seeking seems to be increasing.

In public choice theory, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.

http://en.wikipedia....ki/Rent_seeking

I think this is a much more important issue rather than debating the finer points of the value of new regulations.