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15 Sep 2008, 12:30
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pelihu
While I'm not an advocate of arm chair quaterbacking or assigning blame just for the sake of it, I don't think assertion that some of the problems were having were forseeable is horseshit. And yes, main street America was happy to but homes on credit and then refinance them because they being told the value of their houses were appreciating by 20% a year.
I remember taking an appraisal class a couple years back and my instructor was telling me how you couldn't do an appraisal to early because if you spent a couple of months negotiating and closing the home price could have appreciated 3-4% in that time frame. In most cases were talking about an extra $10-12,000 in a matter of months. Houses were going up 12% a year easily.
I can't think of any job where your salary increases 12% year over year. It doesn't take a rocket scientist to see that eventually were going to need a pretty big correction. So while $4/gal gas wasn't foreseeable, a correction of 20% house price gains year over year was. I think you're giving the average Joe far to much credit. If banks let them, most people would always take out more credit than they can afford. The person lending the money should be more responsible than the person receiving it. Especially considering this is not what the average Joe does for a living. An "expert" tells them this is what their house is worth today and it's going up in the near future and a bank is willing to lend them the money without throughly checking the financial status. Worse case scenario for the borrower is that they ruin their credit, worse case scenario for a lender is that they lose their lively hood.
So why would people who saw this coming still throw "good money and their firms' good names in the pile". I can give you a one word answer. Greed. Plenty of people did deals that they knew were not in the best long term interest of their firm. But it made them good money now, and they weren't sure when it would come back to bite them. Or if it would ever come back to bite them at all. After all not everyone at a bank is looking out for the strategic long term vision of the company. If they have a good 4 year run and make money who cares if someone else gets left holding the bag.
I think it's obvious that without the proper regulation most people will push the limits until it breaks. Now what amount of regulation is "proper", I don't know. But I think we can all agree that giving out hundreds of thousands of dollars for mortgages with out any down payment and little to no checking of their financial situation isn't it.
15 Sep 2008, 13:23
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gixxer1000
While I usually agree with Pelihu - who is probably my favourite poster - I'm 100% with Gixxer here.
When you mention that whatever level a market is at at any given point is the fair value based on available information, now we both know that it is not true (even though markets are very often pretty efficient). If we have learned anything from the latest financial meltdowns, it's that markets sometimes go crazy, just because people are convinced that whatever the price they will buy something, there will always be somebody to buy it for more (the famous Castle-in-the-Air Theory). Just look at the internet bubble.
I mean, come on: who in his right state of mind could think that the expected yearly price increases of houses were sustainable? It was a classic speculative bubble, it's nothing new: it happened centuries ago with the tulips in Holland, it happens today again in another form. Smart people have fallen for this trap before, and smart people will still continue to fall for this trap. And as usual, all this was driven by greed - high bonuses combined with no major negative consequences (getting fired is the worst that could happen, a small risk in comparison with the massive bonuses one could earn).
Everyday people bought houses because they weren't able to read the fine print: now they have to surrender their houses. Again, this was driven by greed, fueled by so-called "experts" as Gixxer puts it so well.
Finally, concerning regulation, I honestly don't see how we can avoid it: a normal company is allowed to take massive risks, only to go bankrupt later on. It's the shareholders' problem (I won't even talk about employees made redundant). However, when companies have the potential to put in peril the whole economy by going bankrupt, they shouldn't be allowed to do whatever they want. That's why we have the Basel convention for example.
I really don't see how we can avoid more regulation in this case. The banks have simply been too greedy because they could do whatever they wanted; this cannot go on IMO.
15 Sep 2008, 14:52
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I can definitely agree that many people were predicting a bubble in the housing market, and that at any point, one could argue that there are people saying that any strong bull market will correct. It will; the market cannot beat historical growth rates forever (unless there's been a fundamental shift in the markets, which many people were arguing not more than a year ago).
What nobody (and I mean NOBODY) could foresee was how widely the damage would spread. Markets seized up last summer, and by last fall (that's fall 2007), many people believed the the worst was over. After Citi, Merrill and UBS took huge mark-downs late last fall, a lot of people believe that those events marked the bottom. When Bear collapsed in March, a lot of people thought that was market capitulation. Lehman lost 50% in one day back in March (intra-day), and by the start of the summer the stock price had recovered almost all of it. People didn't rush back into Lehman stock at that point because it was obvious Lehman would go to zero within 6 months. Dick Fuld didn't take the stage at his annual meeting (April I think) and declare that the worst of the market correction was behind us just to make himself look silly.
In some parts of California, housing prices went up 20% a year for 5 straight years (I was in on about 3.5 years of that); but the housing correction in many parts of California has been mild, perhaps 20-30% off peaks, or about a year of growth. Leading up to recent weeks, most of the big banking stocks have lost ten years of growth - ten! That's back to the early days of the internet boom, then bust. So, if the point is that many people saw well in advance that there would be a market correction in the housing market, I do agree with that. But nobody thought that a some boom years in the housing market would lead to the bust in the overall economy, taking major investment banks down with it.
It's much different to say that we were due for a correction in housing (yes, we were definitely due), and to say that anyone could have foreseen the devastation. Meridith Whitney was just on CNBC saying that in her wildest dreams she didn't imagine that the problems in 2007 would lead to what we've seen in recent months - and her views on the market are some of the most influential around these days. The reality is that regulation wouldn't have changed much because nobody saw this coming - not to this extent. Regulation is very much a reactionary tool, generally over-reactionary, but I don't think regulation works well to prevent market situations that haven't happened before. You can generalize and say they market corrected here, here and here, so they could have stopped it, but that's just not true. Different market conditions, different circumstances.
Regulations are great for preventing another savings and loan crisis (only a dozen or say bank failures so far this time, compared with several thousand in the S&L crisis), but regulations are a reactionary tool. Without a doubt, regulations will be implemented to prevent restrict leverage levels in the future, but market participants (the banks) would know to do that anyway. That's why Merrill rushed into BofA's arms, because it's clear the funding model is broken, and that they would be next. They didn't need regulators to tell them that. Yes, regulators must react, but suggesting that simple things could have been done to prevent the current crisis is severely understating the historical nature of events. Decades from now people will still be talking about the day that Lehman & Merrill died, and the year that independent broker/dealer model was destroyed.
Do not be surprised to see Morgan with a partner in the coming months. I think that's all but inevitable now. And Goldman, they might need to buy a deposit base of their own as well. Wachovia is looking pretty cheap these days.
What nobody (and I mean NOBODY) could foresee was how widely the damage would spread. Markets seized up last summer, and by last fall (that's fall 2007), many people believed the the worst was over. After Citi, Merrill and UBS took huge mark-downs late last fall, a lot of people believe that those events marked the bottom. When Bear collapsed in March, a lot of people thought that was market capitulation. Lehman lost 50% in one day back in March (intra-day), and by the start of the summer the stock price had recovered almost all of it. People didn't rush back into Lehman stock at that point because it was obvious Lehman would go to zero within 6 months. Dick Fuld didn't take the stage at his annual meeting (April I think) and declare that the worst of the market correction was behind us just to make himself look silly.
In some parts of California, housing prices went up 20% a year for 5 straight years (I was in on about 3.5 years of that); but the housing correction in many parts of California has been mild, perhaps 20-30% off peaks, or about a year of growth. Leading up to recent weeks, most of the big banking stocks have lost ten years of growth - ten! That's back to the early days of the internet boom, then bust. So, if the point is that many people saw well in advance that there would be a market correction in the housing market, I do agree with that. But nobody thought that a some boom years in the housing market would lead to the bust in the overall economy, taking major investment banks down with it.
It's much different to say that we were due for a correction in housing (yes, we were definitely due), and to say that anyone could have foreseen the devastation. Meridith Whitney was just on CNBC saying that in her wildest dreams she didn't imagine that the problems in 2007 would lead to what we've seen in recent months - and her views on the market are some of the most influential around these days. The reality is that regulation wouldn't have changed much because nobody saw this coming - not to this extent. Regulation is very much a reactionary tool, generally over-reactionary, but I don't think regulation works well to prevent market situations that haven't happened before. You can generalize and say they market corrected here, here and here, so they could have stopped it, but that's just not true. Different market conditions, different circumstances.
Regulations are great for preventing another savings and loan crisis (only a dozen or say bank failures so far this time, compared with several thousand in the S&L crisis), but regulations are a reactionary tool. Without a doubt, regulations will be implemented to prevent restrict leverage levels in the future, but market participants (the banks) would know to do that anyway. That's why Merrill rushed into BofA's arms, because it's clear the funding model is broken, and that they would be next. They didn't need regulators to tell them that. Yes, regulators must react, but suggesting that simple things could have been done to prevent the current crisis is severely understating the historical nature of events. Decades from now people will still be talking about the day that Lehman & Merrill died, and the year that independent broker/dealer model was destroyed.
Do not be surprised to see Morgan with a partner in the coming months. I think that's all but inevitable now. And Goldman, they might need to buy a deposit base of their own as well. Wachovia is looking pretty cheap these days.
