nationwide foreclosure moratorium!

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Submitted by BigGovernmentIsGood on October 8, 2010 - 7:26am

Bank of America just announced a moratorium on foreclosures in all 50 states. Stop paying your mortgage! We've got 'em on the ropes!

Submitted by SK in CV on October 9, 2010 - 11:10pm.

jpinpb wrote:

Which states had the biggest bubble? Which states need the extend-pretend the most?

Clear to me. It doesn't surprise me one bit they included California.

So you think they're using the colossal paper work screw up as an excuse to keep properties off the market? Interesting. Stupid idea, but it does take some actual planning. I think you give them more credit than they've earned. I worked with a lot of distressed asset managers and REO departments last time we went through this. As a whole, they were about as inefficient as I've ever seen in business. The RTC was actually better than most commercial lenders, and the steals people got from the RTC are legendary.

The model is entirely different now, yet the mindset doesnt seem to have changed. But you could be right.

Submitted by SK in CV on October 9, 2010 - 11:11pm.

dup.

Submitted by jpinpb on October 10, 2010 - 8:11am.

SK in CV - maybe I'm just too jaded and skeptical. To me, since we are non-judicial foreclosure state, there would be NO reason to halt foreclosures here. But the result of halting them does drag things out a little more and that does seem to be the preferred way to go. At least it appears that kicking the can is what they want. Maybe some of the procrastination we've seen was unintentional and out of incompetence or inability. But halting the process in California now just seems like too good to pass up another delay, when not really justified. So it just makes me suspicious.

Maybe TPTB are trying to not let the SHTF until after elections.

Submitted by davelj on October 10, 2010 - 8:47am.

CA renter wrote:

Good post, dave, and think you nailed the elusive nature of the truly guilty parties in the financial system.

I would disagree, though, about the lack of knowledge regarding the eventual outcome of these "innovations" in finance. I'm not involved in finance (other than trading), never took an econ or banking class, and wasn't privy to the inner workings of the mortgage market, but could easily see where things were going back in 2004. If I could see it, surely "the experts" could have seen it. It's hard to believe that so many people who had that much power were so completely incompetent.

Well, let's be honest here - I'm sure that you saw that it would all "end badly" back in 2004. As many of us here at the Pigg were discussing at this website as the peak neared. But did you realize the extent of what AIG was up to? I doubt it. Did you realize what Paulson and Magnetar were up to? I doubt it. The intricate maze of CDOs? I doubt it. I could go on.

I think plenty of folks - many fellow Piggs - strongly suspected that housing prices were going to drop significantly, we'd have a wicked recession, and that some number of banks were going to fail - and this was an extreme outlier view back in the mid-noughties - but with the exception of a small handful of folks (maybe Taleb and a few others - I would add Paulson and Magnetar but in fact they helped to MANUFACTURE the crisis), very very few folks predicted the extent of the damage. Most folks who identified the bubble and tried to profit from it probably started a few years too early (because the bubble should have been arrested back in, say, 2002) and had their asses handed to them by the time it actually burst. Such is that nature of markets. I'm not excusing anyone here - make no mistake - just pointing out that there's a very large gulf between saying, "Houston, we have a problem" and saying, "Bernanke, the financial system is about to collapse."

Anyhow, I think when you're heavily compensated not to see something, you're unlikely to see it. You put blinders on and say, "No one else is seeing anything, so everything must be copacetic." Compensation - especially when it's enormous - blinds people to alternate scenarios.

And here's the other major problem with our "financial leaders" from the last several years: most of them arrived at their position as a result of adverse selection. Allow me to explain through use of an example.

A business partner of mine rescued an ailing bank during the mid-90s. Recapitalized it, cleaned it up, ran it extremely well and sold it in 2001. He sat back and said, "Things are getting crazy. Time to hit the eject button." Everyone made a crappile of money. But the bubble kept inflating. Anyhow, based on his considerable prior success he was asked to run a much larger bank a couple of years later. He thought things were even more crazy but he was bored, took the job and didn't invest any of his own money. He got there and basically said, "Folks, we gotta slow this train down and tighten up some things because it's really crazy out there." He was fired within a year. He didn't really care because he didn't need the money. But the larger point is this: most of the cautious bankers (or financiers, if you prefer) had been weeded out by the time the bubble burst. They had either sold, retired or just moved to the sidelines (like my friend). Most of the folks who remained at the top had only known expansion and bubbles and couldn't really fathom any other condition. And if they could fathom it and tried to slow their companies down, they were pushed out. If you saw that the emperor had no clothes, you were long gone by 2006. So, the length of the previous expansion engendered a LOT of adverse selection in the top ranks of banks, investment banks, etc.

So, combining adverse selection with blindness-via-compensation, I find it very easy "to believe that so many people who had that much power were so completely incompetent." In fact, in hindsight, it looks fairly predictable.

Submitted by davelj on October 10, 2010 - 8:59am.

SK in CV wrote:
The RTC was actually better than most commercial lenders, and the steals people got from the RTC are legendary.

Speaking of the RTC and steals... I've got a buddy who works for a firm that just bought $1.7 billion (unpaid principal balance) from the FDIC for $460 million. Now these loans are all pretty crappy, hence the 73% discount. But here's what's going to happen at the micro level. Let's say there's a $10 million credit to ABC Company. The bank that underwrote the original loan has failed (which is how the FDIC ended up with the loan), so no one's beating down ABC's door anymore. So, my buddy's company will go to ABC and say, "We now own this loan. We don't want to liquidate your company. $10 million was obviously too much for you to service. But if you can service $5 million and find a bank willing to lend it to you, we'll let you out of the obligation for $5 million." ABC will likely find a bank willing to re-underwrite the credit at $5 million (my two banks are doing a little bit of this), so my buddy's firm will end up with $5 million on a credit for which they paid about $2.5 million, or almost 100% return. And the FDIC eats the other $5 million.

So, while the RTC was not resurrected this time around... it sure feels like the good 'ole days! File under: History doesn't repeat, but it rhymes.

Submitted by CA renter on October 10, 2010 - 5:09pm.

davelj wrote:

Well, let's be honest here - I'm sure that you saw that it would all "end badly" back in 2004. As many of us here at the Pigg were discussing at this website as the peak neared. But did you realize the extent of what AIG was up to? I doubt it. Did you realize what Paulson and Magnetar were up to? I doubt it. The intricate maze of CDOs? I doubt it. I could go on.

I think plenty of folks - many fellow Piggs - strongly suspected that housing prices were going to drop significantly, we'd have a wicked recession, and that some number of banks were going to fail - and this was an extreme outlier view back in the mid-noughties - but with the exception of a small handful of folks (maybe Taleb and a few others - I would add Paulson and Magnetar but in fact they helped to MANUFACTURE the crisis), very very few folks predicted the extent of the damage. Most folks who identified the bubble and tried to profit from it probably started a few years too early (because the bubble should have been arrested back in, say, 2002) and had their asses handed to them by the time it actually burst. Such is that nature of markets. I'm not excusing anyone here - make no mistake - just pointing out that there's a very large gulf between saying, "Houston, we have a problem" and saying, "Bernanke, the financial system is about to collapse."

Anyhow, I think when you're heavily compensated not to see something, you're unlikely to see it. You put blinders on and say, "No one else is seeing anything, so everything must be copacetic." Compensation - especially when it's enormous - blinds people to alternate scenarios.

And here's the other major problem with our "financial leaders" from the last several years: most of them arrived at their position as a result of adverse selection. Allow me to explain through use of an example.

A business partner of mine rescued an ailing bank during the mid-90s. Recapitalized it, cleaned it up, ran it extremely well and sold it in 2001. He sat back and said, "Things are getting crazy. Time to hit the eject button." Everyone made a crappile of money. But the bubble kept inflating. Anyhow, based on his considerable prior success he was asked to run a much larger bank a couple of years later. He thought things were even more crazy but he was bored, took the job and didn't invest any of his own money. He got there and basically said, "Folks, we gotta slow this train down and tighten up some things because it's really crazy out there." He was fired within a year. He didn't really care because he didn't need the money. But the larger point is this: most of the cautious bankers (or financiers, if you prefer) had been weeded out by the time the bubble burst. They had either sold, retired or just moved to the sidelines (like my friend). Most of the folks who remained at the top had only known expansion and bubbles and couldn't really fathom any other condition. And if they could fathom it and tried to slow their companies down, they were pushed out. If you saw that the emperor had no clothes, you were long gone by 2006. So, the length of the previous expansion engendered a LOT of adverse selection in the top ranks of banks, investment banks, etc.

So, combining adverse selection with blindness-via-compensation, I find it very easy "to believe that so many people who had that much power were so completely incompetent." In fact, in hindsight, it looks fairly predictable.

Absolutely, the most cautious players were pushed out -- many of whom tried to sound the alarm years before things actually collapsed, as I'm sure you know. The fact that things continued for so long contributed to making them look like discredited idiots...relics from the "olden days" who didn't get "modern financial innovation." I was personally sitting on 30-40% unrealized losses in my short positions for over a year because I had jumped in too soon (shorting homebuilders, financial firms, insurance companies, some retailers who benefitted from the bubble, etc.).

A lot of people on the blogs were indeed warning about CDSs and the securitization problems -- definitely in 2006, and some before that. I knew the pension funds were going to have problems because I was monitoring what they were getting into at the time (real estate, MBSs, and CDSs, among other bubble beneficiaries). I just find it difficult to fathom that "nobody knew." They knew, but they were also pushing out those who were most vocal about sounding the alarm. IMHO, the people who pushed the "Chicken Littles" out (often firing them) are the real criminals, among others.

IMHO, John Paulson entered late in the game, and was NOT the cause of any "crisis." He saw that the crisis was coming, and looked for a way to make the most money from it. Not saying that what he did was ethical, just that the danger of things blowing up already existed before he entered his trades. I think he's a scapegoat for those who won't confess to the real problems...just like Lehman's failure is being credited with "triggering the crisis." Um, no. Lehman's failure was a **RESULT** of the crisis. The crisis was happening between 2001-2007 (or thereabouts), when securities that were sure to blow up were being created and sold as "a way to spread risk around." Yeah, it spread risk around alright...all around the globe, and it affected almost every single financial institution.

Submitted by gandalf on October 10, 2010 - 10:10pm.

Bankers somehow 'not responsible' for a banking meltdown?

If you believe that, I've got a bridge I can sell you.

They absolutely knew. They made obscene profits and passed the costs, risks and losses downstream to a greater fool. Nobody was holding a gun to their head. When the house of cards blew up in their face, they feigned ignorance.

Historically, banking has been a conservative field, and a greater burden of trust is put upon corporations operating as banks because they hold our money. It was never okay to operate with the recklessness of a casino.

* * *

More important question:

Are owners, managers and employees of corporations so completely shielded from liability as to be 'Not Responsible' for the conduct of their firms? Bankers somehow not responsible for a banking meltdown?

How fucked are we if corporations aren't responsible for their actions? Every cost, pollutant, risk or hazard of consequence will be passed off downstream to some other balance sheet, or onto the public's balance sheet.

Submitted by davelj on October 11, 2010 - 10:06am.

CA renter wrote:

IMHO, John Paulson entered late in the game, and was NOT the cause of any "crisis." He saw that the crisis was coming, and looked for a way to make the most money from it. Not saying that what he did was ethical, just that the danger of things blowing up already existed before he entered his trades. I think he's a scapegoat for those who won't confess to the real problems...just like Lehman's failure is being credited with "triggering the crisis." Um, no. Lehman's failure was a **RESULT** of the crisis. The crisis was happening between 2001-2007 (or thereabouts), when securities that were sure to blow up were being created and sold as "a way to spread risk around." Yeah, it spread risk around alright...all around the globe, and it affected almost every single financial institution.

I agree with you re: Lehman. But I've not argued otherwise.

Regarding Paulson/Magnetar/Et al... I did not say they "caused" the crisis. I said they "helped" to manufacture the crisis. That is, they exacerbated the crisis through their actions. Without Paulson/Magnetar, many billions of mortgages would not have been underwritten toward the tail end of the bubble. They exploited a flaw in the analytics of the ratings agencies and cherry-picked the shittiest of loans for their long vehicle, where they were betting only 10 cents, so that they could short that very vehicle via CDSs and earn $1. They created a flawed, leveraged long investment destined to fail so that they could short it and earn back the loss 10x over. Now, should the other investors and ratings agencies caught on to this silliness? Of course. And on a small level one might view something like this as innocuous gamesmanship. But when many billions of mortgages are involved, it's just plain wrong, in my view. Again, no one's blaming Paulson/Magnetar/Et al alone for the crisis. But not to see that they played a significant role in exacerbating the bubble when it could very well have started winding down (with less damage) otherwise is to either not understand what they were doing or to be naive in the extreme.

Submitted by davelj on October 11, 2010 - 10:20am.

gandalf wrote:
Bankers somehow 'not responsible' for a banking meltdown?

Did someone say that somehow bankers were not responsible for the banking meltdown? Where did you read that?

What I said - if you're referring to my comments - was that it's difficult to assign individual bankers with blame - outside of the obvious villians - due to the complicated nature of the task. That's a world apart from suggesting that they're "not responsible." They're responsible, alright. It's just very difficult to pin that responsibility down at the individual level outside of fairly obvious cases, which are the exception rather than the rule.

gandalf wrote:

More important question:

Are owners, managers and employees of corporations so completely shielded from liability as to be 'Not Responsible' for the conduct of their firms?

Technically, senior officers and directors of banks are "personally and severally liable" for losses to the FDIC if their bank fails. The problem, of course, is that the FDIC has to prove criminal negligence, which is a difficult standard to prove. Having said that, during the S&L/banking crisis of the late-80s-early-90s, the FDIC sued officers and directors of 26% of the banks that failed. I think we're going to see a LOT of law suits this time around as well. (The FDIC is just getting geared up for these suits right now.) The problem is that most of these folks who aren't working at the top-20 banks - who TPTB won't allow to fail - don't have nearly enough net worth to plug the holes they've created. Not even close. But as a director of two banks, I'm quite aware that my net worth is on the line if something goes wrong. D&O insurance helps out a bit in this regard, but if a bank fails, the losses tend to dwarf the D&O amount by many multiples.

Submitted by gandalf on October 11, 2010 - 3:45pm.

I agree. The banks are principally responsible for a 'banking meltdown'. The corporate directors and managing principals are responsible. It's the letter of the law. And yet, for all intensive purposes, most of the people managing the financial services corporations at the epicenter of this disaster are going to emerge unscathed. They are not going to be held responsible for what happened, not in any practical sense. And there is something fundamentally wrong with that.

Yes, there will be FDIC lawsuits, another 25%, etc. Bloomberg reported on this the other day. Some may even succeed, resulting in a measure of forfeiture, ironically covered by insurance deducted as a business expense. There may even be criminal trials, but nothing of consequence. By and large, the results will be insignificant against the scale and backdrop of what happened, reckless banks and financial services corporations bringing our economy to the brink of collapse.

I could care less about 'Deadbeat Joe'. He's a fraction of the problem. I want to know when Wall Street is going to be held responsible for its reckless misconduct. That's where the money went, and that's what I want to know.

Submitted by davelj on October 11, 2010 - 4:10pm.

gandalf wrote:
I agree. The banks are principally responsible for a 'banking meltdown'. The corporate directors and managing principals are responsible. It's the letter of the law. And yet, for all intensive purposes, most of the people managing the financial services corporations at the epicenter of this disaster are going to emerge unscathed. They are not going to be held responsible for what happened, not in any practical sense. And there is something fundamentally wrong with that.

True, unfortunately. There will be a few high-profile successful prosecutions and host of small-time folks will get nailed as well. But in the larger scheme of things, the majority of malcontents will walk away unscathed.

gandalf wrote:

I could care less about 'Deadbeat Joe'. He's a fraction of the problem. I want to know when Wall Street is going to be held responsible for its reckless misconduct. That's where the money went, and that's what I want to know.

While individual Deadbeat Joes are a tiny fraction of the problem, Deadbeat Joes as a group are a big part of the problem. They're the source of a huge part of the SFR losses, after all. So, I care about both - the banking malcontents and the Deadbeat Joes. But of one thing I'm sure: neither will truly suffer much. It's the nature of the game.

Submitted by carlsbadworker on October 12, 2010 - 10:55am.

I'm wondering if there is going to be a hit to HD, Lowes stock because of this? Maybe it would be time to consider remodeling the house, as home sales will definitely be slowed down.

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