How did it happen?

[Bimmerbill]

I guess I don't know how all these big banks and investment firms went belly up. Was ALL of their cash tied up in bad CDOs etc?

I would think they would be diversified, so if one sector took a dive (housing) they would have a cushion and cash reserves.

Did they all just get swept up in the housing bubble/greed and bet the bank on that one sector?

Guess I don't know what's going on. Can anyone explain it in laymans terms?

[deepc]

They all got swept up in greed, as you say.

Read this month's Harpers, where there's a description of the process of cleaning up foreclosed homes. Their money (and all of ours in the long run as we bail them out of this mess) went to overvalued homes filled with crap that the owners have walked away from. The former owners have no credit (and don't care), blew through phenomenal amounts of money as they refinanced their equity, and successfully reached into all our pockets to do so.

[crazy connie]

YUP you got that right. Greed and then look at the obnoxious comp packages for the CEO's and the fair haired deal makers. They all thought they were so much smarter than the rest of the world. A lot of the common folks here in the real world saw this housing collapse coming about 2 or 3 years ago when they started the BS loan campaign with no money down and self stated income. Where the hell were the banking regulators then? What was good old Alan G doing? Taking a nap I guess.

I just wish this were the end of the blood letting. But, I think we have another 6 to 12 months to go yet.

[Bimmerbill]

They put all of their money in one basket? No diversification?
Even houses full of stuff must be worth something...

[laurence]

I was wondering that, too! Let's say 4% of houses were foreclosed on, that's enough to wipe out all these institutions? The other 96% of their mortgages don't matter and the securities they were rolled up in are now worthless?

[crazy connie]

Even houses full of stuff must be worth something...[/quote]

Not when the mtg was on a falsely inflated price with no money down. Then you have to look at a lot of the nice folks who just had bad luck and overbought and overspent who squatted till eviction and then stripped out the house on the way out the door.

The house is worth 20% less than the mtg... That leaves the bank and their stockholders stuck with the problem. The majority of the problem was due to the greed of the banks who refused to follow prudent lending practices. I think we all know that 10% to 20% down payments on all loans over the last 5 years and we would not be into a financial/banking meltdown.

[Milton]

As crazy connie says, things are going to get worse before they get better (take a look at the climbing Texas ratios).

The writing has been on the Wall Street for a long time, but many people live in denial. When I cautioned against buying any US banks last August, one of the replies was as follows:

Quote:

Have you, um, looked at the balance sheet of the typical US retail bank? Most of them hold securities, but the vast majority of these portfolios are treasuries, agencies, and GSE backed paper (i.e. stuff with implicit or explicit US gummint guarantees).

[saluki9]

Quote:

Originally Posted by laurencewill I was wondering that, too! Let's say 4% of houses were foreclosed on, that's enough to wipe out all these institutions? The other 96% of their mortgages don't matter and the securities they were rolled up in are now worthless?

The only word you need to know now is leverage.

Lehman was at one point levered over 30 to 1. A decrease of less than 4% would wipe out your equity at that amount of leverage.

[2B]

One of the problems with our current situation is the relatively new accounting rule requiring companies to "mark to market" all of their assets. Some very illiquid assets can be "estimated" it's much harder for financial firms to not take a near immediate hit when a financial product is sold in the market at a very low value.

Companies in financial trouble find themselves having to sell at a distressed price which suddenly reduces every similar asset in their portfolio and everyone elses. Right now there is no market for performing non-govt backed mortgages. The home owner is still making payments and the underlying home value still exceeds the mortgage amount but the actual mortgage as a security is worth a small fraction of the face value. That's how a 4% repo rate has gutted the financials.

About a decade ago their was a SA debt default "crisis" that hammered the financials but they all pretty much slid through it. They continued to generate income and plow it back into their balance sheet. Suddenly, they were solvent again and nobody really knew the difference. There was also no need to "mark to market."

[Nords]

Quote:

Originally Posted by saluki9 The only word you need to know now is leverage...

... and margin calls. Kinda hard to stay liquid when your collateral stock is down 80%.

Remember when Long-Term Capital Management (I know, redundantly oxymoronic) was leveraged over 200:1 and the justification was "Hey, our Nobel laureates know what they're doing, and besides the entire country of Russia would have to default on our debt!"...

Wonder how that Orange County Alabama county is doing on negotiating their bond payments.

[donheff]

Kinda makes you wonder when you hear about the "big boys" and all of their superior knowledge. It seems like the big boys werer dumb enough to destroy their own companies. Although, I guess there are a few big-big boys who made money going in and going out while their posses went down the drain.

[ERD50]

IMO, "greed" is too simplistic of an answer - it just does not explain it, though it might make some people feel better.

Greed didn't just suddenly 'happen' in the past few years. I think what is different, is that something allowed some greedy people to put their risk on someone else. When that happens, greed loses its boundaries.

I'm no expert in the matter, but those just seem like underlying principles of capitalism, so I would think they would apply. Every capitalist is 'greedy', but they also generally understand how they have to balance that with risk.

So what happened to risk? I think your answer lies down that path, not in the 'greed' path.

-ERD50

[ERD50]

Quote:

Originally Posted by crazy connie YUP you got that right. Greed and then look at the obnoxious comp packages for the CEO's and the fair haired deal makers.

I guess I wasn't sure which 'greed' you were talking about. The greed of some unethical CEO who might walk away from a failed company with his/her own pockets full of cash, or the greed of someone who wanted to live in a house they couldn't afford?

Takes two to Tango.

You can't cheat an honest man.

-ERD50

[al_bundy]

Quote:

Originally Posted by ERD50 IMO, "greed" is too simplistic of an answer - it just does not explain it, though it might make some people feel better. Greed didn't just suddenly 'happen' in the past few years. I think what is different, is that something allowed some greedy people to put their risk on someone else. When that happens, greed loses its boundaries. I'm no expert in the matter, but those just seem like underlying principles of capitalism, so I would think they would apply. Every capitalist is 'greedy', but they also generally understand how they have to balance that with risk. So what happened to risk? I think your answer lies down that path, not in the 'greed' path. -ERD50

used to be that fannnie and freddie gave the mortgage market most of the money with FHA also doing it's part for people with poor credit. they had pretty good standards and things were OK for the most part.

then came wall street banks who thought they could do the same and sell the mortgages to suckers. in the case of wall street banks they didn't follow proper underwriting procedures like Fannie and Freddie. What hurt the GSE's is that they went into the Alt-A market in the last 10 years to compete with wall street and this is what killed them.

[laurence]

Quote:

Originally Posted by ERD50 I guess I wasn't sure which 'greed' you were talking about. The greed of some unethical CEO who might walk away from a failed company with his/her own pockets full of cash, or the greed of someone who wanted to live in a house they couldn't afford? Takes two to Tango. You can't cheat an honest man. -ERD50

While its true the hardest hit are the people who bought more house than they can afford, I think it's safe to say every person on this board, honest or not, has been adversely affected by this debacle. Tight credit, slowing economy, and portfolios being crumpled affect all of us. Those who "tango" need to face more personal risk in the future, as others have said.

[eridanus]

Quote:

Originally Posted by ERD50 So what happened to risk? I think your answer lies down that path, not in the 'greed' path.

Right. The (perceived?) risk/reward ratio was too low.

[OAG]

I don't have any funds in the stock market (too poor) but in reading this stuff today I came across this article: How to protect your money if your broker goes belly up - Sep. 15, 2008

Excerpts:

How the system works
What would happen if your brokerage defied the odds and went out of business?
If there's no fraud involved - for instance, if it's just a case of the business going sour - SIPC might not even need to get involved. The broker itself might simply transfer your holdings to another firm, where you'd then have access to them.
If it is a case of fraud or if accounts are amiss because of bad record keeping, SIPC would help coordinate the transfer of your remaining assets (most transfers take one to three months). It would also be responsible for replacing missing securities.
When a broker fails, a court-appointed trustee will contact you to let you know how and when to file a claim. Even if you get a notice that your assets have been transferred to another broker, you should still file a claim.
That's just in case there's a problem during the transfer or there's a discrepancy in the records of what you held at the brokerage. And be sure to use registered mail with a return receipt, just in case any errors are made.
Here's a quick rundown of what else you should know:
What SIPC covers

• Stocks, bonds and funds SIPC will replace up to $500,000 of equities, fixed-income securities and funds for each account. If you held separate accounts at two different brokerages, each totaling $500,000, you'd be fully covered for both (though it would be unlikely that both of your brokers would fail).

• Cash Included in the $500,000 cap is coverage for up to $100,000 in cash. Note, however, that SIPC doesn't consider money-market mutual funds to be cash. They're treated like any other funds, so they would fall under the larger $500,000 limit. Brokered CDs are a special case. If your CDs have gone missing - for instance because of broker fraud - then SIPC would be responsible for replacing your holdings. But if you lost money on the CD because the bank behind it failed, it would be FDIC's responsibility to make you whole.

What SIPC doesn't cover

• Some alternative assets With a few exceptions, SIPC limits coverage to SEC-registered securities. So foreign currency, precious metals and commodity futures contracts aren't protected.

• Bad timing SIPC will replace your shares, not dollar values. So if you own 100 shares of Microsoft worth $3,000 and your broker runs off with them, SIPC will replace your 100 shares - even if they're worth only half as much now because of market gyrations.

• Some outstanding margin loans If your broker fails while you have a margin loan outstanding, SIPC will try to transfer the debt and collateral to another broker. But if no other firm takes on the loan, you'll be on the hook to pay it off to your broker or ultimately to its creditors.

[youbet]

Quote:

Originally Posted by ERD50 I think what is different, is that something allowed some greedy people to put their risk on someone else. When that happens, greed loses its boundaries.

Ding! Ding! Ding!

I think you nailed it ERD50. The ability of lenders to shift the risk of making risky (but profitable if they don't default) loans away from themselves is the root cause IMO.

[ERD50]

Quote:

Originally Posted by al_bundy then came wall street banks who thought they could do the same and sell the mortgages to suckers. in the case of wall street banks they didn't follow proper underwriting procedures like Fannie and Freddie.

OK, but were they just being stupid to take more risk than they should have (very possible, but heck, this *is* their business), or did something allow them to hide or divert that risk somehow?

Or did they just get caught up in the bubble - like, hey, that company is offering easy loans, and if I don't offer easy loans I won't get any business. So they decide it is better to take some extra risk and *maybe* face a problem down the road than to close the loan office today?

I could see the 'human nature' side of that, and companies just reflect human nature, IMO.

-ERD50

[Tempesta]

Should I go all in today, or should I wait for more carnage? my asset is still 95% cash