patrick.net

MarkInSF says

But given that the US government devoted about 10 times as much money investigating Clinton’s blow jobs, as it did the financial meltdown (forget about actually prosecuting anybody), it’s pretty obvious the fix is in.

That much... really? (insert blow job joke here)

Clawback...sounds tantalizing. Let me see.. If a Realtor sent a bus to the homeless shelter to find "qualified buyers" ...and told them how to sign on the dotted line to get "cash back" at closing...or told them they had thousands of Obama bucks just waiting for them...if they only bought a house....even though they walked from the last one...The same for the mortgage brokers who specialized in NO DOC loans...the No Income No Job and No Assets....the people who made BIG bucks out of the obviously fraudulent DPA or Down Payment Assistance programs using and manipulating religious or social organizations to sell houses to buffoons who didn't and don't know how to save a nickle...and they want a mortgage debt for the next 30 years..

They need more than "Clawback"...they need to be prosecuted fro fraud...along with the cheerleaders who touted and promoted it. IT IS FRAUD.....so the money must be returned...and PRISON sentences imposed....Maybe we can put the most serious offenders in GITMO with some of Dick Cheney's waterboard specialists? Hmmm. But I just rent and watch....and laugh....

TerriDeaner- Which Clinton? The Blue Teal bison or Mr. Wonderful?

Oh come now investor90, that is naugh-TEEE!

Sorry CL, I think this is a good topic and I don't want to derail it. I probably shouldn't have posted that earlier comment!

I paid $40 for a steak at a restaurant last night, and it turned into poop in my toilet today. I'm sure the restaurant made a decent profit by buying the raw steak at about $8 (only a 16oz steak) and selling it to me for $40 . . . the labor of meat flipping on the grill for a few minutes couldn't possibly have been worth $32! Can I have my "lost money" clawed back from the restaurant owner?

Oh yes, let's also talk about clawing back lottery winnings. I mean, someone has to bear the responsibility of not telling me the winning number ahead of time.

Good one.

Yeah, it's not the fault of the guy who knew when to sell, that the government (taxpayer) was (is) socializing the risk and losses of the banks. He or she took the risk, and got the reward.

A much better argument can be made for penalizing the banks and it's high level employees, as well as others for their role in essentially risking our tax dollars. At least have their bonuses go to the government, even if it's only for symbolic purposes (not to put a dent in the deficit). That could be a warning to others who assume taxpayer bailouts if their investments don't work out. Claw those bonuses back !!

marcus says

A much better argument can be made for penalizing the banks and it’s high level employees, as well as others for their role in essentially risking our tax dollars.

Exactly. Like I've said before, this is not insider trading or asymmetric information. We're talking about consumers with the same available information. Some made the right decisions, which in retrospect were completely obvious. Others made the wrong decisions, and in retrospect you have to wonder what the hell they were smoking. To insinuate that the ones who played it smart are somehow in principle owing money to those who were not is so absurd that I doubt the majority of those who lost could even agree to it. Just the ones that blame others for their own decisions.

And yes, the "insiders" a la the banking industry is always fair game IMO. I don't think anybody is due their profits except those who bought AAA-branded junk.

CL says

The question I’m positing is a twist on the line I see here all the time, that losers are losers and they deserved to lose. Did the winners “deserve” their winnings?

Reality framed my response better than I could. The steak analogy is apt.

And as klarek and Roberto alluded to, someone bailing on housing in 2005-06 was unheard of for the most part. Not only were people ridiculed for suggesting home values were ripe for a crash, but people were ridiculed for simply not joining the madness and buying. It was an openly-hostile environment. For someone with no prior knowledge of the bubble (not speculating with 104% financing on multiple properties) to have correctly assessed the situation, made a decision which they were openly and ruthlessly being criticized for; that decision being a calculated move to bail on a market due for a crash for which there was absolutely zero historical precedent for that prediction.; whoever had the courage to pull the trigger on that absolutely "deserves" the profits from the decision.

People seemingly have forgotten what it was like 5 years ago, and for that matter, the nature of housing and the market in general. To suggest your plan was to sell your home and move into a rental based on just a hunch that your property was going to tumble in value in the next 1-2 years, was a BALLSY move in 2006. People were mocked for this behavior right up until Countrywide tanked in spring of 2007, and by winter 2007 this seemed to be a brilliant plan. Now that the crash has set in, observers (particularly those either burned by the housing market game, or those who didn't have the gaul to act on their own suspicions, get in early, and get out in time as they saw others do) want to ascribe terms like, "Undue, Unjustified, Undeserved" to the money those who sold in 2005-06.

This is like asking if the survivors of the Titanic sinking "deserved" to live. Should the survivors have to pay restitution to the departed's families? Why? For simply surviving a trip that they did not? There were plenty of people who sat around laughing at the notion that the thing was going under, even when all evidence pointed to it being a foregone conclusion. Far fewer correctly assessed the situation, and quietly headed for the exits (lifeboats) as fast as possible. The reason most of the lifeboats went out half full is not because the ship was being run by a bunch of incompetant dolts, it was because the vast majority of those onboard simply refused to believe what they were being told by the experts. To suggest that those first dozen or so people who got on lifeboats didn't "deserve" to live any more than any of those who perished is true in an existential sense, but one cannot dispute that they made a very wise decision in the face of overwhelming sentiment to the contrary, and they thus escaped death. Just because those who died did not deserve to die, does not mean those who escaped didn't deserve to live.

In this instance, unless someone did something abjectly immoral (like grabbed a grandmother out of a lifeboat, tossed her overboard, and then took her seat) then they deserve to live just as much as anyone else. In much the same way, the average homeowner who sold during the bubble peak did not hold a gun to their buyer's head, forge signatures on mortgage documents, directly pay off an appraiser to bump up the value, or bribe the mortgage company to issue a loan to someone who didn't qualify....then the seller is not responsible for the losses incurred by the buyer, period. It's all a game. The fact that 99% of America didn't understand that housing is not intrinsically a rock-solid, zero-risk game with constant appreciation guaranteed, doesn't mean that those who DID understand this and made their choices in kind are either a) responsible for compensating buyer for losses, or b) do not "deserve" to keep the proceeds.

The only parties who do not deserve to have made money are the assholes on wall st who gambled everything, like the poor homeowner, and got raped by the market.....and then got billions of dollars handed back to them. If you make a wise decision, you deserve the reward. If you make a poor decision, you deserve the consequences. What is undeserved is making a horrendously foolish decision, getting whored by the market, and then being handed all your losses back by the Federal Government. That is undeserved.

A clawback would have been more socially just than having taxpayers and savers bailing out the big banks, the debt speculators, etc. However, it is impossible to clawback now. The profit taking occurred years ago and the financial trail is too convoluted. A clawback on a per-case bases involving investors suing institutions for financial fraud would have been possible back in 2006-2007, but the government was too much in bed with the bankers to do this.

Really, what the government should have done was simply let the courts back in 2007 hear cases from both US investors and foreign investors regarding the fraudulent packaging of mortgage back securities. Sure, a lot of big banks would have gone down, but that would simply open the market to all the little banks with little to no exposure to the fraudulent securities.

Other than that, the government should have simply done nothing. No printing money, no redistributing resource by "stimulating" one area of the economy at the expense of other areas, and no artificially low interest rates -- the only way to stimulate an industry is by taking resources from and thereby depressing some other industry. Government policies are always doom to fail when they address the symptoms of a problem instead of the causes. The cause of all the financial mess we have today is simply the misallocation of vast resources into an overpriced housing market. The solution is simply to stop misallocating resources to this pig.

Specifically, it is cheap money that got us into the second great depression. And the fed's solution is more cheap money. That's like trying to save a person from drowning by pouring buckets of water on him.

People who risked their capital and made profitable decisions should keep the profits. Duh! otherwise why would anyone invest?
If you screw up and lose money on an investment take your lumps. God knows I made some stupid decisions and lost a lot of money but it would never occur to me that the people who made wise decisions should forfeit their profits.
Now if people made money from scams and fraud, that's another matter. The bankers certainly should be made to forfeit their bonuses for example

CL says

Capitalism is supposed to reward hard work and entrepreneurial spirit, not this stuff.

Is that really the point of capitalism? It sounds more like a strategy. I think the purpose of capitalism is more about freedom; the ability to choose what path of work or business you want to pursue in life. But the freedom of that choice also comes with the ability to fail.

There are 2 main ways to make a living. Go to work everyday, put in your time and then collect a check at the end of the week. Or take risks with your own capital in a business or investment idea of your own. The first option carries very little risk, the worst that can happen is you lose your job and have to find another one. The second option carries much more risk. You can lose everything, and if you're using leverage you can lose more than you started with.

The moment people started looking at their homes as "investments" rather than a place to live they stepped into the world of the second group of people. And a lot of those people did that without the proper knowledge of how to do so and lost because of that. But capitalism gives no forgiveness to those who take risks in ignorance. We only have laws to protect people who were intentionally mislead by others in the risks that they took. Unless somone acheived a gain due to fraud on their part I don't believe there is any principle in forcing them to pay their profits back.

Also, I think the very idea of giving back profits just because they seem "unearned" would destroy capitalism. Who would be willing to take any risks if they knew their profits could be taken away afterwards when the losers screamed "not fair"?

I think the claw back approach is for jealous stupid financially un-educated people looking for revenge against there own buyers remorse. I own and run a hedge fund in Seattle. Around spring 2005 I liquidated all my real estate holdings I did not outright own. I did a real nice thing for my friends and advised them to sell now and get out before they were under water. During that time I was flipping Bank owned REO for shortsale. I made a killing on short sales that are now under water. However if the people who bought the houses want a clawback, thats not going to happen. They felt they were paying a good price and they qualified.
On the hedgefund side. Most of these people don't understand how money works. So that is there fault, not mine.
Now on the hedgefund side of life. I made a killing shorting GS, and Morgan Stanley, my clents made millions and I made 10' of millions, all legal and legitimate, want to clawback on me; can you outrun a Metal Storn phalanx gun. I think not.
Clawback is just an idea financially uneducated peole want to use to get revenge on the rich guy. SCrew your dumb people. This blog should be used to tell the housing crisis as it unfolds, not a forum for stupid poor people; they only have themselves to blame.

Do you know who was BIG on clawbacks?

The Khmer Rouge.

Why should you clawback profits of anyone who made money during the housing bubble? What about everyone who made money during the tech bubble? Should that money be clawed back? Anyone who things clawbacks are a good idea is jealous that they did not profit from the bubble. Well, too bad. I missed out on the tech and gold bubbles (yes, gold is in a bubble), and in no way do I think people who profited from them should have to return their profits.

Reality says

I paid $40 for a steak at a restaurant last night, and it turned into poop in my toilet today. I’m sure the restaurant made a decent profit by buying the raw steak at about $8 (only a 16oz steak) and selling it to me for $40 . . . the labor of meat flipping on the grill for a few minutes couldn’t possibly have been worth $32! Can I have my “lost money” clawed back from the restaurant owner?
Oh yes, let’s also talk about clawing back lottery winnings. I mean, someone has to bear the responsibility of not telling me the winning number ahead of time.

Fair enough, but what if there were malfeasance in the "market" for meat? What if you, as the consumer, were paying $40 for meat because the entire country said there were forces at work making meat more expensive? So, the canard goes, steak that used to cost $16 is now $40. If you want to eat, you'll need to pay up. Of course, you can always eat hamburger, but it too was affected by the fake run on steak.

If after the fact, the meat suppliers were found to be manipulating the meat market (insert any artificial influence you'd like here), could not consumers be able to morally complain to the restaurant that they were hoodwinked? And wouldn't the restaurant go to his suppliers for redress?

Another analogy would be private used car sales. If you sell a car as-is to an unsuspecting buyer on the street, and the engine falls out in less than a mile-- You are under no legal obligation to refund the money, but I'd suggest you are under a moral one. Are you?

As far as legalities are concerned, if the consumer were protected by a "lemon law", would he be moral in seeking protection under the laws of his state? Or should he simply fall on his own sword and shout his praise for Capitalism and all of its wonders? In the dog-eat-dog capitalism many espouse here, you'd say there would be no moral obligation. But I'd bet you that countless citizens do this every day, because their code says that it's the right thing to do.

Not such a good idea.

Some of us put two and two together in '05 and '06 and sold, leaving $$ on the table, and took a lot criticism for it. It smelled like 1989 all over again and it was time to get out.

At the time, it was normal to do a Tax Deferred Exchange into a more expensive investment property to defer the taxes. Some of us just paid the taxes and took criticism for that too. It truly smelled like time to get out.

Lots of taxes and lots of criticism.

You cannot go with the crowd and make any headway.

Unfortunately, silly buyers and stupid "investors" have been losing since '07, over and over.

In 2016, looking back on this huge mess will be a very sad time for humans. The Stupid-Age.
Like walking around all day with toilet paper hanging out of your britches.
Just how stupid can people be. Read anything about humans from 2006 - 2016.
And, there's nothing anybody can do. They just won't stop, look and listen.

Are you from the future?

The group of people who actually lost money is very very very small.

Most all bubble buyers paid with 97%+ loans. (no down payment).

Then they live for free for 2 to 3 years while I wait for the bank to foreclose on them so I can maybe outbid 3 other people on thier still overpriced 40 year old home?

How can we as taxpapers clawback 2 years of free rent since the Feds are making banks extend and pretend? THATS a topic we should discuss also HOW TO SPEED UP THE FORECLOSURE PROCESS and kick all the weak hands out of thier homes. But thats pointless with the feds runing the economy like the CCCP.

When will the crash end and prices be stable? When all people either upside down or who cannot afford thier house are removed and replaced with people who can. (don't hold breath)

Lets remember the bubble was the disease and the crash is the cure.

I bought a $30,000 Honda in 2001. Today it is worth $5,000. Can I get a clawback of $25,000 from Honda? Where's my money?

CL says

Fair enough, but what if there were malfeasance in the “market” for meat? What if you, as the consumer, were paying $40 for meat because the entire country said there were forces at work making meat more expensive?

What? This happens all the time. Have you ever bought a beer at a baseball game, or popcorn at a movie theater?

I'm not sure why it matters if the market was manipulated or not -- if the meat prices were artificially elevated or not. You decided to buy the steak, and nobody made you. You'd do better to talk about staple foods, or maybe even gasoline -- things that people "have" to buy.

CL says

If you sell a car as-is to an unsuspecting buyer on the street, and the engine falls out in less than a mile

If I knew that the engine was about to fall out, maybe. But if I didn't know...the car was sold as-is. Would I feel bad about it? Yeah, I would. Would I give the guy his money back. Maybe some of it. Maybe not. I'm not really sure how that relates to buying a house that someone is later willing to pay a lot more for, and selling it to them.

I have entertained the idea, but I don't think it has legs.

@CL

Nobody put a gun to your head to force you into buying a house (although some wives did force their husbands into buying; there's even an NRA ad hinting at the power of the wife; to that problem, the remedy is divorce! or grow a set of balls and tell her you'd leave if she can't put family financial security ahead of looking good among her chatty low self-esteem fratricidal "friends"!)

Regarding the lemon car analogy, if you find a structural problem with the house that the seller should have disclosed; e.g. if the house collapsed on you a week after you moved in, of course you'd have legal recourse. However, when was the last time any seller of used cars would take the car back years later because you think you overpaid?! There's nothing wrong with the car as a transportation device, and there's nothing wrong with the house as a shelter; you just overpaid! How is it fair to reverse something like that years after a mutually consenting exchange? The whole idea is ridiculous and immature . . . just like the immaturity in pushing a wiser spouse into buying a house in order to show off relatives and friends during the boom to begin with!

There were plenty good advice against buying at the peak, if you cared to find them. Patrick has been running this site since 2004. I started renting shortly after the stock market bubble crashed in 2000 . . . thinking that the housing market would crash within 3-5 years. Looking back, I could have bought a house in 2002, paying next to nothing down, then tapping it like an ATM machine to pay cars, boats and vacations . . . then after 2007, as a homeowner with negative equity in that case I could have stopped paying altogether and stayed in the house for free for a few years. Since I didn't take advantage of the system like that, can I "claw back" the free car, free boat, free vacation and free housing for a few years?!

Free market means that individuals have the right to participate in the price discovery process . . . so that resources can be directed efficiently through the dynamic competitive bid-and-offer process. If you want the government tell you how much a house should be worth and how much your own output should be worth . . . well there's Cuba and North Korea for that. The problem with those system is of course that those god-like government officials always give themselves much more than they give you, just like on the slave plantation, where housing, food, clothing, education and medicine are all free, except the standards of service is at the discretion of the "leaders/real-owners." You have to take your own chances if you want to have a say in what is most important to you; i.e. private property rights means absorbing consequences for your own decisions; the first and foremost private property right is self-ownership!

Clawback should first and foremost be implemented at the top of the food chain: Bank CEOs, Bank CFOs, managing directors at investment banks, NAR chief economists and the like.

Once we are done with them, we can see how much misdeed has been unearthed about their underlings and act accordingly.

I would not claw back from some Joe Shmoe who sold at the top unless he was at the same time making profit off lending to buyers.

There's no way they can get money back unless the methods used to gain the money were illegal. People who bought low and sold high, bought high and sold higher...they didn't do anything illegal. There's no court in America that would ever rule they owe money.

What a ridiculous question! I've made a lot of money in gold and silver since 2001. Should I forfeit those gains, too? Do I deserve a comeuppance??

CL says

Fair enough, but what if there were malfeasance in the “market” for meat? What if you, as the consumer, were paying $40 for meat because the entire country said there were forces at work making meat more expensive? So, the canard goes, steak that used to cost $16 is now $40. If you want to eat, you’ll need to pay up. Of course, you can always eat hamburger, but it too was affected by the fake run on steak.

But the hamburger - rent, in this case - did not go up as the price of steak went up. The steak kept becoming more expensive, and you intentionally ignored the price of hamburgers because you lusted over an overpriced stake. Now those who switched from steak to hamburgers should reimburse those who doubled down on steak? Market malfeasance or not, I'm still waiting to hear your moral argument for punishing savvy customers to subsidize the profits of reckless customers.

CL says

As far as legalities are concerned, if the consumer were protected by a “lemon law”, would he be moral in seeking protection under the laws of his state? Or should he simply fall on his own sword and shout his praise for Capitalism and all of its wonders? In the dog-eat-dog capitalism many espouse here, you’d say there would be no moral obligation. But I’d bet you that countless citizens do this every day, because their code says that it’s the right thing to do.

Yet if you were to profit wildly from your foolish home purchase, you would be all for this capitalist system. Fact is that a simple amount of due diligence is what separates those who lost from those who "won". You seem to think you were wronged, and that someone profited from you out of their own malicious plot. In reality, they had access to all the information you had access to, and bet against the insanity that so many people were swearing by at the time.

You put practically nothing into a $3/4 million house, yet feel entitled to profit from a horrible investment. For you to decry capitalism yet operate with that sense of greed and self-entitlement is quite amusing.

Reality says

I paid $40 for a steak at a restaurant last night, and it turned into poop in my toilet today. I’m sure the restaurant made a decent profit by buying the raw steak at about $8 (only a 16oz steak) and selling it to me for $40 . . . the labor of meat flipping on the grill for a few minutes couldn’t possibly have been worth $32! Can I have my “lost money” clawed back from the restaurant owner?

You didn't just pay for the steak...you paid for the hostess to seat you, the waiter to serve you, the building to shelter and climate control the room for you, the seats you sat in, the table you ate on, the silverware you used, the napkins you wasted, the menus you read, the manager who trained the employees, the aesthetics you witnessed, the cook to make the steak, the energy needed to cook the steak, the seasonings...shall I go on?

Reality says

Free market means that individuals have the right to participate in the price discovery process . . . so that resources can be directed efficiently through the dynamic competitive bid-and-offer process.

Well said. This isn't just a key tenet of capitalism, but a fundamental core of economics and markets of any kind. Efficiency in and of itself is not always a good thing unless you're a purist, but we're far too often trying to go the route of inefficiency because there are a handful of idiots who need protection - from themselves.

ozamerican says

What a ridiculous question! I’ve made a lot of money in gold and silver since 2001. Should I forfeit those gains, too? Do I deserve a comeuppance??

If you've been painting rocks to meet the demand, the question becomes more reasonable.

I don't see a reasonable way to take back money from people who just jumped on a bandwagon or just coincidentally made money. I have two friends who made great money selling homes in San Francisco by buying them in the early 2000s and selling them around 2005. In their case, they sold for personal reasons. One broke up with a live-in girlfriend and sold a condo, the other's wife finished a PhD and got a job in another city, so he sold and moved.

The only idea to which I'm connected is the idea of going after people who definitely showed intent to make more money by making the system of supply and demand based on something other than that which the buyer was aware.

JAWS says

In 2016, looking back on this huge mess will be a very sad time for humans. The Stupid-Age.

We're going to be stupid for way, way longer than that.

This whole concept stinks of FB's.

For this crazy train of thought to appeal to you....you MUST be an FB Bubble Buyer.

And why wouldn't they want to tax everything under the sun to pay for their 2% loan mod, principal reduced at taypayer expense extend and pretend sqattervilles?

Its the bailout mentality gone one step futher and thats "how to pay for bailouts" (other than print 12 trillion USD).

Reality says

There were plenty good advice against buying at the peak, if you cared to find them. Patrick has been running this site since 2004.

The difficulty here is that you'd have to teach everyone investment/money fundamentals and get them to change their behavior based on that understanding instead of the dominant mode of influence/power which is our silly little social systems.

Plus there's still the flaw in thinking others are acting based on fundamentals. Who knew mortgages were being approved on a massively fraudulent scale? Yes, it seemed like it to me too, because I couldn't figure out how everyone else was affording a house when I made two to three times their income and still wouldn't afford one. But I didn't know. The fundamentals just suggested something was amiss.

uni6jon2 says

The only idea to which I’m connected is the idea of going after people who definitely showed intent to make more money by making the system of supply and demand based on something other than that which the buyer was aware.

I don't like my statement being based on buyer awareness. As already covered here, you can't be expected to cover all levels of understanding and awareness.

So words that work better for me are "based on actions or ideas purposefullly made unknown to the buyer to the benefit of the seller."

Maybe that doesn't quite work either. What's the legal definition of fraud? If people in power massively screw a bunch of other people, I get the idea of wanting money returned. If you were buying and flipping houses and feigning ignorance about the validity of the paper work, then I think you've stolen money. I want to live in a country where people connect with their conscience and I think America has an underlying(even if it's way underlying at this point) intent to be such a place.

Wow that is the dumbest idea I've ever read on Patrick.net. This guy used his brain and you want to punish him by taking his money?!
Silver is at $50.00 dollars today. How about confiscating all the profits of those who bought in 2009 for $10.00?
Your idiocy is truly breathtaking. I'm not hiding behind my keyboard either - I would love the opportunity to say this to your face.

Illogical. There have been bubbles (in any asset class) throughout human history. There were no clawbacks then, or now in general. Some get lucky, most don't. The human race simply trudges along.

m1ckey6 says

Silver is at $50.00 dollars today. How about confiscating all the profits of those who bought in 2009 for $10.00?

What if someone convinced you that you were buying silver when actually you were just giving them money they were using in another way to make money? Then when you wanted to sell, the value was far below what you'd paid.

Would you just say,"Oh well, the person who convinced me is just smarter than me?"

The term Clawbacks by definition applies only to illegal and otherwise ill-gotten gains (breach of contract, breach of fiduciary duty, etc)

The term is being misused frequently in this thread.

Hey justme - do you have a source for this stricter definition?

Investopedia provides a more generalized one:

http://www.investopedia.com/terms/c/clawback.asp

1. Money or benefits that are distributed and then taken back as a result of special circumstances.
2. A retraction of stock prices or of the market in general.

justme says

The term is being misused frequently in this thread.

Thank you. I recognized the inconsistencies in the arguments, but had no background in the terms to say it was a matter of definition.

If people on this thread think the idea is that profits should always be regulated below a certain level of increase, that's not the idea.

terri,

Clawback is contract lingo, it has been given multiple meanings.

From Wiktionary:

3. (US, business) Any recovery of a performance-related payment based on discovery that the performance was not genuine. The airline got a clawback provision in the event of failure of the engines to meet fuel-consumption targets.

Clearly, clawback can mean whatever people want it to mean, but in the context of bubble gains I think my interpretation is reasonable.

With reference to this thread, I guess what I'm saying is that in the context of bubbles, "pump and dump" profits (as in investment banks bundling up and selling bad mortgage securities, and then betting against them) is ill-gotten gains and qualify for a clawback, whereas "Joe Schmoe sold at the top" is just "dump" and does not generally qualify.