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I see your point. And a good one it is. If a person is a qualified borrower, than the only impedence is time. A small price to pay for quality. It's not like interest rates are going up.
In a normal market that was sufficient. The problem happens when the guy borrowed the 20%, and then the overpriced houses started snowballing and bringing other prices down with each additional foreclosure.
Google has posted a primer on the subprime mess. It's worth a look.
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1
The BS appraisal is the biggest threat. I'm still not sure how that could have been prevented. Many times the high appraisals were substantiated with comps. This then drove the frenzy in ever more decreasing loan standards to win market share. Historically I think it will be viewed as a very interesting set of events that came together.
I sent that to Patrick and I guess he had no way of posting a PowerPoint.
Patrick, you need to add that link from Dennis in the main links section. It is hysterical.
just move the money from a credit card and let it sit there for a couple of months
That trick would show up in your credit report. Not only would it show the phony savings, it would lower the amount you qualify to borrow.
In the days Richmond is refering to, it was very difficult to borrow your down payment. If the banker saw any indication your down payment was borrowed, he would deny the loan. "Nothing dow, bankers frown." This strict downpayment requirement is why FHA and VA loans came about in the first place.
I was shocked at how the give back loans skewed the comps.
Let's say I want to buy your house. You say it's 250. I say ok, but I don't have the down. So, I say that I'll give you 275 and you give me 25 back. The first holder doesn't check, I have my fake down that I owe and the sale records at 275. Do that ten times in a neighborhood and you can see another reason prices went up so fast.
Yes, the amount would increase what shows on the credit report. Qualifying was based on the minimum monthly payments to your creditors, so an extra $10,000 is easily masked. But yes, your point is true, each monthly dollar of debt payment, reduces your borrowing ability by roughly twice the amount in mortgage payment.
That's basically my take on what happened. That was the systemic flaw, they were real comps, they just masked the kickbacks and that made the sheep all chase a bogus trend.
FHA guidelines used to have a front and back end ratio. The front end was just what your house payment relative to your income is. The back end is for total debts including the house payment. People would qualify for a loan with a 45% back end ratio on FHA loans. To me that is insane since taxes can make up close to 30-40% for lower income borrowers. Therefore someone buying at the max guidelines is basically committing 70-80% of their paycheck each month. Not really smart normally, but in some cases it really paid off.
Let’s say I want to buy your house. You say it’s 250. I say ok, but I don’t have the down. So, I say that I’ll give you 275 and you give me 25 back.
In the old days, an appraiser would have said the house was worth only $250k based on recent sales, and he bank would want to see the unborrowed $50k down payment. The loan paperwork had a phrase like "source of funds for down payment" and a question like "Is any of the down payment borrowed?"
The appraisal used to be the control. It screws the whole model up when you can't rely on it.
# skibum Says:
I and others were predicting this last year - I recall several, including Randy, who claimed VC money had some degree of immunity from overall economic hard times, as that is mostly private equity wealth. So much for that claim.
I was one of the guys talking about a bad startup-funding scenario - it was not much of a "prediction", because I was reporting on actual observation with maybe a little extrapolation into a liquidity-crunched future - not very hard to predict. The reality is that after the Y2K bust, VC funding in internet/tech was never as reckless as it used to be from '95-'99 anyway.
This is not to say that Randy wasn't right - his point still stands in that private-equity wealth will be immune. However, what it does mean is that VC's will be very selective in their approach. As the prospects for IPO and acquisition become dimmer and/or distant, VC's look for lower risk, experienced management track-record, existing customer/revenue base and proven business models - and expect more equity in return for their money.
While the _obvious_ result is tighter funding for new startups, the true Oh Shit moment is when _existing_ start-ups with _existing_ employees go looking for another round of funding - and find that there is nothing there. Watch for that, because it will translate into large numbers of pink slips for burnt-out, highly-specialized, senior-level techies making over 1 HAHA - exactly the kind of staff that no one is looking to hire soon.
true Oh Shit moment is when existing start-ups with existing employees go looking for another round of funding - and find that there is nothing there. Watch for that, because it will translate into large numbers of pink slips for burnt-out, highly-specialized, senior-level techies making over 1 HAHA - exactly the kind of staff that no one is looking to hire soon.
Totally agreed. Smart portfolio companies are soon planning the austere budget, many optimistic ones will face a serious surprise. Proactive layoffs coming near term.
The environment for small companies and entrepreneurs is about to cycle through a very, very difficult period. Manage revenues to support the burn or die.
Existing investors will keep their portfolio on life support, but make them cut off an arm or leg. Expensive resources are in trouble.
Anybody getting the feeling this whole mess is orchestrated? Our markets are not acting "free" by any stretch.
What is the motivation of the string-pullers this time?
Whoever it is seems to want the dollar trashed. Everything is pointing to that fact. Think someone might be forcing our hand to adopt the euro?
There is a big play at work here. Much bigger than housing or Bear Stearns. And it's threatening to rip apart the fabric of our country.
@sp,
Maybe Randy and others can correct me, but there's a difference between true private wealth and your typical private equity firm (Carlyle, Blackstone, Cerebrus, etc.) The latter still use a huge amount of leverage to get deals done. I'm just not sure how much leverage is used to fund VCs and in turn startups. My guess is not much, as why borrow money to throw into a 2-5 year investment?
Peter P,
this is a great chance to swap your paper position into a physical position because the absolute mark-up will be lower. I am planning to go physical 100%.
GLD can be borrowed for shorting, and since it is Wall Street, we know naked shorts happen. Well, if I am holding physical, I don't care what your manipulated paper price is. When all shit hits the fan, we will see if gold or USD toilet paper goes further in buying anything.
Speaking of leverage, did anyone else catch one of yesterday's WSJ articles about BSC? Turns the balance sheets on all these Wall Street firms is incredibly leveraged. The talk in the news is how Lehman is the one on shaky ground b/c of it's degree of leverage, but Lehman is right about 32x leveraged, comparabe to BSC, while the "beacon of hope" on Wall Street, Goldman Sachs is "merely" 26x leveraged.
That's frightening.
skibum,
Carlyle, Blackstone are not VCs, they fall into the category of private equity group which typically play financial gains of doing LBOs, privatizing and later on bringing the same privatized company public. In doing so, they typically resort to cheap financing through issuing bonds or taking on bridge loans (which now become pier loans). They create no value, they are just the mother of all arbitrages of value (or the mother of packaging up). They buy *existing businesses*, turn them around in accounting sense to dress up for a bigger sale to dumber investors.
I have had pleasure to do business with one of those groups in my previous position. I have to say they add no value whatsoever for the world, except for playing the arbitrage to pocket the "arbitraged value" for the partners. The management employed by these private equity groups are usually accounting experts in making the company look good on paper, but in fact, the enterprise value is destroyed in the long term, but they've cashed out so they don't care.
GLD seems to track spot gold prices reasonable well for now. I may go physical, but I need a way to hedge easily.
GC actually has pretty good action at night, have you looked into your hedging options? (I also notice that the Asian session seems to be more optimistic about higher gold price lately. Gold futures can go up $10 just to be beaten down by the gorram New Yorkers.)
I hope the Asian session will be lower because that's when I buy physical.
The whole thing about Wall Street can be summarized in the following:
Put a value on future expected (perceived) cash flow and cash out today.
It is ok to do so when one needs to buy or sell a company or a portion of a company. But this mentality has gotten out of whack, so everyone wants to cash out TODAY. No one wants to wait for tomorrow for the value to prove itself. No, we want it TODAY. Not only that, we want to tweak the *perception* of future cash flow so that we get a higher value TODAY.
So Wall Street is really a story-telling machine. To tell a good story, you need to line up the different components, the numbers need to look good (in accounting sense only), the management needs to look sharp, the general business environment needs to look upbeat. But story cannot divert too much from the reality. Eventually realty will shine through.
I can only do that during the Aussie-only session, because that's when the Mint accepts my order and parks my physical PM.
So Wall Street is really a story-telling machine.
All successful businesses are.
Gah. 32x and 26x. If those leverage values are against MBS, CDO, etc then they are insolvent.
If BSC was 30b to the Fed, Goldmnan and Lehman will be something like 100b?
Time to create a Fed burn clock. They are tracking towards insolvency.
Delta airlines just offered severance to 50% of it's employees, 30,000 of 'em.
Fed has another $500B to burn without turning on the press full speed. But we have MER, C, LEH and perhaps Wamu waiting in the pipeline for part of that $500B, I say the press will go on full speed before the end of summer.
Successful businesses have to backup its story-telling skill with real products. Wall Street's product is the story itself, a moneyed version of Hollywood.
I can only do that during the Aussie-only session, because that’s when the Mint accepts my order and parks my physical PM.
The market is thin and quiet after NY closes and before Hong Kong opens. You may be able to find a good deal.
Not investment advice.
Successful businesses have to backup its story-telling skill with real products.
Successful executives on bonuses and stock options don't have that requirement.
Carlyle, Blackstone are not VCs, they fall into the category of private equity group which typically play financial gains of doing LBOs, privatizing and later on bringing the same privatized company public.
oo,
You misread my post. I realize these guys are private equity. I was making the point that these guys provide a lot of the cash sloshing around our economy by "freeing up" that cash through leverage. They add no real value, I agree, but their contribution to all the free-flowing money in our economy will become apparent as they continue to not get the loans needed to complete these deals.
The whole thing about Wall Street can be summarized in the following:
Put a value on future expected (perceived) cash flow and cash out today.
oo,
In many ways, today's story runs parallel to the junk bond crisis of the 80's that brought down Drexel. Funny how a new generation on Wall Street repeated the same recklessness and greed.
History repeats. Whatever transpired in the past *will* transpire in the future, in one manifestation or another.
skibum,
sorry about that. But I don't think they "provide" lots of cash sloshing around. According to what I have seen, they don't even put in 10% down for a deal that they are committed to. They borrow most of that money, either from public market or from banking buddies. They always try to minimize their own cash contribution so that they can spread their equity over to as many deals as possible.
I think they contributed to the misallocation of money in the economy, not the free flow. Funds that could have been lent to more productive uses got diverted to such deals which have shorter turnaround time and higher "guaranteed" payback than, for example, building a research facility. The deal that I experienced was funded mainly by money from BOA, which was only making a fixed return on coupons while the partners at the group get all the upside. Downside? The deal is structured so that the bucks stop at the failed LLC leaving partners untouched and BOA eats all the loss.
Why would a bank take on such a shitty value proposition? Because the BOA executive approving such a deal is buddy buddy with the partner and they are related through some kind of marriage relationship. The kind of rampant corruption on the Wall Street is just completely disgusting.
I honestly think Michael Milken is a saint compared to many senior execs on the Wall Street today.
The kind of rampant corruption on the Wall Street is just completely disgusting.
They are just being human. I am not saying that humanity is not disgusting.
OT but of interest. The oral argument transcript for DC v. Heller is up now at the SCOTUS site. www.supremecourtus.gov/oral_arguments/argument_transcripts.html
The justices have been holding DC's lawyer down and kicking him in the nuts. :)
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From a reader:
Wow, is this true? The Fed is now printing money to pay Wall Street bonuses?
An alternate explanation I heard is that Bear is somehow essential to the mechanism for the Fed's money creation, but I don't understand how that works.
Patrick