Business

Wall Street To Write Down $460 Billion In Losses

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Yeah, sure, deregulation works great…

From Bloomberg:

March 25 (Bloomberg) — Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.

“There is light at the end of the tunnel, but it is still rather dim,” Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.

Just think if some sensible limits would have been put in place. I hear all this grousing about how regulations only confine markets, but hardly ever any mention of how they help. Well folks, here are 460 billion reasons to make sure our markets are more closely regulated.

Listen, there’s nothing wrong with making money, but this situation shows us that when you let pure, unadulterated greed govern markets, well, get ready for massive fallouts. And you can’t tell me that people couldn’t see this coming. In fact, many did. But the reason it wasn’t readily apparent is that this particular type of debt didn’t need to be stated publicly. Corporations could hide it. All they needed to do was make even more questionable loans and forecast how much they would make off of them to offset the losses they were already suffering. Pretty interesting, no? Corporations can hide their debt by going further into debt? Yeah, doesn’t make much sense to me either, but then again I’m not a Wall Street whiz, so what do I know?

So now all this greed and gross lack of business ethics is going to land on the backs of the American middle class. And that isn’t a platitude. The little “guys” will be the ones hardest hit by the lack of obtainable loans and the inevitable inflation that the Fed’s move to stem this mess will cause. Also, let’s not forget that this credit crunch will most likely result in less business investment, particularly for small businesses. That means fewer good jobs.

So much for the American Dreamâ„¢.

  • http://maverickviews.blogspot.com/ Alan Stewart Carl

    Drawing the line between regulation and over-regulation is very difficult. I mean, exactly what do you think the government should have done in the housing market? You do too much and it creates the exact same effect you complain about here — destroying people’s ability to own a home and get loans.

    I think there were obviously some predatory lending practicies goiing on in the housing sector and some suspicious money-shuffling in the financial sector but I always get nervous when people start thinking government regulation would have someone made everything better. Maybe it would have, maybe it would have caused a whole new set of problems.

    Instead of seeing government regulation as “the answer” I like to think of it as a necessary evil. Sometimes the free market “solution” is too painful (i.e. if we don’t inspect meat and people die, the meat packer will go out of business but at too great a cost, so we step in to prevent things from getting that far). But sometimes markets need a crises to sort themselves out.

    I think the current problems may have been tempered by well-targeted regulation, but the collapse could have still happened. There’s only so much a government can do to stop personal irresponsibility before it squelches freedom altogether.

  • TerenceC

    The global financial positions are so tightly wound together that there really isn’t any other choice but to bail them out. The alternative for world financial markets is unpalatable, especially during an election year. I hate giving any type of assistance to these greed merchants – the best thing would be to let it all boil over and “and allow financial darwinism to weed” out the weakest members. Unfortunately, the weakest members are just about every bank in the USA.

    The Arab financial houses as well as the Chinese are whole since their sovereign wealth funds are stuffed with dollars. Fortunately the only economy “primed” enough to take in hundreds of billions of dollars and not fall apart is ours…..so there is some light at the end of this tunnel – but alot of “little” people have been broken by this…..it’s always the little people with no collective voice that get crushed. One thing’s for sure – the USA isn’t number 1 anymore where global financing is involved.

  • http://www.warning1938alert.ytmnd.com Jimmy the Dhimmi

    Watch this entertaining powerpoint presentation illustrated by stick-figures which sums up the whole sub-prime lending crisis. I suppose the government could ban these “liar’s loans” as the presentation calls them, but other than that, I don’t know what else regulation could do. Remember, this all starts with low-income earners wanting to buy homes they cannot afford. A recent study showed that when there is fraud, about 60% comes from the loan applicants, not the banks or brokers.

  • http://www.warning1938alert.ytmnd.com Jimmy the Dhimmi
  • Bill A

    If the banking industry were more heavily regulated, $460 billion dollars would still be disappearing.

    The only difference is someone else would be losing it.

    You can regulate the volume of mortgage backed securities being bundled, which results in local lenders holding onto their own loans, but the loans are still bad and $460 billion of value that should exist doesn’t.

    You can regulate the lending practices of mortgages; but in the world of 4-5 years ago when home prices were going inexorably up and interest rates were artificially low, I doubt you could have prevented either:

    1. Finance industry lobby inserts convenient loophole(s) into regulation which, although it sounded strong and effective, still allowed them to get away with murder.
    2. Execution of the regulation fails, not enough auditors are hired for all the over-the-shoulder-watching, local lenders lie or forge documents (this already happened a lot), and they still manage to get away with murder.

    Either way, the housing markets would still be in free fall and the credit industry would still be freezing up; the money is still going to be written off and the big investment banks still would have found a way to get their mouth’s on that poisoned chalice that looked so tasty a few years ago. Probably in to form of direct loans or investment to to the local lending institutions.

  • Zaphod

    “So now all this greed and gross lack of business ethics is going to land on the backs of the American middle class. And that isn’t a platitude. The little “guys” will be the ones hardest hit by the lack of obtainable loans and the inevitable inflation that the Fed’s move to stem this mess will cause. Also, let’s not forget that this credit crunch will most likely result in less business investment, particularly for small businesses. That means fewer good jobs.”

    For those who WANT more regulation, let’s start by looking at the political “regulations” that said that lenders were discriminating against lower-income groups and minorities. That’s why the companies loosened underwriting — because they were being threatened by Congress and activist groups for discriminating.

    If you’re the sort to blame corporations, it was their fault then and it’s their fault now. Economies always have boom and bust cycles, as the booms favor those who take risks and the busts favor those who do not. In this era of no-responsibility, we want to pretend it should be boom forever, favoring those lacking wisdom and self-control. Rest assured, however we prop it up, the bust will happen, and the longer it goes the worse it will be.

  • http://www.uscentrist.org Agnostick

    Zaphod Says:

    “For those who WANT more regulation, let’s start by looking at the political “regulations” that said that lenders were discriminating against lower-income groups and minorities. That’s why the companies loosened underwriting — because they were being threatened by Congress and activist groups for discriminating.”

    One of the first ways these lenders dealt with all these “new regulations” was to leverage the Greek system on college campuses. How, you may ask?

    By occasionally employing these folks to set up crappy little card tables, loaded with cheap sunglasses, frisbees, boxes of candy and other little “prizes”… all for filling out a credit card application. No job required, no credit check… you’re “pre-approved” just because you’re enrolled in classes! $500 credit card–maybe even $1,000!! No problemo!! If you screw up and can’t pay it off, that’s okay… mommy and daddy will do it! And if *they* don’t do it, we can just jack up your interest rates until your next student loan check comes through; then, you can pay it off. Of course, you’re more than welcome to use the card again.

    [I was a college student in the late ’80s and early ’90s. I never saw these kinds of tables. The first major credit card application I received in the mail was about a month before I graduated.]

    Of course, once you get out of college, loaded to the gills with credit card debt and student loan debt, then you can buy a house. And as Jimmy’s most-excellent powerpoint show points out, “the value of your house will always go up!” So go ahead… take out that 2nd, 3rd, 4th mortgage. Sign up for that credit card… ’cause after all, you have 13 credit cards now, and everyone knows that “13” is an unlucky number. But 14 is twice as lucky as 7!

    Oh, but let’s not forget the one regulation that nobody mentions… the single federal statute that is the root and cause of this whole economic mess:

    I’m talking about the statute that tells banks and mortgage houses and credit card companies: “You must approve each and every application that comes across your desk, regardless of credit history, income, credit rating, outstanding debt, asset-to-debt ratio, or any other factor. Just rubber-stamp everything that comes through. You’re under no obligation to say ‘no'”

    Might that be the regulation you’re referring to?

    Bottom line: We’re all to blame for this. The consumers who took on debt that they didn’t have the discipline to resist, and the banks & mortgage companies that rarely or never said “No!” to either their own cravings, or the cravings of their customers.

  • Dos

    Certainly, the Fed Reserve & Al Greenspan’s magic certainly allowed for the conditions of this. And yes, mortgage brokers did their job and the banks/underwriters of these loans were complicit.

    I was actually one to fall “victim” after law school. All of my buddies were buying homes and so I thought, I should go buy a house. Better than renting, right? Must keep up with Jones, also. I had no money to put down and I wasn’t making very good money at the time.

    So I bought a nice house in KCMO. Then we moved. I couldn’t sell the damn house. I was upside down on the deal because I borrowed money to pay for the downpayment which then lowered my interest rate…which was variable. I owed 125K on property that appraised for 122K. My interest rate was a variable 6.25. (I have since refinanced several times.) So I ended up have to rent the house for $250 less than the monthly mortgage. Nice. (I have since refinanced and life is good.)

    Was my mortgage broker a predator? Yes, in the sense that he was more than willing to provide me with a way to do what I wanted, even though it wasn’t very smart. Was I the Victim of predatory lenders? Well, no, I was the victim of Dos being a dumb ass and doing something that wasn’t very bright, which in my heart of hearts I KNEW wasn’t very bright — but the desire to keep up with the Jones and immediate gratification was stronger.

    The same prinicpals apply in credit cards. Gosh, I had no idea that 27% interest rate on a credit card isn’t very good!!! I am the victim of predatory credit card companies!!! Regulate them. In other words, don’t let me make decisions on my own, because I can not be trusted to make responsible, smart decisions in my own best interest.

    Freedom is the freedom to fail. Freedom involves risk. The paternalistic nanny state that Justin desires is poor option for cause of contractual freedom.

  • http://www.uscentrist.org Agnostick

    “Freedom is the freedom to fail. Freedom involves risk. The paternalistic nanny state that Justin desires is poor option for cause of contractual freedom.”

    And so naturally, you would advocate a similar approach for the likes of Bear Stearns? Neither a “hands-on” approach… nor a “handout” approach?

    Does personal responsibility keep going when you put on a $3,000 suit, and take a seat behind a hand-carved oak desk?

    Or do you hang “personal responsibility” on a hook outside the door of your corner office?

    The government was wrong to bail out Bear Stearns. What should’ve happened is a short-term takeover by SEC… followed by, next year perhaps, an auctioning off of the assets and holdings to the highest-qualified bidders. The current owners and officers of Bear Stearns should be subject to lifetime prohibitions of even working for SEC-licensed businesses and firms. Let ’em ride the bus to McDonald’s and flip Big Macs for the rest of their days!

    After all… isn’t that more in line with what happens to the petty thief? The habitual drunk driver? The embezzler?

    Agnostick
    agnostick@excite.com
    http://www.uscentrist.org
    http://www.americanplan.org

  • Dos

    Agnostik — Yes, I would. I think “bailing-out” Bear Stears is not a good idea at all. No body was there to bail me out. I had to pay $250 on top of the rent I was receiving to make the mortgage payment. And guess what — I LEARNED A VALUABLE LESSON!! The next house I bought I was prepared to put over 20% down on. There is such a thing as moral hazard and it applies to individuals and business alike.

    But forget about all that, this is about class-warfare and evil corporations, right JG?