More pain ahead

Written By: - Date published: 2:50 pm, April 17th, 2009 - 38 comments
Categories: economy - Tags:

The current financial crisis originated in America with a wave of defaults in “sub prime” mortgages. The excellent presentation found here covers a lot of data in a lot of detail (step through the slides), and shows why there is more pain ahead in the American mortgage and housing markets.

The companies making crazy loans didn’t care very much if the homeowner ended up defaulting for two reasons:

1. Either they didn’t plan to hold the loan, but instead intended to pass it along to Wall Street, which would bundle, slice-and-dice it and sell it (along with any subsequent losses) to investors around the world;

2. Or, if they did plan to hold the loan, they assumed home prices would keep rising, such that homeowners could either refinance before loans reset or, if the homeowner defaulted, the losses (i.e., severity) would be minimal.

I guess we all know how well that turned out. And some of those “investors around the world” are right here in NZ…

38 comments on “More pain ahead ”

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  1. Peter Johns - bigoted troll in jerkoff mode 1
    17 April 2009 at 3:22 pm

    Are these the types of loans that originated when a certain Barak Obama insisted on when he was just a humble employee of Chicago about 10 years ago? Hence Clinton started the Fanny Mays of the world as it was your right to own a home?

    • BLiP 1.1
      17 April 2009 at 3:35 pm

      No. More like the loans John Key consolidated and turned into new products for sale to unwitting pension funds.

      • The Baron 1.1.1
        17 April 2009 at 3:59 pm

        Eh? How the hell would JK be involved in that sort of market as a currency trader?

        Have I missed something, or is this another example of the “Evil John Key” theme that really seems to be paying off…

        • BLiP 1.1.1.1
          17 April 2009 at 4:10 pm

          Are you denying that John Key was involved in bond and derivative trading as well as currency trading?

          • The Baron 1.1.1.1.1
            17 April 2009 at 4:18 pm

            I’m not denying anything. I’m merely pointing out that I’ve never seen any credible reference to JK being a bond and derivative trader during is career – only a currency trader. Do you have something to back that up – I’m genuinely curious…

            Regardless though, it seems a bit petty and disingenuous to imply that he is somehow personally responsible for pulling the wool over the eyes of the “poor ole” pension fund industry… I’m pretty sure the big boys in that industry are quite closely related to the traders that your putting the hate on here!

          • BLiP 1.1.1.1.2
            17 April 2009 at 4:36 pm

            Then, please, allow me to educate you – provided, of course, you are willing to accept John Key’s own page as “credible evidence”.

            His department at Merrill Lynch was instrumental in the creation and sale of derivatives made up of “sliced’n’diced” toxic mortgages.

          • Quoth the Raven 1.1.1.1.3
            17 April 2009 at 4:41 pm

            Baron – Here you go from the National party website’s biography:

            John launched his investment banking career in New Zealand in the mid 80s. After 10 years in the New Zealand market he headed offshore, working in Singapore, London and Sydney for US investment banking giant Merrill Lynch. During that time he was in charge of a number of business units including global foreign exchange and European bond and derivative trading.

          • The Baron 1.1.1.1.4
            17 April 2009 at 4:56 pm

            Well there you go. I respectfully acknowledge your point on his previous career.

            Still an awfully long bow though isn’t it, BLiP?

          • Felix 1.1.1.1.5
            17 April 2009 at 5:17 pm

            How is it drawing a long bow to say he’s responsible for whatever he was in charge of?

            No fucking idea about personal responsibility you righties.

          • The Baron 1.1.1.1.6
            17 April 2009 at 5:29 pm

            Felix, I think you are misrepresenting BLiP’s original argument. Key should certainly be responsible for what he did, and I’ve learnt a bit more about what role he may have played in that industry due to this thread.

            I challenged BLiP’s assertation that the pension fund industry is “unwitting”, which I think is a bit of a spurious attempt to cast JK as the bad guy against those “honest” pension funds.

            The point is that I think that the pension fund industy – with billions if not trillions in assets and staffed by financial experts just as rougish as those you would find at any bank – would have been able to hold their own around that table.

            Regardless, it is easy to judge errors that caused this collapse in hindsight. Could you guys see this coming?

            See this for more info on the mathematics/quants behind the creation of those derivatives – quite a useful article to add to the mix of sources: http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all.

          • Tom M 1.1.1.1.7
            17 April 2009 at 5:49 pm

            There are different types of derivatives, you know. Some of them are very simple and by all accounts have nothing to do with the financial crisis. I’m pretty sure the more complex products weren’t even invented while John Key was in banking.

            Just putting it out there.

          • Felix 1.1.1.1.8
            17 April 2009 at 9:39 pm

            See it coming? Of course – it was inevitable and anyone who gave the global finance system a moment’s thought certainly knew it. We just didn’t know exactly when it would all come crashing down.

      • mike 1.1.2
        17 April 2009 at 9:53 pm

        Blip – are you Eve? cause you sure sound like a paranoid mess

        [mike: Are you brain-dead? You know I don’t like guessing games about peoples identities. That is a moderator privilege used to get rid of the irritating banned who don’t think that rules apply to them. Neither BLiP or ev are banned. ]

    • ripp0 1.2
      17 April 2009 at 7:11 pm

      The spelling is bad – I’m no saint on that score but your comments are so short (pointed) that speed is unsatisfactory excuse.. but really PJ this problem – this BO problem of yours is cause for concern.. over this weekend at least..

      but if I/we are to assist you with such concern it would be appro to inquire first as to whether you are one sandwich short of a picnic. so to say..?

  2. Tom M 2
    17 April 2009 at 3:25 pm

    Although the loans were obviously poorly made, don’t forget that people weren’t forced to take them. I would say it is just as misguided to take a loan with minimum repayments of 60% of your income as it is to offer such a loan. Perhaps more so, seeing as in the former case you are the only one bearing the consequences.

  3. Brett Dale 3
    17 April 2009 at 3:36 pm

    No one had a gun hold to their head, they choose to do it, unlike under socialism.

  4. randal 4
    17 April 2009 at 3:48 pm

    yes there will be more pain
    this recession was engineered just like a detroit car
    it looks like it might last but sooner or later the wheels fall off and then everything else and then its here forever
    nothing lasts forever and it looks like our style of civilisation might be on a bit of a slide folks
    in the meantime the compradores and the aquisitors will be using the uncertainty generated by the market to grab everything they can
    the main thing to rmemeber is that the proletariat are dispensable and if necessary disposable so we have to be very careful about we need to do in the next few years as reality begins to bite over the dreams of all the hot house flowers that have sprung inot an adventiotious existence
    didja get that?

  5. Brickley Paiste 5
    17 April 2009 at 4:12 pm

    Saying that people weren’t forced to take the loans is moronic. These are people that never thought home ownership would be within their means. Suddenly it was, and people at financial institutions were telling them it was just that easy. Caveat emptor is all very well but it can only extend to what a normal person could reasonably surmise from a situation. You’re honestly expecting people to understand these wacko investment vehicles for which they were the bottom of the pyramid?

    • BLiP 5.1
      17 April 2009 at 4:18 pm

      Exactly! Bit like saying “caveat emptor” in relation Fonterra’s melamine-enhanced products.

      • The Baron 5.1.1
        17 April 2009 at 4:29 pm

        And again, that is only similar if you rely on evil = evil to test correlations, BLiP.

        Caveat emptor has nothing to do with Fonterra – there was no disclosure of that risk, hence why people are being punished for that error (I don’t want to get into who, what and why they are being punished though – wholly off topic).

        Whereas in this case, all the information about the contract for that loan was available to those individual investors. Was it transparent enough? I dunno… but still COMPLETELY different to your emotive Fonterra comparison.

        • BLiP 5.1.1.1
          17 April 2009 at 7:20 pm

          Apart from that silly little thing on the top of your head, you don’t get the point. Can I suggest you resist the impulse to engage keyboard before brain.

          • The Baron 5.1.1.1.1
            17 April 2009 at 8:44 pm

            Come on BLiP, actually engage the argument. Care to actually point out where I was wrong with that post?

            Otherwise I’ll assume you’ve got nothing more than blank ideological ranting.

    • The Baron 5.2
      17 April 2009 at 4:26 pm

      Oh come now, that is a little rich…

      Just because everyone would LIKE a home doesn’t mean that they should leap at every opportunity to get one, and pay no heed to the consequences. I would have LOVE to buy a kickass new car, but I don’t because the repayments would kill me. That’s got nothing to do with the financial markets that makes that money available – only to do with my income versus expenditure.

      Yes, these banks are undeniably to blame for offering credit to people who really shouldn’t have got it. I don’t think anyone would disagree that that was a really poor call.

      But these people are also partially to blame for taking outrageous risks with the level of debt they were assuming. And the assessment of that risk really has little to do with the investment vehicle that made it available.

      I think your argument has the causative link the wrong way around – the fundamental insecurity of these people’s loans led to trouble for a set of f*cked up investment vehicles. I can’t see how it worked the other way around, unless you rely on some pretty gloomy assumptions about just how capable people are of assessing their ability to meet repayments set at 60% of their tenuous incomes!

      • Maynard J 5.2.1
        17 April 2009 at 4:42 pm

        What’s this bullshit about repayments at 60% of someone’s income?

        That’s not the problem.

        Start digging aroung ‘negative equity loans’ and ‘sub-prime mortgages’ if you want to sound vaguely clued-up about the problem. Sheee-it.

        • The Baron 5.2.1.1
          17 April 2009 at 5:02 pm

          What? How is massive borrowing against unsteady income not a problem? That was the very essence of the sub-prime mortgages issue – that is why they were SUB-PRIME!

          As for negative equity loans, all that relates to is how much they were borrowing against low incomes – which again would have led to unsustainably high levels of repayment.

          I really don’t see what your point is here, Maynard. The 60% was an example of how bad it got – in fact, I borrowed it from Tom M’s comment above.

          Gonna have a go at him too? And since you’re apparently so clued up, maybe you’d like to share some wisdom so people can make bizarre comments back at you! Sheee-it!

        • Tom M 5.2.1.2
          17 April 2009 at 5:06 pm

          At 60% repayment would probably be considered a sub-prime loan. They’re not mutually exclusive terms.

          🙂

          EDIT: I see some kind person has generously, if vehemently, defended me in the brief time I was writing the comment. It should be clear that I am responding to ‘Maynard J’ .

          • Tom M 5.2.1.2.1
            17 April 2009 at 5:18 pm

            And by defended, of course I mean defended by proxy, as Maynard, J has yet to ‘have a go’ at me explicitly, even if do feel personally attached to the examples I give on the internet.

          • Maynard J 5.2.1.2.2
            17 April 2009 at 5:53 pm

            Well sorry Red and Tom, but as far as I can see you have it entirely bass-ackwards. The sub-primes and neg-equity loans causing all the fuss were geared around low repayments that beefed up up debt, lending to people with no assets and lending in farcical situations where you were barely covering the interest.

            People offered loans at more like 6% of their income.

            That’s how people got into these loans – and you two were blaming people for taking loans at 60% of their income.

            That came later, when it went balls-up, but you’re blaming people for taking loans on terms they didn’t take them on.

            My flippant comment probably wasn’t the best way to express that.

    • jerry 5.3
      17 April 2009 at 4:34 pm

      I had an excellent piece sent to me some time ago that summed up the situation quite succinctly.

      “……many home owners simply bought houses they couldn’t afford, some of them did so only because they were counseled to do so by mortgage brokers, lenders, and others in the industry who just wanted the sale.

      Buyers were counseled by people they considered to be professionals and people they trusted. Many older Americans see bankers almost as government agents because of their experiences with FDIC and other government programs putting so much government support behind financial institutions. That is why some studies place bankers as the #2 most trusted profession behind doctors.

      Unfortunately, some individuals in the lending industry had widespread practices of showing people how they could afford houses using interest-only loans, and convincing them that they could gain equity just by letting their homes appreciate over time. This actually works okay when houses and land do gain in value, but what happens if house prices fall or someone loses a job?

      Ultimately, the bottom line is that there is plenty of blame to go around. Buyers made purchases they couldn’t afford, lenders allowed and encouraged them to do so, the government encouraged more risky loans by pushing Fannie Mae and Freddie Mac to back more mortgages, and investors bought into mortgage-backed investments without analyzing the risk. Really big problems usually have more than enough people to blame, but everyone gets hurt.”

    • Tom M 5.4
      17 April 2009 at 5:14 pm

      From the perspective of a home-buyer, what the bank does with the loan after you take it is pretty much irrelevant. So I’m not sure what you mean when you say “You’re honestly expecting people to understand these wacko investment vehicles for which they were the bottom of the pyramid?”.

      No, I’m not expecting that. I’m expecting them to understand that there is no way they will be able to make the repayments on their loan. The conditions of the loan have nothing to do with the way the bank trades it afterwards.

      That said, some here have implied that the financial advisors are to blame for giving bad advice from positions of authority. There is certainly something to that, but simply because you have been offered advice doesn’t mean you can suspend rational judgement and not assess whether or not you can actually make the payments on your loan, in my opinion.

      • Pascal's bookie 5.4.1
        17 April 2009 at 8:16 pm

        Fair enough, as far as you go.

        But the borrowers are only ever responsible for the effect of the very few, (usually one) loans that they are responsible for.

        The other thing to remember is the loans were sold with the first few years payments being very affordable, the idea sold was that by the time your repayments went up, you would have enough equity in the house to refinance yourself out of sub prime and into a more traditional loan. This was advice given by the banks, the real estate agents and the mortgage brokers. All acting supposedly rationally. They were supposed to be the professionals and some of them had fiduciary duties as well, to varying degrees to various stakeholders. So I think that for the one admittedly bad loan that the typical borrower took out, there is a fair amount of mitigation to be shared around when laying the blame.

        On the other hand, the lenders are likewise responsible for the loans that they lend out. A far larger number. The fact that people wanted to borrow money is not much mitigation at all in my books. The banks knew the role they played in the financial system. They have: no excuse.

        The banks are responsible for pushing managers to sell as many loans as they can, so those loans could be bundled up and tranched, magically turning all this toxic crap into sludge that the credit rating agencies, in their undying wisdom gave AAA status. Then we have the leveraging, and the crappy reinsurance products and all the other nonsense that was used to pretend that these really crappy loans that the banks deliberately and knowingly made, were actually worth something.

        When working out where the blame should go for the mess as a whole, that has required such extraordinary measures to try and stem the damage, the decisions made by individual borrowers hardly enter the picture. It is only if you try and look at borrowers as a group that the idea makes any sense. But they are not in fact a ‘group’ that can be blamed, because they did not do anything as a ‘group’.

        Unlike, for example, the banks. Who have legal person status and made thousands and thousands of bad loans, knowing they were shit, and then leveraged that shit. If not for all that leveraging, if it were just the initial bad loans that were being defaulted, things would not be any where near as bad.

        • Tom M 5.4.1.1
          20 April 2009 at 8:22 pm

          You’re right, I hardly meant to blame imprudent mortgage-takers for the entirety of the financial crisis – I was just pointing out that with respect to their individual circumstances, they must shoulder at least some of the responsibility, insofar as it’s related to them taking a poorly considered loan.

  6. ripp0 6
    17 April 2009 at 8:34 pm

    The Baron,

    An excellent link, as you say. Felix Salmon at his best. And, insofar as this thread related to guest blogger’s item 1 for its wider, larger, darker banking/financials backstory.

    Very pertinent was traders/dealers descriptive language – ‘simple, beautiful’ – for the equation concocted by Li. In reality methinks the commentary of ignorance rather than appreciation (save the altogether self-interested greed evident on trading floors and desks).

    I’ve pulled a paragraph out to explain several things to other commenters .. later…

    As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included.

    To the commenter concerned at any possible relation between currency trading and ‘complex derivatives’ allow me cite the proctor-gamble case against bankers trust back in the early 90s. Evidence was placed before the court (taped conversations) in which a bt dealer(salesman) sought access to PG’s corporate treasury – known as a ‘line to treasury’ – via the company secretary’s staff manager. A fellow who clearly was out of his depth with the other though not lacking in ambition to do well (for PG) in the ‘new get rich quick’ stuff being purveyed for what had only a year prior become known in the US corporate world as ‘profit center’ ie money makes money. Anyways, to cut a long story short, one of the means used by the bt guy to impress his target and gain access was currency – greenback/peso – dealing. ‘Sweeteners’ as I believe the talk related.

    Repeat: currency dealing used not in itself of and/or for itself, but pursuant another goal. An end which even back then the court came to rule did not justify its means. One might liken its use in kiwi terms to ‘treating’ per election process.

    The PG/BT case was also origin I believe to the CDO-squared concept. Expertise back in 2000 explained it as equivalent(in the rort before that earlier court) to not leveraging a contract 7 times, but 7 x 7.

    Whether real or not at the time – defenders always seek to confuse courts/media when their culpability would otherwise likely drive them out of business – such returns were capable of extraction because unwitting corporate officials are subject to the rule of contract law. Having signed off on a deal and choosing continue despite bad things happening well then aren’t they deserving! Or most certainly straitened from admitting fault/failure. And, with bt clocking huge profits from such business (in 96/97 they’d gone from a million bucks net pa to near $100M), there was every reason to keep things that way.

    Finance, especially at these ‘cutting edges’ of profitmaking, is a small world. Then as now likely to remain so, certainly for ambitious folks. As it ought to be, yes. Perhaps. And as a means of not getting burned oneself. Both being good reason/s for keeping an open mind on the personas in and around that world. Lest a lack of vigilance has them revisit.. upon us.

    • BLiP 6.1
      18 April 2009 at 9:21 am

      John Key and his back room “thundering herd” mates must have known the derivatives they were compiling were dodgy – why else tick up billions in credit default swaps – but I suspect the Merrill Lynch Singapore office was more concerned with the plunder of Thailand during the period Goober was operating.

      I note that The Standard has dealt with many of the bullshit arguments and peacock like displays of ignorance from the trolls already. How tedious this must all get for the regulars.

  7. Ground2Work 7
    18 April 2009 at 8:54 am

    So they sent us that nice smiling man with a crappy backstory of a ‘cherished childhood ambition of being the Sir Prime Minister Presidente’ of Internal Tourism’ and we sucked it up. Nice front.
    Yes John Key made his $30 million but whose money is it really?
    What did he do or produce to make such a load?
    Lots of ‘sweetened deals?
    Offloaded lots of shizer bundled cdo’s onto his mates – smiling his Cheshire-cat shit-eating grin all the while.
    What the hell, the mans corrupt as all hell. There it is.