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I'm against taxpayers bailing out private firms, but this is a mess. Both of the idiot parties are pointing fingers and trying to one-up the other since it's an election year. Here's my question, are the consumers responsible for some of this mess? Specifically in the failing mortgage market. I see young couples with incomes under 60K and have gone out and purchased 350-400K new homes using sub-prime loans underwritten by junk bonds. Several years into these loans, the interest rate moves to the market rate or higher and their note increase dramatically, so they walk away, thus flooding the market with foreclosed homes. How can mortgage companies tell people they qualify for much more home than they can actually afford and how can people be so stupid to sign these loans? I was always under the assumption that you could not qualify for a loan that was more than 2.5 times you net take-home pay.
 

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Up until 6 months or so ago their were NO DOC loans meaning they took your word for what you made and didnt verify your income. I have one of those loans only because my wife and I are self employed(1099) and not W2 so by the time all my write offs come out my tax returns show I make half or less of my take home. But I **** sure wasnt suckered into an ARM!
 

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Give it hell Remy!
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The mortgage lenders make lots of money off of these high fee, high risk loans. Brokers then package and sell these as high return, high risk mortgage notes in big blocks to bond brokers, institutional and individual investors. Because there is a high return and there are 1000's of loans in these packages they seem to have lower risk... until the bottom falls out and more than half of them are in default. The actual lenders who made these loans have no interest in them after the loan is sold. The only lenders who took big hits were the ones who held a bunch of these B and C paper loans in house or in subsidiary companies. It was a formula for disaster sooner or later.
 

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Most of the great financial blowups (maybe all of them) require a greedy financial system and a greedy public.

Dutch tulips, beanie-babies, emus, the dot.com bust early this decade and the current mortgage crisis (read bank crisis). This is merely the next reckoning and it will be followed by another.

The US government has had to basically suspend the concept of free and open markets. It's scary. It's laughable. It is also the best thing they can do right now and should be buying some of these assets/companies at pennies on the dollar. Really, how often does the gov buy market dips with the likes of such folks as Warren Buffet?

I feel very sorry for honest folks that have learned a hard lesson about leverage and cash flow. I don't feel sorry at all for amazing percentage of folks that took out loans fraudulently to make some "easy money" in real estate.

IMHO
This will work itself out. This will get worse before it gets better. This will provide some amazingly good opportunities. This proves once again that you need oversight (as opposed to regulation).
 

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In today's WSJ. I am in agreement!

The Public Deserves a Better Deal

By JOHN PAULSON

The Treasury plan to buy illiquid financial assets has been widely criticized as being unfair to taxpayers, who will have to bear losses ahead of shareholders of the institutions that will be bailed out.

Corbis

There is a better alternative to stabilize the markets: Invest the $700 billion of taxpayer money in senior preferred stock of the troubled financial institutions that pose systemic risks. Let's call this the "Preferred plan." In fact, it is the Fannie Mae and Freddie Mac model -- which the Treasury Department has already endorsed and used in practice. It is also the approach Warren Buffett used for his investment in Goldman Sachs.

There are major problems with the Treasury plan. First, by buying banks' worst assets at above-market prices, taxpayers take an immediate economic loss -- while transferring wealth to shareholders and executives of the very institutions that brought on the financial crisis.

Second, this plan puts too much discretionary power in the hands of Treasury officials. Who determines what financial assets are purchased and at what prices? Who determines which bank gets to benefit from these taxpayer subsidies? Will bank shareholders continue to receive dividends, and executives continue to get paid huge bonuses?

When financial institutions borrow massive amounts of money to invest in assets that are now found to be illiquid and poorly performing, it is not the responsibility of taxpayers to bear the resulting losses. These losses should be borne by the shareholders.

If taxpayers have to step in and provide capital to keep operating enterprises that the government decides are key to the functioning of the economy as a whole, taxpayers must receive protection.

Treasury Secretary Henry Paulson said at the Senate Banking Committee hearing this week, "[the] Fannie Mae and Freddie Mac [interventions] worked the way they were supposed to." These enterprises continued to function, maintaining homeowner access to and lowering the cost of mortgage financing. However, managements of these companies had to leave and forfeit the compensation packages they had negotiated.

Shareholders had their dividends blocked and remain first in line to bear losses, as they should have been. Taxpayers came both first and last -- first to get paid back, as the new preferred stock is senior to all shareholders; and last in realizing losses, as common and other preferred equity would be extinguished before the taxpayers would be at risk.

This mechanism -- purchases of senior preferred stock with warrants in troubled institutions -- addresses the problems with the Treasury plan. The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature.

The institutions continue to function, their cost of funding will decline as equity capital increases, and innocent third parties like bank depositors, broker/dealer clients and insurance-policy holders are all protected. The only difference is that potential losses are kept with the shareholders where they belong.

The Treasury plan would also entail larger outlays than the Preferred plan. By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have a private alternative. But under a Preferred plan, only banks that don't have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.

Few people familiar with the issues deny that Treasury action is needed to stabilize the financial markets. However, the question is who should bear the cost?

Under the Treasury plan the taxpayer pays the price. Under a Preferred plan, the shareholders of the firms who created the problems bear the first loss. Who do you think should pay?

Before committing $700 billion of our money, we should encourage Congress to take a few extra days to get this legislation right.

Mr. Paulson is president and portfolio manager
 

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I think I am going to quit paying home insurance because if my home is destroyed, the government will give me a new one for free. I think I am going to quit paying auto insurance too because if I hit someone, the other person's insurance will cover it. I think I am going to quit paying all health related insurances because the emergency room won't turn me away and the government will pay that too. I think I am going to quit paying my mortgage because the government will bail me out before I am forced out. I think I am going to quit my job too because the government will give me food for free.
 

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Give it hell Remy!
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I'd agree with that Flakman along with much more regulation for all the financial institutions on their lending practices and investments.
 

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If you are looking for someone to blame, I think you can point your finger at just about all of the parties involved. BUT, in my opinion the main cause was the government and every politician who voted for the affordable housing act. This act made it possible for people that could not afford homes to buy them anyway. Every time you turned on the news you would hear the talking heads say "Home ownership is at an all time high". Duhhh!!! Any schmucko with a job could buy a house due to this new legislation. By the way, If you're looking to find out who voted for this act, one of the senators intials are B. O'b along with a bunch of other people in his party. To give a simple answer to a complex question.........This all could have been prevented if we would have just kept doing things the way we did before 1994 and the affordable housing act. If we don't want to see this happen again we will have to revamp the affordable housing act.
 

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Give it hell Remy!
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BondBroker said:
If you are looking for someone to blame, I think you can point your finger at just about all of the parties involved. BUT, in my opinion the main cause was the government and every politician who voted for the affordable housing act. This act made it possible for people that could not afford homes to buy them anyway. Every time you turned on the news you would hear the talking heads say "Home ownership is at an all time high". Duhhh!!! Any schmucko with a job could buy a house due to this new legislation. By the way, If you're looking to find out who voted for this act, one of the senators intials are B. O'b along with a bunch of other people in his party. To give a simple answer to a complex question.........This all could have been prevented if we would have just kept doing things the way we did before 1994 and the affordable housing act. If we don't want to see this happen again we will have to revamp the affordable housing act.
The mortgage lenders made those loans because investors would buy them. If the investors would not buy them, the funds would not be there. What you said for sure played a huge part in the lax lending standards and was a catylyst in the whole mess for sure. There is a whole lot of blame to be laid. It will be years before this all shakes out.
 

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You're right, but if the AHA had not made these sub-prime loans possible, there would be no bad loans to make sub-prime bonds out of, and there would be no sub-prime mess.

I only wish you could hear some of the conversations I had on the phone over the last couple of years with institutional investors. There are some very smart institutional investors out there and some who are about as sharp as a sack of wet mice. Many bank CFO's and investment officers fall in the latter category. I've dealt with lots of them. They blindly follow an investment policy written years ago for the bank to invest by. In lots of small print most of these bank investment policies state: Buy AAA rated bonds that give you the highest yield with X maturity and they have to pass the FMED test. Sub prime bonds were AAA Rated due to the fact that any bond issued takes on the credit rating of its insurer. This ment sub prime securities were AAA credit rated with FFF rated mortgages backing them. So bankers said, "It's giving an 8% coupon, it's AAA rated, and yup! it passes FMED. Let's buy these!!!"

When Fannie and Freddy are giving 4% and these bonds are giving 8% it doesn't take a genius to see that something is wrong in this risk/return world.

I'm A bond broker, I sell bonds for a living. How hard do you think it was for me to sell Fannie and Freddy bonds giving 4% from 2004-2006? I had to listen to all of my clients tell me, "Sorry but I'm getting 8% on mortgages that are AAA rated. I can't buy your 4% bonds." Later in 2004 when I figured out what was going on and I'd call them back and tell them, "This is going to bite you in the a** in the long run." I told them how the bonds were being structured and what they were getting for their money. Some of them decided to take a leap of faith with the insurance companies that were backing the bonds and kept right on buying them. Some got smart. Those who took the leap of faith, as you can see, were not so lucky. To this day I have never sold a whole loan mortgage backed bond.

If we really want to get down to it we can also blame the ratings agencies for some of this problem. where in the hell did Moodies, S & P, and Fitch get off giving the insurers that backed these bonds an AAA rating. SOME OF THEM ARE STILL AAA RATED AFTER THEY DEFAULTED ON THE SUBPRIME BONDS.
 

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Give it hell Remy!
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I wasn't arguing with you bondbroker, I agree with all you said. I'm in the real estate investment business and I could see this coming 3 years ago. I didn't think it would be as swift as it was but, I knew it was imminent. I haven't had much faith in credit rating agencies since the dot.com bust. They are just feeding on press releases now instead of actually doing their homework.
 

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my 2 cents.
i dont have a problem with the no paper loans going bad, i dont have any beef with the loan industry or either political parties. i'm not against the bailout. what i'm hearing is that the bailout will ease the credit crunch so we can make loans to keep the economy going. ***, the idea of making it easy to give bogus loans was what got us here in the 1st place. it cause the housng bubble, the banking bellyups .. speculative wall street and the drop in the dollar. we bail these loans companies out so they can make more loans to keep the economy going? BS. we'll be back here in a few years asking for more bailout because this one will allow more bad loans while your cost of living will escalate to pay for the extra billions that was injected.

my stance, let them fail. let better institutions buy their assets and make better decisions. the private sector will always survive. sideline money will see this as a casue to keeep away from anything that isnt paulson insured.
 

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What really ticks me off, is what I see coming after Jan. of 2009. At that point we will have a new president. Doesn't make any difference which one it is. Whoever is president in Feb. of '09 will have an built in excuse "this was not my plan. This was George W. and Hank P's plan."

Barney Frank and others in the Congress are complaining about in the infusion of Presidential Politics in their "process" (like their "process" is always without error). I disagree. I believe that McCain and Obama should gather up their two smartest economics guys and get in a room with Bush, Gentle Ben and Hammerin Hank. They should not come out of the room until a deal is struck. Let's face it, Obama and McCain have been knighted the leaders of their parties. Congress will fall in line with the leader of their party. If they come out of the room with a plan that either one will back in '09, Congress should pass this plan. That way there is no excuses in '09.

McCain is running on the moto "Country First" and Obama is running on the "not the same ole Washington politics as usual". Seems like comming together to solve the "worst economic problem since the Great Depression" fits both visions.

You are right there is plenty of blame to go around, and eventually we have to keep this from happening again. However, at this point I want to see a plan that is workable and will not change with a new President and a new Sec. of the Tres..

Thanks for listening to the rant.
 

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H.P.

Sorry, Didn't mean to sound argumentative or like a know it all with any of the folks on 2cool. I'm just frustrated with all of this because it was so easy to see into the future and they just kept on building the house of cards higher.
 

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I have heard a lot more say they saw it coming after it happened than I heard predict it would happen before it did.
 

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Give it hell Remy!
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BondBroker said:
H.P.

Sorry, Didn't mean to sound argumentative or like a know it all with any of the folks on 2cool. I'm just frustrated with all of this because it was so easy to see into the future and they just kept on building the house of cards higher.
I hear you brother...
 

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Give it hell Remy!
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MikeV said:
I have heard a lot more say they saw it coming after it happened than I heard predict it would happen before it did.
If you were in the real estate investment biz, you would have seen it coming. 110% loans were the rule rather than the exception. Carry on...
 

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I agree Flakman & HP, but how about this ?????

We were discussing this Bailout topic the other night whilst consuming some cold ones & a different idea came up.

What if they suspended the capitol gains tax for 6 mos or a year?? (Executive Order)

Don't you think that some of the large private investoris who have billions in the market would take it out & buy up a bunch of this debt at 20 cents on the dollar???

What would the effect of a TRILLION or two reinvested in the economy have???

Just an idea...

Supergas
 

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My 2 cents ....... as a former small business owner if my business went in the tank noone offered to "bail me out". I know is a simplistic view but seems very interesting that some of the very institutions that have been foreclosing, ie: refusing to bail out homeowners, are now asking the tax payers to bail them out. Nice job by those folks with their MBA's.
 
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