Pheeew! The Week's Over!

[bstratt]

As the lead guy responsible for dealing with my bank's exposure to Lehman Bros and AIG (as of Monday) I had a rough week. First, having to learn what the products were, then how to unwind them to minimize exposure, with new things cropping up every day (how do you unwind and collect a failed repo???)- my days were from 4:00am to 8:00pm, ending Friday afternoon with a presentation to the Board of Directors.

Logged on to POA this morning for the first time all week - 2,000 new posts. Can't read 'em all. Hopefully if there is something I should read someone lets me know.

 

[wabower]

We've spent most of the week on the IB failures and the reasons it occurred. Our conclusion was that their failures were primarily caused when they introduced their own products that ultimately failed. Our hope was that you could add an insider's perspective to all this, and perhaps tie this into the failures of law firms that made the same fatal mistake a few years ago re tax-shelters.

As the lead guy responsible for dealing with my bank's exposure to Lehman Bros and AIG (as of Monday) I had a rough week. First, having to learn what the products were, then how to unwind them to minimize exposure, with new things cropping up every day (how do you unwind and collect a failed repo???)- my days were from 4:00am to 8:00pm, ending Friday afternoon with a presentation to the Board of Directors.

Logged on to POA this morning for the first time all week - 2,000 new posts. Can't read 'em all. Hopefully if there is something I should read someone lets me know.

 

[bstratt]

Well yes and no. As with most situations like this, anyone who focuses in on a single issue as a root cause misses the big picture. They can create the product but if no one buys it there's no problem. I hear greed on Wall St mentioned but it ignores greed on Main Street. Why do we have people caught by having 5, or 6, homes? How did the internet bubble exist (and die)?

The fundamental reason to me is that people (and firms) forgot the basic rule that there was no such thing as a free lunch. If something pays you more its because there is more risk. If you can't understand the risk, don't do it. Why take advice from someone who only makes money if you buy the product? (e.g. investment advisors, mortgage brokers, used car salesmen, etc) It's the old "If the bank hadn't lent me the money, I wouldn't have been able to lose it. They have to pay me back. It's their fault. I shouldn't have to repay the loan."

Do we need regulation to protect people from their own stupidity?? Maybe. But fundamentally it was Main St greed, not Wall St.

 

[wabower]

How many of the big busts have not been tied to over-extension of credit, usually tied to newly-hatched methods of doing so?

Well yes and no. As with most situations like this, anyone who focuses in on a single issue as a root cause misses the big picture. They can create the product but if no one buys it there's no problem. I hear greed on Wall St mentioned but it ignores greed on Main Street. Why do we have people caught by having 5, or 6, homes? How did the internet bubble exist (and die)?

The fundamental reason to me is that people (and firms) forgot the basic rule that there was no such thing as a free lunch. If something pays you more its because there is more risk. If you can't understand the risk, don't do it. Why take advice from someone who only makes money if you buy the product? (e.g. investment advisors, mortgage brokers, used car salesmen, etc) It's the old "If the bank hadn't lent me the money, I wouldn't have been able to lose it. They have to pay me back. It's their fault. I shouldn't have to repay the loan."

Do we need regulation to protect people from their own stupidity?? Maybe. But fundamentally it was Main St greed, not Wall St.

 

[bstratt]

Precisely! But credit requires a lender and borrower. Don't only look at one side.

 

[wabower]

The pro-forma's always show that it works. In the sub-prime housing market, borrowers' pro-forma data is probably not scrutinized as thoroughly.

Precisely! But credit requires a lender and borrower. Don't only look at one side.

 

[mikea]

...Logged on to POA this morning for the first time all week - 2,000 new posts. Can't read 'em all. Hopefully if there is something I should read someone lets me know.

Barry, you gotta learn to get your priorities straight.

 

[mikea]

...The fundamental reason to me is that people (and firms) forgot the basic rule that there was no such thing as a free lunch. If something pays you more its because there is more risk. If you can't understand the risk, don't do it. Why take advice from someone who only makes money if you buy the product? (e.g. investment advisors, mortgage brokers, used car salesmen, etc) It's the old "If the bank hadn't lent me the money, I wouldn't have been able to lose it. They have to pay me back. It's their fault. I shouldn't have to repay the loan."

Do we need regulation to protect people from their own stupidity?? Maybe. But fundamentally it was Main St greed, not Wall St.

Which is what is happening as the 30-somethings are saying "OF COURSE we're walking away from the loan! It's upside down!" like they would have given the bank a cut if the house value went up instead.

They should put in some severe civil or criminal penalties for THAT in the new fast tracked bill.

 

[Jay Honeck]

Precisely! But credit requires a lender and borrower. Don't only look at one side.

There will always be people begging for money. Banks have to serve as the gate-keepers, with minimum requirements, to safeguard their depositors. In this, your industry failed.

The next banker that writes a mortgage to anyone with less than 20% cash down should be publicly executed. The minute you guys got away from that simple requirement the clock began ticking toward last week's disaster.

IMHO, of course...

 

[bstratt]

There will always be people begging for money. Banks have to serve as the gate-keepers, with minimum requirements, to safeguard their depositors. In this, your industry failed.

The next banker that writes a mortgage to anyone with less than 20% cash down should be publicly executed. The minute you guys got away from that simple requirement the clock began ticking toward last week's disaster.

IMHO, of course...

No, we didn't fail. We only acted as middle men. If someone tells us they want to buy a mortgage at 110% of the homes value and someone wants to borrow 110%, we make the mortgage and sell it to them. Caveat emptor. We're not going to tell the purchaser they're being stupid. Particularly sophisticated entities like Lehman, Merrill, etc. Every banker out there knew these were bad risks and so we never held any. Believe me, if the banks had to hold the mortgages on their books, they never would have been made!

 

[Chip Sylverne]

No, we didn't fail. We only acted as middle men. If someone tells us they want to buy a mortgage at 110% of the homes value and someone wants to borrow 110%, we make the mortgage and sell it to them. Caveat emptor. We're not going to tell the purchaser they're being stupid. Particularly sophisticated entities like Lehman, Merrill, etc. Every banker out there knew these were bad risks and so we never held any. Believe me, if the banks had to hold the mortgages on their books, they never would have been made!

And the ratings agencies who declared some of this CMO paper AAA? Where do they fit in? Or is that only for public consumption?

 

[Areeda]

I heard on NPR that Lehman was leveraged 25:1 so a 4% downturn in their investment wiped out all their capital.

While I agree there are enough bad decisions to go around, these guys were not innocent victims either.

Joe

 

[bbchien]

The gouge is that when the FED made liquidity credit to Lehman (and a few others, Putnam just went TU) they didn't use the credit to write down their mortgage portfolios. Write downs are death to managers and CEOs. They used the credit to buy more securities, e.g, to get bigger.

As they went around the table, it became clear that the Secretary was dealing with a pig. He decided to let it bleed to death. The next pig was MLPFS. He was even bigger, but saw the other guy dying and took the deal.

The ONLY way a securities firm will take a write down is when the firm fails.

 

[bstratt]

I actually thought Lehman was leveraged 30+ times, I thought GS was around 25x.

When you're earning 6% and paying 5.5% you need a lot of leverage to make a lot of money.

Lehman wasn't important enough to save. AIG on the other hand was critical.