Reform Wall Street: Put the Risk back in

[Skull Pilot]

Reform is a word being thrown around a lot. I was talking with a few colleagues and inevitably, conversation turned to the economy. I realized something that is one of those "duh" it's obvious points that I have not heard much said about.

One of the problems with the market over the past years is not capitalism per say but rather risk-less capitalism.

In the world of small business, we practice a pure form of capitalism where the enterprise is privately owned and the risk is solely on the individual. What caused the mortgage "meltdown" was the removal of risk. Loans were written by "lenders" who lent no money. Those loan were then bundled and sold off not once but several times further removing the loan originator from the risk associated with bad decisions.

There were questionable lending practices such as not verifying incomes etc. but the consumer was also to blame and the "meltdown " was inevitable. We all knew that housing costs had to correct and we got it in spades because of the risk removal going and with mark to market trading.

So now with regulation threatening to strangle the free market, what should we do?

To me the answer is simple we only need a little regulation here. Put the risk back in capitalism. Lenders should be required to hold a loan for a specified time frame before selling it off on the securities market.

Fixed rate loans should be held by the originator for 5 years. ARMs should be held for a period of the arm plus 5 years IE. a 3 year arm cannot be sold off for 8 years. Now real money is at risk and lenders will be forced to be more responsible.

Yes money will be harder to get but that is how it should be. Risk forces accountability which is exactly what has been missing.

 

[Ravi]

That sounds logical. Two questions, how is regulation threatening to strangle the free market and how is your plan not regulation?

 

[Skull Pilot]

That sounds logical. Two questions, how is regulation threatening to strangle the free market and how is your plan not regulation?

I should have said over regulation.

When the government can step in and spend tax payer dollars to "save" a private entity then tell said entity what to do and how to do it is nothing but regulation of the worst sort.

And I said what we need is a "little regulation" to put the risk and accountability back into capitalism.

 

[Diuretic]

That's an interesting OP SP.

Just on question for anyone. I read today in one of our newspapers that in the US if a mortgagee defaults on a home loan they walk away and the mortgagor forecloses and that's that. In this country (Aus) if we default on a loan the bank will sell our house from under us and will sue us for the remainder of the money owed. So if a mortgagee owes say 250k to the bank the bank (mortgagor of some type) gets 200k then the former mortgagee has to find the other 50k.

If that was the rule in the US would banks/lenders have been as keen, less keen or more keen to run this whole low doc loan scheme?

I have no idea, which is why I'm asking.

 

[Ravi]

I should have said over regulation.

When the government can step in and spend tax payer dollars to "save" a private entity then tell said entity what to do and how to do it is nothing but regulation of the worst sort.

And I said what we need is a "little regulation" to put the risk and accountability back into capitalism.

Okay, that makes sense. I do like your plan, as it seems pretty clear the cause of this entire mess was the ability to make bad loans and sell them off, over and over again. Until people started defaulting and suddenly the bad loans were visible to those whizzes on Wall Street.

 

[Skull Pilot]

That's an interesting OP SP.

Just on question for anyone. I read today in one of our newspapers that in the US if a mortgagee defaults on a home loan they walk away and the mortgagor forecloses and that's that. In this country (Aus) if we default on a loan the bank will sell our house from under us and will sue us for the remainder of the money owed. So if a mortgagee owes say 250k to the bank the bank (mortgagor of some type) gets 200k then the former mortgagee has to find the other 50k.

If that was the rule in the US would banks/lenders have been as keen, less keen or more keen to run this whole low doc loan scheme?

I have no idea, which is why I'm asking.

My understanding of foreclosure laws in the US is one that they can differ from state to state and that 2 the home is considered collateral for the loan and the bank can confiscate the home as a result of a loan default. It is then up to the bank to sell the property to recoup its capital. but I might not know all the ins and outs of the law. Maybe a shyster can enlighten us more on this?

I like the idea of keeping the borrower on the hook. Again risk makes one accountable

 

[rayboyusmc]

I agree, we need some sort of regulation for the large companies/ corporations just like we need regulation/laws for you and me and the small business owner.

It is more of a temptation to try and get away with millions and move to another country than to steal a thousand and go to jail. There is not risk of failure or of accountability.

Maybe if some more of the bastards like Ken Lay, Kowolski, and other crooked CEOs went to jail and lost their homes, they might just believe that the laws were for them also.

Sen. Hillary Rodham Clinton said she is worried that taxpayers could be left "holding the bag." Interviewed Tuesday morning on CBS's "The Early Show," she said she agrees that the situation is critical and that something must be done quickly, however. "The house is on fire," she said, "and we've got to call the fire department and put the fire out."

Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, blasted the emerging plan as "neither workable nor comprehensive."

"In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts," Shelby said.

Lawmakers on both extremes of the political spectrum assailed the plan as a massive, poorly conceived bailout. Conservative House Republicans and liberal House Democrats both huddled privately Monday to express their concerns, and they were drafting their own legislative alternatives.

The emergency legislation would give the government broad power to buy up devalued assets from troubled financial firms in a bid to unlock the flow of credit and stabilize badly shaken markets in the United States and around the globe.

In an expansion of its original proposal, the Bush administration is asking for broad power to buy up virtually any kind of bad asset — including credit card debt or car loans — from any financial institution in the U.S. or abroad in order to stabilize markets.

If the Dems buckle on this one, I am an independent. Bush and Co are trying to panic US into agreeing without full oversight like with The Patriot Acta and the war in Iraq.

Bernanke and Paulson: Congress must move now - Yahoo! News

 

[editec]

What risk is the bank taking that can lend fourty times as much money as it has?

Insolvency?

They lose money they didn't really have to begin with and this is my problem why?

Fuck the bankers.

 

[Skull Pilot]

I agree, we need some sort of regulation for the large companies/ corporations just like we need regulation/laws for you and me and the small business owner.

It is more of a temptation to try and get away with millions and move to another country than to steal a thousand and go to jail. There is not risk of failure or of accountability.

Maybe if some more of the bastards like Ken Lay, Kowolski, and other crooked CEOs went to jail and lost their homes, they might just believe that the laws were for them also.



If the Dems buckle on this one, I am an independent. Bush and Co are trying to panic US into agreeing without full oversight like with The Patriot Acta and the war in Iraq.

Bernanke and Paulson: Congress must move now - Yahoo! News

i can't believe that i basically agree with you on this or that you seem to agree with me. The world really is coming to an end no?

No one should be gives free reign over a trillion dollars of tax payer money. PERIOD.

Now we have some pols saying that " we don't even know if we'll need all that money so don't get scared of the amount"

Now when has a government NOT spent all the money that is is given and then some?

 

[Diuretic]

Thank you SP, will check later for further enlightenment (I think we get the shaft here though on this stuff, don't mean to distort the thread).

 

[Skull Pilot]

What risk is the bank taking that can lend fourty times as much money as it has?

Insolvency?

They lose money they didn't really have to begin with and this is my problem why?

Fuck the bankers.

Insolvency and the FDIC is on the hook which means that you as a taxpayer are on the hook. Maybe fucking the banks is tantamount to fucking yourself.

And it IS your problem to the tune of a trillion plus dollars isn't it?

 

[Ravi]

I have a question. How would this work unless the entire banking industry was made to conform to this regulation? We don't have any say over what the foreign banks do, correct?

 

[rayboyusmc]

Ther real 700 Trillion dollar question is: Will this even work? Someone who is proposing this,needs to breif Congress and US and what this is supposed to accomplish.

I believe there are enough Americans who would understand what is going on if they government gave a shit about our opinion.

The attached short article is one of the better intial explanations that I have read so far.

Lawmakers raised doubts Monday about what would be the largest government bailout in American history, but a bigger, more terrifying question lurked right under the surface: What if it doesn’t work?


Failure, says one insider, is not an option.

“The alternative is complete financial Armageddon and a great depression,” said a former Federal Reserve official. “Where do they go after this? Well, the U.S. government could nationalize the banking system outright.”

A few months ago, that idea would have been laughed out of the room.

But no one’s laughing anymore.

While almost no one wants to dwell publicly on the possibility that a $700 billion package could simply be too small to forestall a financial meltdown, privately some aides were already thinking of what the government might do if the Treasury plan passes but fails.

In a statement Monday, President Bush said that “the whole world is watching to see if we can act quickly to shore up our markets and prevent damage to our capital markets, businesses, our housing sector and retirement accounts.”

What the president didn’t say is that the whole world will be watching to see not just if Washington can act but whether Washington’s actions can still make a difference.

Under the current plan, the U.S. government will buy up to $700 billion in assets from private holders on Wall Street. That would help banks stabilize their balance sheets, and in theory provide an incentive for banks to begin extending credit among themselves again — a critical component of a functional financial system.

So what’s Plan B?

There really isn’t one.

If this week’s bailout doesn’t work, the government will probably have no choice but to continue to buy assets. There’s no one left to pick up the tab. “The private sector got us into this mess,” said House Financial Services Committee Chairman Barney Frank (D-Mass.). “The government has to get us out of it.”

Getting us out of it would likely mean buying up even more debt in the markets if the $700 billion fails to turn things around. That could include credit card debt, which is securitized and sold on Wall Street the same way as home mortgages, car loan debt and even commercial real estate debt, until the problem begins to recede or the taxpayers gain effective control over the nation’s banking system.

So how will leaders know whether it’s working or not?

Traders and Washington insiders will look at credit market indicators to gauge their progress. One number in particular will be the focus of enormous attention on the day the bill passes: the difference between the interest rate offered by the federal government and the rates private banks charge when they loan money to one another.

If confidence is returning to the credit markets, the spread between the two numbers should begin to narrow as the banks’ rate — known by the acronym LIBOR — falls. But if the credit market is still in distress, the spread will widen.

In theory, traders should be able to see the results of any congressional legislation within minutes of news of the bill’s passage hitting Wall Street.

Here’s the good news: Already, just based on the news that Treasury is working on the proposal, the spread has been narrowing this week, down from the dramatic highs of last week. That means the market is pricing in an expectation that Congress will act and that the action will work.

If everything goes smoothly, it is even possible that taxpayers will profit from the deal in the long run, as the underlying assets accumulate value over the coming years and the government is able to ultimately sell them back into the market at higher prices than it’s paying now. Of course, it’s also possible that the values will never come back, in which case taxpayers would be on the hook.

The specific details of the package were a moving target on Monday, and congressional Democrats tangled with administration Republicans over the exact makeup of the bill.

Said Senate Banking Committee Chairman Chris Dodd (D-Conn.): “The last thing any of us want is to be back here in a month coming up with some new plan because this didn’t work. It’s important that we act quickly, but it’s more important that we act responsibly.”

That’s congressional code for: “Hey, wait a minute.”

The Banking Committee’s ranking Republican was of a similar mindset. “I am concerned that Treasury’s proposal is neither workable nor comprehensive, despite its enormous price tag,” said Sen. Richard Shelby of Alabama. “In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted and may actually cause the government to revert to an inadequate strategy of ad hoc bailouts.”

Ultimately, the negotiations will come down to doling out huge new powers, including:

• Buying Power: This is the cornerstone of the proposal — allowing Treasury to buy up to $700 billion of privately held assets in the market. The original proposal called for buying power to be limited to “mortgage-related” assets, but a later draft expanded that to allow the government to purchase any “troubled assets.” There’s a staggering difference in authority between the two phrases, and it is a moving target as of press time. The banking industry generally favors the second version, but that potentially exposes taxpayers to much higher costs.

• Managing Power: Under the Bush administration’s plan, Treasury would hire private managers to handle the hundreds of billions of dollars’ worth of assets it will soon own. But Treasury was silent on whether those managers would be able to actually negotiate directly with homeowners who hold the troubled mortgages. Democrats would go further and demand that bankruptcy judges be given the ability to renegotiate those failing mortgages on behalf of homeowners. This will be one of the more contentious sideshow fights of the negotiations.

• Global Power: Under one version of Treasury’s proposal, the government would have the power to buy assets from any institution in the world that it deemed worthy of a bailout.

• Pay Power: Democrats on Capitol Hill say they want the final plan to include restrictions on payouts to the executives of the financial institutions that take the taxpayer lifeline. Paulson says he doesn’t like this idea, but it may be tough for elected officials to oppose this populist carve-out in an election year.

• Equity Power: Democrats would like the government to get shares in the financial institutions that take federal help — effectively giving taxpayers ownership stakes in the nation’s largest banks and providing them with a huge windfall if those institutions prosper in future years.

• Oversight Power: Treasury’s initial proposal included very little room for congressional oversight of the new effort, calling for reports to be sent to the Hill just twice per year. That isn’t flying with Democrats or many Republicans on the Hill; if a bill makes it through Congress, it will almost certainly have much stronger oversight provisions.

What if the bailout plan doesn't work? - Yahoo! News

 

[editec]

Insolvency and the FDIC is on the hook which means that you as a taxpayer are on the hook. Maybe fucking the banks is tantamount to fucking yourself.

Oh I understand that sentiment completely. This weekend before I got to see "the PLAN" I still had confidence that these guys were going to do something real.

Obviously, they're not.

And it IS your problem to the tune of a trillion plus dollars isn't it?

Oh, it's much worse than that if they don't start thinking creatively.

They're going to throw money as a system which is so screwed up that it's already failing for 60% of America.

But the REAL reason it's failing now, is because it's been failing 60% of the population for decades, now.

Why do you think so many people have been borrowing all along? Why do you think that the prices of our homes has been rising at double digit rates for the last 15 years?

Because it has not been working, that's why.

They don't want to change that, (it still works for them) they just hope they can keep it going a while longer.

If they don't fix these systemic flaws in our system (and those flaws are not merely bad morgage paper, but WHY people signed onto those bad loans) , many of you right now who think I'm crazy or some kind of socialist or whatever, are going to start sounding like me.

Why?

Because sooner or later the shit of this system will back up the economic crapper and you will discover that you aren't so damed secure and well off as most of you imagine yourselves to be today.

Pray to God they can keep this mess from melting down worse than it has already, folks.

I don't think they really can, but hope spring enternal even with a cynic like me.

 

[Skull Pilot]

I have a question. How would this work unless the entire banking industry was made to conform to this regulation? We don't have any say over what the foreign banks do, correct?

A foreign bank doing business on US soil should have to abide by all US banking laws for business transacted within the US and with US citizens.