The Coder Behind the Mortgage Meltdown

axjms writes "New York Magazine has a confessional/abdication from the man who wrote the software that turns mortgages into bonds and those nasty little things called CMOs. An interesting first-person account from a coder whose work reached far beyond what he or anyone could have anticipated."

Comments

Re:Red?

[moniker127]

Because it is a fresh story with no comments.

Or... It was...

Until you re-redified it. Thanks.

bomb?

[robvangelder]

Joe Public: What happen ?
Coder: Somebody set up us the bomb.
Operator: We get signal.
Joe Public: What !
Operator: Main screen turn on.
Joe Public: It's you !!
Wall Street Fat Cat: How are you gentlemen !!
Wall Street Fat Cat: All your base are belong to us.

Re:bomb?

[moniker127]

Can I borrow the time machine that you so obviously possess?

Re:bomb?

[interkin3tic]

Missing a "Where's the beef" joke here.

Re:bomb?

[Brian Gordon]

You know what you doing take off every Σ.

Re:bomb?

[Brian Gordon]

Wow I'm stupid for some reason I thought we passed the 1980s. I guess unicode hasn't been adopted yet. Should have known with all these zero wing references.

Re:bomb?

[__aaclcg7560]

Wall Street Fat Cat: All your base are belong to Uncle Sam.
Joe Public: Oh, God, not again.

Re:bomb?

[Morphine007]

it has come to pass!

Re:bomb?

[blitzkrieg3]

Wall Street Fat Cat: All your base are belong to Uncle Sam
Joe Public: Oh, God, not again.
Uncle Sam: Yes that's right, all your base are belong to me.
Wall Street Fat Cat (to Uncle Sam): That's right! and all your base are belong to us!!! Joe Public: NOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!

Re:bomb?

[Dishevel]

I had no idea that there exists people who post on /. that still believes unicode works here.

Re:bomb?

[Thinboy00]

Use an (x|ht)ml entity, sometimes they work (e.g. & is &).

Re:bomb?

[McGiraf]

One can always hope.

But maybe it's time to replace "duke nukem forever" with "slasdot unicode support" in our posts.

Re:bomb?

[Anonymous Coward]

So...

Where's the Zig? :(

Re:bomb?

[Tycho]

There is a reason for the lack of direct entry of Unicode.

http://yro.slashdot.org/comments.pl?sid=32808&cid=3541545

However, I think that there are at least 100 better ways of handling Unicode related issues than the current method.

Re:bomb?

[jonadab]

> I guess unicode hasn't been adopted yet.

Unicode adoption is in progress. A lot of software supports it now that didn't five years ago.

But unicode is a large and complex beast, and not entirely a stationary target, and supporting it properly and completely is difficult, and it isn't always the first priority for software developers, even in the open-source world. Unaccountably, sometimes they just want to get the basic functionality of the software working first, figuring that they'll add unicode support later. Subsequently, they discover that unicode support is difficult to add later, because it breaks a number of common assumptions that programmers can and often do make if they only need to support ASCII or individual 8-bit codepages (like ISO-8859-1, for instance). Since it's difficult, it tends to be the object of significant procrastination, and then when it is undertaken, it takes a long time to be completed.

Progress IS being made, but gradually. I figure about 25% of the email I get now uses Unicode (mostly UTF8) for the character encoding. But the percentage increases every year.

I'm just glad we finally got to the point where pretty much all computer systems at least support ASCII at the bare minimum. I believe the last EBCDIC software was decommissioned, along with the ancient IBM mainframe it ran on, several years ago. And there was much rejoicing.

Re:bomb?

[Anonymous Coward]

you have no money to survive
make your payment

Re:bomb?

[jonadab]

> But maybe it's time to replace "duke nukem forever" with "slasdot unicode support" in our posts.

My understanding was that slashdot filters out anything other than ASCII not out of laziness, but because it specifically wants to be an all-English-language-all-the-time forum, and foreign characters would just be illegible and/or distracting to most readers. If slasdot allowed non-ASCII characters, people would use them, and that would make the signal-to-noise ratio even lower than it already is.

Europeans would use diacritical marks that the rest of us don't really know how to read: dots and funny squiggles over the letters and eight different kinds of accent marks and slashes through the letters and all sorts of nonsense. But that's not the worst of it. Language nerds would sling around ancient Greek words _in the Greek alphabet_ (I've caught myself trying to do that in slashdot posts on three separate occasions, even though I theoretically know better), so if you don't know Greek you wouldn't be able to recognize them, even though there are copious English cognates in most cases. Trolls would fill entire posts with cyrillic characters, and the mods who don't read cyrillic (i.e., most of them) wouldn't really be completely sure whether these posts were really trolls or legitimate messages that happen to be in Russian or Ukranian. You just know the anime fanboys would sling kana around in their otherwise English-language posts, for names of characters if nothing else. Wouldn't you rather they be forced to transliterate them into romaji, so that everyone else can follow? And so on and so forth.

Limiting slashdot to ASCII on the one hand makes it less literate in the academic sense, and references to foreign words and names are less authentic, but on the other hand it guarantees a certain minimum level of legibility: everyone in the entire English-speaking world can at least read the individual _letters_ in every single comment. The weirdest writing system you have to figure out is ISO-1337-1, which frankly doesn't exactly require a great deal of study.

I wouldn't make this argument for every site, but for slashdot I think it does make sense.

Re:bomb?

[jonadab]

> There is a reason for the lack of direct entry of Unicode.

I think there's more than one reason. Slashdot is, by design, an English-language-only forum geared primarily toward Americans. Foreign characters aren't really *desirable* on slashdot. They would just make the signal-to-noise ratio worse, for no significant benefit.

Yeah, I admit, I have been annoyed by it at times. I wanted to put the little squiggly mark over the n in the word jalepeno once, and several times I've wanted to post untransliterated Greek words for one reason or another. But the current system is fair: I can't post Greek letters, and you can't post Cyrillic letters, and the Perl6 people can't post weird double-angle-bracket thingies, and the Frenchies can't put little marks on the bottoms of the letter C, and everybody else can't post kana or arabic or devanagari or whatever. For an all-English-language-all-the-time discussion forum like slashdot, all of this isn't really a net loss, IMO.

With the ASCII-only filter, the weirdest writing we have to put up with is 1337 |-|4X0r 5P33|<, and that's bad enough.

Re:bomb?

[bobdotorg]

Wall Street Fat Cat: All your base are belong to us.

More like,

All your basis points are belong to us.

Re:bomb?

[SanityInAnarchy]

With the ASCII-only filter, the weirdest writing we have to put up with is 1337 |-|4X0r 5P33|<, and that's bad enough.

With the moderation system, I never see that.

In fact, frankly, the way to address your other concerns is via the moderation system. And for any decent software, these days, turning on Unicode should be like flipping a switch. With UTF8, there isn't even a loss of efficiency for those of us who stick to Latin1.

It just feels... amateurish.

Re:bomb?

[Brian Gordon]

Yeah but with everything being written in java/.net/python/php these days, not supporting unicode is unusual and unexpectedd.

Re:bomb?

[Meski]

> There is a reason for the lack of direct entry of Unicode.

I think there's more than one reason. Slashdot is, by design, an English-language-only forum geared primarily toward Americans. Foreign characters aren't really *desirable* on slashdot. They would just make the signal-to-noise ratio worse, for no significant benefit.

You insensitive clod! *I'm* a foreign character!

Sigh. But I don't care that much. Aussies don't seem to have the need for accents.

Re:bomb?

[Meski]

But unicode is a large and complex beast, and not entirely a stationary target, and supporting it properly and completely is difficult, and it isn't always the first priority for software developers, even in the open-source world. Unaccountably, sometimes they just want to get the basic functionality of the software working first, figuring that they'll add unicode support later. Subsequently, they discover that unicode support is difficult to add later, because it breaks a number of common assumptions that programmers can and often do make if they only need to support ASCII or individual 8-bit codepages (like ISO-8859-1, for instance).

Collation sequences, where you have a database set to one, and a client connecting to it from a different country wanting *their* collation, and rows might have different languages in them, and arghh!!

This topic is too hot to handle.

[mosel-saar-ruwer]

There is no way in Hades that this topic could possibly be addressed honestly - not at NYMag, nor at /., nor at any other mainstream news outlet.

The underlying horror of the demographics at work here - and the galactic insanity of the CRA & the redlining initiatives & the fiduciary disaster at Fannie & Freddie - is just too much for the circuits to handle.

Not to mention - heck, even I can't mention that one.

Re:This topic is too hot to handle.

[ColdWetDog]

Wasn't it John Kenneth Gailbraith (an economist) who stated that "If all else fails, immortality can always be assured by spectacular error"?

We've been Osinski'd....

Re:This topic is too hot to handle.

[MozeeToby]

Yep, you can pretty much say that the financial crises was caused by just about anyone, and you'd probably be right to some extant or another. Homeowners, loan officers, big banks, small banks, the FHA, AIG and companies like them, investors, the media, the non-journalistic media, republicans, democrats, and government regulators just to name a few and I'm sure you can come up with more if you try.

There's plenty of blame to go around, anyone who claims one group is responsible is pushing an agenda or very short sighted.

Re:This topic is too hot to handle.

[dkleinsc]

I've argued the issue of the CRA on many occasions, but I guess I have to do it one more time. For starters, I refer you to an earlier Slashdot discussion on exactly why the CRA had very little if not nothing to do with it.

The short version: The vast majority of bad loans originated from brokers (e.g. DiTech, Countrywide, Ameriquest) who weren't covered by the CRA. Banks who were under the CRA actually did considerably better than other financial companies. Furthermore, CRA borrowers had to meet identical loan standards as anyone else.

The reasons that various groups have blamed the CRA has a lot to do with hating that regulation since at least 1990 or so, and very little to do with reality.

Re:This topic is too hot to handle.

[Anonymous Coward]

Or is trying to sell magazines.

Re:This topic is too hot to handle.

[Anonymous Coward]

Guess that'll trump Juan Pablo Davila

http://en.wiktionary.org/wiki/davilar

Re:This topic is too hot to handle.

[brian0918]

Why would anyone in the market have had an interest in loaning to high-risk individuals if it wasn't for the "affordable housing" and "homeownership for all" agenda pushed by both the Clinton and Bush administrations? A few quick examples: driving interest rates artificially low, using Freddie Mac and Fannie Mae to drive the appeal for mortgage-backed securities, using CRA bank regulations to directly force banks to loan to specific demographics in order for bank functions to occur.

Sure, once this thing got going, it's difficult to place blame, but it started somewhere, so if we're going to learn from this, we need to be able to cut it off at the beginning.

Re:This topic is too hot to handle.

[Brian Gordon]

I blame IP pirates undermining the entertainment industry.

Re:This topic is too hot to handle.

[bunratty]

Frontline on PBS had a good explanation of the mortgage meltdown. The problem wasn't the securitization of mortgages itself. The problem was that financial institutions borrowed money to buy more mortgage securities than they had in available cash, creating an insatiable demand for securitized mortgages. In an effort to keep the supply of mortgages to meet the demand, mortgage companies lent money to anyone who could breathe, even if they clearly couldn't repay the loans (i.e. "subprime mortgages"). When the homeowners defaulted on their loans, the bank seized their properties, which were the collateral for the loan. Because so many homes foreclosed, it created a huge supply of houses for sale on the market. This huge supply made housing prices drop, so that other home sellers owed more money on their mortgages than they could sell their house for. This in turn led to their houses going into foreclosure. Wash. Rinse. Repeat. For each foreclosure, the supply of money to the securitized mortgages dried up, making those securities drop in price. Because financial institutions had borrowed money to buy those securities, they ended up losing more cash than they originally had, which any investor knows can happen if you buy on margin.

It's all pretty simple, really.

Re:This topic is too hot to handle.

[Anonymous Coward]

NYMag, nor at /., nor at any other mainstream news outlet.

New York magazine is not a "news outlet" -- it's a third-rate "lifestyle" magazine that's been teetering on bankrupcy for years now.

And New York magazine != The New Yorker.

Re:This topic is too hot to handle.

[Hatta]

There's plenty of blame to go around

And yet, no one has gone to jail.

Re:This topic is too hot to handle.

[Brian Gordon]

There's nothing inherently wrong with guaranteeing housing for (nearly) all - it works well in China. The problem is when you can't pay for it. If you spend billions of dollars on housing your citizens and then balance your budget by counting on them paying you back then you're going to face a disaster. Get the money elsewhere; counting on someone with terrible credit to balance your deficit is just stupid.

Re:This topic is too hot to handle.

[Dionysus]

Why would anyone in the market have had an interest in loaning to high-risk individuals,

When it's not your money your lending out.

Say, I'm a loan officer. I see someone being high-risk. Do I loan out to that person? Well, if I'm at risk, I might not, but since the home prices are going up, I give the loan, and then sell the loan to someone else. I'm not stuck with the loan, and I make money on loaning out money. See where my incentive is to loan out money whether the person can pay back or not?

Re:This topic is too hot to handle.

[slashdot_commentator]

Cut the crap. You're telling me that FMA and FRE caused the world financial meltdown??? That's like blaming Bernie Madoff for the world financial meltdown. FMA and FRE were improperly run, and neutralized regulators, and its going to cost taxpayers in the 11 digits. But they are only a small part of the mortgage market collapse. Residential housing is not the only construction sector being hit, and how many poor people could FMA and FRE subsidize to go bankrupt?

Look at how bank lobbyists were able to deregulate their industry. What happens when they go into financial competition with a gov't program? They scream bloody murder. Its like saying unionism caused the American economic collapse.

Re:This topic is too hot to handle.

[tcopeland]

> the financial crises was caused by just about anyone

Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.

Re:This topic is too hot to handle.

[afidel]

You're another idiot that thinks the CRA is to blame? Let me give you a hint, it wasn't. It was the fed leaving credit too loose for way to long combined with the greed of the banking system and lax regulation. Less than 20% of all subprime mortgages were even insured by Freddie and Fannie, only a few percent of those were due to CRA provisions. All of the rest were made freely and knowingly by banks that thought they could make large profits and handling fees on mortgages that they securitized and sold off no matter the credit worthiness of the recipients of those loans.

Re:This topic is too hot to handle.

[slashdot_commentator]

Here here! Too bad I don't have the points to upmod you.

Its Republicans looking for a Democratic scapegoat to pin the world banking meltdown upon. Its a preposterous argument, when you look at the numbers involved. It was flat out deregulation and neutralization of regulators that allowed the mess to come about.

Re:This topic is too hot to handle.

[Anonymous Coward]

So I have an answer to you: You may look for those people who took the issue very seriously and tried to warn the public beforehand. What did they gain by their effort? Nothing.

So, what they have to say, it may well be honest.

And then, *if* they push an agenda, then they might have good reasons.

(It's just that I don't like too pessimistic views.)

Re:This topic is too hot to handle.

[CFTM]

Wow.

That's all I have to say about that one.

Wow.

Hyperbole, Check!
Misogyny, Check!
Confusing Causation and Correlation, Check!

Re:This topic is too hot to handle.

[MozeeToby]

Then we, as individuals, started chemically castrating ourselves because we saw the writing on the wall. And the rich and the powerful encouraged us, because single people make better wage slaves.

I was at least thinking about what you said up until this point. The idea that an unmarried man or woman without children makes a better wage slave than a parent is just ridiculous. When I was single, if I fucked up my life that was my own fault and caused me and only me pain. Now that I have a spouse and we're thinking about kids, screwing up my life hurts a lot of other people. Some of us take that responsibility very seriously, to the point of sticking with a dead end job that we hate because it puts food on the table and pays the mortgage (not that I hate my job, far from it, but even if I did I wouldn't be risking it unless I had a fallback ready to go).

Re:This topic is too hot to handle.

[slashdot_commentator]

And the key thing to realize here, was that the banks thought they had a no lose situation. Even the "disaster" of foreclosure still left the bank with a recoverable asset (the property). Instead of losing 135K on a loan, it was more like a 35K loss. The banks didn't count on a reversal of the housing markets, outright fraudulent lending, and how securitization would only mask the losses, not render the losses moot.

And mortgage securitization only breaks the small banks that specialized in it for their earnings. Investment banks like Lehman and Citigroup got wiped out from their derivatives manufacturing/gambling.

Re:This topic is too hot to handle.

[slashdot_commentator]

Its still a relatively good magazine. Its not really a "lifestyle" magazine like People. They write more interesting articles for the upper-middle class than say Time, or GQ. I find the New Yorker a little too staid (but better vetted information).

Re:This topic is too hot to handle.

[Hatta]

if it wasn't for the "affordable housing" and "homeownership for all" agenda pushed by both the Clinton and Bush administrations?

There's no reason everyone can't own a home. Whether you own or rent, you are paying for your living quarters either way. In fact, renting is even more expensive than owning when you consider that you don't get to keep any of the equity, and the landlord needs to make a profit. Knowing this, I would argue that any system where the vast majority of people are not home owners is fundamentally broken.

So the crime here isn't that poor people had the audacity to buy homes. The problem is the accounting tricks our fucked up system needed to get the poor people in their homes. If, instead of lending large sums of money to poor people up front, our system allowed people to pay as they go and still build equity in their homes, this wouldn't be a problem.

I imagine some kind of a rent-to-own for homes. If you stay the whole time and pay it off, you get to keep the house. If you can't pay it off for some reason, you're no worse than you would be if you had rented, and no one lost the cash they would have lent you to buy the home. Seems like the best of both worlds.

Re:This topic is too hot to handle.

[Todd Knarr]

Why was the CRA a bad idea? It didn't, after all, say banks had to make loans to people who couldn't afford them. What it said was "We've caught you refusing to give loans to certain groups regardless of their ability to repay. And as a society we don't think locking those groups out completely is in our best interests. So, given your proven track record, if you want to refuse to give loans to people in those groups you're going to need to provide written justification pointing out the exact financial basis for the rejection.". Under the rules, the banks could perfectly well refuse to give loans out to people in those groups whose financial situation would make the loans too risky. All they'd have to do is, for instance, write up a report attaching the guy's credit report and noting "He's defaulted on these loans for these amounts in the past 3 years, and we don't make loans to anybody with that record." (backing it up, of course, by showing they indeed didn't make loans to anybody with that kind of record).

When I hear people talking about how that's so unreasonable, I can't help but recall that the banks were in fact caught refusing to give loans to a black man with a certain credit record but were perfectly happy to give that same loan to a white man with the exact same credit record. When you've been caught with your hand in the cookie jar repeatedly, it's not unreasonable for your Mom to start taking steps. When I hear people saying how if the banks can't loan money willy-nilly to anybody they won't loan at all, I can't help but hear the brat in the playground who if he can't have it all his way throws a tantrum and threatens to take all his toys home. I think the term is "does not play well with others".

Re:This topic is too hot to handle.

[phantomfive]

Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.

Ah, but let them take hope! They will soon be benefited by the coming inflation! Anyone with debt will benefit from that. The ones who are really going to be hurting are the ones who have been saving their money over time, and are not sophisticated enough to hedge against inflation. Sympathy for them.

Re:This topic is too hot to handle.

[CarpetShark]

the financial crises was caused by just about anyone

Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.

Which is not surprising really. It's a lot like when the wise people in a village tell a kid not to play at the waterfall, and he does, and then the elders need to pick up the pieces when he breaks his leg. There have always been irresponsible, foolish people, and responsible, wise people in societies. Only question is whether the elders are happy being who they are.

Re:This topic is too hot to handle.

[Anonymous Coward]

Another thing most people in Europe (including quite a few bankers apparently) didnt realize that in the USA you can actually walk away from your home without debt. A subprime loan in The Netherlands not being paid back means that yes, your house is gone, but any remaining debt will be just that: remaining debt. Until you pay it back.

That provides quite an incentive to not take out impossible loans.

Re:This topic is too hot to handle.

[Yhippa]

While this is true, a lot of the economy during this time (when I bought my house) was propped up by the housing/irresponsible lending engine. In a way the people who were responsible about managing their finances still benefited indirectly from all this financial nonsense.

Re:This topic is too hot to handle.

[Sponge Bath]

A (chosen) few will eventually go to jail. There are investigations in progress, but the justice system moves slowly, has limited resources, and is hamstrung by people with lots of money and connections. My guess is that in a year or two we will see some indictments, then another few years for trials and appeals. By the time anyone is convicted of a crime the public will say "huh? what?" and be gearing up for the next bubble/scam.

Re:This topic is too hot to handle.

[Anonymous Coward]

no one lost the cash they would have lent you to buy the home.

Forgetting the fact they could have lent it to someone who could be paying more, which means they could be losing potential money...

Re:This topic is too hot to handle.

[Anonymous Coward]

Is it just me or does it seem like every financial crisis always boils down to somebody misusing credit?

Re:This topic is too hot to handle.

[umghhh]

Oh so it is a housing and mortgage that are problematic now? I mean any credit can default and if there is enough defaulted credits there is no system in the world that can sustain damage. There is another problem of course that all the financial products similar to insurance where not following any rules that are forced upon real insurance companies making it impossible to pay in case things go wrong as they seem to do. And then there is another problem that greenback is thought to be world currency and holds to its value although it should not - not with such deficit that US has. Now it works all well as long as holders of dollar denominated reserves believe they have value but it paralyzes the system as the holders are scared shitless to move their dollars and so the gov starts to print big time. Until dollar loses some value the economy will not pick up and this does not happen until dollar falls. I suppose all other problems being big and nasty are just a side effect of the inbalance in US-world relationship where US was allowed to buy products so cheap that their production became unprofitable everywhere else except China etc. The problem became so big that even economy as big as german went down with it. One of the reasons why dollar holds value against other currencies is that countries that still produce anything have no transparent financial markets and governments that all to readily take their money, so even if dollar is not as good as it once was it is still better bet than to live your account in say China. Paradoxically excellence of US and UK financial system breaks the system by itself. It is mind boggling and yet it seems that this was unavoidable as the structures that brought down the system were the same as the ones that made it working in the first place. To see it from another angle the system if left alone will go bananas as it did. Too much freedom for one component (finance) while others have to follow constraints of physical entities is apparently bad. Who might have thought.
I only hope that the return to economical normality will not take another WW.

Re:This topic is too hot to handle.

[Americano]

This system is, I think, known as "owner financing" - the current owner of the property agrees to finance the purchase, and in return, the buyer pays them a monthly payment (instead of a bank); if the buyer defaults, ownership of the house would revert back to the original owner.

Problem with this is, you still need somebody in the mix who has a vast sum of money - bank or owner - to provide the financing for the new buyer, or the new buyer will end up paying exorbitant monthly fees to cover the interest & risk on the loan the owner must take out to provide financing.

I'd amend your initial sentence to read: "There's no reason everyone couldn't own a home they can afford." This is the problem - some predatory banks extended too much easy credit to people knowing they didn't have the means to repay, and some unscrupulous people took that credit knowing they didn't have the means to repay. Not everybody is a crook on either side, but both sets of people are guilty of ignoring the simple reality that they were spending (or enabling people to spend) beyond their means.

If you buy a house you can't afford based on the assumption that "home prices will always rise, so I can just refinance once I have equity!" are taking a gamble, not making an investment.

Re:This topic is too hot to handle.

[Americano]

Then we, as individuals, started chemically castrating ourselves because we saw the writing on the wall.

Would that be before, or after, the Baby Boom?

Re:This topic is too hot to handle.

[radish]

Why would anyone in the market have had an interest in loaning to high-risk individuals

Because you can charge a higher interest rate. Yes, some will default, but you'll get more from those who don't, so you're still in the money. If you're good at deciding who to lend to you can make a lot of money that way (not just homeloans, any credit situation).

Re:This topic is too hot to handle.

[geekoid]

AND if the foreclose, you'll probably make money from that.

Re:This topic is too hot to handle.

[geekoid]

Yes, sad but that's how it has always worked.
Plus the downturn will cause some of them to loose their jobs.
What else do you do? if it spirals too much, everyone will be out of their home.

Re:This topic is too hot to handle.

[sbeckstead]

Could be pushing a very short sighted agenda too!

Re:This topic is too hot to handle.

[ShieldW0lf]

Would that be before, or after, the Baby Boom?

After the baby boom. As/After the changes had been implemented.

Re:This topic is too hot to handle.

[Anonymous Coward]

Definition of sub-prime was the 5% of loans that were at a premium to the highest risk borrowers. So much sub-primes were given out that they accounted for 20% of the market. We were brokered into oblivion on a fat tail.

Re:This topic is too hot to handle.

[sbeckstead]

Well that's because there wasn't anything, strictly speaking, illegal done. So which person who was within the law and following the guidelines set down by the powers that be would you send to jail. I vote the first person who recommended sending someone to jail. Report to the pen. Hatta!

Re:This topic is too hot to handle.

[vlm]

In fact, renting is even more expensive than owning when you consider that you don't get to keep any of the equity, and the landlord needs to make a profit.

Actually, no. The whole point of the psychological aspect of the bubble was/is that "housing only goes up". Therefore landlords didn't care that the typical rental cost was a fraction of their mortgage payment.

For example, say the cost was $500K. That would imply, at a reasonable rent to cost ratio of 100, a rental cost of $5000 per month. But the going rental rate for a SFR is only $1800. Thus each month a landlord loses $3200 in cashflow.

However the whole point of the bubble is to mix up cash flow and balance sheets. So, if that $500K house cost $250K two years ago, it's gonna double in two years, right? Because housing only goes up, right? So, if you expect to gain $500K on the balance sheet in two years, that is simplistically a monthly gain of $20833. A new car each and every month....

So, the bubblehead thinks he gains $1800 a month from rent, lost $3200 a month in expenses, and gains $20833 per month in bubble prices. Sounds highly profitable. Now what happens when real estate no longer goes up? What if it drops by half, thus a balance sheet loss of 10K per month, every month? Ooops. Mail the keys back to the bank and tell the bank, tough luck. Don't worry about the bank, taxpayers will bail them out.

Another way renting can be cheaper is looking at opportunity costs. If the "savings" of ownership are less than the money lost thru peasant work of maintaining the house, then you're better off outsourcing property management to the landlord. People whom get alot of money by working crazy hours are far better off outsourcing toilet plunging and lawnmowing to a landlord. Also some people are willing to pay alot for someone else to handle the hassles for them.

The final way renting can be cheaper, is if you know anything about economics, and see whats going on in the inflation adjusted prices over the long term over the last century, in the ratio of house prices to rent over the last century, in the ratio of median income to median home price, in the ratio of median home price to... heck just about any commodity, in the historical graph of interest rate vs house price with attention given to the current temporarily multi-generationally low interest rate implying a very temporarily multi-generationally high house price, in the trends of median middle class income over the years, in the demographics of baby boomers flaming out with not enough younger folks to move in/up, in the graphs of house construction vs population change (supply vs demand), it's not too hard to see whats going to happen to prices. On one side you've got all the math and graphs that are worth considering, and on the other side, you've got slogans like "real estate only goes up", pretty easy to evaluate what will happen soon. So, pay a small rent to the landlord whom will take a staggering huge capital loss. Some homes in CA have been/are dropping in the high five figures per month, an order of magnitude larger than their rent...

Re:This topic is too hot to handle.

[ColdWetDog]

Are you trying to say this ought to be a screenplay?

All you missed were the explosions.

Re:This topic is too hot to handle.

[jonbryce]

In some cases, eg Bradford & Bingley, a British mortgage bank that went bust last year, the ability to breathe wasn't a requirement. They gave out loans to people who died 30 years ago at the age of 2.

Re:This topic is too hot to handle.

[Missing_dc]

Yep, you can pretty much say that the financial crises was caused by just about anyone, and you'd probably be right to some extant or another

Well, since I do not have a mortgage or stocks (etc) I think I am blameless there.

The AMMO shortage on the otherhand...

Gotta feed the Bersa, the Glock, the wife's Kahr, the Mossburgs and the Kalishnikov.

Oh and the famliy too, so I have contributed to the rising food prices as well.
but the credit shortage or the BS on wallstreet, or even the O(A)bamanation we call a government, it was not me.

I saw a shirt that I agreed with, it said:
"I'll keep my guns, my money and my freedom, YOU keep the CHANGE"

Re:This topic is too hot to handle.

[Anonymous Coward]

"Why would anyone in the market have had an interest in loaning to high-risk individuals..."

Because for several years, you could lend to some loser, collect the underwriting fee, and then sell the mortgage to a big investment bank to securitize and dump on pension funds and other unsophisticated institutional investors.

Of course, some of those big investment banks drank too much of their own koolaid and now we are propping them up (because they are politically well connected and government flunkies actually believe the FUD of "systemic risk"). Funny how that works.

Re:This topic is too hot to handle.

[amicusNYCL]

Why would anyone in the market have had an interest in loaning to high-risk individuals if it wasn't for the "affordable housing" and "homeownership for all" agenda pushed by both the Clinton and Bush administrations?

Politics doesn't enter into it at all, besides the deregulation that encouraged more subprime lending. The reason is the same old reason that anyone does anything: money. The lenders made relatively huge margins on subprime deals. They didn't give a crap who was in office or what they were saying, they just figured out that they could make a ton of money by giving someone with worthless credit a loan at 20% interest.

Re:This topic is too hot to handle.

[mr i want to go home]

Renting is not more expensive than owning property. It's fairly borderline, depending on what you do with the money you save through renting. There are plenty of other ways to build equity.

Re:This topic is too hot to handle.

[DotDotSlasher]

Well that's because there wasn't anything, strictly speaking, illegal done.

Nothing illegal done? Let's start with the dishonest loan brokers. Those brokers had people come in with a $40,000/yr salary, but put on the application that the salary was $160,0000/yr. Of course, these were no-doc loans, so no documentation was required. There was a lot of of fraud going on. Let's send a few thousand loan brokers to jail. Anyone with me?

Re:This topic is too hot to handle.

[Anonymous Coward]

There IS a reason EVERYONE cannot own a home!!!!!!!!! The crime is that the poor people bought homes they KNEW they couldn't afford. Why didn't they just buy older, smaller homes and used cars??? Why be responsible when you can just sit back and let O breast feed you? CROOKS

Re:This topic is too hot to handle.

[Anonymous Coward]

This huge supply made housing prices drop, so that other home sellers owed more money on their mortgages than they could sell their house for. This in turn led to their houses going into foreclosure.

Your house wont go into foreclosure just because your house value goes down. Its that you took out a loan that you couldn't afford that made your house go into foreclosure.

Re:This topic is too hot to handle.

[sgent]

That is only true in a very few states -- although to be fair it included some big ones (California).

Re:This topic is too hot to handle.

[misexistentialist]

But now that you're married you demand a higher salary. Any additional enslavement you feel does not particularly benefit your employer since it makes you more expensive. Anyway, it's clear that employers would dislike marriage because it takes most females out of the labor pool, reducing productivity and raising wages.

Re:This topic is too hot to handle.

[__aagmrb7289]

There's no reason everyone can't own a home. Whether you own or rent, you are paying for your living quarters either way. In fact, renting is even more expensive than owning when you consider that you don't get to keep any of the equity, and the landlord needs to make a profit. Knowing this, I would argue that any system where the vast majority of people are not home owners is fundamentally broken.

Here's one: I can rent an apartment that has everything I need for half to 3/4's of the price of a home.
Here's two: I can rent a place even when my credit is not so good (because I'm a fucking flake who can't figure out how to budget), and the person renting the place will probably be okay when they have to kick me out. The same is less true in a homeowner situation.

Do I need to continue?

Re:This topic is too hot to handle.

[MrPhilby]

aww shucks you got me

Re:This topic is too hot to handle.

[Bromskloss]

Say, I'm a loan officer. I see someone being high-risk. Do I loan out to that person? Well, if I'm at risk, I might not, but since the home prices are going up, I give the loan, and then sell the loan to someone else. I'm not stuck with the loan, and I make money on loaning out money. See where my incentive is to loan out money whether the person can pay back or not?

If it is obvious that the debtor will never be able to pay back, you would have trouble selling the loan, right? Unless the buyer is unaware of the risk involved, of course.

Re:This topic is too hot to handle.

[Hognoxious]

I imagine some kind of a rent-to-own for homes.

As I understand it Islamic mortgages sort of work like that. Because they aren't allowed to charge interest (too Jewish or something), the bank buys the house, you rent it from the bank but you also sort of buy it bit by bit and month by month. Oddly, by jigging the proportions of the monthly payment considered as rent versus buying, it often works out exactly the same as a normal mortgage.

If you can't pay it off for some reason, you're no worse than you would be if you had rented, and no one lost the cash they would have lent you to buy the home. Seems like the best of both worlds.

I this case the landlord bears the risk, but gets none of the reward; if the price has gone up, he's lost the potential profit from selling to someone else. The tenant effectively has a free call option on it.

I would, however, suggest that something along those lines - a partial or temporary government buyout and converting the owner-occupier to a semi-tenant is better than simply writing off part of the capital in reposession case; that's throwing money at someone for making a wrong decision. And in countries like the UK, where the government would be obliged to find accommodation for the evictees (especially if they have children) in would probably be more cost effective.

Re:This topic is too hot to handle.

[daver00]

No even pointing the finger at deregulation is too simplistic. It was an asset price bubble, funded by debt. It was just very severe this time. You know the whole feedback loop business, companies and banks invested in equity that is rising through the bubble process, so they borrow and lend more and more, causing their assets to rise (households too), causing more borrowing and lending. Throw in a glut of debt fuelled consumption for over a decade and you have the makings of the perfect storm.

Human stupidity, chaos, I dunno what you want to call it but at the end of the day it was the same thing that causes just about all recessions: Asset price bubble.

Re:This topic is too hot to handle.

[toadlife]

Human stupidity, chaos, I dunno what you want to call it...

"Tragedy of the commons" is the term that comes to mind.

Re:This topic is too hot to handle.

[loteck]

Because they aren't allowed to charge interest (too Jewish or something)

It's called usury, and it is prohibited quite explicitly by Islamic law. Nothing to do with Jews.

Re:This topic is too hot to handle.

[Hognoxious]

Your house wont go into foreclosure just because your house value goes down.

It goes into foreculosure when you don't (which might be because you can't, but it could also be because you won't) make the payments.

Now if the house has gone down in value and you're in negative equity, it can actually make sense to simply walk away. This is because in some US jusridictions, reposession of the property is considered full and final settlement, i.e. you're quits and the bank takes the loss on the chin. Keeping up the payments would be throwing good money after bad.

Ergo indirectly a fall in value can lead to foreclosure.

Re:This topic is too hot to handle.

[Pontiac]

Well really what happened is the bank gave Joe Foreclosure a loan.. They knew Joe is a bad risk so they bought insurance for that loan from AIG.
Now that loan is 100% guaranteed to pay off so the debt of off my books (balanced by the Insurance policy) repeat over and over again.... Ohh since these loans are fully insured they run out and package bundles of them up as AAA bonds and sell em off to market investors.

This is all fine and dandy, AIG wrote policys out for trillions in mortgages. To bad and they only had the cash to pay on a handful. No big deal they thought.. Home values have only gone up for 30 years..

The the bubble burst.. record numbers of homeowners were defaulting on mortgages. The Banks turned to AIG for the insurance. AIG didn't have the cash..

Now the banks are over leveraged and all those bad loans are wrapped up out there as AAA bonds they are liable for.

Thats why the feds have to keep pumping billions into AIG.. If they fail the policies fail. then the banks fail and the bond market fails..
You know the rest..

Re:This topic is too hot to handle.

[Estanislao Mart�nez]

If it is obvious that the debtor will never be able to pay back, you would have trouble selling the loan, right? Unless the buyer is unaware of the risk involved, of course.

Exactly. Securitization packages up pools of loans into bonds that get given a credit rating by an agency. A lot of bond buyers just go by the bonds' ratings. These bond buyers are the ones who ultimately provide the easy money that ends up being used for the junk mortgages.

Who are these bond buyers? All sorts of banks, and, more worrisome, retirement pensions and bond mutual funds in people's 401k plans. Look, for example, at what happened to Fidelity Ultra-Short Bond Fund. This is a fund that was supposed to be extra-low risk; it lists "preservation of capital" as a goal, and it's supposed to compete with money-market funds and bank accounts. It lost 20% because of exposure to highly-rated subprime securities.

Re:This topic is too hot to handle.

[homer_ca]

Fannie Mae and Freddie Mac held a significant fraction, maybe even a majority, of the collateral that was leveraged into trillions on Wall Street. There was no similar bubble in commercial real estate.

Not saying they should get most of the blame, but based on the sheer volume of collateral flowing through them, they were guilty of going along and enabling the eventual collapse.

Re:This topic is too hot to handle.

[Lemmy Caution]

The problem also includes the fact that "houses you can't afford" is a pretty vague category. There is the inflationary effect on housing prices which pushed up the costs of homes; one of the ironies is that people who had their homes foreclosed when they took out loans to pay for them at their boom-prices (when they couldn't really afford them, as 20/20 hindsight tells us) might well have been able to afford them at their post-bust prices.

Re:This topic is too hot to handle.

[homer_ca]

Here's one: I can rent an apartment that has everything I need for half to 3/4's of the price of a home.

Living in an apartment with only enough space for your needs?!? Why do you hate America?

Re:This topic is too hot to handle.

[Anonymous Coward]

It depends on how you define a "home". If you mean 3 bedroom, 2.5 bath with attached garage then you're totally wrong. Not everyone has (or will ever have) the wealth to purchase such a dwelling. If you reduce the definition of "home" to mean any kind of rudimentary shelter (say, a garden shed) then you're right.

I don't understand your claim that if "...our system allowed people to pay as they go...", there would be no problems. Where do you think homes come from? They're built. By people who want to be paid their full worth _now_, not over the next 30 or 40 years. Where do the builders get their money while they're waiting for payments to trickle in? Are they supposed to live on nothing for the first 10 years of their career before the trickle of money from each job accrues into enough of an income to survive? How are they supposed to get the materials to build the homes?

Somewhere along the line, SOMEBODY has to put up the wealth necessary to build the home.

Re:This topic is too hot to handle.

[Bassman59]

Great explanation, but you keep mistakenly using "whom" for "who" every time. -a

Re:This topic is too hot to handle.

[homer_ca]

It works both ways,

wife, kids and mortgage = obligations that tie you to a steady paycheck.
young and single = more conducive to insane overtime

I tend to agree that more obligations make you more of a wage slave.

Re:This topic is too hot to handle.

[homer_ca]

This point is often lost on people. Whether or not you personally participated in the bubble by buying or selling a McMansion, much of our employment and investments was either tied directly to real estate or supported by the general economic growth that was driven by real estate.

Re:This topic is too hot to handle.

[homer_ca]

The financial term is a non-recourse loan, and it doesn't apply to all mortgages. Most importantly, if you refinance the mortgage becomes a recourse loan; you'll owe the difference if you walk away. How many homeowners *didn't* refinance in the low interest frenzy of the early 2000's?

Still, it was common for banks to forgive the shortfall when foreclosing recourse loans.

Re:This topic is too hot to handle.

[Anonymous Coward]

> The problem was that financial institutions borrowed money to buy more mortgage securities than they had in available cash, creating an insatiable demand for securitized mortgages.

So, can we blame those mortgage spammers for some of this? It would be nice if we could pass a law to go after those rats...

Re:This topic is too hot to handle.

[explosivejared]

Actually, home ownership for all is a terrible idea. Not everyone needs to be a home owner, per se. Obviously, everyone needs housing, just not to own a house. Very high rates of home ownership have been consistently shown to be correlated with high rates of unemployment. A house is a tremendous fixed cost, and one of those costs is ones mobility as a worker. If your homeowner there is a tremendous disincentive to move to find a job. When recessions hit, this disincentive pushes unemployment higher and causes the recession to deepen and last longer. Home ownership for everyone is not only unaffordable, but it is dangerous economically. A mobile and flexible labor force is important for any economy.

Now to what extent did things like the CRA actually create this crisis is a whole other story. Government pushed home ownership certainly contributed, but it went hand in hand with a basically industry wide lapse of reason when it came to assessing risk in the financial sector.

Re:This topic is too hot to handle.

[Anonymous Coward]

We've been Osinski'd....

Judging by the last name's most likely origin, you should invade Poland. It's all our fault.

We're long overdue, and could use a new oppressor to start blaming for everything. ;)

Re:This topic is too hot to handle.

[Weedhopper]

I am intrigued by your ideas and would like to subscribe to your newsletter.

Is the tinfoil hat included as a part of the membership kit?

Re:This topic is too hot to handle.

[__aagmrb7289]

*laugh*

Re:This topic is too hot to handle.

[sgent]

In some states you can't have a recourse loan against a primary residence by law -- CA being the biggest one.

Re:This topic is too hot to handle.

[Bromskloss]

Thank you for your explanation. I was hungry for knowledge, and you gave me something to eat, which has now made me hungry for more!

Securitization packages up pools of loans into bonds that get given a credit rating by an agency. A lot of bond buyers just go by the bonds' ratings.

I've understood there exists credit rating agencies, but not why anyone would care about their ratings (they might be bribed, for example) nor what they base their ratings on. And what do they make money from? Who pays them for their work?

Re:This topic is too hot to handle.

[homer_ca]

The law is that a purchase money loan on a primary residence is non-recourse. A refinance is not a purchase money loan and is a recourse loan. Taking cash out in the refi may or may not make a difference, IANAL.

Purchase money loan defined as:

A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs.

Re:This topic is too hot to handle.

[Mitreya]

I know I will begin my slide towards the circle of hell reserved for the grammar Nazis by doing this...
But it's "Hear, hear!"

Re:This topic is too hot to handle.

[sjames]

Nobody required the banks to put people with little or no credit into McMansions with a time bomb loan. One of the big impediments to home ownership has always been the down payment. Had the banks done the RIGHT thing, they would have complied by loosening the down payment requirements and then lending amounts appropriate for a starter home.

Re:This topic is too hot to handle.

[jrumney]

Because they aren't allowed to charge interest (too Jewish or something)

The association between Jews and money lending was formed in medieval Europe, well after Islamic law was written. In medieval Europe, Jews were not allowed to own land, or into most of the professions that were protected by guilds, so they found other ways to make a living - ways that just happened to end up being better ways of generating wealth over the long term than the traditional land ownership of the European upper class.

Re:This topic is too hot to handle.

[geoskd]

Renting is not more expensive than owning property. It's fairly borderline, depending on what you do with the money you save through renting. There are plenty of other ways to build equity.

Renting is absolutely more expensive than owning, by a *very* significant margin. When people figure the cost to own vs. cost to rent, the costs are almost always figured in the present tense, but you need to consider the cost over the lifetime of the occupant. If you are looking at a house that costs $150,000, and you can get 8.0% (not great, but not horrible for someone on the low end of the credit spectrum), then you will pay about $1000 / month in rent, plus about $290 / month in taxes. A fair observation is that the property will also cost you an additional $290 in maintenance and insurance, so your total monthly cost is $1580. Now, say you can rent the same property for $1100 / month today, saving you $480 / month.

Sounds like renting saves a bunch of money doesn't it... Now stop and figure in the rest of the equation. That mortgage will cost you that same $1000 for thirty years, so you paid $360,000 plus about $105,000 in taxes, and $105,000 in maintenance, for a total of $570,000: bottom line, you have $150,000 in equity (assuming no growth in the homes value, which is ridiculous over that kind of time scale) for a total cost of $420,000. Divide that by 360 months, and you have $1166 / month (about the same as you were paying in rent to begin with).

Now, the magic part comes when you remember that you will *not* be paying $1100 per month for the rest of your life, every year, the rent will increase by roughly 3%, so in thirty years, your rent will be $2670 / month. If you calculate the total cost of the rent over 30 years, it then comes to $678,000, which is much higher than the $420,000 you paid to own the same home above. This is the fundamental reason why investors are willing to buy a property even knowing that the rent is 30% or more below what their monthly costs are at the start. Even if the property never gains any value at all, the investment still makes money, and the increase in property value just sweetens the deal. Plus after thirty years, their monthly payments drop by 60%, but the rental income stays the same; making rental property ideal as a nest egg for retirement: It starts paying off big time right about when you're ready to retire. The trick is surviving the first years while the investment is still cash flow negative.

This basic investment strategy, and the lending practices that enabled it, caused our current woes. Most of these investors were affluent people with big paychecks, leveraged to the hilt, so when things turned a little ugly, it took them down whole. Add on top of that, the speculators buying and selling houses based purely on the expectation of rising home prices, and the whole thing looks like what it was: a big bad idea. A bunch of investors who just wanted their money to earn money and didn't feel that they had any responsibility to have to work for their earnings, coupled with a bunch of over ambitious "entrepreneurs", who saw the long term potential of investment property, and over estimated their short term ability to take a loss, and down it goes. I own rental property. I started five years ago, but I took a slightly different approach. I only bought the properties I knew I could get a positive return on investment on right from day one. It doesn't need to be much, in fact, I can live with break even for a long time to come, but i was *very* careful. I turned my nose up at plenty of deals that would have paid of big time in the long run because of the sure knowledge that a turn for the worse would bring me down just like the rest. The funny thing is that most of us in the business saw trouble coming early, and scrambled to make ourselves healthy, which had the perverse affect of adding fuel to the fire. (I myself cleared two of my riskiest buildings right at the height of it, and clearly remember my mortgage agent thi

Re:This topic is too hot to handle.

[ahabswhale]

Really? Where's your references to back up such an assertion?

Re:This topic is too hot to handle.

[turbidostato]

"The crime is that the poor people bought homes they KNEW they couldn't afford."

How is this a crime? Is it a crime the desire to own your home? Is it criminal to take the money from one that have the experience, the experts and the responsibility to make a savvy decision if he decides to give it to me?

I'd better say that it was banks the real criminals offering *other's* money in loans they knew there was no chance to recover.

Re:This topic is too hot to handle.

[turbidostato]

"I tend to agree that more obligations make you more of a wage slave."

But that won't make you more productive, only more sumise.

Re:This topic is too hot to handle.

[The_Quinn]

The thing that is inherently wrong with trying to guarantee housing for all is that such a claim is an infringement on the rights of those who will be forced to provide that housing. There can be no right to take what you "need" from others.

Re:This topic is too hot to handle.

[The_Quinn]

Dont forget also that: 1. the government punished banks that didn't make risky loans through the Community Reinvestment act, 2. Government-licensed rating agencies gave AAA ratings to the securities, 3. the government created Fannie Mae and Freddie Mac, guaranteeing government debt and artificially lowering interest rates 4. The government's long (and increasing) track record of telling everyone they do not need to be responsible for their their own lives/decisions.

Re:This topic is too hot to handle.

[TerribleNews]

> the financial crises was caused by just about anyone

Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.

Yep, all 4 of them.

Re:This topic is too hot to handle.

[The_Quinn]

When was the banking industry deregulated? Was I sleeping? Are you?

Re:This topic is too hot to handle.

[gd2shoe]

there wasn't anything, strictly speaking, illegal done.

Oh, there was. There was probably a lot of illegal stuff going on. I don't understand that industry, but economists have said that the FTC usually overlooks illegal shenanigans. (purportedly because they don't understand the law either.)

As the other poster brings up, there was a lot of illegal stuff happening at the local level. Not only did entire loan offices commit wholesale fraud, they often did so with the assistance of home appraisers and others.

Re:This topic is too hot to handle.

[homer_ca]

Which part? The leverage ratio of derivatives ultimately backed by real estate collateral or the percentage of home mortgages guaranteed by the GSEs? Neither of those assertions are especially controversial. I will give you that the majority of FMA's and FRE's portfolios were conforming loans.

Re:This topic is too hot to handle.

[damasterwc]

The fact of the matter is that financial derivatives were sold in orders of magnitude higher than the actual contract. "Investors" made highly leveraged purchases, then with mark-to-market, predicted a profit, then leveraged that to buy more of them. All of these numbers are completely bogus and bunk. We need to defuse this time bomb. We need a new bank holiday to go through the books and write off all the fraudulent debt. In order for these objects to be politically feasible (WTF?!) we need a new Pecora commission, one with full subpoena powers, and one that will look at ALL angles, including Pelosi's sweethearts Soros and Rohatyn.

Re:This topic is too hot to handle.

[damasterwc]

This isn't a housing crisis... this is the derivatives bubble popping. The good news? Most of the value of the estimated $1 quadrillion is bogus... so with concentrated effort we can demand an investigation and subsequent banking holiday + receivership & reorganization. Bad news? Well, I think we need more people to see it this way, the way Roosevelt saw this same sort of issue...

Re:This topic is too hot to handle.

[ukyoCE]

Yeah. The problem wasn't giving loans to "poor" people. The problem was giving out too high of loans, with too little down, and no evidence of employment capable of paying the mortgage.

8-9 years ago (or do we have to go back farther?) your person with $30k annual salary and poor/no credit history would have to put down 20% to get a loan for a $140k home.

Instead, 4-5 years ago that person was getting an interest-only 3-year ARM for a $300k home that cost them $20k out of their $30k salary.

This drove house prices up, so they may have even bought the same $140k home, but paid $300k for it.

And then they lost their job, the ARM adjusted up, or all of the above at the same time.

Had nothing to do with the government "forcing" anyone to loan to poor people. Had everything to do with greedy lenders lying to get people into homes, and AIG lying that they could realistically insure it all.

Re:This topic is too hot to handle.

[Brian Gordon]

Not when the government owns the housing. Even in America the construction companies providing the housing get paid immediately; it's the private lenders who pay the bills that are screwed by defaults.

Re:This topic is too hot to handle.

[Anonymous Coward]

Dont forget also that: 1. the government punished banks that didn't make risky loans through the Community Reinvestment act, 2. Government-licensed rating agencies gave AAA ratings to the securities, 3. the government created Fannie Mae and Freddie Mac, guaranteeing government debt and artificially lowering interest rates 4. The government's long (and increasing) track record of telling everyone they do not need to be responsible for their their own lives/decisions.

Somehow, I suspect you feel "the gub'mint did it!" applies to everything except the party in power the last eight years, who, somehow, magically, are blameless.

Re:This topic is too hot to handle.

[ahabswhale]

Both.

I still call bullshit unless you got some referencable stats. I get sick of people on /. making all kinds of assertions with nothing whatsoever to back them up. So I assume they are lying or making it up unless they do.

Re:This topic is too hot to handle.

[ElectricRook]

When a $40,000 a year rent-a-cop finances a $500,000 home in San Francisco with what's now called "a liar's loan", yes that's a crime.

Re:This topic is too hot to handle.

[Duhavid]

"Why would anyone in the market have had an interest in loaning to high-risk individuals if it wasn't for the "affordable housing" and "homeownership for all" agenda pushed by both the Clinton and Bush administrations?"

Those who knew that they would only be originating the loan, taking fees ( and profit ) and immediately selling that loan off to some other company for defaulting on?

Re:This topic is too hot to handle.

[rtb61]

Actually /. is a very appropriate place to discuss this kind of activity. They got a programmer to automate a process basically because the executives in charge did not care about conducting anything even remotely resembling due diligence, all they cared about was getting paid as much as possible for doing as little as possible.

So did the programmer facilitate it, or did they just automate the process that corrupt executives were intent on creating regardless of how manual or automated it was. Clearly the whole scheme was intent on the creation of illusory profits in order to maximises short term executive bonuses regardless of the long term consequences, to paraphrase "mission accomplished" and yet the buggers still complain above not getting the final lot of bonuses after bankrupting their companies, which they knew was the inevitably result of their actions, hardly any surprises there.

So computer simulations are really good at creating all kinds of illusions, sometimes the manual way whilst it takes longer is still a whole lot safer.

Re:This topic is too hot to handle.

[Inthewire]

"Hear Hear"
And while I'm at it, it's. It Is.

For fuck's sake.

Carry on.

Re:This topic is too hot to handle.

[fractoid]

1) Contrary to what they told you, the property market doesn't always rise.

2) Lose. Not loose.

Sorry for the nitpick, and if you look at a larger time scale than the 20-or-so-years boom-to-bust cycle, then you're right. Personally, whatever property I end up buying in the coming years, I plan to sell all of it in 2027 or so and buy a crap ton of gold. I will then live on instant noodles for three years, sell the gold once the market's collapsed, and buy myself an island lair. :)

Re:This topic is too hot to handle.

[Nazlfrag]

Part of the problem is that the US is already waging its own one sided world war, with troops, tanks, planes, navies and missiles stationed in their thousands across the globe. It made little sense during the Cold War and makes even less sense now, unless one was trying to perpetuate an Orwellian continuous war. The private sector and banking markets may collapse but the military industrial complex will roll onwards, escalating its domain of influence until it produces an overtly military controlled police state or collapses on itself. If America would simply arm itself with a defence force and be done with it the government and country won't need to bankrupt itself to stay afloat.

Re:This topic is too hot to handle.

[smallfries]

It's strange that you can the US and UK financial systems excellent. There was a time when banks were conservative, the excellence that they sought was to maximise their returns by being very, very picky about who they lent money to. It was quite a good system.

What we are looking at now is the after-effect of a huge credit binge caused by those "excellent financial systems" throwing away risk assessment and throwing money hand over fist at anyone who walked past.

This is not a result of the system being left along (although loose regulation has clearly not helped). This was direct intervention. If interest rates are held artificially low to "stimulate" the economy then the binge on credit will commence. Perhaps one day economics will put the idea in the same bin as printing money to ease public spending.

Re:This topic is too hot to handle.

[Anonymous Coward]

I've understood there exists credit rating agencies, but not why anyone would care about their ratings (they might be bribed, for example) nor what they base their ratings on. And what do they make money from? Who pays them for their work?

That's the kicker, they are paid by, and make money from... the people whose bonds they rate. Keep in mind if they do not rate them favorably, they don't get repeat business.

Re:This topic is too hot to handle.

[Rycross]

Except if you look at the rate of foreclosures from banks covered by the CRA and the rate of foreclosures of CRA loans, they are not at a higher risk of foreclosing. The CRA did not mandate risky loans, only that banks not redline. It did not require banks to lend to people with low income or bad credit.

The CRA is a scapegoat for free-market advocates, but there isn't any evidence that it contributed to the financial crisis.

Re:This topic is too hot to handle.

[gd2shoe]

No, they all boil down to speculation bubbles. Abusing credit in the mix only makes things worse, but it's the speculation itself that is the problem.

Re:This topic is too hot to handle.

[Anonymous Coward]

Problem with this is, you still need somebody in the mix who has a vast sum of money - bank or owner - to provide the financing for the new buyer, or the new buyer will end up paying exorbitant monthly fees to cover the interest & risk on the loan the owner must take out to provide financing.

Apparently you and I have a slightly different grasp on the concept. The loan would be of the house itself, being paid off over time, ending with the transfer of ownership at a previously agreed accumulated amount. The security would lie in that the owner keeps the house should payments stop. Where do you get your "vast sum of money" from? This arrangement is known as "leasing" hereabouts, though I expect the term has different meanings elsewhere.

Re:This topic is too hot to handle.

[Anonymous Coward]

Ah, well ... someone has to do it! Nice and warm here, isn't it?

Re:This topic is too hot to handle.

[QuestorTapes]

> The association between Jews and money lending was formed in medieval Europe, well
> after Islamic law was written. In medieval Europe, Jews were not allowed to own land,
> or into most of the professions that were protected by guilds, so they found other
> ways to make a living

IIRC, Catholics were in a similar position in Protestant nations and turned to the same ways of making a living.

Back people into a corner and they'll do what they feel they have to.

Re:This topic is too hot to handle.

[horza]

You are looking on home ownership from a sentimental viewpoint rather than an investment one. Traditionally owning a home has seen good capital gains with relatively low risk. This is good for the owners, but also good for the economy as it's more stable and follows more reliable rules than the fluid stocks and commodities. Even those caught in negative equity during a bust will have recovered and turned it into profit if they were able to hold on to it for a few years. It's not especially difficult to sell a property and buy a new one in a different area, it's an effort but then so is finding a good rental property. The home owner can also rent out his property to cover his fixed costs if he wishes to move. Some even turn this asset into extra cash by using the increasingly popular foreign home swaps to travel.

Of course the above will not work if there is mass migration like in China from the villages into the cities, but this is unlikely to happen in the States or Western Europe. I'm not sure about the correlation you are talking about, as over the past couple of decades in the UK home ownership has increased and unemployment has decreased. With the current recession and repossessions, home ownership is decreasing and unemployment is increasing.

A final point is that if you make your labour force too flexible, there is also the risk of "brain drain" where all the most talented and productive workers leave the country for another one with better prospects.

Phillip.

Re:This topic is too hot to handle.

[Anonymous Coward]

What about those of us who actually bought what/where we could afford. And I mean bought. As in paid cash. No bank. Just saved and had to fill out the damn forms asking why we were withdrawing over $10,000. (and the bank did not accept hookers and blow for the answers on the form BTW) Yea, I've had a gun pulled on me twice in 10 years - but at least I don't have a mortgage.

Re:This topic is too hot to handle.

[Man On Pink Corner]

There was no similar bubble in commercial real estate.

Are you sure?

Re:This topic is too hot to handle.

[jonadab]

Actually, the whole fiasco really boils down to this:

Things (economically speaking) had been so good throughout the nineties, a lot of people had started to actually believe that the economy was always going to keep endlessly spiraling upward like that with no setbacks and no corrections. This is, of course, not possible in the real world, but people had started to believe it anyway, including people who ought to have known better, and so they started to behave as if that were the case.

When people believe that values will always rise, they overestimate the values of things, and that's where bubbles come from. And where there's a bubble, sooner or later it's going to pop. (Economists call this a "correction", because the market is correcting somebody's mistaken, overinflated concept of the value of whatever it is.)

Also, when people believe that values will always rise, they underestimate risk. For example, people who believed that property values would always rise underestimated the risk associated with investing in sub-prime mortgages, and so funds were invested in sub-prime CDOs that should not have been, because they could not tolerate the level of risk involved. (A "sub-prime" loan is a loan to someone who arguably can't really afford to borrow that much money. Typically they have less than 20% for a downpayment, which puts the value of the principal amount dangerously close to the value of the collateral. There are other factors as well.) If property values had continued to only rise all the time, it would have been okay, because in that case when somebody defaults the bank could simply foreclose, sell the house, and get its money back. But the reality is that values don't always rise all the time, and when housing values fell (it happens sometimes, over the short term), the risk inherent in sub-prime loans came home to roost, and the people who had assumed that this could never happen (don't you know, property values always rise?) discovered that they had made an error in judgment.

And they really should have known better. Nothing that promises to pay out more than double the prime rate comes without some risk. But they had sold themselves on the line, "values always go up", because values had *been* going up for a while, and so it seemed like that was the pattern. Like I said, things were so good in the eighties and especially in the nineties, people got to thinking that was normal and expected it to keep on going like that. But that kind of endless upward spiral is not sustainable over the long term.

Re:This topic is too hot to handle.

[RingDev]

Actually FMA/FRE combined represented less than 20% of the subprime mortgage industry in 2006. I don't have the citation handy, but I can dig it up later. They were both to some extent regulated by the federal goverment on their actions in the sub-prime market. The rest of the banks in to top 20 subprime lenders list, were not controled under the same regulations, and were free to lend to unqualified buyers.

The problem was worsened by the removal of the glass-spiegleman act. Which had prevent private lending banks from working as investment banks. With that law out of the way, it allowed the private banks to utilize CDOs to securitize these sub-prime mortgages. And that's where the over leveraging really ballooned.

If it hadn't been for the excessive leveraging by other banks leading to a boom and bust of the housing market, FMA/FRE would have likely been just fine. Sure, they may have had some lean times, but nothing like what we saw as the market plumetted.

-Rick

Re:This topic is too hot to handle.

[bsane]

it's the private lenders who pay the bills that are screwed by defaults.

Not when the Federal Government pays for the defaults.

Re:This topic is too hot to handle.

[Americano]

Because the house the owner is leasing costs money. You must have the money to first own the house before you can lease it to others. Somewhere in that chain of custody, the person who owns the house must have the sum of money available to own the house - for the vast majority of people, this means a loan. For a lucky few, it means they already have enough money to own the house free and clear.

Re:This topic is too hot to handle.

[TemporalBeing]

Until dollar loses some value the economy will not pick up and this does not happen until dollar falls.

There's also another solution - deflation, with currency pulled from the flow to raise the valuation at the same time. Done properly, it'll keep a solid value and raise the valuation while deflating the currency overall.

The odd thing here is that a currency's valuation is the direct inverse of the inflation it receives over time. Inflation decreases the valuation and deflation increases it.

Next up: Treasury to issue 1 dollar for every 2 to reverse inflation. (No - that would be the wrong way - but I wouldn't put it past a politician to do.)

The best way to do it would be to pay down the national debt and balance the federal budget.

Re:This topic is too hot to handle.

[Americano]

Not as vague as you might think. If your gross income is $2000 a month from all sources, how will you make a $1500 mortgage payment and meet all your other obligations? Simple math will tell you that $1000 + 1500 > $2000. If your cash flow after purchasing the house is net-negative, you cannot afford the house. If you're *betting* that home price increases will allow you to refinance out of your high-rate ARM before the teaser rate expires, you probably cannot afford the house.

It doesn't matter what the "future value" of the house will be if you cannot pay the bills at today's price, or if you're *relying* on future price gains to reduce your mortgage payment by allowing you to refinance to a better fixed rate. Lax lending policies & home-buyer's appetite for risk led people to gamble that those prices would keep going up. They lost the bet, and a sound financial advisor would have told them not to place the bet in the first place.

Re:This topic is too hot to handle.

[oh_my_080980980]

Wow, so basically what you are saying is, "My dog ate my homework."

It's just a wonderful way of denying responsibility for your actions.

Bravo. Let's just pass the buck

Listen up jackass, there's no agenda when you are trying to figure out the problem. It's pretty easy to figure it out when you follow the money.

Credit Default swaps were a problem back in the late '90s but Fed Chairman GreenSpan did not want to go anything about them when asked by Congress.

This coupled by the deregulation of the Banking Industry led by Phil Graham led to all this over leveraging. Basically you regulations that kept the Banks honest. One they were removed the Banks were left to the honor system. We know how well that works.

But back to the article. The guy denies any responsibility and even justifies it by saying, "provided banks donâ(TM)t resume writing mortgages to people who canâ(TM)t afford them."

Yes perpetuate that myth. It's the home owners fault. Thing is what happens to a person who loses their job? Well they no longer can afford to pay their mortgage. So they were able to pay their mortgage and now they are not.

So his notion that these are safe if only "safe" mortgages are written is false.

Nice one ass.

Re:This topic is too hot to handle.

[Anonymous Coward]

Renting is almost never more expensive than owning, in this country. About the only places that it happens to be are area whose housing prices have been depressed so much that people in general would prefer to rent rather than be stuck with the financial responsibilities of owning combined with falling or stagnant prices.

The reason for this basically comes down to how people price the cost to themselves.

Rental prices are priced by people at the monthly rental rate, plus maybe rental insurance.

Housing prices are almost always priced by most people by just the mortgage amount and by some more astute buyers by the mortgage, insurance, tax, and HOAs/common charges/etc. They almost never figure in maintenance, repairs, liability, associated costs with buying and selling.

You generally pay interest on a large amount of the purchase price. And even on the portion that you pay cash there is a lost opportunity cost to the cash you used.

Generally, there is a 6% charge to buy and sell by the realtor cartel. On the one end you are going to overpay ~6% when you buy (above what the seller decides he wishes to receive) and are going to surrender ~6% of your proceeds when you sell, even if you split the difference with the other buyer/seller that is still 3% each time. Also other closing costs can easily eat up another 3% on a buy/sell transaction. This means that by the time you sell you better sell for at least about 10% above your purchase price so as to avoid having to bring money to the table.

People figure they will save tons of money once they pay off the mortgage and have saved up equity. They do not account for the fact that they could have taken the savings from renting, invested it, and have grown a large nest egg in the same amount of time. They also do not count the 6%-7% they paid to save up that equity which in due fact may have also decreased below the purchase price either nominally or inflation adjusted (housing prices are normally suppose to increase at the rate of inflation).

There are three components to a house's price. The real value which is what the house is worth as a rental unit. Generally expenses run about 50% of the rent roll so this means that the real value of a property (including payback for the risk of ownership) works out to about monthly rent / 2%. After this there is the emotional value attached to owning the house itself and the gambler's value of possibly making a huge gain when you sell. The real value usually stays pretty stable however the other two can fluctuate wildly. People usually pay extra for the emotional and gambler's value.

Re:This topic is too hot to handle.

[Duhavid]

By that analysis, everyone is losing potential money, as you can always claim that there would be someone who could pay more.

Re:This topic is too hot to handle.

[Anonymous Coward]

The "foreclosures" are not what made prices drop. We were in a huge real estate bubble. Prices were inflated by fake demand created by all of those seeking to cash in on the boom. Once the bubble popped that fake demand started to disappear, rather quickly. With that fake demand gone prices are now heading back to where they should have been in the first place, with perhaps some overshoot to a new mean due to the destruction of the idea of property ownership being a path to wealth.

Re:This topic is too hot to handle.

[Maximum Prophet]

It's more complicated than that. If housing prices are not rising, neither are rents. Work the scenario at the height of the bubble, the owner will face falling value, but the renter will face failing rents. (Although he may have to move to take advantage of them)

Another disadvantage to owning is the "Love Canal" effect. My parents owned the house I grew up in and with a elementary school just up the road, it seemed stable. Then the City incorporated against the wishes of the County, so the County built a prison right next the the City's school. My parents moved before it was completed, before house prices in the immediate are plummeted. (Less than a week after opening, an inmate escaped from the new "Escape Proof Prison")

If you are uncertain, rent. If you find a piece of property that you want to live in for many years, buy. All the math in the world isn't going to a difference.

Re:This topic is too hot to handle.

[The End Of Days]

No, unless we're going to start putting the people who accepted loans they knew they could never pay back into jail as well.

Re:This topic is too hot to handle.

[jotaeleemeese]

Which is exactly what happened (sigh, months of this going on and there are still people out there that are not grasping the issues).

Once sub prime mortgages where securitized and those securities divided (and those bits sold individually) there was no chance in hell that any bank buying the stuff could say if they were buying a pot of gold or of the proverbial shit.

Enter rating agencies. These idiots didn't do their work, they simply looked at the securitized mortgages, saw a big name behind them (like Lehman Brothers lets say) and gave them a good rating, anyway Lehmans is paying for the service and you don't want to upset your client....

The whole system is full of incompetence, corruption and complexity.

Re:This topic is too hot to handle.

[pod]

You can pretend to do all kinds of math, but renting is almost always the better choice. It is strictly better in a housing bubble market. Once you factor in mortgage closing costs and property fees, interest, property tax, maintenance, repairs, upgrades, and broker (realtor) fees and taxes when you sell, you are losing a lot of money. That's assuming you buy during a sane market, and housing, at best, maintains its value vs median income.

That's not even counting the opportunity cost of forgone income due to mortgage interest, significant personal time investment into maintaining and upgrading the property, and greatly reduced mobility (also, if you want to move you may have to make overlapping payments on two mortgages, especially in a buyer's market).

Renting, and pocketing the difference (to, say, invest in something that pays more than rate of inflation) will make you better off than the person who's just done paying off their mortgage. UNLESS, you guess right and buy in a low market, or in an area that experiences significant rise in values.

That said, I have a mortgage, because I like the peace of mind (I HATE moving) and being able to take the hammer and rearrange things, but I also recognize that I am paying way more than I could rent the place for.

Re:This topic is too hot to handle.

[pod]

To follow up, basically look at it this way.

Housing, historically, ideally, rises about equally to rate of income growth. "Affordable" housing is usually 2-3 times the median annual income. Incomes have not been keeping pace with the official inflation figures, never mind actual inflation figures (CPI excludes housing and energy costs... why? who knows, it just does).

But if you assume incomes keep pace with inflation, and so does housing, you're paying a rate your mortgage dictates (definitely higher than rate of inflation) to maintain the value of your money (the house). You could have just bought T-bills instead, and made a better return, then, after 20-30 years, bought yourself the same house with only a portion of the profits.

Rents never exceed the cost of a mortgage payment. They do sometimes, in some markets, for a period of time, but it always settles down.

Re:This topic is too hot to handle.

[pod]

Giving a loan to someone who cannot afford it, or is a high default risk, is not illegal. It is bad business, but not illegal. It may be actionable by shareholders and you may be found personally liable (unlikely), but it is not illegal.

Re:This topic is too hot to handle.

[Hognoxious]

Nothing to do with Jews.

Shakespeare didn't thinks so.

Re:This topic is too hot to handle.

[Neeperando]

Middle class and wealthy people bought homes they couldn't afford, too, which contributed just as much.

I've never understood blaming this whole thing on "the poor" when it seems pretty clear that everyone in every financial position was suffering from collective delusions about the health of the housing market.

Re:This topic is too hot to handle.

[turbidostato]

"When a $40,000 a year rent-a-cop finances a $500,000 home in San Francisco with what's now called "a liar's loan", yes that's a crime."

Yes, if that's the case. But it seems more of the times it was more about "Hey, listen to me: I'm the expert one here, so let me tell here you earn 200.000 a year instead of 40.000; it's standard practice" which indeed seemed to be the case since all the people known by the poor bastard were told exactly the same.

Re:This topic is too hot to handle.

[geoskd]

It's more complicated than that. If housing prices are not rising, neither are rents. Work the scenario at the height of the bubble, the owner will face falling value, but the renter will face failing rents. (Although he may have to move to take advantage of them)

I'm not sure where you live, but I have owned rental property in three cities in two states, and lived in apartments in a third state, and I have never seen any situation where the rents go down. Not even the current situation is causing rents to drop, quite the contrary. An increase in demand has allowed me to increase rents on all of my units significantly above the usual 2-4%. The rents may stay stable for a while, but again, you have to take the long view, any one decade or other is irrelevant, only the 30+ year time-span is important when calculating the value of renting vs owning.

-=Geoskd

Re:This topic is too hot to handle.

[splatter]

Really who are the other three.. oh I'm sorry you were trying to be FUNNY..

Re:This topic is too hot to handle.

[sbeckstead]

In that case, yeah it might be illegal, but who lied, the consumer or the loan agent, who decides?

Re:This topic is too hot to handle.

[The_Quinn]

Of course the CRA is not the sole cause (I indicated 3 of many in my post), and the borrows had some blame, and the lenders had some blame.

The lenders should have suffered humiliation and bankruptcy, but, just as in previous savings and loan scandals of the past, the government didn't allow that.

Given that the government has a track record of bailing out companies that make mistakes, absorbing (and encouraging) risk, promoting home ownership, and steadfastly eliminating the need for personal responsibility in so many aspects of life, it is naive to think (as is commonly reported), that this is a problem of "lack of regulation".

Re:This topic is too hot to handle.

[jonadab]

> Why would anyone in the market have had an interest in loaning to high-risk individuals
> if it wasn't for the "affordable housing" and "homeownership for all" agenda

You have a point, but it's also true that the risk was underestimated. Some people who *ought* to have known better had themselves convinced that "property values always rise over time", and so they underestimated the risk associated with subprime mortgages. If it were indeed absolutely true that property values without exception rise over time, the risk would then be minimal, because the bank could always foreclose and sell the house and get its money back. There's some overhead associated with doing this, so the bank would typically prefer that everyone make their payments as agreed, but on the whole mortgages would be a fairly safe investment, IF it were really true that property values always rise. But, of course, while property values tend upward over the long term, sometimes they don't rise over the short term. In that case, the bank gets stuck holding a house that's worth less than the mortgage. That's the risk the investors forgot to properly account for.

When any significant number of people become convinced that the value of Item X always rises (whatever Item X may be), this causes a Item X to become overvalued (i.e., a bubble), a situation that invariably leads to what economists call a "correction", i.e., sooner or later the bubble pops and prices fall back toward (or, in some cases, temporarily below) what they really should have been; thus, the prices are corrected to better reflect the item's actual value. The people who were doing the investing in the collateralized obligations *ought* to have known this. I mean, it's Econ 101 stuff, not something you can afford to be ignorant of if you're in charge of investing risk-averse funds. But property values had been increasing for so long, people started to believe it would continue indefinitely. That was an error in judgment.

The investors *also* should have known better because the investments in question were offering interest rates well above what would be considered normal for a safe investment. Well, the numbers were reasonable if you took them out of context, but the prime rate was low at the time, and so of course interest rates were running low across the board. Yet, these subprime mortgage investments were offering rates double, triple, even quadruple the prime rate, and that's *not* normal for a safe investment. The investors' brains should have been screaming "TOO GOOD TO BE TRUE", but they allowed themselves to be lulled into a false sense of security.

Incidentally, there's nothing per se wrong with investing in subprime mortgages, provided you know what you're doing and have a sufficiently diverse portfolio to tolerate the associated risk. But treating a risky investment as if it were a safe investment, that's dangerous.

Re:This topic is too hot to handle.

[Anonymous Coward]

Rents are going down all over right now. Even in NYC, in Manhattan no less. I hope you built in some cushion into your finances.

As for the 30 year horizon... Most people move within 7 years these days. There is also a significant cost to selling and buying a place. Namely the 6% realtor tax and the ~3% or so in other closing costs. Considering properties do not generally rise above the level of inflation it probably costs most people money when they switch houses during normal appreciation times (not to mention the current situation).

Re:This topic is too hot to handle.

[Anonymous Coward]

And why would the bank and the investors that bought up their mortgage backed securities do this? Basically you want us all to believe that these sons of b$$ches were so evil that they forced or tricked people into borrowing their money that they did not have a prayer of paying back.

Now in reality a good part of the trouble was due to many parties in the transaction being paid by the transaction and not the end result of that transaction. However why did the evil banks and investors allow this to happen? What evil plan could be based upon lending some 30k/year fool 500k on a property actually worth more like 100k? Were the banks and investors that desperate to end up overpaying in a legally complicated way for some rat hole?

The reality is that EVERYONE banks, investors, government, BUYERS, the populace, etc fell for the same delusion that property values always go up, and not only up a little but a lot, and they are a great investment. This cult became a worldwide phenomenon that engulf practically every nation. Everyone and every nation thought they could get rich by just selling property to each other. The ultimate build it and they will come fiasco.

Re:This topic is too hot to handle.

[GWBasic]

There's plenty of blame to go around, anyone who claims one group is responsible is pushing an agenda or very short sighted.

Well... Someone selling investments that he/she knows are going to fail can't exactly hide behind the "I was just following orders" excuse.

Re:This topic is too hot to handle.

[GWBasic]

Except for folks who bought within their means and paid their mortgages on time. Sadly, they will now end up paying for everything else.

It was a lot worse during the depression when everyone HAD to pay their mortgages back. What happened was that, as soon as someone got a job, he/she would start paying the mortgage. This kept money out of local economies, which caused more job loss, which effectively hurt the responsible people even more. Even if the responsible people were able to keep their jobs, their wages decreased, effectively increasing the portion of income that had to go to the mortgage.

IMO, It's a lot better to bite the bullet now and use inflation to reduce the real value of responsible peoples' debt. Remember, when there's high inflation, the real value of debt goes down.

Re:This topic is too hot to handle.

[tcopeland]

> Remember, when there's high inflation, the real value of debt goes down

Kind of hard on folks on a fixed income though - elderly folks, etc. Any savings that they scraped together gets eroded.

Re:This topic is too hot to handle.

[turbidostato]

"However why did the evil banks and investors allow this to happen? [...] Were the banks and investors that desperate to end up overpaying in a legally complicated way for some rat hole?"

Because no matter how much the liberal du-jour tries to convince you of it corporations don't have a soul nor a volonty: people do. The banks didn't allow this because they can't allow a shit. People can. And it happens that people at the head of it knew they were not risking *their* money but that of the corporation and in exchange they were making indecent ammounts of money that finished in their pockets. And these greedy bastards -that I already told, were the ones with the abilities and the experience, did perfectly know that no matter what, they would end up either being nastily rich or being fired with compensations that would make them almost nastily rich -oh! and all this backed by public money because of their great performance as it indeed has happened.

"Everyone and every nation thought they could get rich by just selling property to each other."

When a father tells his little child that the Moon is made of cheese, would you think the child is guilty if he wants to use it for a hamburger Moon-sized? What now if it were the father the one asking for it? In an equation with an illiterate guy on one side and a Ivvy League member in the other I *do* know which one is the worst scum when shit hits the fan.

Re:This topic is too hot to handle.

[GWBasic]

Kind of hard on folks on a fixed income though - elderly folks, etc. Any savings that they scraped together gets eroded.

I agree; although I think it's a solvable problem.

More than anyone could have predicted?

[brian0918]

This article from eight years ago sure did a great job of predicting this whole thing. Is it any surprise that when a government (whether under Clinton or Bush) promotes "affordable housing" as an end in itself, by manipulating interest rates and bank regulations, that they're bound to create a bubble, and bubbles by definition cannot last?

Re:More than anyone could have predicted?

[netscan]

A lot of really smart people saw this coming, but as long as the money is flowing people have a tendancy to see it in a different light, ie: "Oh, I'll get out before this catches up to me, because I'm Smart".

Re:More than anyone could have predicted?

[Anonymous Coward]

From that article:
"It will take a Republican president to change or abolish CRA, so firmly wedded to it is the Clinton administration and so powerfully does it serve Democratic Party interests."

They must have missed that memo when they had full control of the senate and congress oh so long ago...

Re:More than anyone could have predicted?

[blueg3]

Interesting. I don't see predictions in that article that are anywhere close. Perhaps you could quote from the article where it "predicts this whole thing" (or at least parts); that should be easy enough if the article did a "great job".

Re:More than anyone could have predicted?

[DomNF15]

Indeed - anyone with a grain of common sense would quickly realize that making a bunch of loans to people that normally could not get or afford them is a bad idea. What is perhaps worse is creating investment vehicles based on those loans and amplifying the effects when, surprise, the people you loaned the money to can't pay it back.

Re:More than anyone could have predicted?

[hondo77]

Finding someone who "predicted" current events is easy. There's always one monkey out of the millions with typewriters who gets it right. Finding someone with a long, successful record of predicting the future? Good luck with that.

Re:More than anyone could have predicted?

[thethibs]

Nassim Taleb repeatedly predicted these events and made a fortune putting his money where his mouth was.

Re:More than anyone could have predicted?

[vertinox]

Is it any surprise that when a government (whether under Clinton or Bush) promotes "affordable housing" as an end in itself, by manipulating interest rates and bank regulations, that they're bound to create a bubble, and bubbles by definition cannot last?

I think they key problem here was the lack of regulation than too much of it.

First, subprime lenders were lending money to people who didn't even meet federal standards, then bundling this toxic debt into CDOs and then selling it off to people who didn't even look at the credit of the people in the inside and then sold it to other people.

Secondly, the subprimes were talking these people and other borderline credit score people into adjustable loans.

Then federal reserve twiddled its thumbs about raising interest rates when it needed to calm the situation but because everyone had adjustable loans, the had no choice to default en masse making the situation worse.

Oh and don't forget about the uptick rule that the SEC removed that prevented short sellers from shorting on stocks on downward movement that had originally been in place for 70 years because of the 1929 market crash! And people have to ask why the market did what it did.

So yes... More regulation would have stopped this.

1. Banks and subprimes should have been regulated into not giving loans they knew could not be paid back.
2. Uptick rule needs to be reinstated which they are doing soon under the new head of the SEC.

And don't bitch and moan about free market because it has been historically observe that free market does correct itself but always... AND it always creates boom and bust cycles through the past 500 years of free hand markets. Which is why we get depressions.

Re:More than anyone could have predicted?

[Actually, I do RTFA]

The CRA had nothing to do with affordable housing. It simply stated that banks could do business in an area or not. If they wanted to accept deposits, they also had to write loans.

Seems like a good plan, aimed at either making big banks be part of a community, or getting out of the way so that another bank could fill that gap.

Re:More than anyone could have predicted?

[maxume]

Why would shoving his money down his backside make him money?

Re:More than anyone could have predicted?

[darkmeridian]

The CRA had very little to do with the collapse of the economy. Most notably, many of the subprime lenders were non-bank entities that were not subject to the CRA. The problem was that banks paid $200 million to lobby for the repeal of Glass Steagall, a venture in which they were successful. From that point on, banks were allowed to participate in hedge-fund like activities like buying up mortgage-backed securities. When GS was repealed in 1999, a senator noted that "we would regret this in ten years." He was spot on.

Re:More than anyone could have predicted?

[DerekLyons]

This article from eight years ago [city-journal.org] sure did a great job of predicting this whole thing.

The amazing thing about the internet is that no matter what happens, it's easy to find the guy the predicted it would happen. Even if the next day he predicted the Brooklyn Dodger would win the pennant in 2001.

Re:More than anyone could have predicted?

[31415926535897]

Oh and don't forget about the uptick rule [wikipedia.org] that the SEC removed that prevented short sellers from shorting on stocks on downward movement that had originally been in place for 70 years because of the 1929 market crash! And people have to ask why the market did what it did.

This had very little to do with the market's downturn. The market went down because people were taking their investment dollars out of the market. People who were long were going flat.

Just because the uptick rule went away doesn't mean it was a free for all to short every stock (or any particular stocks, like financials). There are still rules in place. You must have a locate (which means your broker has to be able to loan you actual (long) shares) before you can short. This places a real limit on the amount short selling can impact the market, and we would have hit that very quickly. In fact, for a very long time, it was hard/impossible to borrow many, many stocks.

The market definitely needs regulations, but it needs the right regulations. Right now it has a bunch of flipping stupid ones, and it's missing a bunch it ought to have. The uptick rule is not one of the regulations it needs.

Re:More than anyone could have predicted?

[BeanThere]

Nouriel Roubini?

Our economies are incredibly complex, but there is no voodoo or anything mystical involved - someone smart enough, with enough information, can make meaningful predictions - because it's just difficult, not impossible. This isn't like an unpredictable natural disaster. We're not merely being subject to random tragic events that nobody can possibly predict.

Re:More than anyone could have predicted?

[TerribleNews]

So yes... More regulation would have stopped this.

I always find it interesting when the knee-jerk reaction to regulators dropping the ball is to increase their authority. "The regulators screwed up, let's give them more power!" It just feels a little bit like leaning into a punch to me...

Re:More than anyone could have predicted?

[nbauman]

Just to get an idea of where this article is coming from:

City Journal Winter 2000
The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities
Howard Husock

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities--and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being....

http://www.city-journal.org/html/10_1_the_trillion_dollar.html

Re:More than anyone could have predicted?

[ukyoCE]

"Affordable housing" refers to making houses cheaply. Not banks giving out loans to people who clearly can't afford them and counting on AIG insurance to bail them out.

Re:More than anyone could have predicted?

[Anonymous Coward]

Booms and busts will happen no matter what. Government meddling only delays the inevitable and makes the busts far bigger when they finally hit.

Re:More than anyone could have predicted?

[Anonymous Coward]

I don't understand why everybody thinks that regulation is necessary to prevent depressions. I think it is perfectly okay to let people lose money.
Take a loan you can't pay and loose your house? Tough luck. Give your money to the Maddof and lose all of it? Tough luck.
Anybody who had their money in cash or in a deposit didn't lose a cent. Everybody else was taking a risk and trying to make a profit. Sometimes you win sometimes you lose.
We can't regulate profit.

Re:More than anyone could have predicted?

[thethibs]

You really should post that kind of stuff anonymously.

Re:More than anyone could have predicted?

[maxume]

Why?

Off by one

[diablovision]

Makes my off by one errors seem so quaint. Add 12 zeros and soon you're talking about real money.

Re:Off by one

[moderatorrater]

Yeah, my off by 0000000000001 error seriously fucked up our program. Nearly got fired over it.

The real reason behind the meltdown

[The_mad_linguist]

The real reason is just generalizing the default rates from the small pools of subprime mortgages given to people who had background checks to big steaming piles of freshly-made subprime mortgages, given to whoever comes in the door...

Re:The real reason behind the meltdown

[tilandal]

Classic case of garbage in garbage out. If you are selling mortgages to people who can not afford them and getting them approved by using phoney income numbers is it any wonder it blew up? What caused the meltdown was not securities or CDS or quaints or a piece of software. It was fraud plain and simple. Fraud on a massive and unprecedented scale; committed by lenders banks and ordinary citizens all trying to cheat the system.

Re:The real reason behind the meltdown

[david_thornley]

I was contracting at a mortgage company from Summer 2006 to Summer 2007, working on a model to predict mortgage behavior (and watching the office getting emptier and emptier). A few observations.

Why, in the name of the FSM, did my data have "stated income" as a yes-or-no field? Nobody sane would make a major loan to somebody who couldn't even verify his or her income, unless they had absolutely no concern about whether it would be paid. Nobody sane would purchase such a loan from a broker. There was no federal regulation saying "You have to make loans to indigent liars" that I know of.

We had several projections of housing prices. The number of them that showed any sort of decline? A bit less than one. It wasn't that nobody was talking about a bubble, either.

What I saw was idiotic, short-sighted, greed, laid out in 1s and 0s. This had nothing to do with any sort of pressure, other than for the quick buck right now.

Re:The real reason behind the meltdown

[homer_ca]

Before the bubble, all these exotic loans were small niche products with arguably legitimate purposes. Option ARM for the recent MBA or law school grad who can expect high income growth. Stated income as a "wink, wink, nudge, nudge" way for escorts and drug dealers to buy homes.

Re:The real reason behind the meltdown

[zuperduperman]

> Why, in the name of the FSM, did my data have "stated income" as a yes-or-no field? Nobody sane would make a major loan to somebody who couldn't even verify his or her income, unless they had absolutely no concern about whether it would be paid

That is very close to the crux of the problem. So why *did* companies make those loans? Because they believed the fiction of their own flawed models that said they could predict the failure rates of such mortgages.

Simplistically, they just look historically at the percentage of such mortgages that fail and figured out what interest rate they needed to charge to ensure they still made a profit. Maybe even as many as 80% of them might fail, but you can still make profit if a) you charge enough interest and b) the value of the asset backing the loan doesn't fall. The fiction is that you can combine the failure probabilities together and lessen the risk.

Consider: if two mortgages with 80% chance of failure are combined together, what is the probability they will both fail? Simplistically, 64%, right? So keep on grinding, keep adding more ... it keeps falling! Amazing! But it's completely wrong ... these variables are not independent, it's high school statistics to know you cannot multiply the probabilities to compute the overall failure likelihood. But they essentially fell for a much more sophisticated version of this and keep computing lower and lower risk until someone like you or I would buy it and put it in our pension fund (or more correctly, we would choose a pension fund that would put it in there, but it comes to the same thing).

Re:The real reason behind the meltdown

[Anonymous Coward]

Not sure I agree. It was some much fraud as it was plain ol' stupidity. Everyone thought that housing price could only increase - so lender and home buyers alike didn't care whether or not a loan could be paid off. Everyone believed that the value of the property would offset loss or default (If you were the lender and the borrower defaulted, no big deal, foreclose on the house and profit off the increased value - if you were the borrower and defaulted, no big deal, sell the house, more than enough equity there).

Problem is, that kind of growth is neither real or sustainable. But nobody seemed to care. Our economy is based on the idea of exponential growth. A company has a bad quarter if their quarterly profits don't increase more than they increased last quarter. The media reports daily on the ups and downs of the dow and goes into a frenzy when it doesn't gain 100 points in a week.

It's not fraud - it's an ideology that is inconsistent with reality.

Re:The real reason behind the meltdown

[mgblst]

Your statement indicates you are missing a major part of the issue. The people who were handing out these loans do not care if they blew up. They made money on getting loans, not getting payments. They made a lot of money. The people selling the CDS made money, lots of money. They don't care if the system crashed.

Re:The real reason behind the meltdown

[lilrobbie]

Wow.. That is one of the most succinct explanations of CDO's I've ever heard. Well done!

Re:Red?

[hezekiah957]

Until you de-redified it. Thanks.

Fixed that for you

Sorry guys, it was me....

[syousef]

....I started world war II, even though I wasn't born yet. World war I. Me again. I messed up the decimal point. I hate that. I always do that. Oh and that devasting flu epedemic that killed more people than the war. me again. The rise of aids. I'm afraid that was my friend Jim. Excuse me please I have to go take my little red pills.

Re:Sorry guys, it was me....

[khallow]

Hey, syousef, could I pick up responsibility for the Black Death, this weekend? I need a good pick up line. Promise to return it, good as new, Monday morning!

Re:Sorry guys, it was me....

[phorest]

I have no sympathy, though pleased to meet you, devil.

Re:Sorry guys, it was me....

[K. S. Kyosuke]

Black Death? Is that what a Black Metal and Death Metal fan has left after passing through an airport X-ray checkpoint?

Re:Sorry guys, it was me....

[Anonymous Coward]

You, sir, are a liar. Here's the movie about the real guy who started WWII:
http://www.amazon.com/Unleashed-World-Rozpetalem-Wojne-Swiatowa/dp/B000DT8OQU

Re:Sorry guys, it was me....

[Blakey Rat]

Reminds me of the Kids in the Hall sketch: "Sorry for causing all that cancer."

http://www.kithfan.org/work/transcripts/one/brucecancer.html

Here's one reason the financial system failed.

[Anonymous Coward]

Two words: Information asymmetry.

Re:Here's one reason the financial system failed.

[dkleinsc]

That is one of the most fantastic explanations ever offered, and by an AC no less.

A more in-depth explanation for those who want more than 2 words:
1. A mortgage broker knows more about mortgages than your typical homeowner, and uses that advantage to sell a bad deal to said homeowner. The reasons it's a bad deal are buried in the fine print that would take a real-estate attorney to sort out (which a typical sub-prime borrower couldn't afford). The mortgage broker promptly collects the commission.
2. The mortgage company that the broker works for builds a security that nobody really understands that effectively hides the bad loan that the broker gave out. They work with the security rating agencies to make sure it has a good rating even if it shouldn't. Once someone buys the security, the mortgage company has its profits and no risks.

In other words, every step of the way the mortgage brokerage has more information than any other party, and uses that to screw over borrowers and investors.

Re:Here's one reason the financial system failed.

[averner]

Solution - accountability on the part of brokers?

Re:Here's one reason the financial system failed.

[dkleinsc]

Unfortunately, that's difficult to pull off, because most of what they did was completely legal, and there's a constitutional prohibition against ex post facto laws (for good reason).

Re:Here's one reason the financial system failed.

[Thaelon]

One word: Deception.

Re:Here's one reason the financial system failed.

[mapsjanhere]

Odd that you mention that, I was reading this and thinking "Eichmann". He was proud too of how well everything he'd thought up worked, out there, somewhere. He just couldn't get away with it since they didn't care about the "ex post facto" stuff.

Re:Here's one reason the financial system failed.

[__aagmrb7289]

Variable rate mortgages aren't really all that hard to understand - it doesn't take an expert to understand that when things go bad, your rates will go up - perhaps to unaffordable levels. I've seen the friggin' paperwork - it's just not that hard to understand, if you bother reading what you are signing - AT ALL. Blaming the mortgage broker alone is silly.

Re:Here's one reason the financial system failed.

[radish]

The reasons it's a bad deal are buried in the fine print that would take a real-estate attorney to sort out (which a typical sub-prime borrower couldn't afford).

My impression (and I may be misinformed here) was that the majority of these loans are going bad because people were given more than they could really afford, using a short-term ARM with a big uptick to make the payments look low initially. Now I might be out of line, but when signing something as important as a mortgage, isn't it really a good idea to understand it? The "truth in lending" papers are pretty comprehensive and explain exactly what an ARM is and what it means, as well as things like balloon payments. I know I had to sign many disclaimers indicating I had read the sheets and understood them, that my payments weren't fixed, etc.

Sure where there was upselling & fraud the brokers should be held accountable, but there's responsibility on the part of the borrower too, claiming to be too stupid to understand simple math is a pretty poor excuse in my book.

Re:Here's one reason the financial system failed.

[dkleinsc]

Now try and have the same understanding if instead of your college education in a numerically-oriented field (e.g. physics, CS, math, and so forth) you're at about the level of education you had at around 9th grade. There are a lot of adults with roughly that level of education running around, and a lot of them are potential subprime borrowers.

I'm not saying the borrowers were saints, but brokers definitely took advantage of their ignorance in general and specifically about mortgages.

Re:Here's one reason the financial system failed.

[loners]

The borrowers were told that they would refinance in a couple of years to get another low rate.

There was a lot of short sightedness and trusting the fox to watch the hen house.

Re:Here's one reason the financial system failed.

[AvitarX]

I don't think this is true.

The general terms of a mortgage are fairly simple, and don't require an attorney to understand.

Things like interest only, balloon, ARM are easy to understand to most everyone, unless they do not have it explained. The mortgage broker misrepresenting is not legal. Not that it matters, because their commission won't cover the damage done (houses losing 20% of their value when mortgaged against 100% of the purchase price).

The real problem is that nobody gave a shit, because if someone couldn't pay their mortgage, it was easy enough for them to sell the house for a profit and get out anyway. The banks didn't care, because they were getting money for nothing lending to people that couldn't afford it. Said people would just sell the house, and make money even.

A guy I work with purchased 3 houses interest only, turned them around in 8 months for a nice profit and purchased 3 more. Now the mortgages have adjusted, and are no longer interest only. He has one rented out now, with the rent being hundreds less than the mortgage payment. He knew what he was doing, and I am willing to bet that it was people like him that caused the crises much more than the un-informed masses.

I would hear a lot of "well if it is too much house, I can always sell it", even if it wasn't purely for profit, and just a nicer house than could be afforded.

I say this as someone who has nothing but benefited from the loser rules of the last 4 years.

They let me get a mortgage there was no way I could pay (using their calculations), I knew I could because I had 2 room-mates lined up for an additional $700/month they didn't consider, but I could easily have wanted to move my family of 4 into the house too. Nobody in the chain of responsibility would have cared, and this with about 1% down (plus 3% sellers assist). Mortgage + Car + Car Insurance left me $340/month to live.

I then went and purchased a house to move into about 6 months ago. My wife and I qualified for the second house, while I still owned the first. The two mortgages combined are within $1000 of our total take-home (best case). Considering the other costs we have to keep alive and employed it was a pretty bad bet to make IMO (and actually by that point people really should have known better).

Re:Here's one reason the financial system failed.

[__aagmrb7289]

You are making an assumption about me that isn't true. I don't have a college level education in a numerically-oriented field. The paperwork spelled out different scenarios, based on the variable rate. It's the fucking law. And it was right there, in black in white, no math required. So yeah, the average ninth grader who ACTUALLY GLANCED at the paperwork would be able to understand, in my opinion. Have you seen this paperwork? And yes, the brokers definitely took advantage. I'm just suggesting that we don't buy the "I was fooled, but anyone would have been!" bullshit defenses that I've seen reported on the news by people who took these variable rate mortgages and who I (and you, and our children, indefinitely) will be bailing out.

Re:Here's one reason the financial system failed.

[jandrese]

IMHO, the Mortgage Broker is supposed to be the person who makes the judgement call as to weather you are a default risk or not. Back in the old days that was the bank manager and they had their skin in the game. In the new system, the bank immediately resells the debt so there is far less incentive to scrutinize the application. In fact there is an incentive to approve as many as possible, because they make a commission on each one. Is it any surprise that this safeguard broke down as a result?

Re:Here's one reason the financial system failed.

[__aagmrb7289]

So, if the bank says you are good for a $100,000 loan, with a payback rate of $200/month, you have no responsibility to mention that your budget only has $100 of free cash to pay the thing back? I'm not sure I understand your point, but if you are absolving the person receiving the loan from the responsibility to consider whether or not they can cover the costs of the loan, then I'd suggest that you reconsider. And to be clear - of course the lender has that responsibility too.

Re:Here's one reason the financial system failed.

[PitaBred]

Seconded. I believe there are even rules about how confusingly those things can be worded, some specific ways that they cannot deviate from when writing the contracts. If you can't figure out what's good and what's bad from that...

Re:Here's one reason the financial system failed.

[eddiegee]

A lot of people like to blame bad mortgages for the financial meltdown, but that was just the beginning of what makes this recession unlike others. The real damage was that big financial institutions were using mechanisms like this guy's software and David Li's formulas to leverage mortgage and bond funds to insane proportions (like in some instances, 20 to 1). When these supposedly safe financial instruments like collateralized debt obligations and credit swap defaults, which mixed good paper with bad, started to fail they took out hundreds of billions of value that was pretty much made up out of thin air by these speculative instruments. This money was of course propping up these firms so the inevitable result from losing so much value nearly overnight is collapse. Now it's taxpayer money propping up the same financial firms that caused all this, and they're STILL screaming for no new regulation!

Sorry if this is too simplistic but it took a banking executive with an MBA and Masters in statistics two hours to fully explain this to me and she still admitted she doesn't understand it fully. The problem was no one in the industry ever did.

Re:Here's one reason the financial system failed.

[az1324]

Don't forget his partner in crime: Ignorance.

Re:Here's one reason the financial system failed.

[Anonymous Coward]

Variable rate mortgages aren't really all that hard to understand - it doesn't take an expert to understand that when things go bad, your rates will go up - perhaps to unaffordable levels. I've seen the friggin' paperwork - it's just not that hard to understand

I suppose it depends on the extent to which one believes the broker's assurances that financial markets are in a new paradigm where interest rates won't go up. Or your own optimistic hopes that your income will double by the time the load resets

Re:Here's one reason the financial system failed.

[Anonymous Coward]

What? GP has nothing to do with variable rate loan, although was often used.

captcha: unfair

Re:Here's one reason the financial system failed.

[DerekLyons]

IMHO, the Mortgage Broker is supposed to be the person who makes the judgement call as to weather you are a default risk or not.

Well, in the real world (as opposed to your 'HO') it's the loan originator that makes that call - the Mortgage broker is just the middleman who handles the paperwork and skims off a commission.

Re:Here's one reason the financial system failed.

[Anonymous Coward]

Wow, I wish I had come up with those two words before. I reckon you could use them to explain just about anything.

Black Death: information asymmetry
WW2: information asymmetry
SCO: information asymmetry
Slashdot posting: information asymmetry

Re:Here's one reason the financial system failed.

[crono_deus]

GP indeed has a fantastic explanation.

It's all tied up in the concept of the Principle-Agent Problem, a problem which seems to pop up on a regular basis, especially in the financial sector.

The problem occurs when the interests of the principle (in this case, the typical home buyer) and the interests of the agent (in this case, the bank or mortgage holder) are misaligned, which often coincides with information asymmetry.

Portfolio managers (like Bernie Madoff) are excellent examples of this sort of thing.

Re:Here's one reason the financial system failed.

[Anonymous Coward]

1. Car dealers do this every day. In fact, almost any merchant knows more about what he/she sells than the buyer.

2. A CDO bundles together many mortgages with certain levels of risk such that the CDO itself is given a specific price relative to it's total risk. Whether the lender gave out a loan that was sure to default or the borrower committed fraud to get the loan, both have the same effect of invaliding the model used to price the CDO.

Re:Here's one reason the financial system failed.

[CharlesEGrant]

Well, there were cases of outright fraud, where the mortgage that was signed, was not the mortgage that was recorded. That kind of crude fraud was certainly not the cause of most of our mortgage problems. The trouble wasn't simply a lack of clarity in the terms of the loan, it was the terrible, self-serving advice peddled, by the brokers, real-estate agents, developers, home improvement networks etc. "Wait, I'm pretty sure I wouldn't be able to afford the payments on the loan after the rates reset." "Don't worry! You'll be out of this house, and on to your next house well before the rates reset. Real estate only goes up! This is an investment, you'll make a handsome profit, just by holding on to the house for two years." Doubtless many were as naive and clueless as the mortgagees, but may other knew better and were simply being predatory.

This ties into the article under discussion. The author relates a story about really want to move out of the back room and on to the trading floor. A friend who is a trader, asks him if he can completely dedicate himself to taking the money of people stupider then him.

Re:Here's one reason the financial system failed.

[Splab]

The problem isn't education per se. Here in Denmark most people are well educated, but common sense is not on the agenda, while our housing situation isn't as bad as the US, it's still pretty rough for some home owners - the problem is people happily signed the contracts without reading them nor understanding them. If you don't get the numbers you call someone who does, people just blindly trusted the bank.

Re:Here's one reason the financial system failed.

[csartanis]

It's OK to blame a conman that scams you, but it's not OK when the mortgage broker is the conman? I guess its a fine line.

Re:Here's one reason the financial system failed.

[BlargIAmDead]

Most people aren't as educated as you give them credit for. The average person on Slashdot is usually more educated than your retarded monkey. And usually you're hanging out with your nerd friends. Recently I've been in the ghetto (non-sequitur I know) in Texas and Lousiana for my job. The large part of these people are uneducated about basic physics...stuff that affects them every single day. You think they're going to find the time to figure out this variable rate mortgage?

I don't mean to be spiteful or derogatory but these people are woefully uneducated and a lot of them are stupid (which by this I mean they know they're ignorant but don't care and just want to continue like they have been doing). You place a higher value on people's abilities than I do obviously but I can only relate what I've seen (given my own biases of course:).

Re:Here's one reason the financial system failed.

[__aagmrb7289]

Please read my post that you responded to again. Where do I say that you shouldn't blame the mortgage broker?

Re:Here's one reason the financial system failed.

[__aagmrb7289]

Please see my response to an almost identical statement: http://slashdot.org/comments.pl?sid=1223111&cid=27838409

CMO vs. CDO vs. CDS

[Fantom42]

The end of the article starts to get to the heart of the problem, which really happened after he was involved. It was when they started doing this with all debt that it got really bad. And even then its only half the picture without looking at the other piece of this the Credit Default Swap. Another thing he alluded to when he talked about default models. The problem was much more complicated than this one guy.

Re:CMO vs. CDO vs. CDS

[slashdot_commentator]

Here here. Its nice that someone is willing to take blame for the collapse of the world mortgage market, but the reality is that he has a ridiculously overinflated ego.

Unless he was also an degreed economist, there's no way he independently came up with the formulas used in order to write the software. He just took the spec from the people who paid him to write the software, and away he went.

Like a gun, its ridiculous to blame the collapse or death on the tool. Its a form of enabling, but certainly not the cause of the problem.

The problem was that the foxes were running the henhouse. and the guard dogs called the regulators were nowhere in sight, or chihuahuas. Instead of the foxes trying to skim off a self-sustaining scam, they let their trading run wild into bankruptcy, and with no regrets.

This is what happens when you let people with poor understanding of risk management, or its mathematical models, set policy (and I don't mean the politicians).

Also sad to see are the comments on this article. People apparently bought this guy's story hook, line and sinker.

Re:CMO vs. CDO vs. CDS

[Anonymous Coward]

Also sad to see are the comments on this article. People apparently bought this guy's story hook, line and sinker.

Ironic that I'm posting this as an AC, but set your threshold to 4. It helps A LOT.

Re:CMO vs. CDO vs. CDS

[actionbastard]

He doesn't take the credit for the math behind the securitization of these debt-based securites. What he feels responsible for is the fact that he wrote the code that made the whole process 'pushbutton' for the greedy traders who duped the people 'dumber than they are' into buying those securities. He is akin to the man who installs the bombsight in a bomber feeling partially responsible for all the people killed by the bombs dropped from the plane.

Re:CMO vs. CDO vs. CDS

[Anonymous Coward]

I guess its impossible for me to do my job because I'm not a degreed economist.

Re:CMO vs. CDO vs. CDS

[Anonymous Coward]

Nitpick: it's "hear, hear".

http://en.wikipedia.org/wiki/Hear_hear

Re:CMO vs. CDO vs. CDS

[webax]

Like this guy who showed up on slashdot a couple months ago.

Re:CMO vs. CDO vs. CDS

[Anonymous Coward]

He's trying to explain to folks a bit of what he did and to take responsibility for it. His work, the Intex model combined a decent albeit simplistic model with great data about prepayments. You could use it and run scenarios estimating how the folks will prepay their mortgages based on all sorts of things like their zip code and FICO score. This doesn't use correlation or copulas or what have you that CDO evaluation requires. David Li's breakthrough isn't involved here.

He wasn't in the senate that force Fannie Mae to buy $200bb of alt-a mortgages, which created the ultimate sucker to receive bad debt (and encouraged more bad loans to feed to them).

He wasn't the guy who replaced AIG's Hank with a moron who let a small division risk 5 times more than the company was worth.

It'd be nice to see the folks that did those things would own up to them.

Re:CMO vs. CDO vs. CDS

[Anonymous Coward]

And, at the very end of the article, a nice prediction that the US currency will collapse under the weight of massive inflation.

Like Peter Schiff says, the country got drunk on cheap money provided by the Federal Reserve lowering interest rates to 1%.

That has the effect of punishing savers. People can't collect interest on money in the bank - they are forced into making risky speculative investments.

It's really all the Feds fault. The government has no business guaranteeing loans. People have always been greedy, but their greed is normally counter-balanced by fear of loss. When the government guarantees that a business, then greed is no-longer counter-balanced. That's not free-market regulation - that's politicians trying to insure the re-election. At the expense of undermining the national currency.

Buck passing...

[owlnation]

Can you say scapegoat?

Of course, it's a geek who is to blame for it all with his immoral software witchery. It couldn't possibly be the result of a large number of greedy, thieving scum, who were regulated by greedy, corrupt scum, and they in turn were regulated by a greedy, corrupt government.

The writing was on the Wall(street) for the subprime meltdown for a very long time before this software was written. It was obvious to anyone with Economics 101, a long time ago.

Re:Buck passing...

[brian0918]

Unfortunately, economists seemed to have forgotten their Econ 101, and now think they can stop the bubble. I have no problem with them believing that, except that they're feeding their nonsense to idiot politicians!

Re:Buck passing...

[reidiq]

Problem lies with government interference with forcing banks to make high risk loans to people who couldn't afford them.

Re:Buck passing...

[macraig]

Economists actually don't know anything - anything correct - about economic systems. They've been beer-bonging the wrong Kool-Aid and preaching the wrong sermons for a very long time; the entire field of economics has been hijacked by a greedy minority and perverted to their benefit. Climatologists actually understand more about economic systems than economists do, since climate and economics have quite a bit in common in terms of systemic behavior.

Re:Buck passing...

[spikeb]

no it doesn't. popular myth among the antigovernment types though.

Re:Buck passing...

[rhizome]

no it doesn't. popular myth among the antigovernment types though.

I prefer to think of them as pseudo-capitalists.

Re:Red?

[moniker127]

Thank doo.

Not One Person's Fault

[RAMMS EIN]

The summary makes it sound like it was all one person's fault. This can't possibly stand up to reason.

First of all, if the code was so important, it should have been reviewed, tested, etc. Bugs happen, everybody knows it. Finding and fixing the bugs before entering production is the responsibility of everyone involved in the whole process from specification to acceptance.

Secondly, even if there was an undiscovered bug in the code, that doesn't excuse those who relied on the faulty outcomes. The whole game in a free market is that the same thing has different values to different people. You must do your own calculations, based on your own inputs, using your own methods. If someone else messes up their calculations, that's your opportunity to win. Relying on someone else's numbers is a risk, and relying on them blindly is a recipe for failure.

All in all, yes, of course, if you wrote buggy software, you get the blame for that ... but it's not your fault that the bugs slip through the cracks and everybody ends up relying on your buggy software. That is their own choice.

Re:Not One Person's Fault

[slashdot_commentator]

You do realize that talking about software bugs only exposes your utter ignorance of the issue.

As far as I can see, the software was perfect. It was the bank trading management which were at fault.

Re:Not One Person's Fault

[jd]

Code reviews aren't as common as you might think, but it is certainly true that the claims don't stand up to scrutiny. Nobody with that little experience is going to be able to write heavy-duty software, for a start. Teams write super-massive projects, not individuals, for another. Enough vodka to total the car is enough vokda to total the specs in your mind, so at best he's flippant as well as economic with the truth.

However, when you dig deeper into the article, you run into other questions. He talks of the software being developed over periods of economic instability. True enough, but the software was presumably not responsible for that instability, and he gives no indication that the causes for said instability were ever removed. So was his software the piledriver that smashed the economic landscape, or merely one straw amongst millions, whose combined weight broke the camel's back?

(If one straw amongst millions, then no straw, not even the last one placed, is any more or less responsible than any other. You'd have to divide his responsibility between each and every straw that factored in.)

But there are some definite bugs. He talks of basic calculus. Ok, that's fair enough, but you need more than basic calculus if you want to factor in the effect of the observer on the system. Once the observer's mass becomes comparable to that of the system as a whole, the numbers become considerably trickier. We see no evidence that he's using anything more than simple numerical methods, first-order calculus and (from his references to offal) the SIMPLEX method. Completely inadequate for an n-body problem in dynamics.

Now, it seems certain that n-body maths were not present in the simulating software, or we wouldn't be in this mess, but it's clear that the software was more advanced than an O-Level project. That gap is not covered by TFA - whether because he's being selective on what he says or because he's just too small a cog to be of importance is unclear - but it's a gap I'd consider more important than anything revealed by TFA.

Re:Not One Person's Fault

[htdrifter]

It wasn't software bugs. It was an inappropriate model with bad assumptions combined with excessive leverage.

Re:Red?

[Brian Gordon]

It has nothing to do with # of comments. I see 0-comment green articles all the time. The red means that it's "in the future" and being seen by a subscriber. For some reason they've been showing up for a few seconds to normal users too.

Requirements?

[zm]

The guy coded it. Who created his requirements?

Re:Requirements?

[internerdj]

For that matter, who analyzed those requirements? Designed the models? Tested his code?
And most importantly what is the tech support phone number?

Re:Requirements?

[conteXXt]

Ah the trillion dollar question at last.

Coders don't design faulty business logic. Coders code what they are told to code.

Re:Requirements?

[DomNF15]

With all due respect, no, he did not create the requirements. But, if he was intelligent enough to write the code, he had to understand what it was doing was basically not good, to put it mildly. Seems like the devil got an awful lot of mileage from that $100,000 salary.

Re:Requirements?

[musicalmicah]

Coders don't design faulty business logic. Coders code what they are told to code.

But the best coders have the guts to point out problems in business logic if they discover any in the design or implementation processes.

Re:Requirements?

[jd]

According to TFA, a bottle of vodka and the moving violation ticket after he totaled his car.

Disconnecting risk from return.

[Anonymous Coward]

FTFA: But when 1,000 similar loans are combined, and the U.S. government, through Freddie Mac and Fannie Mae, absorbs the default risk, you now have a nifty little AAA-rated piece of paper paying one or two points above Treasury bills.

It's real easy to gamble when you don't have to bare the risk. That was what caused the banks to make all those risky loans.

Re:Disconnecting risk from return.

[Anonymous Coward]

No, the really risky sub-prime loans were not agency-backed.

FMAC/FNMC were not the cause of that problem.

Re:Red?

[moniker127]

Yes but i've never once seen a red article with comments.

Software Bug

[BGrif]

Bug:

Title: "Depression 2.0"
Type: "Suggestion"
Description: "This might not be a good idea"

Status: Unresolved

Oh, jeez, not more CRA-blaming

[StandardDeviant]

The idea that giving loans to THOSE PEOPLE (implicitly poor, black, and whatever other qualities our society is calling moral failings this week) is behind the collapse of the financial industry and had nothing whatsoever to do with the saintly finance industry's business practices itself is a meme that really needs to bite the dust. Was CRA part of the problem? Maybe, but there's no such thing as a single cause to a collective fuckup/fiscal meltdown of this magnitude. I'd argue that the repeal of Glass-Steagall is an even larger singular driver.

I'm sorry if it seems like I'm singling you out or jumping down your throat in particular, I'm just real tired of simplistic finger-pointing at the CRA. (I even vaguely recall seeing numbers that said CRA-driven loans were actually less likely than average to be in foreclosure, but it's been a good while and I can't remember where to dig up the particular citation.)

Re:Oh, jeez, not more CRA-blaming

[dkleinsc]

Some citations for those interested:
http://www.ccc.unc.edu/news/news.021809.php
http://www.clevelandfed.org/research/Commentary/2000/1100.htm
http://www.treas.gov/press/releases/ls564.htm

All are very clear that the CRA had little to nothing to do with the subprime mortgage foreclosures.

Re:Oh, jeez, not more CRA-blaming

[ericrost]

Gee, I remember that too:

http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf

Re:Oh, jeez, not more CRA-blaming

[Anonymous Coward]

Why don't they blame the flippers who were buying $2 million dollar condos in Miami, Phoenix, Vegas and southern CA? This is the market that crashed. These flippers tended to have money, at least enough to be middle class.

It wasn't the single family working for a set income 40 hours a week in the middle of the country, unless they lost their job. The poor people getting subprime loans only were impacted if they lost their income.

Re:Oh, jeez, not more CRA-blaming

[nine-times]

And even if CRA was the cause of the mortgage foreclosures, that still wouldn't make it sufficient to cause the financial collapse. The banks were playing fast and loose with the rules, including selling more insurance than they could afford to pay out to people who had nothing to do with what was being insured (credit default swaps).

Now I'm not going to pretend that I have a deep knowledge of what I'm talking about, but I've heard/read several respected economists who claim that all the mortgage foreclosures that we've had would still have been manageable, but the real problem is the credit default swaps.

Re:Oh, jeez, not more CRA-blaming

[Anonymous Coward]

Two of your references were written in 2000, so they have very little context to add.

Here's some better references:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Controversies_and_criticisms

The thing is, it's not about whether the low, middle or high income people contributed most to the financial crisis.

What it's really about is banks were told to cater to the needs of x demographic. However, that demographic came with increased risk that they weren't willing to bare. So, the government took the burden of that risk from them. Creating a huge moral hazard. But the government didn't really care as it forced house prices higher, it forced home ownership higher and made them look awesome.

Re:Oh, jeez, not more CRA-blaming

[Rycross]

If you actually read that, the CRA did not require or force banks to make risky loans. They could deny an applicant based on income, credit rating, or any other relevant factors. What it forbid was red-lining, which was denying loans based on the current living location (used as a proxy for the applicant's race). A person's race and living location does have correlation with risk of defaulting, but a responsible financial institution would have a person's credit and income information. This information points to causitive factors behind the correlation, which means that a person's living location is useless for anything other than discrimination.

The actual CRA law does not require high-risk loans, and the evidence bears this out. CRA loans were given out for three decades with no problems, and all current evidence points to CRAs having little to do with the current financial situation. The citations in Wikipedia article you posted bear this out, in addition to the seven citations the other posters gave.

Furthermore, the criticism in the Wikipedia article you cited is mostly just "he said she said," accusations, devoid of any facts. It would be more convincing if the detractors could point to actual evidence that the CRA loans were a problem as opposed to speculating. How detractors imagine the CRA works in theory is not very interesting to me. What I am concerned with is reality, and the reality seems to be that the CRA makes a convenient scapegoat for free-market advocates, given that they can't give any objective evidence to support their point of view.

If you were hoping to change anyone's opinion, you failed.

Re:Oh, jeez, not more CRA-blaming

[The_Quinn]

The point is not that CRA is singularly responsible for the financial bubble, but rather that the financial and housing industries are highly regulated (i.e. controlled) by the government - a fact that is widely overlooked by the media, in my experience

Not only do the Treasury, Fed, and HUD play large roles in matters financial and housing related, including Freddie/Fannie, FDIC, SOX, interest rate manipulation, etc., but it is getting to the point where it is suicidal to even try to stand against the government. All the TARP recipients were told to take the money under threat of government persecution, execs who disagreed would get the boot. The govt fired the head of GM and installed a puppet to cram it's bankruptcy plan down.

Here Warren buffet mentions Moody's rating role in the real-estate bubble

If Moody's had started to take a negative view on residential real estate, the ratings firm would have been hauled before Congress to testify about why it was hurting the U.S. economy with its bearish ratings.

The 3 rating services themselves are government-sponsored monopolies

Re:Oh, jeez, not more CRA-blaming

[pod]

No, the problem was not that "those people" got loans, that's just a side effect of artificially ultra-low interest rates, and offloading of all risk to misinformed investors.

The problem was the rapid inflation of the monetary base (ie inflation) and gross misallocation of investments and assets, which leads us into the current "correction".

Re:Do you even know what 'subprime' means

[Anonymous Coward]

Subprime mortgages are precisely those mortgages that Fannie/Freddie WILL NOT buy and securitize. Rather, it was the large investment banks that bought and securitized these mortgages- sidestepping entirely the very 'government manipulated interest rates' that you point to as the genesis of the housing crisis.

Stop parroting the 'truthy' psuedo-information promulgated by the right wing and start growing a clue by looking things up.

Oh, yeah, right- this is slashdot. The place where Java died 10 years ago and everything is done in Ruby...

A bit late..

[kay41]

This is over a month old.. surely we can keep it a bit more fresh, right Slashdot?

40-year low interest loans

[xjerky]

That played a large part in this problem. I was eyeing a home from around 2000-2001. Proces were still reasonable. Then the rates dropped to ridiculous lows. Great, right? But then that caused a mad rush on homes, driving the prices to even more ridiculous highs. At that point, your monthly payment became even higher than when the interest rates were higher. At that point I dropped out of the market for a house. Who the hell else didn't see this coming? Who was Alan Greenspan really helping by keeping the rates so low?

Re:40-year low interest loans

[tilandal]

Low interest rates are not an issue if you buy a house you can afford. Fraudulent loans made to people who could not afford them with 0% down is what caused this mess. Couple this with the huge proliferation of ARMs and you have a recipe for disaster. People who can not afford their loans default. This causes housing values to drop. People now owe more then the value of their house. Those who need to move due to job loss or other reasons now can not afford to sell their house because they have no equity. They default and drive prices lower. Risk goes up ARMs adjust up to compensate triggering more people to default lowering prices causing more defaults etc. This is now magnified based on traders dealing in securities that are far more risky then then thought because the loans were fraudulent. Losses are magnified due to leveraging which ripples through the whole economy as banks and investment houses need to sell assets to cover their losses. Reduced lending leads to economic stagnation which reduces asset values further causing another sell off to cover losses and suddenly you are in a deep recession.

Re:40-year low interest loans

[cpm99352]

Lowering interest rates causes house prices to rise, since the total cost of the mortgage (typically principal and interest) is really what matters. If interest drops, then sellers will increase the price of their house, since buyers can afford it.

However, since the house price rises to compensate for low interest rates, the assessed value also rises, and property taxes then increase.

If a house was purchased at historically low interest rates, then chances are interest rates have risen in the 7 years since the house was purchased. Because interest rates have risen, new buyers cannot afford the new price (old price appreciating 4% per year). The original buyer will not make as large a profit when selling.

The ideal scenario for a home buyer is Carter-era interest rates of 16%. After buying a house and watching historically *high* interest rates drop, the home buyer can refinance at a lower rate.

As a potential home buyer, I'm of course quite upset at the govt/wall street's machinations to keep house prices artificially high. What happened to supporting affordable housing?

Re:40-year low interest loans

[vlm]

Low interest rates are not an issue if you buy a house you can afford.

Very bad, terrible, awful, financial life destroying advice.

Income spent on housing is basically fixed.
Therefore low interest rate = high price, and high interest rate = low price.

Say you spend $1K/month on a low rate loan. That means when the rates go up to normal, the price will implode, and you'll be upside down. So, your choices are pay off a huge loan on a house that is just not worth it, or foreclose/bankruptcy. Basically this is the situation now.

On the other hand, say you spend $1K/month on a high rate load. That means you pay a very low price for that home and on average the price of the home will always be much higher in the future. When the rates go to normal, you refinance your itty bitty mortgage to a normal/low rate, lets say $500/month. So you pay practically nothing and you can sell at a profit at (almost) any time.

Low interest rate means the buyer is screwed, high interest rate means good times ahead!

So, if you look at interest rates from 1980-now, its a steady decline to the lowest rates seen in many decades. The result is fairly obvious.

Re:40-year low interest loans

[tilandal]

That is the most ridiculous thing I have ever heard. If you can afford to live in your house why exactly would you go into foreclosure? Being upside down in a loan is meaningless. The second you drive your shiny new car off the lot you are upside down on your loan. That doesn't mean you stop paying for it.

No surprise...

[Anonymous Coward]

I worked for a financial structuring company about a decade ago. One of the things we specialized in was subprime default predictions. We were able to predict with frightening accuracy the number of loans (and which ones) in a portfolio that would default and helped companies structure portfolios around the expected defaults and cashflows.

Why is this whole fiasco not exactly a surprise? Well, no one was buying. Nobody _cared_ that the loans they were handing out would default. The company I worked for closed its doors.

The tools were available, but nobody used them. People were making bonuses off of the number of loans they sold, not the cashflow that was expected. They'd give loans to people who had no way in hell of being able to pay it back.

Assuming the guy's software was sound, greed is really the culprit in this case, not the software or the analysis...

Re:Red?

[thebes]

correlation does not...awe forget it...

If was the Li's formula

[S3D]

Wired: The Formula That Killed Wall Street
David X. Li formula used "Gaussian copula function" for risk estimation. It greatly oversimplified risk estimation and ignored any nonlinear, topological and whatever nontrivial dependencies, taking into account only single correlation parameter. Formula was applied recursively and the end result was completely divorced from reality.

death star contractors

[evilmousse]

oh good, my comments still there from the first time i saw the story:

i programmed in some of the same subject matter for several years recently, and much of this strikes me as a very believable tale. ...except it feels history-rewritten so as to remove any negative light from the author. he comes off entirely too saintly-while-surrounded-by-evil, and that makes me wonder what else to believe.

in particular how he made it seem like he just happened to fall into his deal to maintain/integrate/etc the software for its new owner, unpaid for a cut of its sales. that's a daring endeavor you take only when you honestly believe in long-term success, so i don't see "i'm tired and wanna take something easier", i see "all in, show your hands boys" kinda farm-betting. he knew then like he said now that his software could become the standard, shot for and achieved success. but i don't think his waxing philosophical about the potential dangers of that success started only after the trouble.

the contractors building the death star knew the risks of that association, so to speak. (I should explain, this is a meme, and honestly an unfair comparison)

Re:death star contractors

[khallow]

So how many planets did this software blow up? Or is your analogy a wee bit broken? As I post elsewhere, I simply don't see the reason for your post. This isn't a story of a weapon, which the contractor knew was going to (or even could be) be used for evil. It was the development of a financial tool. What sort of evil does a financial tool do? Does it make highly leveraged and risky bets? No. It doesn't even enable the clowns who make those sorts of bets.

Re:death star contractors

[evilmousse]

thus, why i ended my post "I should explain, this is a meme, and honestly an unfair comparison". working for a financial institution is not tantamount to working for an evil empire. that's a completely overblown comparison, and i know it. still, i couldn't resist over-reaching for the star wars reference. if you can excuse the conflation, the part of the metaphor i'd hoped to highlight was being aware of the broader impact of your work.

this author has shown enough intelligence and introspection in the piece that i believe he was fully conscious of the likely effects of the tool. i'm positive the original developers of napster and gnutella had an inkling of the effects their creations would have too. yes, truthfully its the individual users of the program that are "pulling the trigger", but the authors already knew the users well enough to be fairly certain of its eventual useage patterns.

since i'm being long-winded already, i'll just add that studying the scientists behind the manhattan project is a fascinating look at these kinds of ethical conflicts.

Re:death star contractors

[khallow]

since i'm being long-winded already, i'll just add that studying the scientists behind the manhattan project is a fascinating look at these kinds of ethical conflicts.

Let's cut to the chase. I don't see the ethical conflict. This tool serves a need past and future. It'll be used until such a time as something better comes along and it will serve to expedite valuations, trading, etc. In other words, add value to the real estate industry. I admire people who build tools like this. Because of him more families have homes and everyone is a bit richer (yes, even in the face of the financial crisis). It makes no sense to me to blame this guy for putting an application on the desktops of people who made bad bets on real estate. We might as well blame MS Outlook or Internet Explorer. Those traders couldn't work as well without email or browsers either.

As I see it, the problem is and will continue to be highly leveraged, risky bets. Some traders and businesses will continue to make those no matter what happens to the tools they use. I tired of the silly witch-hunting. To repeat something I said earlier, I bet society is a little better off because of this tool not worse. The crisis would still happen. The only difference would be that this tool would not be adding value to what was going on.

Re:death star contractors

[evilmousse]

i see you don't, and i can respect the position. the blame i place on him is by no means whole. perhaps bittorrent is the better comparison. it too serves a need (past and future?) and adds value. it also, by human nature, has very obvious and tempting misapplications. but as with any pandora's box type of dilemma, it's tough to be pointedly blaming.

yes, this was just an effective automation of something that was done manually before, and that's very enabling from an engineer's perspective. becoming an industry standard has its own problems though. even presuming empathy, people begin trusting the magic black box. more cynically, such a system is rife with potential to be manipulated and serve as an obfuscation for ill intent. especially if those things combine and you have a system being widely trusted and not being paid due attention to. i hold the opinion that a system so powerful is only half-built without further checks on it. same as a race car without safety engineering, a driver without licensing, or bittorrent without god-knows-what-i-wish-i-knew.

Re:death star contractors

[khallow]

Checks? I guess I can see why you'd be concerned about that. There are three observations to make here. First, the culprits in this caper would have worked their way around any checks on the software. We speak of the brightest and most cunning fools on the planet. who stand to make tremendous sums of money if they can figure out how to bypass those checks. I don't believe it's possible much less practical to make financial trade tools "foolproof". Second, checks would instill more of that false confidence. It's silly to expect software to handle every failure mode possible. Even if you tried, you would miss something. What you miss would become the next financial crisis. That's how things work. The only checks that should in a high end financial tool are against common user error (like spotting fat finger trades). Third, the software does not have access to the relevant data for most of these checks. For example, unless you tell it, it can't determine how much money you borrowed for the trade. Nor can it figure out how much risk your counterparties might have accumulated especially if they're hiding that information. Lying is a very effective way to bypass checks on a system. And once everyone starts lying in order to stay competitive (because bypassing checks gives you an advantage), then the situation is even worse than if no checks were in place.

I notice you mentioning "safety engineering" in a race car. Safety is always secondary. The only truly safe race car is one that can't drive. They put in light, effective protection like roll cages, but it's a car traveling at up to 200+ miles per hour in a pack of cars doing the same. It's not safe nor will it ever be.

My view is that there's really two questions. Did the action of creating this software cause harm? My view is no, it did not. It didn't create nor aggravate the sloppy lending environment, nor create the securities that had so many hidden risks. Most important, it didn't alter in any way, certain banks' decisions to lend out 50 dollars for every dollar held by the institution. What it did do was make certain lending and real estate security trading easier and more efficient. That's probably a net benefit overall. As for checks in the system? These are professional traders, not people wandering in off the internet. I do not believe that there's any checks aside from simple typo checks that make sense or would have net benefit.

Re:death star contractors

[evilmousse]

i don't agree with your attitude that checks are impossible, nor did i imply that the checks should be entirely software based. if the same creativity put into creating the system is applied to securing it, i'm sure much can be done. a lot of times just making sure enough of the right information is put before the right eyes is all you need. attention is the light shone into the dark areas in which misbehavior is hidden. and just because it can be an arms race doesn't mean we shouldn't fight the good fight.

safety is not secondary. period. anyone who develops a 300mph vehicle without safety belts is negligent. no it won't ever be completely safe, but dropping the effort to secure it is foolish. the answer is not to stop building racecars, or stop trying to make them safer, it's to address the issues to the best of your ability.

I wholly disagree with your last paragraph. the combination of the software and peoples natural tendency to misuse it did cause harm (in addition to the good it causes). it absolutely gave license to a sloppy lending environment to get even sloppier. yes it did create the securities in the technical sense, isn't that exactly what its function was? and i don't understand the relevance of the 50 dollars point, unless i'm supposed to accept that because bad behavior happens in other contexts, i'm supposed to tolerate it here.

What is the significance of 'professional traders' vs 'people wandering off in the internet'? I don't understand the point, unless you're saying we should just lay down and accept whatever 'professional traders' want to do because they're just so smart they're gonna do it anyway. typo checks? how about multiple independent fault tolerance checks on some of the key values? (hmm, why are the average fico score of 70% of the loans in this package 700+, and 30% below 500, but all loans are for over 200k?) how about placing a small daily random sampling of anonymized-and-scrubbed-for-privacy information is placed before your fellow competition using the software and vice versa, creating a system of peer review based off the motivations of competition. i'm just throwing ideas out there, but i'm sure the problem can be approached scientifically/sociologically.

the answer to sneakiness is eyeballs. a system that can automate the sneakiness so well needs to help automate the eyeballs as well.

Re:death star contractors

[khallow]

I wholly disagree with your last paragraph. the combination of the software and peoples natural tendency to misuse it did cause harm (in addition to the good it causes). it absolutely gave license to a sloppy lending environment to get even sloppier. yes it did create the securities in the technical sense, isn't that exactly what its function was? and i don't understand the relevance of the 50 dollars point, unless i'm supposed to accept that because bad behavior happens in other contexts, i'm supposed to tolerate it here.

The 50 dollar point is the key issue. What happened was that a number of places had a dollar, borrowed 50 more, and then bet the farm with what they had. If that 50 dollar bet worked, then they made a great income on an initial one dollar asset (eg, a 2% return on the $51 bet more than doubles the $1 asset). If the bet went wrong, they only had to lose a little (about 2% again) to lose their initial investment. Enough businesses make that sort of leveraged bet and you have the fuel for a failure cascade.

What is the significance of 'professional traders' vs 'people wandering off in the internet'? I don't understand the point, unless you're saying we should just lay down and accept whatever 'professional traders' want to do because they're just so smart they're gonna do it anyway.

This is the point I've been making which you don't seem able to get. The people who use this software are too smart for the software and their needs are far too diverse to capture with software. If you want to supervise them, you need to employ other smart humans. This was already done and it failed because the problem wasn't in checking what the traders were doing or supervising the traders. It was in the high leveraged bets. Enough of those bets go wrong and it doesn't matter what the software or the supervision does. You are still bankrupt.

how about multiple independent fault tolerance checks on some of the key values? (hmm, why are the average fico score of 70% of the loans in this package 700+, and 30% below 500, but all loans are for over 200k?) how about placing a small daily random sampling of anonymized-and-scrubbed-for-privacy information is placed before your fellow competition using the software and vice versa, creating a system of peer review based off the motivations of competition.

The former is a good idea and it's likely the software already did that since those considerations are worth money and they'd be information available to the software. Incidentally, a trader can lie to the software about these attributes, if the business permits it or just doesn't look hard enough. The latter is proprietary information and not available to the software. What killed these companies was outside the ability of the software to know. And no offense to science and sociology, but markets and their participants are smarter than scientists and sociologists at the market game. Get enough incentive and they'll find a way around any obstacle.

In summary, the financial crisis occured due to a combination of traditional institutional failings that have been repeatedly seen for centuries combined with an environment of easy credit, lax oversight, and considerable, poorly thought out government interference. Software tools can't ever compensate for that.

safety is not secondary. period. anyone who develops a 300mph vehicle without safety belts is negligent.

Anyone who developes a vehicle, no matter how fast or slow it travels, has some priority higher than safety. Period. It could be getting from point A to point B, winning a race, or some other goal. If safety were the highest priority, then the vehicle wouldn't be built because it never can be perfectly safe. There is always some risk.

Financial investments are always risky and unsafe to some degree. If you borrow money, you can increase the risk and the reward. When you borrow as much money as some of the

Re:death star contractors

[evilmousse]

i understand the premise behind your '50 dollar' point. i don't see the connection, however. maybe some of the traders were jaywalkers too, but just because the software can't catch their jaywalking actions doesn't mean they can't catch the jaywalkers that try to make illegitimate derivatives.

This is the point I've been making which you don't seem able to get. The people who use this software are too smart for the software and their needs are far too diverse to capture with software. If you want to supervise them, you need to employ other smart humans.

I get it perfectly, and I never suggested a wholly technical solution. Yes, you absolutely employ other smart humans (or ideally, set up the system so that there's a competitive interest in checking each others work.) I don't see you challenging the legitimacy of the trading tool's effectiveness at making derivatives when it too needs smart humans using it to work; why are you challenging the safety mechanisms on that basis?

The former is a good idea and it's likely the software already did that

and i want to re-emphasise they are just brainstormed ideas. as in the racecar developer saying to himself "i bet a restraint system might help the mortality rate in crashes". that's still a far cry from the professionally designed and tested crumple zones etc that we now have as a result of applying a scientific process to the task. i don't know what form the security mechanisms of a loan-packaging software would entail until that work is undertaken. as for "already did that", i don't consider such a boolean value. i consider how WELL they did that; a shade of grey. lying to the software is exactly what the safety system (and its educated userbase) should be engineered to attempt to detect.

In summary.... Software tools can't ever compensate for that.

I don't disagree with anything in your summary, but I wasn't trying to propose any theories on what caused the financial crisis. I was simply suggesting this tool is rife for abuse as-is, and the author was conscious of that. Your defeatist attitude towards human nature and its ability to use tools to solve social problems is duly noted, but not shared.

Anyone who developes a vehicle, no matter how fast or slow it travels, has some priority higher than safety. Period.

developing a prototype and launching a national production line are two very different things. which do you think an INDUSTRY STANDARD peice of software is more similar to? This was not a tool a trader built for personal use, this was intended from the beginning to have total or majority market share. the safety obligations of something intended for broad systemic use is much higher than something done one-off and for personal use. Agreed there is always some risk; the inevitability of risk is not an exuse to ignore it and fail to minimize it.

Nothing on Earth can compensate for that sort of high flying hubris, certainly not a software tool.

and the bill of rights is just a goddamned peice of paper. it's inconceivable that a dried hunk of animal skin with symbols inked on it can help society be more civilized. people will disregard the document and that's all that can be done about the situation. ...or is it?

Re:death star contractors

[khallow]

i understand the premise behind your '50 dollar' point. i don't see the connection, however. maybe some of the traders were jaywalkers too, but just because the software can't catch their jaywalking actions doesn't mean they can't catch the jaywalkers that try to make illegitimate derivatives.

That's my point and has always been my point. The cause of the financial crisis is completely unrelated to the presence of this trading tool. There is no connection.

The murder weapon is extreme leverage. More often than not past crises have been due to extreme leverage as well. There are some crazy stories from other major recessions. Sure, you often see criminal activity or shoddy oversight as well. People who ignore a monstrous increase in risk often ignore these lesser flaws as well. If you drive 300 MPH every day without a seat belt, then there isn't much reason to avoid smoking cigarettes or drinking alcohol. Hit a bump or corner wrong (and you will sooner or later) and you're dead no matter what your blood alcohol level is. People afterwards might blame the alcohol and they might be right, but you'd die soon anyway.

If you actually look at the misdeeds during this period, few companies were crooked or had trader teams with the maturity of five year olds (that engaged in real live pissing contests). They simply went into this mess owing too much money.

developing a prototype and launching a national production line are two very different things. which do you think an INDUSTRY STANDARD peice of software is more similar to?

This is one of the scary differences between finance and other more stable fields. The software is closer to being a prototype.

and the bill of rights is just a goddamned peice of paper. it's inconceivable that a dried hunk of animal skin with symbols inked on it can help society be more civilized. people will disregard the document and that's all that can be done about the situation. ...or is it?

Bill of Rights has nothing to do with the situation. Unless there's some secret amendment in there about people not having the right to be stupid or prohibited from taking crazy risks.

Re:death star contractors

[evilmousse]

That's my point and has always been my point. The cause of the financial crisis is completely unrelated to the presence of this trading tool. There is no connection.

ok, so your disagreement is more with the title of the article and less with me? even if you consider the crux flaw to be elsewhere, surely you can agree the software is exemplary of the type of problem, and at least contributory?

This is one of the scary differences between finance and other more stable fields. The software is closer to being a prototype.

you can even broaden it to software in general. that situation needs to be matured, and what happened is a warning to do so. especially in circumstances like this where there's large numbers involved.

Bill of Rights has nothing to do with the situation. Unless there's some secret amendment in there about people not having the right to be stupid or prohibited from taking crazy risks.

correct, the bill of rights has nothing to do with the problem. neither do racecars or bittorrent. i was making a comparison between how it is used and regarded and how safety checks can be. neither the bill or rights nor the safety checks will directly force anyone to do anything, it's all in how they're regarded by the people using them. though getting people to regard them is a difficult task, it's not impossible, and ultimately very fruitful. the miraculous adherence you doubt can occur with the software has already been accomplished in more difficult circumstances.

Re:death star contractors

[evilmousse]

as i reread more of your latest point, i think i owe you more concessions. what you're telling me about overextended debt is very believable, and i will be considering it as i read more and discuss with other people. i'll need to do so before i can really agree or disagree.

i think most of the point i made still stand if they can be disassociated from the famed troubles lately, and confined to just this piece of software. i was never trying to force you to concede this caused the markets to crash lately, only that it's completely unsafe as is, and that's regrettably in-theme.

Re:death star contractors

[khallow]

I'll just finish my part of this thread with an observation about risk in financial trading. Some forms of trade are so risky that the trader expects to lose money on part of their investments every day. Such trading is fundamentally different from most human endeavors. If they aren't playing with Other Peoples' Money (or at least they play only with money from investors cognizant of the huge risks) nor have large open-ended, potential liabilities, then there isn't any real risk to the rest of the market. Instead, it's social Darwinism at its finest, a brutal but effective system. The rest of the market enjoys better market prices and improved liquidity.

The reason I keep insisting that safety measures in cutting edge trading tools are unwelcome, is because traders already evaluate and take enormous risks. The trade tools have to be unobtrusive otherwise they will cause the trader to lose trades and profit. As I mentioned much earlier, these are "professional traders". What does that mean to me? It means they've proven themselves, have been given the authority to make split second decisions that commit multimillion dollar chunks of a business's assets to a risky trade, and are paid huge sums of money for that responsibility. How do your tools help reduce risk for these people? As I see it, once you get past valuation (estimating the value of a security) and a report of the known criteria that contribute to value and risk, it's not clear to me that you can do so in a way that isn't futile nannying. The traders (with help from their support team of analysts) are the people assigned to make the big money decisions not the programmers of your software tools. They take the blame even if a tool gives wrong info.

Finally, we are in a time of great innovation in financial instruments. The obvious problem is that the risks of these new instruments as they come out will be poorly understood. Any early financial tools will by their nature be prototypes as will tools entering use for the first time. It's easy in hindsight to say that these tools should have accounted for errors and risk that show up, but it's far harder to anticipate those errors and risks without some serious trial and error. In fact, without the hideous leverage, this episode would have just been another lesson learned. So for whatever reason, this programmer decided to plead somewhat guilty to contributing to the current financial mess, but honestly, I don't see the connection. His software seems to increase the information available and reduce some of the risks of trading certain real estate securities. And the traders like it. Seriously, that's all you can ask for from a trading tool.

And, some more citations

[weston]

http://www.mcclatchydc.com/251/story/53802.html
http://www.ptmortgage.com/blog/2008/10/01/pointing-fingers-was-it-cra-and-minority-lending-that-caused-the-mortgage-mess/
http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
http://www.frbsf.org/news/speeches/2008/0331.html

Finally, there's a summary at Wikipedia.

The buyers let them

[Anonymous Coward]

The ONLY reason mortgage brokers had more information was because the buyers didn't demand all the information the broker had.
It really is that simple.

They didn't do their due diligence on these investments themselves, they relied on a third party.
That third party (rating agencies) didn't do their due diligence on these investments either.

At the consumer level, we almost never inspect the investment details to any extent, mostly because so few even ask for the details that it isn't worth their while to bother preparing the information.

As far as the mortgage agreements, I didn't take mine to my lawyer as it was pretty straightforward. The problem with many of the subprime mortgage wasn't that the contract themselves were fraudulent, more that the people signing them didn't understand what the contract was at all. Which isn't surprising as most peoples financial literacy is absolutely horrible.

Re:Red?

[Anonymous Coward]

It is to alert the First Posters to get ready.

Re:Red?

[RDW]

'The red means that it's "in the future" and being seen by a subscriber. For some reason they've been showing up for a few seconds to normal users too.'

That gives me a great idea! Why not devise some sort of complex financial instrument that nobody understands, which effectively bets the entire economy on the future colour of Slashdot articles? It would be no sillier than what happened over the last decade, and pretty easy to implement if we can come up with a single neat formula that seems to give correct predictions if you don't look too hard. Speaking of which, I thought we were still blaming this guy:

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

You're spinning an awfully long, thin, thread.

[MarkvW]

The vast majority of WWII US servicemen did not see service on the pointy head of the spear. The ones that did serve at the pointy head got ground up, but there are not enough battle-scarred combat veterans to create the mass-PTSD problem that you posit. The overwhelming majority of veterans got bored out of their skulls for the duration (but nevertheless made a vital contribution to victory).

Your undisciplined post is fun to read, though.

Re:You're spinning an awfully long, thin, thread.

[ShieldW0lf]

The vast majority of WWII US servicemen did not see service on the pointy head of the spear. The ones that did serve at the pointy head got ground up, but there are not enough battle-scarred combat veterans to create the mass-PTSD problem that you posit.

The significant trauma was not the war. It was the abandonment.

You people keep believing whatever you've been spoon fed... you're going to anyways. But cultures that didn't do this to themselves, India for example, they are going to be the significant players of the future. We are going to go out with a whimper, and most of us are never going to be able to understand why. Personally, I saw the writing on the wall 15 years ago, for the reasons I have described, and I have yet to be surprised. I did a short stint as an insurance salesman before I realized how immoral the whole thing was, and got to lay eyes on actuary and demographic tables that the governments and industries have been covering up since before I was born. It's not complex to understand, not even slightly, and the people who have access to the raw data always knew this would be coming.

Re:You're spinning an awfully long, thin, thread.

[BorgCopyeditor]

-1, Improbably Simplistic Historizing

The problem isn't how "complex" your theory is to understand. The problem is that no adequate account of even a single, much smaller fact about human cultures or history bears any resemblance to the story you are telling.

But that's not the biggest problem. Even so-called "just so" stories are better than this drivel, since they at least are false (because overly simplistic) explanations of actual facts.

CRA

[weston]

the galactic insanity of the CRA

Whether the CRA was a good idea or not might be up for debate, but if "galactic insanity" implies that it was operating at a scale necessary to be a real driver of the crisis, there are significant indications you're wrong.

Consider, for starters, these statistics:

"Federal Reserve Board data show that:
* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions...
* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics."

There are a number of other relevant resources (such as those posted elsewhere in this discussion and in my comment history) which also examine the idea that the CRA was a significant cause of the current problems. The data seems to indicate that not only were CRA loans not any significant portion of problematic loans, they're actually turning out better than comparable private loans.

Re:CRA

[jd]

I took "galactic" to mean there's a supermassive black hole at the centre.

Re:CRA

[Anonymous Coward]

I suggest readers who want the truth have a leisurely stroll through Steve Sailer's site and reserve some time to savor all the excellent analytical journalism he's written on the minority mortgage meltdown.

• 50% of subprime dollars went to minorities during the peak years of the bubble
• minorities are now defaulting at twice the rate of whites
• CRA commitments increased to $2.3 trillion; many major banks drank this Kool-aid, including Countrywide, Bank of America, and Washington Mutual

It was non-minority Wall Street bankers and quants who of course took what was essentially a south-side Chicago shakedown operation (Mugger 1: "You of course wouldn't mind if I borrowed this $300,000 to give to my friend, would you? He promises to repay you when he can, see, with interest too.") and leveraged it to the moon. But it would never have happened without the CRA and the ambient politically correct liberalism which selected for stupidity by allowing those banks most committed to CRA to grow fastest (and thus dominate the market) through mergers and acquisitions, and made it impossible to speak the truth about minorities and mortgages through threat of anti-discrimination lawsuits (which bank officer would nowadays risk his career by asking if his institution was making too many loans to blacks or Hispanics)?

Re:Red?

[TinBromide]

no, this sounds like "The plural of anecdote is not..." Yeah, forget it.

Why the "blame"?

[khallow]

I don't understand the need (apparently in the article above) for people to blame everyone who had any connection at all to the financial crisis. This guy didn't do anything yet some of them are referring to him as a "scumbag" (and maybe a few naughty terms, I didn't look that hard). Further, Osinski claims to feel a little guilty, though he never explains why he should feel a shred of guilt. As I see it, he built a tool. Maybe highly leveraged traders leaned on that tool too much, but it's not intended to spot systemic risks (particularly the risk that all assets decline in a correlated way). Those systemic risks are what brought everything down. So a tool, working as intended, used by fools who made some hideously risky bets.

finance = teh fail!

[Anonymous Coward]

So, we all had a great laugh when it transpired that the greedy reckless banks had been caught in a predicament, namely having all those crappy mortgage backed securities on their own books, and we figured, serves them right. I guess we did not see that we would end up paying for them.

Who is really to blame for this:

(i) the guy taking out the large mortgage he knows he cannot afford, but knows he can walk away from it (well, in the US anyway)?
(ii) the mortgage salesweasel, selling products patently unsuitable, for his instant bonus?
(iii) maybe the big banks packaging up these bad mortgages, into bad maths products, sold as investments to people who may have trouble with long division, let alone comprehension of how to drill down into CDO squared?
(iv) the programmers who wrote the software to allow all this to happen?

Yeah, we know who is really to blame...

Re:Red?

[eln]

That's because you can't post comments to articles that are "in the future". One of the "benefits" of being a subscriber is being able to see the articles early, but you can't post to them until they go live (green) on the whole site.

Monkeys Pushing Buttons

[Anonymous Coward]

Just wait...it gets way better:

http://monkeyspushingbuttons.com

confession?

[superwiz]

He was part of a team that wrote some trading application. Confession? Is this a joke? Blaming wall street for this meltdown is like blaming your electrician when the power company stop providing power. All they do is repackage stuff. All the repackaging in the world wouldn't raise home ownership from 20% to 30% in 10 years. This was through policy... Brought to you by your friendly government (which I must be a right-wing nut for questioning, right?). Reminds of a the Jackie Mason joke: "This is the richest company in the history of the world and every year we lose money. That's because your congressman gets paid whether we lose money or not. I say put em on commission..." Honestly though... It's the "ownership society" that created this crisis -- not the middleman they are trying to blame now.

Re:confession?

[geekoid]

"All they do is repackage stuff. All the repackaging in the world wouldn't raise home ownership from 20% to 30% in 10 years."

Completely incorrect. Your ignorance is astounding.

The government involvement in the Mortgage industry changes where the removal of regulation.
The industry has been becoming more and more libertarian since Reagan.
Learn some damn history.

Re:confession?

[pinkocommie]

As another poster said it was a lack of information and regulation. The 'ownership society' part was a somewhere in the range of 10's of billions not the trillions already sunk. It was the disconnect between people that were giving out the mortgages and risk. If they had no incentive in checking out the ability of someone to pay back a mortgage, why would they not engage in risky behaviour - after all it was legal.

Re:confession?

[UncleAndy]

You are wrong, or not old enough or both. In the late 70s early 80s before mtge securities took off, mortgage spreads on 30 year fixed mortgages was 320 basis points (3.2%) above 10 year treasuries, by the late 80s these spreads had come don to 125 - 150 basis points all on the back of repackaging portions of the mortgages to different types of investors. These lower relative interest rates, made homes more affordable and surely helped increase home ownership without question, had to. Yes FNMA and Freddie Mac helped in this process, but ultimately it was finding new buyers of mortgages that changed the game.

Re:confession?

[superwiz]

The fact that you've bought to the propaganda campaign doesn't mean that I am ignorant. The regulation increased during those 10 years. The size of the regulatory agencies grew by 70% during the Bush years with Republican Congress. Specifically, new regulation was introduced which penalized banks for not landing to enough low-income borrowers. This is what caused this. The banks had to lend to high-risk individuals or face penalties. This is policy. It's increased regulation. Now go back to watching the Daily Show. I'm sure Jon will make you feel good about not looking behind the curtain.

Re:confession?

[superwiz]

There was increase regulation despite the media reports. The regulation penalized them for not giving mortgages to those who ultimately proved to be unable to pay.

Re:confession?

[superwiz]

Not sure how I am "wrong" or why you say "yes" while disagreeing with me. But ok. I'll assume that the condescending ad hominem that you vomited up there was an accident and actually keep reading. Lower spreads have nothing to do with this. They are only an indication of higher liquidity. So what? So they found more way to repackage these mortgages and turn them into tradable instruments. A 20% to 30% increase over 10 years is a huuuge jump. It's got nothing to do with deregulation of the 70s and 80s. The new ownership society was the policy put in place in the late 90s/early 21st century. They didn't "find" the new buyers. The S&L's were required to make loans to more risky buyers or face fines. The reason they came up with lower downpayment mortgages was to meet these requirements. This was policy. It was policy and policy alone that created this depression.

Re:Red?

[pwfffff]

Ah, Slashdot: where not even your made-up, bullshit words are safe from the grammar Nazis.

Wrong, wrong wrong, and then some....

[sgt_doom]

"The problem wasn't the securitization of mortgages itself. The problem was that financial institutions borrowed money to buy more mortgage securities than they had in available cash, creating an insatiable demand for securitized mortgages."

Forgive my negative response, but I'm afraid P(etroleum)B(roadcasting)S(system) got it wrong, but is still propagandizing correctly. The problem was indeed the securitization of mortgages - which created an enormous number of hyper-leveraged financial products, from one original and often shaky financial instrument - thus incredibly increasing the amounts brokers, and banks and investment houses, and insurance companies (and combinations of all three institutions) earned, again and again and again. The entire point of Credit Default Swaps (CDS) and credit derivatives is super-leveraging while compounding risk to infinity. The problem is the credit derivative - and its various subcategories - which create super- and ultra-leveraging - which allows for a small number to illegitimately become billionaires at the expense of the rest of us - because that super-leveraging then becomes super- and ultr-deleveraging!

It doesn't matter whether or not you can understand it, what matters is that it occurs - there is a colossal transfer of wealth - and the rest of us honest types are royally screwed!

Don't blame the coder

[Brandybuck]

Don't blame the coder. The mortgage meltdown was a "perfect storm" with lots of causes all coming due at the same time. It was a systemic problem. Unfortunately, our "solutions" aren't getting at the root causes, just covering them up with lots of cash. The next crash will be worse because of it.

Blame IT

[cbass377]

Yeah right. They always blame IT.

Re:If was the Li's formula

[jd]

There are some really really bad jokes that could be made of the function name. Only problem is that nobody on Slashdot has been outside the basement long enough to get them.

correlationisnotcausation

[Wilson_6500]

This is what $2 million of bonus can do to grown men.

I wanted desperately to try to argue that perhaps the kind of person who can position himself to make that kind of money is simply the kind of person who would be amenable to literal pissing contests and so on, rather than money itself changing what were previously normal people.

Re:correlationisnotcausation

[CodeBuster]

rather than money itself changing what were previously normal people.

Sort of like taking a collective look in the mirror and not liking what we see, but was this really that surprising? At some point every one of us is corruptible and every man (or woman) has his (or her) price. If you say, "not me" then say that again after tearing up a $2 million dollar bonus check that someone has just placed into your hands.

Re:correlationisnotcausation

[Wilson_6500]

My comment was more along the lines of asking if becoming rich really turns a person into a sophomoric frat boy, or if it's possible that type of person will do well in the Wall Street club anyhow. Regardless, I don't think it's necessarily that we can simply say that "becoming rich makes people into wall-pissing douchebags" or that everyone has some kind of "douchebag price" that tips them over into a socially irresponsible idiot once they've made it. The article seems to imply that these people were "corrupted" by the money, whereas it could've been that they were simply enabled to act in that way because of the general laxity of attitudes brought about by their prosperity. I mean, sure, it's easy to see that if you're finally making enough money to hire a housekeeper, then anyone might care a bit less about splashing up on the rim, but that's not really what went on here.

Re:Red?

[moniker127]

I've never had a problem posting to them... or seeing them... and I'm not a subscriber.

ghostwriter... liberal arts major .. !programmer

[cheap.computer]

Obviously the guy who wrote this article is not a programmer, he is a liberal arts major and knows a little about the crisis... nice interesting read.
I did not like the fact that he claimed that he was over paid all along his career, and compared the work done by some oyster farmer to being harder than a computer programmer, sounded more like a pol-pot fan.

Re:Red?

[eln]

Subscribers don't just see them for a few seconds, they see them sometimes for hours. The issue with non-subscribers seeing them for a few seconds or minutes appears to be a bug.

Michael Bolton?

[PeterChenoweth]

Is that you?

fsckin' wankers

[Anonymous Coward]

they could have at least had a beta testing phase before they went live and brought down the whole financial system.

So not only are they crap at economics, they are crap coders too.

Meh.

Well, duh...

[tgibbs]

Why would anyone in the market have had an interest in loaning to high-risk individuals if it wasn't for the "affordable housing" and "homeownership for all" agenda pushed by both the Clinton and Bush administrations?

Because you can charge high-risk individuals higher interest. So loaning to high-risk individuals can be extraordinarily profitable, if you can figure out a way to average out the risk.

This isn't rocket science--unless you get all of your "information" from right-wing talk radio.

Re:Well, duh...

[homer_ca]

Indeed. From Wikipedia. This is the only info that remotely substantiates the claim of "Democrats forced banks to lend to poor people!" Subprime lending is very profitable as long as the higher interest covers defaults.

In 1999, Fannie Mae came under pressure from the Clinton administration[9] to expand mortgage loans to low and moderate income borrowers. At the same time, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits.[10]

In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[11]

Re:If was the Li's formula

[xrayspx]

So we go back and kill Carl Gauss. Then my CRTs won't be all ghosty and my house would still be worth something.

Re:Red?

[emurphy42]

Whatever it is, it's confusing. Can we at least get a link to a FAQ near the "green" button in the upper right corner?

Re:Red?

[moniker127]

So being a subscriber allows you access to a time machine? Thats pretty cool.

what do you think freedom is?

[BorgCopyeditor]

I'm interested to know what you think freedom is.

Re:ghostwriter... liberal arts major .. !programme

[Chirs]

I disagree with you on several fronts.

First, I find it interesting that you seem to think that a computer programmer cannot also write for a non-technical audience.

Second, I think I'm probably overpaid, and I *know* (having done both) that being a tree planter is harder than being a computer programmer.

Liar's Poker

[Anonymous Coward]

For a good first person background on how Salomon Brothers and other institutions developed and popularized CMOs, read Liar's Poker by Michael Lewis.

Re:Software Development Cycle

[Anonymous Coward]

How is this a troll? The guy's (I'm assuming it is a guy here) horny. Let's help a brother out! I suggest craigslist erotic services page, or perhaps http://www.pornhub.com/ for some great vids if you don't wanna pay for a hooker.

RTFA

[Estanislao Mart�nez]

Can you say scapegoat? Of course, it's a geek who is to blame for it all with his immoral software witchery. It couldn't possibly be the result of a large number of greedy, thieving scum, who were regulated by greedy, corrupt scum, and they in turn were regulated by a greedy, corrupt government.

Um, dude, RTFA. It's a piece by a software developer who wrote a bunch of software for mortgage securitization, telling his story and doing some navel-gazing about whether he should feel guilty about his part in the debacle.

RTA, dude

[Estanislao Mart�nez]

The article isn't seriously claiming that one guy was responsible for it, nor that it was due to a software bug. The article was written by a guy who developed some mortgage securitization software, who tells his story and idly asks himself to what extent he shares responsibility for the debacle.

yes, and it will continue

[zogger]

All these bubbles can be laid at the feet of easy credit. And it starts with a credit based money supply scheme, rather tha a past produced wealth money supply system. For millenia, money was actual wealth, or a tangible and portable representation of wealth, wealth that had been produced, past tense. Now nations use a future credit system that inflates the money supply way beyond what actual wealth production would indicate as being sane, thinking that in the future, enough wealth creation will be done to cover that inflation. It is "loaned into existence". About as crazy a notion as it gets. They never get it right, no matter how much they try, and always eventually overly inflate, as they did with these mortgages then the derivatives of the mortgages and the sliced and diced risk contracts, which are bets on inflated wishful thinking once you distill it down. This leads to a series of boom and bust cycles that are more intense than they would have been if the supply really represented past produced wealth. Because you can't loan that which doesn't exist unless you inflate the system and base your figures on wishful thinking. That's all currencies are "backed" with now, a few fatcats ideas and some wishful thinking.

Of course...

[copponex]

Although, it will still cost them far less than the American Empire they've been supporting for 60 years. And for some reason, I don't suspect the nightly news will mention it. Strange.

America's a wacky place. Spending less than 100 billion saving people who were dumb with mortgages is cause for Panic! Hyperbole about Socialism! Quick, throw a tea party! Fox News anchors weeping on air for their fallen values system!

Spending 1,000 billion on warfare every year is Patriotic! Go team! USA! USA! USA! Post some videos about shock and awe! Let's run some swell pieces on brand new weapons systems designed specifically to "protect freedom," and never mention their price tag...

Re:Of course...

[overunderunderdone]

America's a wacky place. Spending less than 100 billion saving people who were dumb with mortgages is cause for Panic! Hyperbole about Socialism! Quick, throw a tea party! Fox News anchors weeping on air for their fallen values system!

Oh, come on. You know a mere $100 billion isn't the cause of anyone panicking or any hyperbole about socialism. Where do you even get such a paltry number from? $12.2 trillion is the cause for panic and "hyperbole" about Socialism. That is of course is just the bailout commitments, the stimulus is another $789 billion, which is "too small" and will require a larger sequel. All of this is only the projections right now, like the wars which were initially projected to cost far less than they ended up costing the real costs will be higher than current optimistic government projections.

Of course it's not only the money spent but the fact that the government now either directly owns or is seeking to own several very large businesses and is effectively running quite a few more that it doesn't (yet) own outright: making personnel and compensation decisions. Deciding which (politically connected) creditors will get paid back and which (politically unpopular) creditors won't. You may be right that this doesn't amount to socialism, the correct term is probably corporatism, which you may not have a problem with but a lot of people find very troubling.

We've already spent more ($2.5 trillion according to the NY Times linked above) "saving people who were dumb with mortgages" in less than a year than the total spent in over five years of the Iraq war.

I'll agree with you though that America is a wacky place.

Re:Of course...

[copponex]

Less than 100 billion of the money is being paid directly to home owners who are in danger of losing their homes. The rest are going to corporations who made a lot of stupid bets that fell apart. This is to protect the 10% of Americans who own the vast majority of stocks from losing all of their paper wealth that is now mostly worthless.

That's how it typically works though. Corporations and the people who matter are special, and receive massive amounts of welfare. Individuals must suffer to learn their lesson. Corporatism is nothing new here. Socialized risk for private profit has been the model for many, many years.

I still think the bailout was necessary, but anyone with a huge 401k should once again thank God for the working class. And in my opinion, they should think about repaying them with investments in education and policies that promote economic equity, instead of destroying it.

Re:Of course...

[overunderunderdone]

Less than 100 billion of the money is being paid directly to home owners who are in danger of losing their homes. The rest are going to corporations who made a lot of stupid bets that fell apart. This is to protect the 10% of Americans who own the vast majority of stocks from losing all of their paper wealth that is now mostly worthless.

It remains that that $100 billion is not what is provoking the outrage and the fears of galloping (as opposed to the normally creeping) socialism/corporatism (a distinction with little difference). It's the bailout and the stimulus as a whole, a massive increase in the size and cost of government and a massive increase in it's role in the economy.

Corporatism is nothing new here. Socialized risk for private profit has been the model for many, many years.

I should probably make a distinction between the two different definitions of "corporatism." I'm not referring to the recent popular usage as "government by corporations" but rather to the older formal definition. Corporatism is a quasi-socialist system where government heavily regulates and manages each industry (setting wages, prices, industry standards, etc.) via the intermediary of the confusingly named "corporations". "Corporations" not meaning business corporations but government councils that regulate each industry and consists of representatives from government, management and labor. So essentially "government by stakeholders" or at least "industrial policy by stakeholders". Of course the two definitions need not be in conflict, the practical result of formal Corporatism may be essentially the popular version with a thick layer of government bureaucracy and the merging of government apparatchiks with captains of industry (think Franklin Raines). As with any system of excessive government control one of the results will be inordinate benefits to those that are politically connected, or as you put it "socialized risk for private profit".

by killing Bankruptcy protection the last break on

[Anonymous Coward]

..bad lending was removed...cause I can always get the house back so, so what.. But when bankruptcy would mean that you KEEP you HOUSE, well the lender won't lend you money unless they are pretty darn sure you will actually pay.

Killing bankruptcy housing protection was the last nail that let the combined bank-insurance-security industry rape and kill the plant - for money.

Accountability

[copponex]

Interest rates pushed housing prices up, no doubt. But two simple rules would have prevented the bubble from getting catastrophic.

1) Leave Glass-Steagall in place (it was repealed in 1999). Banks are banks, insurance companies are insurance companies, investment firms are investment firms. Whining about losing "profit opportunities" are ignored, and intra/intercompany shenanigans greatly reduced. From 1987, defending the Act:

Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

2) Force companies that lend to keep the mortgage, without any side bets or leverages, until it is paid off.

And, if you really want to stop these cycles from developing, you have to implement usury laws once again, to prevent continued capital flood into financial services. No one is going to build a factory until it offers a competitive ROI.

Re:If was the Li's formula

[EdgeyEdgey]

taking into account only single correlation parameter

That's a single correlation parameter per pair of mortgages. If you have N mortgages then that's N^2/2 parameters.
This is one reason why people can't agree on a price for the CDO's. No-one can agree on the underlying correlation matrix.

Re:ghostwriter... liberal arts major .. !programme

[Maxmin]

The oddest thing about Osinski's article is his claim to be "the one" to have written the CDO packaging software that brought down Wall Street-

I wrote the software that turned mortgages into bonds.

That statement alone pegged my bogometer. Sweeping claims for sole ownership of a *type* of system that developed by many banks - bullshit.

During the 80s and 90s, I worked for several major Wall St. IBs, writing institution-level portfolio risk-valuation software - dealing with billions in net value across markets, trillions in notional face value (whoop-t-do.) And I collaborated with coworkers who wrote and maintained, get this, CDO packaging/securitization systems.

Osinski, wherever he was at the time, wasn't "the one." Many people worked at this, across numerous banks (eventually.) That he has a guilt complex about it is kind of absurd. He might have been an early developer, though certainly not the only one, and he was most definitely not the inventor of mortgage-backed bonds. That alone should clear his conscience.

His guilt is either misplaced, or amplified to a level that runs way, waaay outside his actual responsibilities as a developer.

Also, his claim that the code became "the standard" used by IBs around the world seems utterly bogus. At the firms I was employed by (and consulted for), while we did license code and contract out for systems developed by quant software boutiques for specific needs, things like securitization systems were in-house. Because: a) it was very complex, b) it had to be very specifically tailored to your "inventory" systems (and the retail banks you bought from), and c) at the time, you did not want an outside firm getting into your books or onto your network. (This was in the days before FIX became a standard.)

So, maybe this guy is seeing a second/third career as a writer. Good luck with that.

Cost to fix problem = $206k per person-on-planet

[Richard0Thomas]

Apparently a lot of people do not know what they are talking about. The people most invested in the system cannot see the flaws and do not want to. The financial jargon is used to obfuscate. Some genius that actually understands it all at the byte and master accounts level, made it very simple for everyone to understand.
Derivatives = Bets
Credit Default Swaps = insurance on bets
Hedge Funds = borrowing of money to gamble with (unregulated and secret also used to manipulate markets)
Taxpayer Bailout = Taxpayers covering the gambling losses for gamblers? (it won't happen without a revolution taking place to correct it)
Reality = Insurance (e.g. AIG) cannot cover failed bets which amount to: USD 206k per person-on-planet.
The number it is based on has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide. The GDP of the entire world is USD 50 trillion. The derivatives "bets" total USD 1,144 trillion which is 22 times the GDP of the whole world. The money 1,144 trillion doesn't really exist in system but only in the terms of a contract, artificial value not validated by economic system participants. It would be inappropriate for the citizens to go into debt as they already have, to cover these contracts. The people that created this catastrophe do not feel the pain of their decisions, but the common folk do. You can read all the rest of this and a bunch more insight into a system that would actually work on http://coinage.me/ Perhaps most ironic was an attempt to build a computer game based on the current economic model, eventually the game / economy always crashed.

Re:If was the Li's formula

[sjames]

But we can't blame him either. He TRIED to warn the managers who could actually change course that there were serious limitations to the formula but they didn't want to hear it.

Well.. what happens in the LONG RUN?

[hackingbear]

History has proven nothing but perpetual inflation, because inflation is the driving force of the economy. Yes, today, the average house price may be down by 30%. But in 10, 20 or 30 years, one may have to pay $1000/hour just to paint the house. The peak price of your house a few years ago may look a like a bargain 20 years from now. Remember, an average worker got dollar a day in the past. Rent would be like $30000/month. The problem is that you will likely still be live by then but too weak to work, and housing is a major cost still.

It all comes down to timing and cash flow of your investment.

Re:Well.. what happens in the LONG RUN?

[smallfries]

That is not strictly true. There was a period of sustained deflation between 1870 and 1890 called the Great Sag. Buying a house at the wrong point in time is a mistake that would not have corrected within a lifetime. There was a sustained period of house price deflation in the UK in the 18th century that lasted for fifty years - this was long enough that the common perception of property became that of a money sink, rather than the free ride that we expect today.

In general house price inflation does work in our favour, but there are exceptions...

Re:Well.. what happens in the LONG RUN?

[hackingbear]

If you are betting against odds, which would you bet? and which would you bet starting from now?

There is no 100% winning investment strategy -- holding onto your cash is not. When everybody does the same thing, it ceases to work. When most people stay away from it, it becomes attractive again. That's what distinguish between smart and rich investors and those who complains in /. and other forums.

Re:Well.. what happens in the LONG RUN?

[smallfries]

I would bet on deflation now. In the future that may change. Right now holding onto cash is a much better investment strategy than a house - cash is not devaluing by 20% a year at the moment.

Right now people still want to believe that housing is a great investment - your post is a symptom of that. It will be a while before the majority of people stay away from it and it becomes a good investment again.

Re:If was the Li's formula

[Anonymous Coward]

Yep, that was one of the really bad jokes. Jokes like that must be why you're still in your mom's basement, huh?

By Neruos

[Anonymous Coward]

The coder only codes the math the BA gives him/her.

Here's another reason the financial system failed.

[Skald]

Moral hazard.

Charity should not be a burden to the responsible.

[Anonymous Coward]

Actually, the question now would be
"How many fools will it take before the elders let natural selection takes it's course"?

While I am for charity... Charity is not the answer to everything.
Also charity should not replace good ethics, morals and that sense of accompishment.

If income tax amounted to a charitable 10% of my income for social, economic and the nations well being then take it... But as it stands now 50+% is not charity, it's robbery, and this is the problem.

you did it...then. It is your fault....too

[bodland]

Thanks. Stand up and take credit for being an enabler of the elite economic ruling class to drive our nation into the ditch.

Re:you did it...then. It is your fault....too

[Anonymous Coward]

Hahaha, no. On the off-chance you're not trolling and are genuinely interested in the topic-

The problems we're (still) having with CDOs and their cousins arose during this decade (and the latter half of the 90s), from the de facto deregulation of mortgage brokers and banks (i.e. lack of regulations suitable to current climate, and existing regulations not being enforced, courtesy the Bush admin and Republican congress, and now same goes for Obama and the Democrats.)

Bad loans were made, bundled into CDOs by investment banks, then sold onto the market. The Glass-Steagal Act repeal contributed, also.

The other leg of the problem is (still) with naked credit default swaps, the so-called insurance policy (more like a bet, really) for mortgage defaults occurring within CDOs. CDSes can be reassigned (sold), whereupon the original terms of the deal can be difficult to enforce. Say you trade the payback responsibility, for a promissory note you hold, to a business entity with no assets (can't pay the note back.) Similar notion to what went on.

CDSes, along with many other kinds of swap, have never been regulated by the SEC. Still. Not. Regulated. Almost completely a business-to-business contractual type thing, despite the now-obvious wide-ranging impact these have had. New York State proposed a plan, don't think it's been acted upon yet (that was in late 2008.)

Besides which, did *you* know, back in the 80s or 90s, that these problems were afoot? I did not, and I was immersed in the biz. But the bankers who made the deals surely did, because they took advantage of the legal voids. They get paid small fortunes for solving that type of problem. Then that money trickles down to lobbyists who make a living convincing elected and appointed officials not to change things.

Round and round we go...

That would have not wrecked the system.

[jotaeleemeese]

The problem is that clever banks like Lehman Brothers (RIP) took those debts and spread the risk by nefarious, unregulated means.

If somebody had stopped the securitization of bad mortgages the problem would have stopped with the banks making bad loans and their costumers. As things were these securities eventually led to such distrust in the interbanking lending system that credit literally stopped worldwide.

We could have bad mortgages as long as corporate banking had been moderately risk averse...

Even if the market does not rise....

[jotaeleemeese]

... when you buy you are left with two very valuable assets at the end of the mortgage: the house and the usage you got out of it.

If you treay a house like your home then you don;t care if its price rises or falls, at the end, the day after the mortgage is paid, you begin to make money (either by not paying rent or by renting the house out and pocketing most of what you charge).

If you are renting, after the same period of time you are left with, er.. nothing, and better you pay your rent next month, otherwise you will be thrown out.

That does not matter! Really....

[jotaeleemeese]

If all had been banks not getting paid, they would have got the houses, would have lost a bit of money (or a lot, that is irrelevant) and that would have been the end of it (not really, it would have affected the economy, but would not have provoked a worldwide meltdown).

The problem is that investment banks, thanks to lax regulation, decided that packaging those bad loans in crazy quasi ponzy schemes was a good idea.

And the people measuring risk (rating agencies) did not to their work.

Bad mortgages would have not come close to cause such monumental problem, no matter which way you want to look at the mess we are living through.

What is so difficult about a mortgage?

[jotaeleemeese]

It is all very basic maths, and nowadays the Intarweb has calculators for you so you know exactly how much you need to pay each month.

I worked myself out this, compared the monthly payments for different mortgages against my salary, and chose one that I could afford (the mortgages brokers I talked to didn't offer the one I chose BTW, what a surprise).

4 years later I am perfectly fine, in spite of having being unemployed for more than a year.

Self-indulgent garbage.

[Anonymous Coward]

Self-indulgent garbage.

That is all.

Re:If was the Li's formula

[Dread_ed]

"Formula was applied recursively and the end result was completely divorced from reality."

"Working as intended", I am sure, would be the honest answer for the vast majority of people who are still spending the money they made off this.

Re:If was the Li's formula

[Anonymous Coward]

CMOs are all about expectation of prepaying mortgages and the correlation of that with interest rates. Intex is based on historical data, which actually takes into account the FICO scores and ZIP codes associated with individual loans. David Li's work involved correlation between the default of corporate bonds and other securities. These are apples and oranges.