# Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch... **URL:** \ **Category:** Great Debates\ **Created:** [September 15, 2008, 2:29am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650 "2008-09-15T02:29:45Z")\ **Posts on this page:** 20\ **Page:** 4
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 15, 2008, 8:13pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/61 "2008-09-15T20:13:34Z")
> [@Throatwarbler\_Mangrove](#): > > You have a couple of fundamental misunderstandings here. > > 1. The “Assets” in this case is not real estate. Banks do not manage apartment buildings. The assets in question are the LOANS. For a bank, a loan is something that generates income in the form of interest, or in other words an asset. The asset may be a loan BACKED by real estate, but in this narrow sense, the actual value of the underlying real estate is neither here nor there - your loan obligations are not derived from the market value of your house. However, if a bank holds paper on a house whose value is now below the loan, they are very likely holding junk - or at least paper with a value less than what is on the books. They haven’t been losing money on foreclosures as much as on the reduction of their asset values (or the problem of not being able to value the assets, which is even worse.) > [@](#): > > 1. The concept of “We don’t need to save for retirement because our real estate will continue to appreciate forever” is a relatively recent one. True, many more people bought into it than they probably should have, but fundamentally, real estate prices generally match inflation, and there is no reason why it won’t do so in the future. The economies of other countries are not based on real estate appreciating forever, they are based on increasing productivity and capital. > > “Real estate appreciate forever” is what’s called a “Ponzi scheme”. It’s actually worse than this. People have been living beyond their means from thinking that real estate will appreciate forever. If the problem was only retirement, it might be put off for a while. The lack of retirement savings is even a bigger problem, since I doubt many people are going to see their houses appreciate enough to finance retirement even without taking out equity before. ---
**Author:** ![Humble\_Servant](https://avatars.discourse-cdn.com/v4/letter/h/47e85d/32.png) [@Humble\_Servant](https://boards.straightdope.com/u/Humble_Servant)\ **Post date:** [September 15, 2008, 8:16pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/62 "2008-09-15T20:16:59Z")
> [@Kalhoun](#): > > My dad and I both have money with Merrill Lynch. I put a call into him today and I’m inviting my dad to a conf call since we both have the same guy. I actually like our dude and I want to get some straight talk from him (is it feasible to even expect that under the circumstances?). My investment is paltry compared to my dad’s. I’m very concerned, but something tells me they did the right thing…for now. Only the parent of Lehman Bros is in bankruptcy and brokerage account assets at its brokerage subsidiaries are segregated and are not currently impacted. It is most likely that they will be sold–treated as a valuable asset (the relationship part) and transferred to another broker at full value–they will also be protected to some extent by the SIPC (kinda like the FDIC for brokerage accounts). Accounts with Merrill are not in any financial danger from the sale to BofA–BofA when it acquires ML (for which it is paying a premium) “gets” these accounts and remains liable to customers in the same way as ML was liable. Note also that if your account is custodied somewhere else and ML or LB only has investment authority over trades, then you should be insulated from the transactions for other reasons. Unless you invested in LB stock or bonds (OTOH, if you invested in ML stock, you will get a premium over the last trading value). ---
**Author:** ![Merijeek](https://avatars.discourse-cdn.com/v4/letter/m/f05b48/32.png) [@Merijeek](https://boards.straightdope.com/u/Merijeek)\ **Post date:** [September 15, 2008, 8:37pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/63 "2008-09-15T20:37:24Z")
> [@erislover](#): > > It is an incentive to take risks. Risks are, well, risky, and don’t always pay off, but it is the only way to get stellar returns on investment capital. If your CEO has to worry about where his paycheck will come from tomorrow, he might not be the most objective person to deal with directing a company in ways that spurn growth an innovation. Whether this is what you want your CEO doing probably depends a lot on the company, and what dollar amount correlates well with healthy risk-taking is probably not something you just google to find out, but I think overall the idea makes a kind of sense. Well, that and he can leave the place a smoking crater and still get his big bucks. The poor dears! -Joe ---
**Author:** ![Hyperelastic](https://avatars.discourse-cdn.com/v4/letter/h/a3d4f5/32.png) [@Hyperelastic](https://boards.straightdope.com/u/Hyperelastic)\ **Post date:** [September 15, 2008, 9:58pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/64 "2008-09-15T21:58:57Z")
Well, the Dow was off 500 points today. Are we going to see a dead-cat bounce tomorrow, or is this the beginning of the end? There is plenty of blame to go around. The Democrats loosened up lending standards so as to increase homeownership, particularly for minorities who were supposedly being discriminated against by that antiquated relic known as the credit check. The Republicans, acting as advocates for the banking industry, repealed the Glass-Steagall Act, allowing commercial banks to put demand deposits in risky investments, including crap mortgages. China was more than happy to help inflate the credit bubble (did the US government make a backchannel promise to the Chinese that if the FMs went belly-up, they would step in and protect China from losses?) And finally, the American consumer was willing to borrow 8, 10, 12 times income to get into a house, goaded on by ridiculous, unsustainable gains in real estate prices. Most of the guilty will be (already have been) punished, but through political means they’ll manage to spread a lot of the losses to innocent bystanders under the guise of an “orderly unwind”. Taxpayers present and future will be paying to keep broke people in their McMansions instead of for clean energy research, health care, or anything else productive. Neither candidate has any credibility on this issue. McCain’s economics advisor was Phil “Nation of Whiners” Gramm, who gleefully gutted Glass-Steagall, and Obama has gotten huge donations from the financial sector and has ties to (former) subprime lenders. What’s the upside? You’ll be able to get a great deal on some California or Florida real estate in a couple of years, if you have any money left. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [September 16, 2008, 3:45am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/65 "2008-09-16T03:45:37Z")
> [@Merijeek](#): > > Well, that and he can leave the place a smoking crater and still get his big bucks. Of course. And it is in the shareholders’ best interest to get CEOs in place that will do just that, right? Er, wait… ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 16, 2008, 4:29am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/66 "2008-09-16T04:29:07Z")
> [@erislover](#): > > Of course. And it is in the shareholders’ best interest to get CEOs in place that will do just that, right? Er, wait… Shareholders do not appoint them. The board takes care of itself. it determines pay and severance. They run the board and loot at will. ---
**Author:** ![hansel](https://avatars.discourse-cdn.com/v4/letter/h/6bbea6/32.png) [@hansel](https://boards.straightdope.com/u/hansel)\ **Post date:** [September 16, 2008, 4:42am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/67 "2008-09-16T04:42:22Z")
> [@Hyperelastic](#): > > What’s the upside? You’ll be able to get a great deal on some California or Florida real estate in a couple of years, if you have any money left. These shiny Krugerrands can be yours for that worthless old piece of land! Both of them! ---
**Author:** ![slaphead](https://avatars.discourse-cdn.com/v4/letter/s/e9bcb4/32.png) [@slaphead](https://boards.straightdope.com/u/slaphead)\ **Post date:** [September 16, 2008, 11:41am UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/68 "2008-09-16T11:41:49Z")
> [@BrainGlutton](#): > > 😕 No, the business of banks (like the business of insurance companies) is to **minimize** risks – by allowing a vast number of depositors to lend their money to an institution purportedly too big to fail, and which can in turn lend money to a smaller number of borrowers at minimal risk to the institution should some of them default. If you look at the average retail bank, their business model consists of taking in a vast amount of small deposits, any of which can disappear at a moments notice if Auntie Ethel needs to buy a new sofa and bundling them up into gigantic bundles of cash which are then lent to e.g. big corporations with no chance of getting them back for years. As **wmfellows** says, this is intrinsically very very very risky - if a stampede develops among retail depositors (or if they all happen to need one-fifth of their deposits in cash today) the bank has absolutely no chance of paying them. The whole concept of ‘too big to fail’ derives from the recognition that banks have an innate tendency to crash and burn, doing massive economic damage in the process, and therefore any large bank would need to be bailed out if it tripped up. The notion of banking=conservative exists because any sensible banker in the past would spend an inordinate amount of time and effort pretending that _their_ establishment would never do anything in the least risky, that they thought about every investment carefully, that they were safe. All those neo-classical branch buildings were flimflam to distract depositors from the ugly fact that their vaults were basically empty, always had been and always would be. So once could define the business of banks as a relatively benign confidence trick. Then over the last few decades banks basically turned into casinos where all the bets were made with borrowed money, and here we are today. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [September 16, 2008, 3:22pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/69 "2008-09-16T15:22:53Z")
> [@Mr.Svinlesha](#): > > **erl!** Brother! S’up! Long time no see! Definitely good to be back, my friend. > [@gonzomax](#): > > Shareholders do not appoint them. The board takes care of itself. And how do you suppose people end up on the board? ---
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [September 16, 2008, 3:31pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/70 "2008-09-16T15:31:01Z")
Lehman Bothers shares were quoted (Friday PM) at about $3.65/share. Monday morning (at market opening), they were worth all of $0.11! So a lot of mutual funds lost $billions on this-while the senior managers of LB walked off with substantial bonuses . This isn’t how capitalism is supposed to work. ---
**Author:** ![Cat\_Whisperer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cat_whisperer/32/4839_2.png) [@Cat\_Whisperer](https://boards.straightdope.com/u/Cat_Whisperer)\ **Post date:** [September 16, 2008, 4:08pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/71 "2008-09-16T16:08:23Z")
So, any thoughts on [AIG going belly up as well?](http://www.bobsguide.com/guide/news/2008/Sep/15/AIG_'in_trouble'_as_Wall_Street_woes_build.html) It’s apparently in trouble as well. This was posted on a different board from an economist who is currently working at AIG on Wall Street (he was asked what advice he would give people regarding all the bad economic news coming out of Wall Street): > [@](#): > > This is unprecedented so I’m not totally sure. > > One thing I can say is to break up your money, for the love of God, break up your money. If you have any deposits larger than $100K in a bank, then scout out some new banks and put part of the money in there. If you have 8 statements instead of 3, who cares? FDIC insures all deposits up to only $100K, but I would go as small as $40K-$50K since the Fed is depleting its reserves to unprecedented levels and even the $100K threshold may not be immediately safe in an old school Depression-type run. He also says: > [@](#): > > People are still eyeing their 401K’s and treating this like ‘someone else’s problem’. It won’t remain ‘someone else’s problem’ for very long once banks start refusing pretty much all mortgage applications and businesses of all sizes can’t borrow the money they need to operate from day-to-day. The speed with which money can move is one of the most important things governing the country’s economic health, and the market just lost 4 or 5 huge counterparties that facilitated that speed. The 2008 election just got a brand new top issue. He thinks Bank Of America, Chase and Capital One will be safe; he is not so sure of Washington Mutual, CitiBank, or Wachovia. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 16, 2008, 4:18pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/72 "2008-09-16T16:18:42Z")
> [@erislover](#): > > And how do you suppose people end up on the board? Usually a nominating committee of the existing board, with major input from the CEO. How many board elections have you voted in with more than one candidate for position? For me, unless there is a hostile takeover in progress, none. ---
**Author:** ![Captain\_Amazing](https://avatars.discourse-cdn.com/v4/letter/c/6de8d8/32.png) [@Captain\_Amazing](https://boards.straightdope.com/u/Captain_Amazing)\ **Post date:** [September 16, 2008, 4:21pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/73 "2008-09-16T16:21:11Z")
> [@gonzomax](#): > > Shareholders do not appoint them. The board takes care of itself. it determines pay and severance. They run the board and loot at will. In almost every corporate structuring document I’ve seen, the Board of Directors is elected by the stockholders. ---
**Author:** ![spazattak](https://avatars.discourse-cdn.com/v4/letter/s/8e8cbc/32.png) [@spazattak](https://boards.straightdope.com/u/spazattak)\ **Post date:** [September 16, 2008, 5:00pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/74 "2008-09-16T17:00:04Z")
> [@Captain\_Amazing](#): > > In almost every corporate structuring document I’ve seen, the Board of Directors is elected by the stockholders. And who do you think controls the names that go up for election? ---
**Author:** ![Maeglin](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Maeglin](https://boards.straightdope.com/u/Maeglin)\ **Post date:** [September 16, 2008, 5:02pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/75 "2008-09-16T17:02:21Z")
> [@Captain\_Amazing](#): > > In almost every corporate structuring document I’ve seen, the Board of Directors is elected by the stockholders. The stockholders being, primarily, a handful of massive institutional investors and perhaps Warren Buffet. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [September 16, 2008, 5:06pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/76 "2008-09-16T17:06:40Z")
> [@Voyager](#): > > How many board elections have you voted in with more than one candidate for position? For me, unless there is a hostile takeover in progress, none. The point is whether it is in shareholders’ interest, or the board’s interest as proxy, to bring in CEOs that will behave in the manner suggested. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 16, 2008, 6:12pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/77 "2008-09-16T18:12:09Z")
> [@Captain\_Amazing](#): > > In almost every corporate structuring document I’ve seen, the Board of Directors is elected by the stockholders. Saddam and Fidel got elected by the people also. Their elections were just about as challenged as the average board members. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 16, 2008, 6:17pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/78 "2008-09-16T18:17:55Z")
> [@erislover](#): > > The point is whether it is in shareholders’ interest, or the board’s interest as proxy, to bring in CEOs that will behave in the manner suggested. CEOs are a slightly different story. Ever vote for a CEO? Didn’t think so. About the only time a board does something useful is selecting a new CEO. Once that happens, cognitive dissonance says they’ll support that CEO unless he or she really screws up. if the CEO is reasonably successful, the board becomes populated by supporters of the CEO - for instance from the top executive positions. If a CEO does not get his or her choice of a new board member, the end is near. The HP saga is an interesting case study of a board in revolt. It happens, but it takes a lot. ---
**Author:** ![vison](https://avatars.discourse-cdn.com/v4/letter/v/e47774/32.png) [@vison](https://boards.straightdope.com/u/vison)\ **Post date:** [September 16, 2008, 7:06pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/79 "2008-09-16T19:06:08Z")
This is not directed at anyone here, but is a rant prompted by a snotty email I got from a rich American friend: I, personally, me, myself, am fed up to the back teeth with ordinary Americans being blamed for the failure of those whose **duty** it is to care for the public good. Now, it is true that ordinary Americans elect the government and thus one could argue that it DOES make them responsible. There is some validity to that point of view. But the men who actually committed the crimes - and they ARE crimes - are rich and powerful men who deliberately and coldbloodedly sidestepped and/or colluded in the removal of the safeguards that should have been in place. This was done with the full knowledge and active participation of the regulatory bodies who were once expected to look after the interests of American citizens, to protect them from greedy and unprincipled raptors, the men responsible for destroying some of the largest financial institutions in your country. No one expects the ordinary person to be an expert in how his cancer should be treated - that man goes to a doctor and he trusts the doctor to manage his treatment. The economy of 2008 is at LEAST as complicated as medicine, and yet it is expected that the ordinary person should somehow have obtained the expertise to navigate through it. Certainly people make mistakes due to greed as much as ignorance. But why does it attract the kind of dismissive contempt that it does? If a man chooses a poor doctor and dies of cancer, do you think he’s a fool? Why is the same kind of man a fool if he trusts the systems and institutions that are supposedly regulated and overseen by the law of the USA? People who are well off usually attribute their prosperity to “good management” and “hard work” and all the other cliches that are paraded around at times like this. Certainly, some people were wiser than their neighbours. But an awful lot of people confuse good luck with good management. If things really go for a crapper, it won’t help much. Luckily for me, I am a Canadian. We are being affected, of course, by all this. But our banking system is different, and I believe we are on a better footing because of that. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [September 16, 2008, 7:28pm UTC](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650/80 "2008-09-16T19:28:12Z")
> [@Voyager](#): > > CEOs are a slightly different story. Ever vote for a CEO? Didn’t think so. About the only time a board does something useful is selecting a new CEO. Once that happens, cognitive dissonance says they’ll support that CEO unless he or she really screws up. if the CEO is reasonably successful, the board becomes populated by supporters of the CEO - for instance from the top executive positions. If a CEO does not get his or her choice of a new board member, the end is near. > > The HP saga is an interesting case study of a board in revolt. It happens, but it takes a lot. I’m sorry, I think the train of thought was lost in these details. The specific quote is: “[The CEO] can leave the place a smoking crater and still get his big bucks.” This is true. The method of choosing a CEO is meant to avoid this disaster. Nothing factually presented in this thread has supported any other conclusion. The system as implemented may be corruptable, may be overly political, and it may not represent a startlingly awesome system for choosing a CEO, but that is different from suggesting that CEOs somehow aim to cut a company to shreds and run with the bucks, or that the board of directors would somehow find this in their interest, which was all I was aiming at. [Previous page](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650.md?page=3) [Next page](https://boards.straightdope.com/t/fannie-mae-freddie-mac-lehman-brothers-merrill-lynch/463650.md?page=5)