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.)
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.
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).
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 The Republicans, acting as advocates for the banking industry, repealed the Glass-Steagall Act, allowing commercial banks to put demand deposits in risky investments, including crap mortgages.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.
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.
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.
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):
He also says:
He thinks Bank Of America, Chase and Capital One will be safe; he is not so sure of Washington Mutual, CitiBank, or Wachovia.
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.
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.
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.
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.