Lehman Brothers filed for Chapter 11 Bankruptcy. On Sunday night, employees in New York and London cleared out their offices with the assistance of police barricades. Insurance giant AIG seems on the verge of financial meltdown. Leading world banks have come together to create an emergency fund to lend to troubled financial institutions. Bank of America is buying Merrill Lynch, but can they really afford the additional liability? Is there any safe place to entrust your savings? Some place not connected at all to our imploding housing-financial-credit markets?
From the Economist: Nightmare on Wall Street
From the Motley Fool: The Biggest Financial Story of the Past 50 Years
From CNBC: Investors Survive Selloff But Worry What’s Next
From Bloomberg: US Stocks Fall Most Since 9/11
From the Telegraph: Meltdown Monday: Stocks Tumble and Thousands Lose Jobs
stjoe56
This “imploding housing-financial-credit markets” was caused by people who should have known better.
It was started by the government as a reaction by 9/11 when interest rates were cut.
It was fueled by investment banks who needed to package more and more exotic offerings to generate more short-term “profit” to justify their high salaries.
It was aided by a plethora of small entities including homebuilders, mortgage brokers, and last but not least, the real estate agents who wanted to get “their slice of the pie.”
The people who got screwed are the little people who did not know how the game was played. Of course you can afford a $500K house on a dishwasher’s salary. Take the negative amortization, balloon balance loan: your payments will be lower. Of course the mortgage broker disclosed everything in a closing document that is almost byzantine in its very nature.
Don’t’ give me that cr*p that these people should have read and understood everything they signed. Most people (99.99%) couldn’t understand if they wanted. I recently hired a lawyer to read through some housing contracts and documents and then explain my options. My bill was over $2K just for that.
The people I blame are the government and the investment bankers. They knew it was a bubble. What they did not know was when the bubble would burst. And they most certainly knew, the bigger the bubble got the more damage it would do when it burst.
cash buyer
do not forget that alan greenspan gave americans free money…………..and they took it.
Marla
I’m wondering stjoe, if that 2 grand you paid to a lawyer was for reviewing your purchase agt. at the Montage and advising you if there is any way to get your deposit back? I recall a while back that you said you were thinking about walking from your Montage contract. Just wondering.
BanteringBear
I agree with stjoe in that Wall St. and the government are most to blame for the current crisis. Alan Greenspan, more than any other person, should be getting roasted alive right now, as his decision to keep rates so low for so long was the rocket fuel for the fire. Yet, he is treated as some sort of financial expert and even consulted on the current matters at hand. It is irritating beyond words.
George Stephanopoulos (sp?) recently interviewed Greenspan (I haven’t had the nerve to watch it), and from what I understand the questions weren’t pointed by any means, but rather accommodating. People should be coming at him with both barrels.
And, what the hell is wrong with our lawmakers? Where were they all this time? That’s rhetorical by the way, because I’ll tell you what the hell’s wrong with them: they’re corrupt as they come! They weren’t asleep at the switch, they were throttling up the runaway train. They’re all crooked. Every last one of them. Write to your local senators and representatives, everyone. Write to them!
Every citizen of this country should be asking themselves if they’re happy today. This is what we get when we have an incompetent administration as well as congress who are bought and paid for by big business. They aren’t “of the people, for the people”. They’re career criminals, if anything. They’re not, and haven’t been, proactive in the interests of the population at large, and are steering us towards a complete financial meltdown and lower quality of living, merely reacting in vain as we’re bombarded by one crisis after another.
And, what about these salaries for some of these Wall St. shysters?! I mean, Merrill Lynch gets a lifeline from B of A, selling out the hour before their death, yet John Thain was guaranteed at LEAST $50 million per year and as much as $120 million per year. Yes, per year! This is outrageous folks! Granted he didn’t make all of Merrill’s bad bets, but what DID he do?? Nothing, he did nothing! He did NOTHING for Merrill or their shareholders!! People should be taking to the streets right now, pitchforks in hand. Remember the French Revolution? Remember the French Revolution!! Enough of this rot. Enough!!!
CommercialLender
BB,
You shouldn’t hold back. Tell us what you really mean.
smarten
BB observes, “John Thain was guaranteed…as much as $120 million per year [yet]…what DID he do…for Merrill or their shareholders[?]”
This is my point. The true owners of corporations are its shareholders. Yet when corporations make money, essentially none is returned to its owners. Instead, it’s paid over to its top employees [and BTW, for doing what?]. And when corporations go under, its top employees are again rewarded while its owners are thrown to the wolves.
Yes, the most secure and highest returning investment vehicle out there [according to financial gurus], year after year, and with a track record of decades, is allegedly your favorite publicly traded stock. Tell that to the former shareholders of Bear Sterns and the current shareholders of Lehman Bros., Merrill Lynch, WAMU, AIG.
I don’t look to politicians as being the root cause of our financial problems [although BB points the finger at Alan Greenspan, it’s really a reminder that Congress doesn’t make monetary policy]. Rather, the greatest casino in the world is again being exposed for what it really is.
Maybe we’ll learn this time.
DERRICK
maybe it is time to put my money under the mattress! considering I have made a killing of shorting OIL
what’s that? oil is at 92?
bird calls are right as rain
NAS
The financial ship isn’t sinking, it’s righting itself after a long period of being upside down. It never ceases to amaze me how so many of us think the party was going to go on ad nauseam.
A friend of mind states that their portfolio IS diversified: under the mattress, in the cookie jar, and in buried in the back yard!
MKchick
Bad businesses must be allowed to fail.
The gov’t failed here because they offered a fallback on the treasury (YOUR money) for bailouts in exchange for industry regulation. This is a ridiculous concept; my tax dollars aren’t meant to bail out a bunch of hedge funds.
Coulda woulda shoulda… this still is nowhere near as bad as 1987, so I don’t understand why supposedly the sky is falling. The markets need an enema again, and that always provides opportunities to make money.
What did you do in 1987? Or 2001? Do the same thing today, or if you made a mistake back then, hopefully you learned from it.
Mike
The effects of this will extend way beyond just the housing part and that’s what’s scary. Some of the people who post comments on this blog seem pretty well off, however there are those of us, like me, who own just one home (just bought in 2003), own a small business that’s making just enough money to scrape by, and who DON’T have a retirement portfolio (yet). Sure, this housing crisis may not affect my 2003 30 year fixed mortgage, but it’s sure as hell hurting my business because my clients are scaling back spending money because THEY are having issues wih the housing crisis. So even when the market does hit bottom, the underlying effects will just be beginning to trickle down to small businesses and other who rely on consumers spending money.
Semper Fi sell or die
Every one is at fault here.I have a friend that refied 110 % on a interest only AR just to get granite counter tops and a new Harley.Also a co-worker that did the same for two vacations a pool,and new cars so are they just innocent victims? I think not ,in 2005 when I refied every one was tiring to get me on the free money express ( my wife,my banker,and all my friends)I said no and only took out what I needed on a fixed rate.Now my wife loves me again and my friends are all whining on how much there mortgage is after the first reset and cannot afford the payments on all the toys .Yea its all the governments fault.LOL.Thank god my parents taught me that there is no free lunches.
Sully
Yeah Mike, you hit that nail on the head. Small business is usally the hardest hit.
When I posted the comment a while back about expectations of the failure of a major bank, bokerage or insurance company I didn’t expect all three to hit in the same day.
And this is all happening before the Alt-A and option arms are due to reset.
So brace yourself, if you think its bad now – just wait.
Reno Ignoramus
“Bad businesses must be allowed to fail”.
Nice theory. Let’s see if AIG is allowed to fail.
If AIG goes down, it will a greater shock to the worldwide financial markets that the bk of Lehman and the fire sale of Merrill combined.
Let’s see.
MKchick
Bah, I’m not falling for the hype.
Bad business models need to be flushed out of the system without gov’t involvement. Otherwise, we’d have to pay for all those dotcom bubble companies like Webvan, Excite, and Pets.com. Terrible business models… if they weren’t “allowed” to fail, you’d be paying for them.
Let AIG’s competitors descend like vultures to buy up their assets for pennies on the dollar over that mismanaged business unit if they go BK.
The market will go on if there aren’t any more bailouts. No one said this deleveraging and unwinding would be a walk in the park, but short term pain for long term gain is a much better prospect.
Derrick
the board will be glad to know, I will be closing out my short position on oil..
if anyone recalls I called it short @ 131.. only to head north to 145.
but like any dilligent investor I simply added to my position by buying more contracts..
now oil is at 93/bbl//
Im laughing all the way to the bank ..
DonC
Reno Ignoramus – “Nice theory. Let’s see if AIG is allowed to fail.”
I guess we now know the answer to this one. Too much risk.
Lurch
Congratulations on your gains, Oracle. Maybe now you can quit your bar tending job, and your bride won’t have to flip fillets at a Japanese steakhouse for drunk tourists anymore. Ain’t it a great country?
BanteringBear
“…the board will be glad to know, I will be closing out my short position on oil..”
I think the board would be glad if you disappeared forever. Your posts are completely boring and hopelessly off topic, rarely even pertaining to real estate. Somebody needs to kick your parents in the crotch for the mess they’ve created.
Reno Ignoramus
It wasn’t hype MKchick.
There was no way the world markets could let AIG go down. If that had happened, we would have been on the way to the kind of financial armaggedon that our good friend Bantering Bear has been talking about.
So now We the People own 80% of AIG. At a cost of about $85 billion.
So that’s about $40 billion to JP Chase Morgan for taking over Bear Stearns, about $100 billion for Freddie and Fannie, and $85 billion for AIG. This priviazation of the profits and socialization of the losses is quite the thing, no?
So now we are down to just two investment banking houses. Which one will be next? My guess is Goldman.
If I may paraphrase the late Senator Daniel Patrick Moynihan of NY, the decade between 1998 and 2008 was an amazing time in the United States. We took a trillion dollars and threw a party.
MikeZ
Innocent? No. Guilty? No!
They were opportunists who took money from stupid lenders who had more money than brains … just like every good capitalist should and would.
I don’t blame the borrowers one bit. And I have no problem with them just dropping the keys in the mail and walking away.
The banks were reckless. They were stupid. Go to any casino in Reno and you’ll see this behavior. Should we blame the casinos for some moron walking in with $500K and putting it all on red?
Let the teetering banks fail and let smarter banks take their place. This is the way markets have to work to evolve and grow … they must punish the stupid and reckless and reward the strong and smart.
Long live capitalism!
BanteringBear
“This priviazation of the profits and socialization of the losses is quite the thing, no?”
It makes my blood boil, quite honestly. Why, when the taxpayers foot the bill to bail out these reckless institutions, are the filthy rotten scoundrel CEO’s allowed to collect not only their paychecks but golden parachutes as well? This is an insult of the highest order. Yes, it was quite a party, RI. A party on the backs of us little guys.
Ralston
RI is spot on about AIG. No way could AIG be allowed to fail. The DOW would have dropped 1000 points if AIG failed. Hedge funds and banks and brokerages all over the world would have crumbled. That’s how interconnected all of these players are with each other.
Bantering Bear would have to get out his camoflauge fatigues, his AK-47, and start bartering for essentials with his gold bullion as the world markets collapsed.
We are in far more precarious times than many, most people realize.
MikeZ
filthy rotten scoundrel CEO’s allowed to collect not only their paychecks but golden parachutes as well?
I’m with you 100% on this, but to be fair, neither Fannie nor Freddie got any bailout and the regulators have decided that neither Mudd nor Syron will get their contractual severance packages.
Credit where credit is due … the government did a good job with FNM and FRE. Now, AIG is another story.
BanteringBear
We are entering a period of time in which owning a house is like being tied to an anchor. When jobs dry up, people need to be able to move to where they can find employment. Hard to do when you’re a slave to the payment on the ol’ stucco sh!tbox. Houses can be quite a hassle. Many people will be finding this out the hard way. Bon Voyage!
BanteringBear
“I’m with you 100% on this, but to be fair, neither Fannie nor Freddie got any bailout and the regulators have decided that neither Mudd nor Syron will get their contractual severance packages.”
If I recall correctly, didn’t congress temporarily raise the GSE limits in order to allow Fannie and Freddie the opportunity to purchase over levered toxic waste mortgages from the big investment banks? That was more of a “silent bailout”, the smoke and mirrors type. Like: “Hey, psssssst good buddy, let’s just fix this number here for a little while, then you can just pass that crap on over, and we’ll go ahead and take the fall, er, ahem, I mean the taxpayer will take the fall, hehehehe.”
Reno Ignoramus
Did you all see where Reserve Primary Fund, a money market with $64 billion in assets has broken the buck today? NAV down to 97cents due to holding a lot of Lehman paper.
BanteringBear
Fed bails out AIG after hours
MILLER
So.. Have to ask…
Has anyone done the Math yet? What’s the total Govt bailout balance up to? And, what does that equate to per taxpayer?
Should be an interesting political scenario for any candidates trying to not put any additional financial burdens on the taxpayer!
MKchick
There is a difference between the Fed and the Treasury. The Fed is funded by banks and the Treasury is funded by taxes.
The Treasury bailed out the GSEs. The Fed bailed out AIG. So no direct taxpayer dollars for AIG.
AIG got a bridge loan from the NY Fed with some steep terms.
Nothing should ever be “too big to fail.” That is a failure of oversight. AIG should have sold off some of its assets, but greedy pigs, at the end of the day, are still greedy pigs. Now they have to sell them off, and probably at a less price than if they had done it before to maintain their solvency.
And now the Fed needs to kick the money printing press up another notch.
Sully
From Reuters:
AIG’s bailout brings to about $900 billion the total of U.S. rescue efforts to stabilize the financial system and housing market. Authorities may get much of that money back provided asset prices don’t slide further.
hmmm, only 900 billion for junk bonds!
MikeZ
The Treasury bailed out the GSEs
WHAT bailout?! There was no bailout! They were seized.
MILLER
So what’s the long term affect of this on the common schmo like me? I’ve just moved back to Reno 8 months ago and I’m definitely a fence sitter hanging tight in my very affordable rental right now. I have my 401K from my last company (which I’m terrified to open today) and a decent savings account that I need to do something with…
There seem to be a few posters on here that are pretty good at the forward looking financial thought process, and I’m looking for advice. This thread is probably the best place to post this question…
Knowing that we’re headed into what is most likely a decent term of recession and inflation, what’s the best angle for saving/investing right now (and unless there’s something I’m missing, real estate isn’t the answer at the moment – Sorry Guy/Diane)?
smarten
MILLER, I’m sure I’m going to take a lot of flack for this, but I say Reno/Sparks real estate [depending upon the price range you’re interested in (under $350K)] assuming you’re able to qualify for a low cost, fixed rate, conforming mortgage. If you can’t qualify for the mortgage; or are looking for a SFR costing much more than $350K; then I say remain a renter.
Mortgage interest rates are falling to historical lows. Plus remember that if you haven’t owned a principle residence for a minimum of three years [I’m assuming you haven’t because you’re a renter], you can qualify for a $7,500 income tax credit to boot! Now if you can find a deeply discounted SFR REO priced at under $350K [a price range where I think values have dropped enough to warrant purchase], to me it sounds like the “hat trick” perfect storm.
If you’re looking for a pure investment play instead [something that will likely get you into the same trouble you’re presumably still in], I’m sure the stucco oracle will have all sorts of recommendations [although I personally wouldn’t put stock in any of them]; your call.
Good luck!
MILLER
Thanks Smarten,
Your assumptions are correct on everything but the qualifications to be a “New” buyer again. It’s been 2 years exactly since we sold our house in Pheonix (Bought in 03 – Decent timing, eh?), so we’ve still got another year to go for any first time buyer stuff.
The other end of it is that as you and others have stated, the next house we’re buying is going to be long term (10 plus years), so even though we are willing to make the purchase, we are extremely picky about the selection and the area.
We’ll jump when the right one comes on the market (I’m sure Guy will love to show me a few). Figure it can’t hurt to lowball in this market! They don’t like the offer, I’ll just wait a month and offer it again, right Guy?
MKchick
Okay Mike, I concede: it was a seizure or takeover of Fannie & Freddie…. regardless, that is using US Treasury money (taxpayer dollars, whether the funds are there or not… read some stuff about how the CBO wasn’t going to put the transaction “on the gov’t books” — how cute).
Just wanted to illustrate the difference between the Federal Reserve, the US Treasury, and the FDIC.
MILLER: sitting on the cash until there is an uptick in the markets is a good strategy. If you have extreme risk tolerance and a medicine cabinet full of Pepsid, you can do some research to figure out the broad index support levels and start buying indexes.
KB
I think in the long run, Uncle Ben and his boys at the FED made a good investment, they bought low and will sell high. 80% of the equity of AIG in return for 85 Billion if they can’t pay back the loan, with the loan at greater than 11%. We might be able to pay off the national debt if Uncle Hank and Uncle Ben keep making great deals like this.
Kevin Kearney
KB
I agree that Paulson is making incredibly smart moves here. I think we’ll make money on the Bear-Stearns deal, AIG, and Fanny/Freddie, not to mention the Foreclosure Rescue Act will allow a lot of people to stay in the their homes at a new fixed loan at 90% of the current appriased value…the kicker…the vesting schedule which more or less makes the federal government the homeowner’s equity partner taking 50% of the proceeds at sale. Sounds like a win win.
Many of you have critisized Merrill’s John Thane. He certainly didn’t deserve that comp package but he took the wheel from the man who put Merrill in the ditch, Stan O’Neil, the worst Wall Steet CEO in history made $45 million a year to drive Merrill into the ground. I began my professional career there and Merrill was an amazing organization. Unfortunately it will never be the same.
Sully
Kevin or KB, whoever knows:
When did Congress pass the Gambling Act. I know Congress is trying to keep pace with California in passing 1,000 redundant new laws every year, but I think I missed the one that gave the Secy of Treasury permission to use public funds for speclative purposes.
Sully
Kevin or KB, whoever knows:
When did Congress pass the Gambling Act. I know Congress is trying to keep pace with California in passing 1,000 redundant new laws every year, but I think I missed the one that gave the Secy of Treasury permission to use public funds for speculative purposes.