Meltdown

[Keroin]

I've been watching a fascinating documentary on the CBC about the recent financial meltdown...aptly titled "Meltdown". I know for most people the stories and images are old news but I was still living on The Rock when this all went down and it might as well have been happening on Mars. Thanks to the snail-like internet and lack of TV and newspapers, I saw only tiny pieces of the story.

Now, watching videos of protests and hearings, seeing so many stats for the first time and taking it all in...wow. I had no idea. I mean, I knew it was bad, I heard stories, but...wow.

What I find most interesting/confusing is how no one saw this coming. In Canada our banks and financial institutions are highly regulated (The World Economic Forum just voted ours the #1 banking system in the world for the third straight year), we couldn't have sub-prime mortgages if we begged for them. And while that may seem repressive to some, to me it makes loads of sense. I remember seeing all those ads for sub-prime mortgages on TV and thinking, 'WTF? That is a recipe for disaster!'

The heavy regulation we have also means that none of our banks failed when all this went down and none needed any bail out money. We're definitely feeling the affects of the meltdown - the US is our biggest trading partner - but not to the extent of many other parts of the world.

So, I'm curious to hear from the Americans here. Has anything changed? Are there now regulations in place to prevent this sort of thing from happening again? And how are things going, in your opinion? Do you see a recovery? What are your thoughts?

And honestly, why aren't many of those suited bastards behind bars?

 

[rida]

A very good video I've found that explain in a simple way what happened:

http://crisisofcredit.com/

Because sub-prime mortgages were just the tip of the problem.

 

[Keroin]

A very good video I've found that explain in a simple way what happened:

http://crisisofcredit.com/

Because sub-prime mortgages were just the tip of the problem.

Thanks Rida, I'll give that a watch. I realize that the SP mortgages were only one aspect of the problem but boy they sure seemed crazy to me, and trust me, I am no financial genius, lol.

 

[rida]

Thanks Rida, I'll give that a watch. I realize that the SP mortgages were only one aspect of the problem but boy they sure seemed crazy to me, and trust me, I am no financial genius, lol.

Absolutely.

But personally I believe that the whole idea of credit the way is handled and done in the US is the root problem, combined with a weak grasp of numbers and and even weaker grasp on delayed gratification.

 

[Keroin]

...and even weaker grasp on delayed gratification.

This. Very much so.

 

[YourCaptor]

Everythings changed. For example, a few weeks ago I went to apply at a dollar store that was just opening, the line went across the entire lot of the shopping center, a good 250 feet or so.

Yup, I get to compete with people at the height of their marketability for shit jobs. These days you need a bachelors and 5 years experience to be a tree trimmer. And even those aren't real jobs anymore, usually you only get a half week now.

 

[midwestyankee]

The lightly regulated (but not really) American banking industry showed its true colors in the period you're talking about, Keroin. Americans of the conservative persuasion hold this illusion that "the market" will operate efficiently to produce results that are the best possible results for the country. Not hardly. Without regulation of the money supply and interbank lending there couldn't be a banking system so the notion that federal regulation ruins the market is unadulterated idiocy.

People who rant about how the TARP program (the overal bailout progra) was a failure ought to think again. While there will be unrecoverable losses from money given to the auto industry and to the AIG company, the $100 billion or so that went to the banks is estimated to turn a profit of about $7 billion.

I had a front-row seat to the sub-prime mortgage issue. I worked on three large projects to provide training to different companies in the sub-prime mortgage business. I'll never forget the glee with which one VP told me that his company had just sold its first batch of securitized loans, thus relieving his firm of all risk on those loans. Later, those securities were packaged again into a larger security and re-sold, once again moving the risk up the food chain. Eventually, as it always does, risk brings negative consequences. But since the risk had been moving up the food chain through the creation and sale of various kinds of loan-package securities and contracts on those packages, when the risk blew up it blew up in some pretty big firms. The result wasn't a whole lot better than it was for the guy near Chicago who built a home-made bomb and then set it off while holding it in his hands. His head landed rather quite a ways from the rest of him.

And that's about what happened to the American banks in 2008.

 

[DVS]

I was in the mortgage biz when the big refi thing was happening. It was crazy. I wasn't in the mortgage side. I was in the computer side, but it was almost non stop hiring more and more people to assist in the mass refinancing of loans, because the rates had gone down so much.

When I got my first mortgage back in 1980, the mortgage rates were in the low 20s. I got a low rate (11.75%) with bond money. Back then, it was a fantastic rate to have. It saved me thousands of dollars. My parents financed their home in the 50s with a 11% interest rate. So, when the refi business hit, loan officers were getting filthy rich.

Some loan officers are pretty crooked people. Sure, they need to make a profit, but mortgage rates, like most loan rates, are so flexible, the borrower has to trust that the loan officer is telling them the truth, when they quote a rate.

A few interest points will cost the borrower thousands, and the loan officer reaps the benefit of that. And all the while, they will tell you straight to your face that you are getting the best rate possible. They usually have a certain deal with the mortgage company with a certain interest rate and anything they can get above that, is total profit, right off the top.

I don't know what the rate is presently, but I think it's below 5% and that was about where the rates dropped to in the mid 90s. They were literally at the lowest they had been in 40 years, so that was what was driving the refi business and all of the loan officers I was familiar with would sit in bars and laugh about the deal that didn't get away.

Some loan officers will give you a loan, even if you can't afford to pay it back. After they have your name on the dotted line, they have made their money. From that point on, it's between you and the mortgage company.

I know a lot of people still in the mortgage and banking industry. I also know a lot who have lost their jobs because of the meltdown. Mortgage companies that were literally created in the refi boom were going under.

I don't think we should have helped the banks, nor the market. I've got my own ideas as to who should have received all of the money our government gave away. A lot of it has never left the pockets of the people who received it, for various reasons. If it never leaves those pockets, the economy will be that much slower in coming back.

 

[SpiritRider]

Nothing has really changed. The government has passed all sorts of new rules and regulations without really addressing any of the problems.
We've got people begging for work that can't find decent jobs and being slammed at the same time for being lazy and getting unemployment. It's gotten to the point where companies get mad if you show up and ask for an employment application.

Doesn't matter who we vote into office because as long as corporations and lobbiests are allowed direct access to politicians the average citizen will be pushed aside.
"We the People" hasn't existed in the United States for quite some time.

 

[intothewoods]

There has been a lot of good in-depth reporting on this. I listened to a few good shows -- This American Life on NPR (not their usual thing, but they did a good job) and a financial reporter for the NY Times (can't remember her name right now).

Has anything changed in the U.S.? Well, from what I understand, not all that much as far as regulation goes. We did pass financial reform legislation but I believe many of the actions that led to the collapse could still happen without raising any flags.

Also, I think all of the "free market" types in this country don't want regulation. I just listened to this interview with an author on a new book about the tea party movement in the U.S. The main thrust of the movement originally and apparently still today, for a good percentage of them, was a reaction to the wall-street bail out and government spending. I assume they are anti-regulation then too. I mean, isn't that a free market principal?

It's funny because I think a lot of progressives weren't so keen on the bail out either. Eh, anyway, I'll spare you all the hijack.

So anyway, I'm curious about Canada. How is the economy doing? What about the housing market? So you guys escaped this particularly issue entirely? Damn you Canadians! Har har. I'm having a weird flashback to Bowling for Columbine where Michael Moore tries to figure out why Canadians don't have our rates of gun-related violence.

 

[Keroin]

Oh, so many interesting responses, thanks everyone! I do have a load of work today but I hope to comment more later.

ITW, the Canadian economy has definitely slowed but that's to be expected given everything that happened around us.

When L and I left for the Cook Islands in 2007, our phone was ringing off the hook for construction work. We had already hired an extra employee and, had we stayed here, we probably could have hired more. Since we started advertising again this spring, we have only gotten enough work to "get by", most from past clients. The three biggest jobs we had lined up this summer all fell through because people said they simply couldn't afford it at this time. So, yes, times are not as good as they were, but we're still paying the bills and managing to save, so it could be much worse.

Our housing market, from what I can see, remains strong though there is now a lot more inventory and it's predicted that house prices will soon begin to drop. This is overdue, IMO, since prices have been overinflated for awhile, (especially in Nelson). L and I really want to buy a house but we are biding our time and we're happy enough to rent until prices come down more and we can grow a bigger down payment.

I think Canuckland will be OK, in the long run. It is damn hard to get a mortgage here and we tend to be a bit conservative all around.

I feel terrible for many of my US friends though. Some are having a really rough go of it. My friend ML does a road trip from CA to MI every year and this year she told me that she was shocked to see how many people were living in the state campgrounds, subsisting off of food that the other campers would donate to them. Sad.