Citigroup, Merrill Lynch reveal 15 billion in losses
- Thread starter The Ozzman
- Start date
Bothering
The hole you're in.
This is becomming quite a castastrophe. The banks deserve this, but it's unfortunate how many people are going to needlessly lose their jobs because of it.
It's not really the bank sector of the business as much as it is the financial services sector that is losing money. Since everything is aggregated onto one set of financial statements, though, it seems as though the bank lost it all when in fact it didn't.
Bothering
The hole you're in.
I thought the financial services are mostly provided by the bank though. So wouldn't the bank be taking a pretty big hit on this, or no?
Yes, but I was speaking of the physical bank (where you go in and deposit money) as PROBABLY not having the majority of the risk and that risk exists in the other financial arms of the business, whether it is brokerage accounts or whatnot.
cookiecutter
Proceed to Ultraslamming
Zephyrus
Tyrants and Slaves
byrne
Certavi et vici
Unregulated free markets are great and alway work!
way to know nothing about anything. financial markets are in no way shape or form, unregulated free markets.
also, lol @ the comment banks deserve it. guess who's going to be paying higher fees to cover the losses?
also, whilst it is attributable to bank lending practices, people should be intelligent enough to know how much they can borrow (which most people don't appear to be able to fathom). if people hadn't over-extended themselves in the first place, this wouldnt have happened.
(no i dont work for a bank, nor has sub-prime directly affected my life, but the stupid comments that people without any knowledge of how banks / markets work is amazing).
MasterOLightning
Optimator
I'm interested in understanding more about this crisis and why so many fucking people took out mortgages they couldn't pay, and why the banks let them. So was it something like:
a) High competition in banks leads to unreasonably risky mortgages to try to gain market share.
b) Bad economy reduces number of people actually able to pay for mortgages.
c) Speculation in housing markets led to inflated prices that people couldn't pay.
d) Something else, or some combination of the previous conditions.
My theory is that this is all a result of an economy spiraling down since the '70s, first evidenced by the S&L buyouts, and now this. If not for the Internet blip in the late '90s, we would have been sunk even earlier. I also don't really believe that people just got dumber in the last few years. Banks should be more accountable than their customers.
I blame the prevailing popular belief that the stock market is a good measure of economic health. The real measure of financial health should be real wages, purchasing power, and standard of living (all of which have been getting worse for some time now), instead of artificial constructs like stock prices. I don't recall how many people own any stock, let alone a significant amount, spanning multiple sectors, but it is a definite minority. Companies prioritize their operations to maximize potential for growth in the markets short term, even when there are heavy long term consequences. It seems like these hens are coming home to roost now.
a) High competition in banks leads to unreasonably risky mortgages to try to gain market share.
b) Bad economy reduces number of people actually able to pay for mortgages.
c) Speculation in housing markets led to inflated prices that people couldn't pay.
d) Something else, or some combination of the previous conditions.
My theory is that this is all a result of an economy spiraling down since the '70s, first evidenced by the S&L buyouts, and now this. If not for the Internet blip in the late '90s, we would have been sunk even earlier. I also don't really believe that people just got dumber in the last few years. Banks should be more accountable than their customers.
I blame the prevailing popular belief that the stock market is a good measure of economic health. The real measure of financial health should be real wages, purchasing power, and standard of living (all of which have been getting worse for some time now), instead of artificial constructs like stock prices. I don't recall how many people own any stock, let alone a significant amount, spanning multiple sectors, but it is a definite minority. Companies prioritize their operations to maximize potential for growth in the markets short term, even when there are heavy long term consequences. It seems like these hens are coming home to roost now.
MasterOLightning
Optimator
I just love how people have been doing shitty for a while now, but when corporations and millionaires are feeling the heat, OH NOES!
byrne
Certavi et vici
economic factors are all interrelated. those things you mentioned (real wages, SoL etc.) will be directly correlated to the movements in the stock market (broadly speaking) and therefore, the stock market is one of many indicators as are the measures you pointed out.
i.e. proporous times = increased real wages = people invest in stock market = more spending = inflation etc. - thats a over-simplified, but it gives you some idea of the concept.
i cant talk to the US economy all that much, nor do i know all the detail of sub-prime. however, the process is largely as follows:
- people default on mortgages (due to security over-valuation and faultering economy)
- causing significant financial losses globally
- mortgage brokers aren't able to obtain funding from banks (i.e. banks are too nervous to lend)
- lower market funding = increased credit spreads (i.e. part of the cost of money)
- increased credit spreads and lack of funding = significant short term higher cost funding squeezing bank profit results
- higher borrowing costs = less borrowing = less money floating about the economy = less spending = unemployment = decreasing in inflation = heading towards recession/depression etc.
one of the biggest financial market impacts of all this is the securitsation market drying up. if banks can't securitise, then they have regulated capital restrictions which means they can't originate as many loans, worsening the problem. there is a huge trust / fund market that was invested in this, which is also where a lot of financial loss has come from.
there are shit loads of issues coming out of it, but the main points are:
- lack of market liquidity
- increasing cost of funds
- market pricing uncertainty
i.e. proporous times = increased real wages = people invest in stock market = more spending = inflation etc. - thats a over-simplified, but it gives you some idea of the concept.
i cant talk to the US economy all that much, nor do i know all the detail of sub-prime. however, the process is largely as follows:
- people default on mortgages (due to security over-valuation and faultering economy)
- causing significant financial losses globally
- mortgage brokers aren't able to obtain funding from banks (i.e. banks are too nervous to lend)
- lower market funding = increased credit spreads (i.e. part of the cost of money)
- increased credit spreads and lack of funding = significant short term higher cost funding squeezing bank profit results
- higher borrowing costs = less borrowing = less money floating about the economy = less spending = unemployment = decreasing in inflation = heading towards recession/depression etc.
one of the biggest financial market impacts of all this is the securitsation market drying up. if banks can't securitise, then they have regulated capital restrictions which means they can't originate as many loans, worsening the problem. there is a huge trust / fund market that was invested in this, which is also where a lot of financial loss has come from.
there are shit loads of issues coming out of it, but the main points are:
- lack of market liquidity
- increasing cost of funds
- market pricing uncertainty
Ender Rises
Wass sappening?
What really makes this situation a kick in the teeth is that inflation is still going up, due to the price of gas.
MasterOLightning
Optimator
Gas prices definitely hurt as gas=>transportation=>cost of everything. I am not sure as to whether this is a cause to or symptom of current problems. I'm guessing since oil co. profits are through the roof, they are exploiting a system that allows for it. They definitely don't seem to be forced to raise prices as a result of external factors.
Also, to Byrne, if you could explain some more about security over-valuation, or securities in general, that would be helpful. We didn't quite get to that in the econ class I took. Otherwise, that was a helpful post for someone who has a merely average understanding of econ.
Also, to Byrne, if you could explain some more about security over-valuation, or securities in general, that would be helpful. We didn't quite get to that in the econ class I took. Otherwise, that was a helpful post for someone who has a merely average understanding of econ.
byrne
Certavi et vici
Security is what banks take as a form of 'insurance' against you not being able to pay your loan back. For the sub-prime issue, it was retail finance (i.e. to mum + dad customers), so security is typically mortgage over the house the loan is funding (there are other forms of security, but they aren't as relevant to the sub-prime issue).
It's also worth noting that bank's weren't really directly doing the lending (well the majority of it). Whilst they were the source of funds, the decisions to lend were made largely by mortgage brokers (I can explain that later if you'd like).
Loan orignators will enforce a policy of a minimum security value vs. the amount of the loan provided (referred to as a loan to value ration or LVR). The LVR varies, depending on a number of things, but is typically around 80%. That is, if you want to borrow $800k, the security (i.e. house) you are buying will probably need to be worth $1m (based on an external valuation).
From what I understand, with sub-prime, the losses were concentrated in certain areas of America where there was effectively a mini-housing price boom. Basically this is a sudden jump in demand for houses (can be drive by any number of things) which causes prices to bubble beyond any sustainable level. Two issues come of these temporary bubbles:
1. Valuations of housing prices are distorted, which then effectively causes the next issue
2. It gives loan originators confidence to lend more (i.e. if house values are going up, then then 'security' value is increasing, which reduces risk of loss to the loan originator thus providing the funding incentive). The logic behind this is, that worst case scenario you fail to pay your debt, they can sell the house and recover their loan + interest without any loss.
Again coming back to sub-prime, the demand for houses began to fall and with this came weakening housing prices. This began a credit loss cycle for loan originators (noting that the there is an explicit link between housing demand and general economic prosperity ... which will also be linked to being able to repay loans). So as people started to default on loans (i.e. not make loan repayments), banks as entitled to first mortgage, take possession of security (the house)and sell it to recover their debt.
The domino effect then begins, because as housing demand is slowing, housing supply is growing and prices plummet further.
In addition to this, banks as a source of funding, tightened credit policy (i.e. were willing to lend less) to avoid any further losses. This again compounded the woes, because people were unable to obtain sufficient funding to then buy these properties, causing less demand for the houses as well.
It's also worth noting that bank's weren't really directly doing the lending (well the majority of it). Whilst they were the source of funds, the decisions to lend were made largely by mortgage brokers (I can explain that later if you'd like).
Loan orignators will enforce a policy of a minimum security value vs. the amount of the loan provided (referred to as a loan to value ration or LVR). The LVR varies, depending on a number of things, but is typically around 80%. That is, if you want to borrow $800k, the security (i.e. house) you are buying will probably need to be worth $1m (based on an external valuation).
From what I understand, with sub-prime, the losses were concentrated in certain areas of America where there was effectively a mini-housing price boom. Basically this is a sudden jump in demand for houses (can be drive by any number of things) which causes prices to bubble beyond any sustainable level. Two issues come of these temporary bubbles:
1. Valuations of housing prices are distorted, which then effectively causes the next issue
2. It gives loan originators confidence to lend more (i.e. if house values are going up, then then 'security' value is increasing, which reduces risk of loss to the loan originator thus providing the funding incentive). The logic behind this is, that worst case scenario you fail to pay your debt, they can sell the house and recover their loan + interest without any loss.
Again coming back to sub-prime, the demand for houses began to fall and with this came weakening housing prices. This began a credit loss cycle for loan originators (noting that the there is an explicit link between housing demand and general economic prosperity ... which will also be linked to being able to repay loans). So as people started to default on loans (i.e. not make loan repayments), banks as entitled to first mortgage, take possession of security (the house)and sell it to recover their debt.
The domino effect then begins, because as housing demand is slowing, housing supply is growing and prices plummet further.
In addition to this, banks as a source of funding, tightened credit policy (i.e. were willing to lend less) to avoid any further losses. This again compounded the woes, because people were unable to obtain sufficient funding to then buy these properties, causing less demand for the houses as well.
It's a completely different situation when an investment bank loses this much money. Again, chalk this up to your lack of understanding of financial markets and how they work and why they are VITAL to the economy of ANY country
gas prices do not cause inflation
This is way better than I could have put it. Do you study finance/economics at all?
Guess you still don't see or believe in the Zero sum game/theory...
This situation has created a net loss for the organization, meaning that it is non-zero-sum. You need to read up on game theory, it seems.
A simple version of how we got here is (and I have first hand experience in being tempted into the latter) - greed and stupidity.
We were looking to bump up into a single family home for the last few years, started about 5 years ago or so looking around. So I've had experience with these sales devils for the extended period of the housing rise/fall.
GREED: These sales devils were trying to sugar coat ARM loans to folks, telling (rather selling) you the good aspects and to "forget the rate the loan would rise to, because by then you can refinance for a fixed amount at a lower, steady rate once you save in the early stages of the ARM loan, plus you'll be making more money then!"
STUPIDITY: People bought into the jaded sales pitch. Hey, I was almost one of the stupid ones. It's easy to be jaded and convinced of what these sales guys/gals are feeding you when you are wanting to move, you're sitting in front of an awesome house plan, looking at how fast lots are selling in this awesome neighborhood you've been eying, etc.
Mix the lethal combination of greed and stupidity and you're left with where we are now. The housing industry / lending bastards deserve this, and yes sadly as mentioned above, we're ALL going to pay for it (and are already) one way or another.
The only good thing is, prices are now back down (and lower) to where they were when we were looking 5 years ago (I'm in the Northern Virginia area).
We were looking to bump up into a single family home for the last few years, started about 5 years ago or so looking around. So I've had experience with these sales devils for the extended period of the housing rise/fall.
GREED: These sales devils were trying to sugar coat ARM loans to folks, telling (rather selling) you the good aspects and to "forget the rate the loan would rise to, because by then you can refinance for a fixed amount at a lower, steady rate once you save in the early stages of the ARM loan, plus you'll be making more money then!"
STUPIDITY: People bought into the jaded sales pitch. Hey, I was almost one of the stupid ones. It's easy to be jaded and convinced of what these sales guys/gals are feeding you when you are wanting to move, you're sitting in front of an awesome house plan, looking at how fast lots are selling in this awesome neighborhood you've been eying, etc.
Mix the lethal combination of greed and stupidity and you're left with where we are now. The housing industry / lending bastards deserve this, and yes sadly as mentioned above, we're ALL going to pay for it (and are already) one way or another.
The only good thing is, prices are now back down (and lower) to where they were when we were looking 5 years ago (I'm in the Northern Virginia area).
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