How Risk Models Failed Wall Street

[sniglet]

[davidlosh@davidlosh.com]

The idea that regulators were turning a blind eye or got confused is a real stretch.

Stock Holders were only too happy to believe in the paper profits of Consumer Credit, Auto Financing, Equipment Leasing, and all the other Financing schemes. Everybody paid while times were good and everything looked good on paper.

Was a regulator really supposed to say that the end was near? Was a regulator supposed to question whether a house hold income of $50K can have ten credit cards with $7K limits, on top of a mortgage, and car loan? No. Those decisions were made by the investors and they were good decisions for the investor.

Now if you are trying to say the regulators are supposed to look out for the little guy, good luck. His car loans are with GMAC, his consumer credit is with Chase, Citi, BoA, GE Money, and his mortgage is with WaMu by way of Long Beach Mortgage. Each entity has Financial Centers in various states. Federal regulators are also by region.

I think it was deliberate. Deregulation sounds good, but I think that the sharpest minds in the world figured this out. The end result has been huge international corporations with a finger in everything. They are cash rich in a very down market. That is a good position to be in.

[TJ_98370]

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RCC, I hope your scenario is the more accurate because what singlet and mukoh are suggesting implies rampant corruption IMO.
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In my little world, the computer modeling guy is a certified genius. I deal with him very occasionally and every time I talk to him it's like, " What did he just say? I know he is speaking English because I recognize the words, but what the hell did he just say!?! Does anybody else understand what he just said?" Management tends to leave him alone and give him what he wants. They are happy if he and his group provide results that look good when they have to make a Power Point presentation to their supervision. Management does not understand what he is doing and they know they never will. I've listened / watched him and his ilk explain "fuzzy logic" and solve differential equations on the whiteboard during presentations. You can just see the upper management types eyes glaze over.
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An interesting side story about our computer modeling guy is that his brother was the lead singer for the band Survivor. Their most well known song is Eye of the Tiger. It is his brother who is singing lead in the original version of that song. I am absolutely not making this up. Talent must run deep in that family. His brother was also the singing voice in the recent Bud Light Real Men of Genius commercials.


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[sniglet]

[davidlosh@davidlosh.com]

Sorry, but what has gone on is perfectly legal.

Claiming legislation from 1933 had a bearing today in the technology age is a feel good response to what has become the main problem in banking.

Banks, in particular, have to answer to stock holders. They are the face we see day to day. Do you remember WaMu, the friend of the family, introducing Murphy Favre into bank branches? They were an investment arm of the company. I was surprised in my little research to find: Murphy Favre Housing Managers, Inc.
Murphy Favre Properties, Inc.

I'll check further but it seems these are Real Estate Holding Companies. It makes sense from the dealings I had with the Loss Mitigation Department about two years ago. The negotiator told me that it was WaMu policy to add foreclosed properties to the Property Management portfolio.

Stock Holders are demanding profits. The stock holders have made money, or should I say made money, by stock price appreciation. You can tie it to mortgages, but ultimately those mortgages at least have an asset. Consumer Credit is unsecured.

So when companies began selling secured debt it looked great on paper because the alternative was thin air. Regulators did their job by over seeing the transfer of unsecured debt into HELOCs and Mortgages. They were in fact working in the best interest of the Stock Holders.

Our government passed laws to allow 29% interest plus late fees on Consumer Credit. That's all profit. It's legal and looks very good on paper. That paper was transferred into secured mortgages, again legal, and good for investors.

The regulators did their jobs. There are more than enough laws on the books that we as tax payers have encouraged. Glass-Steagall had to go. Stock holder demanded it. The stock market was inflated to 14000 by the tech stock revolution. Pension Plans, IRAs, 401Ks were tied to it. The federal government had to sustain the "markets." It was and is still a mandate.

We all have an opportunity today to stop the stock market from acting foolishly. It's called Consumer Confidence, but I look at it as Consumer Spending. Rather than spend we can pay down debt. It's an individual choice not tied to what the government does.

The stock market has been a gamble since 1987. In the 1980s Mergers and Acquisitions gutted any and all viable companies. It's a long story, but technology took over. Microsoft, as a monopoly, by the way, made America Great once again.

In 1999 when the monopoly was broken it should have been a warning. Stock Holders ignored the warning and moved ahead based on Consumer Spending of new found wealth. In a way the stock market perpetuated itself.

It's all legal and demanded by the Stock Holders. Claiming the government was some how at fault is misleading. it has all worked perfectly. We are exactly were we wanted to be.

[rose-colored-coolaid]

[davidlosh@davidlosh.com]

The difference is that banks need to generate profits. Everything is predicated on profit. Amazon or Google didn't make profits and the stock price was going up.

It made sense that banks could offer a wide variety of lending products to generate profit. Taken as a whole the entire bank potfolio was taking in cash. It invested cash in instruments tied to lending. As lending grew, they then included insurance products, it was all income.

We're just talking about banks because you see them. We have the idea they take in deposits then lend the money in say home loans, like in "It's a Wonderful Life."

The reality is that banks are now parts of larger and larger corporate entities. They buy mortgage generating branchs like Long Beach Mortgage. Other corporations may invest in those mortgages because they have a vested interest.

Unsecured debt holders are fair game for refi and second position loan solicitation. Citi Group could, I'm not saying they did, have given Long Beach Mortgage a list of usecured debtors and inticed them into refinancing to pay unsecured debt.

Citi Group could have been the investor that backed the refi or second position loans. I'm not saying that happened, but it is possible and legal. On paper it looks as though Citi Group is on the hook for the loan. They are the ones at risk. It's legal, regulated, looks great on paper and everybody should be happy.

Once the loan is in place Citi Group could solicit the home owner with more lending products like credit cards and the cycle begins again.
Unlike Amazon or Google these corporations and banks are making real profits. The stocks and securities are sold on the basis of real profits that are in many cases now backed by mortgages.

It's all legal, regulated and looks very good on paper. Real Estate prices appreciated across the board, it was national and global. On paper it looks very solid.

Ok, even with a crash as we are calling it these corporations still end up with tangible assets. These banks end up with rentable properties. maybe the rental market softens and they rent for less, but it is still income. They own the properties free and clear and it is all income paying down a principle balance.

In the mean time banks, and corporations are still selling consumer credit which more and more people need more and more. It's perfect, legal, and regulated.

The kicker is that every stock purchaser, 401k, IRA, and Pension Plan wanted this. It is a mandated to have an "expanding economy." So if I understand regulations concerning stocks it's to work for the stock holders.

[rose-colored-coolaid]

[FreedomLover]

Bottom line is that Wall Street funny money era is dead. Barack Obama is going to regulate the hell out of those greedy bastards once and for all. In fact the best thing we could do is shut it down and turn the NYSE building into a community centre.

[sniglet]

[davidlosh@davidlosh.com]

You've got to be kidding.

Number one the lenders are not writing down the value of properties they own outright. On the books the value of the asset is as they say. They bundle the properties into land trusts.
Murphy Favre Housing Managers, Inc.
Murphy Favre Properties, Inc.

You can do wonders with mobile homes in a leverage situation. Yes, if you own a few hundred rentals it adds up to very little, a few thousand units or a million start to make money. They are not the prize.

Then take the second part of the equation of the performing loans and consumer credit. That's where the repeal of the Glass-Steagall Act come in. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999,

Banks can do anything today and certainly do no wrong as far as the stock holders are concerned.

No those single wide mobiles will be leveraged into larger parcels, built on, and resold. Maybe with some accounting creativity they will buy the Trump Tower if they don't own them already.

[davidlosh@davidlosh.com]

Instead, banks are paying to get these homes off their books in Michigan.

Yes this has always been true even in very good times for the Real Estate market. You used to be able to buy homes, apartment buildings, and commercial buildings for $1 now it's $10. The cost of rehab is higher than the property is worth.

It's dollars in, dollars out.