Wall Street

I am sick of hearing about the crooks on Wall Street. Can someone explain to me what is it that the traders have done that is out of character in a capitalist society?

Credit default swaps.

Or basically insurance for a lender.

Unfortunately, companies like Lehman and AIG ran these from a non-insurance arm of their business. Which, btw, are not regulated by the govt. So they had no or little reserves, and took in the premiums, if you will, at almost 100% profit, thinking they'd never have to pay out because as we all know, real estate always goes up. Except this time.

Oh, and if you are the issuer of a CDS, you can sell those too.

So, one mortgage may be tied to 2 or more CDS.

The CDS market is about $65,000,000,000,000. No, that is not too many zeroes. 65 TRILLION dollars are floating on CDSs. Took down Iceland and almost the rest of the world.

You cen bet there will be a slew of regulations world wide to control CDSs from here on out.

daedong said:

I am sick of hearing about the crooks on Wall Street. Can someone explain to me what is it that the traders have done that is out of character in a capitalist society?

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I'll give you my take on it. Everybody has opinions, but there are some basic facts that apply, and logical conclusions can be drawn from those facts.

1. It is not just Wall Street. Wall Street did what Wall Street does, which is buy and sell various financial products. Sure there was greed involved, but greed has been around since humans crawled from the slime of the evolutionary Earth....So, nothing out of character here.

2. The problem, to me, began when it became uncommon for companies to pay dividends on common stock. When dividend payment was the rule, you actually owned a portion of the company whose stock you purchased, and you actually shared in the profits and losses of the company. Now days, stocks do not commonly pay dividends, and are bought and sold upon "The Greater Fool Theory." What this means is essentially, to purchase stock, and hope that a bigger fool than you will come along and buy the stock from you for more than you paid for it. It no longer matters to most investors whether the company is solid and profitable or not. All that matters to investors is "momentum". The stocks go up, and people buy! Buy! Buy! That is why we experienced the stock bubble, and why the inevitable "Dot.com Bust" happened in 2000. There was no value to most of those stocks except in the minds of people buying the stocks. People eventually realized they were playing the fools game and bailed out of stocks when they discovered many of these companies they were investing in did not even have a product to sell. As a result, the stock market has been moving sideways for the past 8 years. So, Wall Street began looking for the next sector to make a profit: Real Estate.

3. So, with the stock market busted for the foreseeable future, Wall Street turned to real estate in a big way. CG summed it up in this humorous thread:

http://www.forumsforums.com/3_9/showthread.php?p=205502&posted=1#post205502

So, everyone is looking for a new way to pump up their 401K and retirement plans since the stock market is basically moving sideways and all "fools" appear equal at this point, with few other fools willing to jump in. Thus, Wall Street and the banking industry create "Mortgage Backed Securities." As you may already know, MBS's are individual mortgages bundled and sold together and traded on the stock market. This was to be the new panacea to profit since the stock market had gone into hibernation. This seems like a good idea on the surface because historically, real estate tends to appreciate. This was well and good, until you look at the government involvement through Fannie Mae and Freddie Mac.

4. The government has been involved in the mortgage business since the Great Depression with FDR's "New Deal". Over the years, government bureaucrats and politicians have thought they could improve on the concept. In recent history, politicians declared a war of sorts on "Predatory Lending", in which minorities appeared to suffer the most. So, the politicians went after the mortgage business, essentially forcing them to lessen their standards and loan to otherwise unqualified borrowers. The mortgages owed by these unqualified borrowers were bundled into these Mortgage Backed Securities (MBS's). But….it’s not just the government to blame. Other consumers saw opportunity with the enhanced government lending laws.

5. With these new lending laws, the door was open to other borrowers in addition to the typical low income, unqualified minority. People saw the opportunity to buy that second vacation home on the lake, in the mountains or at the beach. Others saw the opportunity to enter the “real estate business” as a land lord or a “house flipper”. The cable TV house flipping shows sky-rocketed in popularity during this time. Everybody it seemed aspired to become a “real estate investor”. Some people actually flipped houses in the traditional way by buying a house below market value, fixing it up, and selling it for a profit. Others, seizing upon the market “momentum” created by the easy mortgage money, simply bought houses, did nothing to them, and sold them at the appreciated value to “Greater Fools”. This is how the real estate bubble was created. And as we all have learned, all financial bubbles eventually burst when they reach unsustainable levels.

6. Meanwhile, back at the ranch…err…Wall Street, the stock traders were busy buying up and selling all these high risk mortgages of the low income minorities, the second homes of up and coming couples, the new land lords and house flippers, etc., and selling them to the big brokerage houses who manage our retirement plans and 401K’s and 403B’s. Main street mortgage brokers were making massive profits by charging origination fees, document fees and other fees to the people who were buying all this property. Many of these mortgage loans required no proof of income or employment. Eventually, the market became saturated with these MBS’s.

7. The construction industry boomed as a result, and home prices increased faster than at any other time in history. Fortunes were made and everybody thought the boom would last forever, that this time “things were different” (just like before the Dot.com bust). Well, as we all have seen, with any unsustainable boom, the inevitable bust must follow, so, here we are today.

Now, the governments of the world are stepping in to attempt to fix this mess caused by excessive borrowing by borrowing even more money to prop up these financial institutions who lent too much money to too many unqualified borrowers because the same governments created the conditions that caused this mess in the first place.

Understand now?

Any questions?

I won't claim to understand Wall Street, but my take [on answering Daedong's question] :

There's simple greed, unethical behavior, and then downright crooked.

To me the line to crooked was crossed when said investors were playing shadey games in markets they knew the government was likely to toss a bail out when things went south. As long as it's your money on the line, or even that of your own investors [really shadey, no doubt], and no one else can get stuck with the tab, I say let the profits and failures fall where they may - and just knowing that should keep 95% mostly honest.

However, now precidents have been set (actually they have before to, just less blatent), so who know's what's next. Gotta love it, more intervention requires more regulation, requiring more intervention....