Too big to fail

[kenberg]

In the last few years rescue efforts have been made with various large financial entities on the grounds that their failure would be a calamity. Fannie and Freddie are the latest in a long line going back, at least, to the S&Ls.

 

It is sometimes argued that "letting the market work" is better than "government regulation". Perhaps true, as long as the market is allowed to work. However, if an entity is seen as being "too large to fail" then we are announcing that the market will not be allowed to work.

 

Questions:

 

Is it not logical that any entity that is too large to fail must then be properly regulated so that it does not fail and also does not need to be bailed out?

 

Stepping away from specific instances such as FNMA and looking at the general question, have McCain and Obama made it clear where they stand on this? So far I mostly have heard a lot of talk about shutting barn doors after the horses, the cows, and everything else is long gone.

 

Of course some may oppose any intervention and suggest just letting the chips fall as they may. Perhaps so, but it's a little scary and the gov folks do not seem to be up for this. I'm not sure that I am either.

 

 

I'm trying to work this out in my head and I am not sure where I come down. Generally I prefer a light touch with regulation but I am getting a little annoyed at the continuing mantra that we have to give my tax dollars to a bunch of fools who have screwed up just so they don't bring the whole structure down with them when they fall.

[Al_U_Card]

Whomsoever stands up against them will just get knocked down (and if he is smart, will stay down).

 

They only want deregulation to allow them to increase profits....not to allow losses! :rolleyes:

 

So, if these institutions were to go bankrupt.....would that mean that your mortgage would have no backer or that it would have no one to take your payments? (And you would then no longer owe anything or perhaps just have to re-imburse 10 cents on the dollar....yeah right!)

[mike777]

In the last few years rescue efforts have been made with various large financial  entities on the grounds that their failure would be a calamity. Fannie and Freddie are the latest in a long line going back, at least, to the S&Ls.

 

It is sometimes argued that "letting the market work" is better than "government regulation". Perhaps true, as long as the market is allowed to work. However, if an entity is seen as being "too large to fail" then we are announcing that the market will not be allowed to work.

 

Questions:

 

Is it not logical that any entity that is too large to fail must then be properly regulated so that it does not fail and also does not need to be bailed out?

 

Stepping away from specific instances such as FNMA and looking at the general question, have McCain and Obama made it clear where they stand on this? So far I mostly have heard a lot of talk about shutting barn doors after the horses, the cows, and everything else is long gone.

 

Of course some may oppose any intervention and suggest just letting the chips fall as they may. Perhaps so, but it's a little scary and the gov folks do not seem to be up for this. I'm not sure that I am either.

 

 

I'm trying to work this out in my head and I am not sure where I come down. Generally I prefer a light touch with regulation but I am getting a little annoyed at the continuing mantra that we have to give my tax dollars to a bunch of fools who have screwed up just so they don't bring the whole structure down with them when they fall.

1) Keep in mind that too large to fail financial inst. are heavily regulated.

2) Keep in mind it is common for governments to fail......:rolleyes:

3) Most importantly keep in mind if the institution, any institituion is going to take risks.....then it can fail.

4) Keep in mind the more the government runs an institution, the more politicians control it and tell it what to do or not do.

[kenberg]

Al,

Let's grant, for the sake of argument, that they are all greedy bastards. Probably not exactly the case, but maybe close enough. Otoh, government regulators can be a real pain in the ass also. So: What to do?

[sceptic]

Why not, heavily regulate Mortages (first house only i.e the home) heavily regulate one current account and one savings account per person or couple to an acceptable or working limit, also allowing one personal loan to a an acceptable working amount, making sure that these are no (or as low risk as is feasibly possible) risk areas.

 

Then deregulate every thing else and let the greedy bastards, take as many risks as they like with the rest of the money, that way the ordinary joe in the street wont get screwed by thier incompetance

[kenberg]

Mike,

 

I mostly grant all of your "keep in minds". Still, it seems I am being asked, through taxation, to help keep afloat organizations that would sink if market forces were allowed to work. It has at least been argued that this is partly a consequence of loosened regulation in the mortgage industry. Perhaps more regulatinon wd have prevented the meltdown, perhaps not.

 

 

But my fundamental proposition is that once any institution is isolated from the consequences of foolish practices by being too large to fail then the correcting hand of the market is tied up and what is left for protection other than increased regulation? Not fond of it, but what else?

[mike777]

Why not, heavily regulate Mortages (first house only i.e the home) heavily regulate one current account and one savings account per person  or couple to an acceptable or working limit,  also allowing one personal loan to a an acceptable working amount, making sure that these are no (or as low risk as is feasibly possible) risk areas.

 

Then deregulate every thing else and let the greedy bastards, take as many risks as they like with the rest of the money, that way the ordinary joe in the street wont get screwed by thier incompetance

Wayne, first mortgages/loans and savings and checking accounts are heavily regulated today, very heavily regulated. Can you be more specific?

[mike777]

Mike,

 

I mostly grant all of your "keep in minds". Still, it seems I am being asked, through taxation, to help keep afloat organizations that would sink if market forces were allowed to work. It has at least been argued that this is partly a consequence of loosened regulation in the mortgage industry. Perhaps more regulatinon wd have prevented the meltdown, perhaps not.

 

 

But my fundamental proposition is that once any institution is isolated from the consequences of foolish practices by being too large to fail then the correcting hand of the market is tied up and what is left  for protection  other than increased regulation? Not fond of it, but what else?

If your main point is, if the taxpayers bail out/own an institution then government controls the instititution, OK.....now what? Not sure you can be more regulated than that.

 

But back to my main point, if any institution, including a government one takes risk it can fail......governments fail all the time.......If a government can fail....not sure even 1000% regulation can save it...:rolleyes:

 

Humans take risks, humans can die.

governments take risks, governments can die

financial companies take risks, they can die.....

 

Also it is pretty hard to find companies that fail due to lack of regulations........

[sceptic]

Wayne, first mortgages/loans and savings and checking accounts are heavily regulated today, very heavily regulated. Can you be more specific?

 

a bank or financial organisation has this basic remit for all, then they must trade as a seperate company for all high risk activity, thus when things go pear shape, the ordinary joe in the street is safe and no need for tax payers to bail out the greedy bastards

 

as for already regulated, obviously not very well

[Al_U_Card]

Al,

Let's grant, for the sake of argument, that they are all greedy bastards. Probably not exactly the case, but maybe close enough. Otoh, government regulators can be a real pain in the ass also. So: What to do?

For me (my bluesky approaches always have some clouds in them....) I would make the process transparent as in shareholders (citizens) knowing what is going on in their company (country).

 

The U.S treasury can print money (politically) without cost or debt. The Federal Reserve "injects" "liquidity" into the markets for a price (debt) at interest that they themselves collect as institutions and from which they benefit as the first come first served.

 

Injecting liquidity indeed. Talk about obfuscation! Create goods and services, make money to represent them so that they can be freely and easily interchanged and make everyone's life easier....not costlier.

[mike777]

Wayne, first mortgages/loans and savings and checking accounts are heavily regulated today, very heavily regulated. Can you be more specific?

 

a bank or financial organisation has this basic remit for all, then they must trade as a seperate company for all high risk activity, thus when things go pear shape, the ordinary joe in the street is safe and no need for tax payers to bail out the greedy bastards

 

as for already regulated, obviously not very well

Wayne, This is very unclear............if a bank fails it does not hurt my mortgage......People got their money long ago.........As for savings accounts they are insured by fdic......

 

 

http://en.wikipedia.org/wiki/Federal_Depos...nce_Corporation

 

 

 

 

Again what do you want to protect that is not protected today?

The ordinary joe is protected up to $200,000....what more protection do you want for the ordinary joe?

[Al_U_Card]

The FR practice ensures a constant (minimum) rate of inflation.

 

Once upon a time, inflation was punishable by death. Debasing a coin of the realm just meant giving less for more and that was not allowed....unlike today.

 

They are robbing you slowly but surely of the value that you yourselves assign to any given good or service. It is just a matter of time and time, like the laws and their enforcement, is on their side.

[sceptic]

actually , I dont think the mortages rate is protected and that is what hurts people. I am sure that the mortage crisis is effecting mortgage rates, so if that is the case, so that does effect your mortgage.

 

Why not let the banks go bust, if everyones money is safe

[mike777]

actually , I dont think the mortages rate is protected and that is what hurts people.  I am sure that the mortage crisis is effecting mortgage rates, so if that is the case, so that does effect your mortgage.

 

Why not let the banks go bust, if everyones money is safe

Wayne of course your mortgage rate is protected, all mortgages are protected, it is protected by regulations...lots of regulations.......again mortgages are heavily regulated...sigh :) Wayne even if you have a variable rate mortgage is protected and heavily regulated........

 

Wayne if you are just trying to say...if I do not pay my mortgage, I get to keep my house anyway..ok just say that in your regulation..

 

Wayne they do let banks go bust...they just let a huge one go bust in Calif over the weekend.

 

As for you claim money is safe..of course money is not safe.......nothing is 100% safe....governments fail.......and die....but what regulations do you want to stop that?

[sceptic]

if everything is rosy, why are the Tax payers bailing out these two big mortgage lenders

[mike777]

if everything is rosy, why are the Tax payers bailing out these two big mortgage lenders

Wayne this is a strawman, who claims everything is rosy?

 

If you want to discuss FNMA, feel free too..I know the company very very well for 30 years...

[mike777]

FNMA is NOT a traditional mortgage lender such as a bank. In other words for the most part the ordinary Joe does not go to the local FNMA office and borrow money to buy a house.

 

What it really does is borrow money in the open markets and use stockholder money to buy mortgages from banks.

 

http://www.fanniemae.com/aboutfm/index.jht...bout+Fannie+Mae

 

 

"About Fannie Mae

 

 

 

 

Fannie Mae provides stability, liquidity, and affordability to the nation's housing finance system under all economic conditions. We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

 

Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America.

 

Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America.

 

The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.

 

In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world. "

[sceptic]

Fannie Mae provides stability,

 

cough

[mike777]

Over the past 30 years, politicians, many politicians, Barney Frank is only the latest in a long line have put pressure on FNMA to buy risker and risker mortgages.

 

FNMA has guidelines on what mortgages it can buy or which it cannot. Congress has told it to buy loans from people with poorer credit and demanded they buy larger loans. Example loans at one time were limited to 100,000 per house now the limit is closer to 400,000

 

On top of this FNMA makes interest rate hedges and bets with its own capital.

It chops up mortgages and resells them. (CMO's)

It resells mortgages to mutual funds for a profit.

 

In return for accepting all this politcal pressure, there is a "debatable, implied government guarantee"......this is really the key.

 

This implied guarantee allows FNMA to borrow money at a lower rate than its competitiors. In other words it has an unfair advantage..well unfair to other companies, not to FNMA shareholders. :)

[mike777]

Loans that are not under FNMA guidelines.....are often called JUMBO loans and have higher interest rates. Why, because your bank cannot turn around and sell them to FNMA.

 

Most USA BBO posters have FNMA type loans...non JUMBO and therefore lower interest rates........

[jtfanclub]

Wayne, first mortgages/loans and savings and checking accounts are heavily regulated today, very heavily regulated. Can you be more specific?

Which is all completely worthless. A rating agency can call a mortgage already in default a AAA debt, and the bank can sell it then for lots of money. The guy who buys it and discovers that it's only useful as toilet paper doesn't have any 'regulations' that help him.

 

That's what has really happened in the mortgage industry. Nobody trusts the rating agencies any more, which means that the mortgage market has just vanished overnight. Almost half the mortgages in the market are either owned or guaranteed by Fannie or Freddy. The only reason you can still get a mortgage at all is because Fannie and Freddy are still buying (with money they don't have). Note that this isn't limited to subprime loans- they just exposed that the rating agencies didn't know what the heck they were doing.

 

It would be interesting if we got rid of the mortgage market entirely, and went back to banks actually keeping the mortgage instead of selling it immediately. For one thing, that means the bank would actually care about whether the person can pay it back, not what it will be rated as (which in turn determines how much money they make off the loan). During this mortgage market craziness, the seller didn't care if the buyer could afford it, the real estate agent didn't care if the buyer could afford it, the bank didn't care if the buyer could afford it, and the ratings agencies had no idea if the buyer could afford it beyond basic paperwork.

 

But then, Fannie Mae and Freddy Mac exist so that a mortgage market can exist, so that banks can loan more mortgages than they have assets (because they turn around and sell some of them). But I don't think they can handle a complete market collapse like this.

 

Dunno what the solution is, but I don't think this is their fault. They did what they were supposed to do.

[kenberg]

Mike,

 

I of course accept that most anything involves risk. I am not trying to eliminate risk. Also, I am not particularly trying to protect individuals from bad choices. I am asking about the best way to keep our complex financial structure from falling apart.

 

If a toothpaste company makes crummy toothpaste, it goes broke. Some investors lose money but hey, investments are not guaranteed.

 

 

Some large organizations seem to be in a different category however. If, say, the American auto industry goes belly up, or further goes belly up, I get hurt by the fall out even though I own no GM stock. OK, maybe we have to just put up with that. But Bear Stearns? FNMA? Apparently we, meaning the government, are not willing to just let matters take their course. (We aren't really willing with the auto industry either.) I suppose maybe this intervention is right. But I think that such a conclusion has implications.

 

The mortgage mess was not exactly just due to misjudgment. Some savvy folks got very rich and left us all with a huge problem. Well, some clever people are screwing over some foolish people, what else is new? Yes, but now we have to launch an expensive rescue operation not to save either the screwers or the screwees but rather to save the whole damn economy. We are being played for suckers and it seems natural enough to want to put a stop to this. Can we stop it, or do we just continue to get screwed?

 

Eliminating risk is not possible. I know that. I just don't like being conned.

[mike777]

I think your main point and what the tv is talking about now is that no one cared if you borrow money if you could pay it back.

 

Let us not be naive, the people buying these mortgages from banks are not innocent niave Joe's. :)

 

We all know the limits of how accurate the rating companies are...btw they are regulated also. Keep in mind one must pay money to the rating companies to get a rating. So if you trust what the rating is, whose fault is that? ...anyway.....

 

Back to the main point of this thread, that somehow more regulation will solve the problem.

 

I just want more transparency......

The problem of course is that Politicians prefer less, when they are in control......see FNMA for case study.....

 

As to what to do now? BUY BUY BUY....if you understand the company and how it makes money :)

[mike777]

OF course none of this is new.

 

 

One can go back throughout history and see the pattern.

 

Just look at ENRON. The problem was not lack of regulations, there were more than enough.

 

The problem was a lack of transparency. Investors react in two ways with too lack of transparency:

1) These guys are regulated and smart..I do not understand how they make money but what the heck.....buy......

2) I do not understand how Enron makes money.....I do not buy.....

 

or

 

 

1) I do not know if these mortgages are sound or not but who cares they are regulated...buy or

2) I do not understand...do not buy.....

[mike777]

Mike,

 

I of course accept that most anything involves risk. I am not trying to eliminate risk. Also, I am not particularly trying to protect individuals from bad choices. I am asking about the best way to keep our complex financial structure from falling apart.

 

If a toothpaste company makes crummy toothpaste, it goes broke. Some investors lose money but hey, investments are not guaranteed.

 

 

Some large organizations seem to be in a different category however. If, say, the American auto industry goes belly up, or further goes belly up, I get hurt by the fall out even though I own no GM stock. OK, maybe we have to just put up with that. But Bear Stearns? FNMA? Apparently we, meaning the government, are not willing to just let matters take their course. (We aren't really willing with the auto industry either.) I suppose maybe this intervention is right. But I think that such a conclusion has implications.

 

The mortgage mess was not exactly just due to misjudgment. Some savvy folks got very rich and left us all with a huge problem. Well, some clever people are screwing over some foolish people, what else is new? Yes, but now we have to launch an expensive rescue operation not to save either the screwers or the screwees but rather to save the whole damn economy. We are being played for suckers and it seems natural enough to want to put a stop to this. Can we stop it, or do we just continue to get screwed?

 

Eliminating risk is not possible. I know that. I just don't like being conned.

More transparency

 

If I do not understand the Math, I can go ask someone who does. If you tell me the math seems confusing to even you, not wrong, just confusing...that is a red flag.

 

For me I owned FNMA for decades, until a few years ago...the math and accounting got to confusing for me to understand, not wrong or bad, I just did not understand it.

 

FNMA borrows money at unfair low rates, ok I understood that.

They turn around and buy ordinary joe mortgages from banks and mortgage companies.

 

They borrow money at 3% get mortgages at 7%.......have a few expenses and mortgage defaults.....and the rest is free money...sweet....:)