More Wealth Re-Distribution: Taxpayers to Banks

[jk]

Re: More Wealth Re-Distribution: Taxpayers to Banks

This, to me, is the most scary thought. I have heard more times than I can count, ". . . in a country as wealthy as ours, nobody should have to [fill in the blank]" What wealth? We have already refinanced our country's mortgage and a few Asian countries, among others, are holding the bank note.

the joke is, the debt the asians are holding will turn out to be subprime, too.

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Who are shareholders ? you, me, pension funds ....

That is not quite correct. From U.S. Wealth Distribution Data (1998) at the height of the dot com boom

Household distribution of common stocks in 1998 (i.e. who "owns" the corporations and gets profits). Note that in 1998, only 48.2% of Americans owned any stock at all (either directly or though mutual funds, 401k-type defined-contribution plans) and only 36% of Americans owned stocks worth more that $5000.

Percent of owners	Net stocks	Cumulative Percent	Cumulative stocks
Top 0.5%	37.0%	Top 0.5%	37.0%
Next 0.5%	10.7%	Top 1%	47.7%
Next 4%	27.2%	Top 5%	74.9%
Next 5%	11.3%	Top 10%	86.2%
Next 10%	9.8%	Top 20%	96%
Last 80%	4.1%	All 100%	100%

[ablevin]

I am not as pessimistic

I am not as pessimistic as you all are that the government will "undoubtedly" use public funds to bail out distressed/failing banks.

There is still a sour taste in the public's mouth about the whole LTCM bailout, and public funds weren't even used in that situation. If the media even begins to report that the government is considering using taxpayers' money to bail out a bank for making bad loans, rest assured those taxpayers will be in an uproar. The American public may not be too intelligent, but the moment you tell them you want to use their money to help some richies, forget about it.

I think you might see a few big banks thrown to the wolves, to quell the taxpayers' appetite for revenge, then the government will strategically aid certain institutions under the table.

[miju]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Rajiv,
fair enough, but 49.8 % is half the US population. this is not exactly plutonomics. at this level social benefits are not negligible and we cannot conclude that only a few persons are the only beneficiaries. So if one request that bank shares should drop as a penalty on the mismanagement of the lending policy one should not forget that all sharedholders will suffer throug their direct or indirect investments. And if shareholders are not happy with that they have to become active during AGM and propose thange in the management

[SSmith]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Personal responsibility. I know it might sound like a tired theme, but please, its worth mentioning.

Borrowers signed up for loans they couldn't afford. Many of those borrowers were not downtrodden individuals manipulated by the evil mortgage brokers who took advantage of their innocent nature.

No, greedy, impractical, educated white-collar workers in their 20s and 30s would not accept a modest home with a reasonable mortgage. They had to have several thousand square feet, 5 bedrooms and 3 baths for their spouse and dog. They insisted on vaulted ceilings and jacuzzi bathtubs. In order to get these things they knowing took a poorly calculated risk, with little thought, that they could finance 100% or more of the value of the home and come out ahead.

Joe1987: I have a lot of sympathy with your position. As a fellow ant who worries about winter, I get pretty irritated by the profligate grasshoppers, too. At the same time, in the current context, it seems clear that many of them will suffer because of their reckless borrowing, whether they deserve it or not. We'll have to see, but I don't regret abstaining from the borrowing binge. My thanks to Aesop.

As I mentioned in my original post, my understanding is that most subprime borrowers have low incomes, which suggests less education, which does not sound like the borrowers you describe. Does anybody out there have the information on this? For the low-income subprime borrowers I'm thinking of, however, it is important not to underestimate their financial naivete or their trust in the purported expertise of professionals. This comes through in virtually every account I read of a troubled subprime borrower. Even the great, wise Alan Greenspan was singing the praises of subprime mortgages and the wonderful opportunities they provide to low-income borrowers, so one can only imagine what they were told face to face by someone whose income depended on selling them a mortgage loan.

Finally, I won't belabor the point, but if you have been saving, you probably know how hard it is. Our society puts a lot of pressure on people to live beyond their means, and there's not a lot of countervailing opinion to help people resist it. Unless their means are significant, it is easy for people to get over their heads just trying to live like a "normal" person. It's not impossible to stay solvent, but it takes some indifference to public opinion and more financial savvy and discipline than most people have. Maybe I have belabored the point, but I think there are a lot of people in financial straits with less culpability than your hypothetical "mortgage queens." As for them, see the first paragraph.

[SeanO]

Re: More Wealth Re-Distribution: Taxpayers to Banks

As I mentioned in my original post, my understanding is that most subprime borrowers have low incomes, which suggests less education, which does not sound like the borrowers you describe. Does anybody out there have the information on this?

I've continued to think a lot about this. While I'm an absolute believer in personal responsibility, I also think everyone deserves a chance to learn from their mistakes. Ultimately I think this particular story is just a repeat of the tech bubble and many before that and a continued failure of many to acknowledge the existence of market cycles.

Here is a little insight, I hope, from my daily involvement in the foreclosure market. First just a couple of clarifications:

1. Subprime loans are by definition for those with poor credit, not low income.

2. Interest only and option ARM's help with qualifying for more home than you can afford - i.e. low income (at least when compared to area house prices and historical level of debt to income ratios)

3. The combination, which is common, means both low income, and poor credit history. Typically with no down payment as well.

It is 3, the combination, that is blowing up right now.

And the the reason (though likely not the "cause"), is a decline in house values. The areas with highest foreclosure are the areas with the greatest price declines. There is no chicken or egg here. Price declines came first. Period.

If your timing happened to be bad, regardless of education level, it is very easy to be sitting on $100k loss of equity in under 2 years (at least here in CA). So it should be no surprise that those that received 100% financing will simply walk away given that it is only their credit on the line. It should also now be clear why subprime lenders are feeling it first... those borrowers don't even have their credit on the line.

Wait a bit. The negative news on subprime, and the resulting pull back on subprime lending will reduce demand with an already high supply. Prices will come down a bit more, and 100% financing loans to prime borrowers from 2004-2006 will fail next. Hopefully the cycle ends there.

Regardless expect foreclosures to continue to rise for a while. And as predicted in Eric's book "America's Bubble Economy", the distressed asset business will be good.

Sean

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

we cannot conclude that only a few persons are the only beneficiaries. And if shareholders are not happy with that they have to become active during AGM and propose change in the management

In fact looking at the data, I come to exactly the opposite conclusion. The top 1% own 50% of the shares. The top 5% own 75%. So 50 % of corporate earning benefits accrue to 1% of the population, and 75% to 5% of the population

The votes you have at the AGM meeting is the number of shares you hold. So small shareholders have NO voice or influence on the management of a corporation, and they can demand nothing! Only thing they may do is to file a shareholder suit, and that is not feasible unless you are already rich. A corporation is not a democracy (one shareholder, one vote.) It is a capitalistic instrument -- which means one dollar, one vote! So if you are rich you have more votes than if you are poor. The proportion of "capital votes" is reflected in the "Average household wealth by wealth class" table. I am copying it below

Average household wealth by wealth class (in 1998 dollars):

Wealth class	Average wealth of class
Top 1%	$10,203,700
Next 4%	$1,441,200
Next 5%	$623,500
Next 10%	$344,900
Next 20%	$161,300
Next 20%	$61,000
Next 20%	$11,000
Last 20%	-$8,900

[don]

Re: More Wealth Re-Distribution: Taxpayers to Banks

I think the sub-prime constituency, with the Alt-A mortgages, included harvesting the ignorant and the poor, the young professionals who couldn't wait, and don't overlook the amateur flippers, a big factor in the current meltdown, with its own cold water effect on the rental market. Have we ever experienced a housing ownership collapse with a falling rental market? I don't think so. During this bubble it became increasingly obvious we would experience historical highs in ownership, followed by an historically significant number of renters. When the US has been de-industrialized, and now is hell-bent on de-professionalizing, a rentier class becomes the default domestic investor's position. It isn't a stretch to see zoning laws accomodating mcmansion multi-family use in the not too-distant future. Dystopian? Sure, but I have only itulip to thank along with getting this off my chest!

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Another good article is In Debt We Trust as the Economy Goes Bust

Whether personal or planetary, a tornado of foreclosures, bankruptcies, missing money -- now arriving on the world stage as a housing bubble, soon devolving into a credit bubble -- is ripping through the United States economy and world markets and will ultimately shatter, splinter, and shred, not only the fiscal fabric of America but is likely to catapult the global economy itself into massive meltdown.
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What makes the industry’s policies not only egregious but in fact, illegal, is the reality that by and large, it lends to people who it knows cannot repay their debt. In the world of finance, this is known as fraudulent inducement and is punishable with fines and imprisonment. Although difficult to prove in terms of motive, the debt industry’s behavior is replete with millions upon millions of instances in which poor risk consumers are deluged with pre-approved credit cards.

[Rajiv]

Re: More Wealth Re-Distribution: Taxpayers to Banks

The latest -- The State of Working America 2006/2007

[DanielLCharts]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Thanks for highlighting this issue, EJ. SSmith, I also emailed Sen. Dodd.

If anyone else is not happy with the idea of using taxpayer money for bailouts, please consider writing an email to Sen. Dodd who seems to be spearheading suprime "relief" efforts:

http://dodd.senate.gov/index.php?q=n...28&cat=Opinion

[jk]

Re: More Wealth Re-Distribution: Taxpayers to Banks

dodd is head of the senate banking committee, so it's an appropriate area of interest for him. of course, being head of that committe, it's not hard to guess who his major contributors might be.

[Sapiens]

Thank You, Los Angeles Times

Thank You, Los Angeles Times

Sharon Lewis went to the Los Angeles Times and cried herself a river. She was a poor innocent homeowner trapped by the subprime implosion. Faced with a pending rate hike and an increasing mortgage and the possible loss of her home, she positioned herself as the perfect victim Senator Dodd want to rescue.


Then we learn that Sharon didn't just buy one home back in June 2005. No, she actually bought three homes.


Then we find out Sharon sold two of the homes to a guy named Darryl in the summer of 2006. Somehow Darryl then added Sharon back on to the title on one of the homes.


Now we find out Sharon and Darryl are actually a married couple. So basically, Sharon sold her homes to her husband at a profit, a profit they both kept.


We now also know the transactions from seller/wife Sharon to buyer/husband Darryl were non-MLS FSBO sales.


And...


Sharon is a RealtorŪ and she was the RealtorŪ of record on the fraudulent sales.




But the public still think Sharon Lewis is a poor homeowner that needs a federal bailout because of LA Times' irresponsible reporting.


Thank you, Los Angeles Times. I feel like I have to laugh to keep from bawling.

[jk]

Re: More Wealth Re-Distribution: Taxpayers to Banks

CHRISTOPHER J. DODD: CAREER PROFILE (SINCE 1989)
Top Contributors:

1 Deloitte & Touche $194,970
2 Greenwich Capital Markets $183,000
3 Bear Stearns $162,850
4 Citigroup Inc $157,000
5 Goldman Sachs $147,516
6 United Technologies $124,550
7 JP Morgan Chase & Co $114,523
8 PricewaterhouseCoopers $113,850
9 Morgan Stanley $99,725
10 American International Group $97,338
11 Lehman Brothers $96,000
12 Ernst & Young $86,000
13 Prudential Financial $85,512
14 Credit Suisse First Boston $85,250
15 Time Warner $84,250
16 General Electric $78,280
17 Hartford Financial Services $78,150
18 KPMG LLP $72,290
19 UST Inc $71,400
20 UBS Americas $66,950

[Finster]

Re: More Wealth Re-Distribution: Taxpayers to Banks

In fact looking at the data, I come to exactly the opposite conclusion. The top 1% own 50% of the shares. The top 5% own 75%. So 50 % of corporate earning benefits accrue to 1% of the population, and 75% to 5% of the population.

This might be an ancillary point, but statistics like these are usually abused for political demagoguery. They may be true, but the conclusion implied by those who cite them may be dangerously misleading.

One example: If the top 50% of the shares are owned by 1% of the population, that suggests that 50% of the shares are owned by 99% of the population. More significantly, those in the lower 99% of the population may only own 50% of the shares, but to those individuals, their share interest may be crucial to their future livelihood.

Every mainstream financial advisor from the corner of Wall and Broad to the corner drugstore has been telling people for years that they must invest in stocks to secure their future retirement. That has actually been for the most part good advice given that interest rates, and by extension savings yields, have been as a matter of public policy so low as to make traditional saving near fruitless. As a result, the very same Joe and Jane Sixpack that the class warfare enthusiast purports to speak for, if he is successful in reducing the returns to "the wealthy", are squarely in his crosshairs.