Should Detroit get a bail out?

[sqlbullet]

I share the frustration of most Americans when I think about the bail out.  I see red when I consider the people I knew who walked away from homes that they had over-mortgaged.  One of them in particular is now already back in a house just three doors down from the one he let foreclose.

And the pure capitalist in me says we should have let the banks at the bottom of the house of cards fail.

But, on the other hand I have to acknowledge a couple of facts that are sometimes overlooked.  Fact which, like in the Trayvon Martin case, the media either is ignorant of, or willfully ignores.

First, that most of those banks strong armed by the federal government into writing those loans. See the Community Re-investment Act and this study:  http://www.nber.org/papers/w18609

Second, I am not enough of an economist to really know what would have happened to our economy if we had let these institutions fail due to insolvency.  I know bail-outs weren't extended in the late '20's and early '30's and it didn't work out so well.

With regard to Unions, I think they can provide labor a sometimes needed bargaining boost.  Certainly we don't want a return to the sweat shops of the 19th century.

But, they certainly played a role in the demise of Hostess.  Like the economy, the history of the company is too complex to point to one factor and say "that alone caused the demise".  But, to say the union negotiated pay schedules, pensions, and work rules did not contribute is similarly skewed.

[REDLINE]

...most of those banks strong armed by the federal government into writing those loans.

I was going to mention that.  Plus, there were plenty of banks that didn't want bailout money and were forced to take it.

Anyway, I don't believe in "too big to fail", and I don't believe Detroit should get bailed out.

How many know that Chrysler has been given a free pass on NOT paying back all the bailout money forwarded to them?

I've also noticed that the only time the feds hand out bailout money is when the feds themselves need to cover up their own screw-ups.

[cmemiss]

Sqlbullet, I think the key to the study you quoted is the last sentence of the summary: "The effects are strongest during the time period when the market for private securitization was booming."  This would lead me to believe that the major banks knew the loans were risky, but willing to make and unload them on unaware investors.  I know of cases where farm hands making $30k were given mortgages for $500k homes.  That's not banking, but stupidity, and indefensible regardless of reviews by CD agencies.  I think a more likely cause was the old Gordon Geko (Michael Douglas, in Wall Street) line, "Greed is good."  Way too many people are doing things, not because it is right, moral, or ethical, but because they can.  How many bankers are in jail.

[sqlbullet]

Don't get me wrong, cmemiss.  I think lots of people did lots of things they should have known better than to do.

But...

make and unload them on unaware investors

That is the investor's fault, unless the securities were fraudulent.  It they securities were not accurately and legally represented for what they were, then laws were broken and someone should go to jail.

But when you get down to it and peel the onion, the sad reality is most of the greed is good folks were the ones buying into investments that looked to good to be true.  They didn't want to spend the time to understand why the investment was so good, or maybe weren't able to understand it. 

But in either case those investors voluntarily surrendered their cash for something they believed to be a better long term asset.  We like, as a society...any society, to lay blame on big faceless institutions, but the reality is in most cases it comes down to your neighbor next door making an investment that isn't sound, and then not wanting it to be their fault when that egg hatches.

farm hands making $30k were given mortgages for $500k homes

I was raised in a farming community in Indiana.  I am the first generation in my family that has never farmed.  I sit on my but at a computer for a living.

There is a saying I learned as a boy...A farmer who owes income taxes is not much of a farmer.

What is my point?  My point is you are referring to a stated income mortgage.  It is (properly) used by people who operate in high cash-flow business with lots of depreciating assets that can be used to offset tax burden, as well as relatively high documentable business expenses.  Farms are a great example.

Since such people cannot document income in via traditional methods (paystubs, W2, tax-returns) since they either don't receive them or the documents don't accurately represent their available income for housing expenses in a way the bank would accept on a conforming loan.  In these cases the borrower states and income amount, and generally must provide some substantiation in the form of 90 days or 180 days bank statements.  The bank then lends on the bases of credit score, collateral value in relation to the loan, and usually at a small increase in rate.

In such loans the burden is absolutely on the borrower to determine their ability to repay the loan.  That is the point of the loan in the first place.

[cmemiss]

From my reading of the cases, the securitized paper was sold as class "A" (low risk, or whatever jargon the investment community uses) or better. Low risk investments to Cities and even foreign governments who would/should have people with expertise to understand the investments.  Someone, it appears to me, lied about the soundness of the investment, Moodys, the seller, the folks packaging the notes, etc.  Having faced some losses in securities that hurt, I understand putting on one's big boy pants and sucking it up, however in every case where I have had a loss it goes back to bad decisions on my part, not misinformation.

As to the half million dollar home, it was in Fillmore, CA and the guy worked on a farm, an hourly worker, not a land owner.  You have to remember that some folks get a commission for making loans, apparently even bad ones.

[sqlbullet]

You have to remember that some folks get a commission for making loans, apparently even bad ones.

Oh...I remember.  18 years ago I was a MLO for an independent brokerage here in Utah while I was working my way through a degree.

I used the farm example as a straw man of where a stated income loan is a good loan.  The problem with a state income loan is it eliminates one of the three main elements of validation from the purvey of the lender.  It is not limited to people that own land, or have a business.  If you have good credit and collateral (based on current market) and are willing to take the .5% bump in rate (or so) then you will get the loan basically without evaluation of your ability to pay.

I am not saying there wasn't fraud, and that some securities weren't mis-represented.  I am saying that the greed was not limited to a few large banks.

[REDLINE]

I think it mostly boils down to bad morals and lack of common sense, mixed in with an I-don't-care-attitude.  Pretty much the definition of a liberal. 

All made possible by liberalism, which itself should be grossly curbed in actual practice via extreme regulation, and a punishment of death for not following the regulations.  Too extreme?

[cmemiss]

Redline,

Do you remember just WHO pushed deregulation.  Hint: One of the main drivers was a Texas Senator who taught economics at Texas A&M university and whose wife was involved as a regulator.  Phil went from a salaried professor to a millionaire before he retired.

[REDLINE]

Redline,

Do you remember just WHO pushed deregulation.  Hint: One of the main drivers was a Texas Senator who taught economics at Texas A&M university and whose wife was involved as a regulator.  Phil went from a salaried professor to a millionaire before he retired.

I did not know.  Just looked him up on Wiki.

http://en.wikipedia.org/wiki/Phil_Gramm

I feel I'm missing your point though.  If you could elaborate?  My post was to some extent tongue-in-cheek.  Your post seems to be making a serious point.  I'ld like to clearly understand what you're conveying.

[gandog56]

No city should get a bailout, except maybe from the state. Too bad the state is probably broke, too.

Thank you NAFTA!

[cmemiss]

Sorry, I didn't see the tongue.  He is another case of a politician "feeding at the public trough" his entire life (think Newt) and then trying to destroy the trough.  Did you notice that the Wikipedia piece says he attended public school then names a private prep from which he graduated.  Not that the public trough is a subject for discussion as no one would be able to agree on just how big or small it might be.

[Ezveedub]

    I know the next big bail out. Mark my word on this one! Student loans. If anything is left after several Cities gets theirs it will be the student loans. I tell my Wife this all the time as we ride through the local college campus. It's more built up than anything I have seen! When the graduates can't get a decent job to pay the tab this too shall be bailed!

The big money right has been colleges and universities. I live by several and they have lots of money to spend for sure.

[REDLINE]

Sorry, I didn't see the tongue.  He is another case of a politician "feeding at the public trough" his entire life (think Newt) and then trying to destroy the trough.  Did you notice that the Wikipedia piece says he attended public school then names a private prep from which he graduated.  Not that the public trough is a subject for discussion as no one would be able to agree on just how big or small it might be.

No problem.  I see more clearly now what you were conveying.

I also noticed when he first entered public office he labeled himself as a democrat, but later changed his label to republican.  That kind of nonsense always puts me somewhat on edge.  Or maybe I should say raises a red flag in my mind.  I see him as one of those guys that likes to play both sides.  Reminds me of Lindsey Graham and John McLame.

Still, I meant what I generally said about liberals earlier, just was a bit over the top in sarcasm the way I laid it out.

[spaniel]

The real enemy got bailed out. It's called the "BANK's". The ones that caused all this bullshit. We do not produce nothing, only financial shit called instruments. Know who the real enemy is. Same sociopaths called "Money Changers".

I am from a bit north of Detroit, and lived in the Detroit area for years.  My wife used to work in Detroit proper.

The banks had nothing to do with the demise of Detroit.  Corruption, an undiversified economy, crime, and a poor management + union led demise to the auto industry did the city in.

Look at the politics in Detroit for decades...rampant corruption, look at Kwame Kilpatrick.  In prison.  They are currently more concerned with passing resolutions about Trayvon Martin than addressing their impending bankruptcy.

Union people don't like to admit it, but while I acknowledge some poor management it is had to maintain competitiveness when in the stranglehold of unions.  I know a lot of engineers who worked for the Big Three and much of the quality/reliability issues they had were a direct result of money issues driven by the demands of the unions.  They had to cut costs somewhere to be able to keep funding union demands, so they cut it from the product and quality suffered.  I've seen direct evidence of this from the engineers.  Literally, Toyota/Honda would reject a supplier parts shipment as out-of-spec and then GM/Ford would accept it because they couldn't afford to pass up the deal.  Unreal.  Also, 1/3 of union workers would fail to show up for work each day, and there was no penalty for this.  So they over-staffed by 1/3 and when extra people did show up they had to pay them.  Then the whole "jobs bank" fiasco. 

My uncle was UAW, he once bragged that he hadn't actually worked more than 2hrs/week in over a year.  A college classmate was doing a co-op in a plant and had a union member file a grievance against him for carrying his own Palm Pilot through the factory, because there was a union member whose job it was to carry all computer equipment in the factory.  No wonder all the jobs left.

We had a GM plant closing in my current city, someone came in and offered to keep all of the jobs but they would have to take a 50% pay cut down to market rate for the work.  So the UAW held the line and the plant closed; it is now vacant and the jobs moved to non-union plants.  $80K for line work by people who may not have even graduated HS is ridiculous, but that's what a lot of people I knew made.

With no other industry, when the auto industry tanked what was left?  I remember circa 2004, they couldn't sell the vehicles but they couldn't slow down production due to union rules so they were parking thousands of Jeeps in open fields across the road from where I lived...and they sat there over a year...assinine.

And the crime....the exodus from Detroit started many years ago.  Anybody who could get out, did.  You can stand on 8 Mile Rd and look north into Southfield, south into Detroit...two completely different worlds.

The city is very large geographically.  The best thing to do would be to bulldoze entire neighborhoods and rent the land out to farmers and make money off of it to support the rest.

[DM1906]

Good post. Reality sucks.