How much bank profits can we afford?

[Mofra]

Isn't that how the sub-prime evolved........

Sub-prime evolved from the inadequate pricing of risk, nothing more.
It was caused my market inefficiency, not the efficiency of the banking system.

* Here: Ubiquitous free bill-paying with BPay. USA: Total shambles, most of it costing fees, with many small institutions still sending "electronic" payments by physical cheque. (Why do you think Paypal exists?)

* Here: Ubiquitous cheap or free direct credit to other bank accounts. USA: Total shambles, again.

* Here: Direct deposits into your account happen reliably same night. USA: Depends on the bank. Might be tonight. Might be tomorrow night. Maybe the next day.

* Here: Simple ATM use all around the country. USA: Various cross-usage schemes. Again, shambles.

* Here: Every bank that I am aware of (apart from INGDirect and similar) is on SWIFT and can directly send/receive money to banks overseas either in AUD or another currency, overnight. USA: Many small banks don't bother, so the only way to get money in/out internationally is through an intermediate bank in USD, which involves extra fees, delays and manual intervention.

Excellent summary Kremmen, people tend to only focus on the negatives and not the positives of a strong financial sector in Australia. A spike in interbank lending rates decimated the industry in the US, our banks with greater control and greater levels of trust with one another fared much better.

 

[IFocus]

Sub-prime evolved from the inadequate pricing of risk, nothing more.
It was caused my market inefficiency, not the efficiency of the banking system.

Understand your point but surely lack of regulation or enforcement had a part arla Ameriquest and others who raped the system.

John Mauldin posted a brief excerpt from Michael Hudson's book called The Monster about the Mortgage industry, and specifically Ameriquest and Lehman.

The new deal left her with a house payment of $1,069 a month””nearly all of her monthly income and twice what she'd been paying on the FHA loan before Ameriquest and Long Beach hustled her through the series of refinancings. She was shocked when she realized she was required to pay more than $1,000 a month on her mortgage. "That broke my heart," she said.

 

[Macquack]

Sub-prime evolved from the inadequate pricing of risk, nothing more.
It was caused by market inefficiency, not the efficiency of the banking system.

Surely the buck stops with the banks as far as the pricing of risk is concerned (they did not have to lend the money).

If the Sub-prime debacle and subsequent Global Financial Crisis was not caused by an inefficient banking system, then who was to blame???

 

[nioka]

Discussion here reminds me of an address by the manager or one of Australias large companies that was delivered at a management seminar. His theory was;
" keep the worker in as much debt as possible and help keep his wife barefooted and pregnant (actual words). That way you will have a workforce that will not be able to miss a days work, that will not want to leave the job and thanking you for letting him have a job. If his debt is over buying a house then he will also be tied to that place and find it hard to shift home".

That was in the early 60s. Now it would probably be "keep both partners working full time to earn sufficient to pay off a mortgage and etc."

 

[Julia]

Understand your point but surely lack of regulation or enforcement had a part arla Ameriquest and others who raped the system.

The new deal left her with a house payment of $1,069 a month””nearly all of her monthly income and twice what she'd been paying on the FHA loan before Ameriquest and Long Beach hustled her through the series of refinancings. She was shocked when she realized she was required to pay more than $1,000 a month on her mortgage. "That broke my heart," she said.

So what did she do?

 

[doctorj]

Surely the buck stops with the banks as far as the pricing of risk is concerned (they did not have to lend the money).

If the Sub-prime debacle and subsequent Global Financial Crisis was not caused by an inefficient banking system, then who was to blame???

The buck stops, where ever the buck stops. Banks didn't hold a lot of these mortgages on their balance sheets (well they did, but often not the ones they originated...). Check out http://orgnet.com/cdo.html for a fun way to see how the contagion worked.

 

[Mofra]

Understand your point but surely lack of regulation or enforcement had a part arla Ameriquest and others who raped the system.

US Lenders were terrible and more lending regulation would have helped, but it was inadequate pricing of risk in the derivative instruments that led to the shutting down in very quick succession of the securitisation market that halted lending worldwide (and yes, even in countries like Australia where the standard of lending is much higher than the US and in many respects is world-leading).
The complexity and depth of the secondary markets make it basically impossible to regulate (and Greenspan himself concedes this point on occasions in his post-Fed career).

 

[Mofra]

Surely the buck stops with the banks as far as the pricing of risk is concerned (they did not have to lend the money).

If the Sub-prime debacle and subsequent Global Financial Crisis was not caused by an inefficient banking system, then who was to blame???

An inefficient pricing system, although pre-GFC we did just encounter a once in history shift in global demographics where something like 10% of the entire world's population switched from an agrarian to industrial existance from 02 to 05, which brought with it a greater saving and investment market as people who lived in the developing world and largely lived hand to mouth suddenly had some (albeit meagre) savings to place in deposit.

As people from developing nations have a higher savings ratio than most other people (less likely to accept risk with investment), this precipitated a large scale drop in fixed interest securities which meant traditional bond holders found their yields wilting and chose other investments that produced higher returns, scewing the risk markets. The lower interest rates compared with historical booms exacerbated the situation when the crisis hit.

In any case, the guilty parties were not retail banks, let alone the big Australian banks.

 

[Calliope]

Poll in the SMH today;

Poll: Will you switch your accounts from the Commonwealth because of this rise?
Yes
62%
No
17%
Depends how much it costs me
21%
Total votes: 10872.Poll closes in 6 hours.
Disclaimer: These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.

Probably most of the clowns who responded to this poll don't even have an account with the CBA.

 

[Julia]

It was just a bit unfortunate for CBA that their announcement of large rate rise came when there was no other news, and while the government and the opposition are fighting for who can make the most meaningless noise about interest rate rises.

So we had considerable hysteria for about 36 hours. Late night ABC Radio talkback in the small hours managed to register umpteen idjits who have no clues but think it's sport to engage in some bank bashing.

Then we have the Qantas engine debacle, and all the outrage turns to unsafe servicing of our flagship air fleet.

Then, some more people die as a result of a further eruption of the Indonesian volcano, and whacko, that's taken the place of all the local outrage on interest rates.

Meantime, the other big banks are wisely just pulling their heads in for now and will make their own announcements re rises at a smarter time than did the CBA.

 

[Macquack]

Meantime, the other big banks are wisely just pulling their heads in for now and will make their own announcements re rises at a smarter time than did the CBA.

So Wise really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.

 

[doctorj]

So Wise really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.

Might as well manage the news cycle as long as the great unwashed are emotional and irrational.

 

[wayneL]

So Wise really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.

It depends on the circumstances.

 

[Calliope]

So Wise really means:- sneaky, cowardly, contemptible, deceitful, devious, disingenuous, furtive, guileful, recreant, secretive, shifty, slippery, sly, snide, stealthy, surreptitious, tricky, unscrupulous, untrustworthy and underhanded.

You are a wise old whale watcher Macq.

 

[IFocus]

So what did she do?

The out come wasn't explored but I think she would have lost the lot

Like many older black women who owned their homes but had modest incomes, Pittman was deluged almost every day, by mail and by phone, with sales pitches offering money to fix up her house or pay off her bills. A few months after her heart attack, a salesman from Ameriquest Mortgage's Coral Springs office caught her on the phone and assured her he could ease her worries. He said Ameriquest would help her out by lowering her interest rate and her monthly payments.

Some thing along the lines of Mofra's comments

For Ameriquest, the fact that Pittman couldn't afford the payments was of little consequence. Her loan was quickly pooled, with more than fifteen thousand other Ameriquest loans from around the country, into a $2.4 billion "mortgage-backed securities" deal known as Ameriquest Mortgage Securities, Inc. Mortgage Pass-Through Certificates 2004-R7. The deal had been put together by a trio of the world's largest investment banks: UBS, JPMorgan, and Citigroup. These banks oversaw the accounting wizardry that transformed Pittman's mortgage and thousands of other subprime loans into investments sought after by some of the world's biggest investors. Slices of 2004-R7 got snapped up by giants such as the insurer MassMutual and Legg Mason, a mutual fund manager with clients in more than seventy-five countries. Also among the buyers was the investment bank Morgan Stanley, which purchased some of the securities and placed them in its Limited Duration Investment Fund, mixing them with investments in General Mills, FedEx, JC Penney, Harley-Davidson, and other household names.
It was the new way of Wall Street. The loan on Carolyn Pittman's one-story house in Atlantic Beach was now part of the great global mortgage machine. It helped swell the portfolios of big-time speculators and middle-class investors looking to build a nest egg for retirement. And, in doing so, it helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits for Roland Arnall.