Where did the sub-prime money go?

[rwarn17588]

Well, well, well.

Look what just came down the pike today: 14 companies are being investigated by the FBI for their subprime mortgage practices.

http://online.wsj.com/article/SB120163969101526197.html?mod=hpp_us_whats_news

[Conan71]

Cannon,

You and I are thinking along the same lines.

I guess my thinking is, the money has not disappeared, it has shifted from one place to another.  Unless money is purposefully removed from circulation by the government, or someone sets fire to a pile of cash, it does not disappear.

[cannon_fodder]

Well, Stock market "money" can disappear with demand - as in my portfolio worth $100K in Oil is only worth $50K if solar catches on (whatever).  And, just to be a jerk - burning a pile of cash would increase the relative value of whatever cash is left.  So the net effect would be a wash (think stock buyback).

My real concern was more WHERE the money went.  The net result seems to be importing money TO the United States.  Which would explain why our currency is being devalued now that the flow of cash IN to fund these loans has dried up.  But, at the end of the day we have piles of foreign cash circulating in our economy.  Avoiding inflation... we still win.

[we vs us]

quote:Originally posted by cannon_fodder

Well, Stock market "money" can disappear with demand - as in my portfolio worth $100K in Oil is only worth $50K if solar catches on (whatever).  And, just to be a jerk - burning a pile of cash would increase the relative value of whatever cash is left.  So the net effect would be a wash (think stock buyback).

My real concern was more WHERE the money went.  The net result seems to be importing money TO the United States.  Which would explain why our currency is being devalued now that the flow of cash IN to fund these loans has dried up.  But, at the end of the day we have piles of foreign cash circulating in our economy.  Avoiding inflation... we still win.

Maybe I'm misunderstanding here, but isn't that exactly what happened to the subprime market?  The equivalent of your oil stock losing value when mass solar comes online.   It's not that money's being physically taken out of the system (as in the burning pile of cash) it's that assets are being revalued, and being revalued much lower than the amount of money you borrowed  to pay for them initially. Money IS actually evaporating into thin air.

Okay, so wait:  bank extends a mortgage loan for $100k (let's say) to a subprime buyer, who then pays that to, let's say a homebuilder, for a home. So that $100k is paid immediately to the homebuilder from the bank, and the subpime buyer now owes that $100k, plus interest to the bank.

After two years of timely payments, the subprime buyer's interest rate doubles, as do his payments.  At this point, he's probably not even touched the principle, meaning the original $100k from the bank hasn't started to be paid off yet. They've only taken their profit.  

The subprime buyer, unable to make his new huge payment, defaults.  He walks away.  His credit is damaged, but he never put up a down payment and can't be forced to continue paying.  So the bank then is out its principle ($100k), plus whatever it had thought it would make in additional interest. It has gained an asset (the house) whose value is off 15% at this point, but is still sinking. In order to get that $100k back, the bank has to sell (or auction) the house, though it's now worth at best $85k and probably much less.  

So after all that, what you're focusing on is the money the bank originally loaned?  What happened to the original mortgage money?

[FOTD]

The sub prime mess is yesterdays news. What shoe drops next?

While thousands of hopeful homeowners fall victim to our broken government, look how well Haliburton is doing...."Net income of the American oilfield services provider Halliburton Co. in 2007 was $3,5 billion, up 46% from $2,4 billion of the previous year. Halliburton reported that revenue was $15,3 billion, an increase of 19% from $12,9 billion in 2006. Operating income grew 9% to reach $3,5 billion. Halliburton's net income for the fourth quarter of 2007 was $690 million. This compares to net income of $658 million in the fourth quarter of 2006.
Revenue was $4,2 billion, up 20% from $3,5 billion in the forth quarter of 2006. Operating income was down 3% - from $923 million to $907 million. http://www.oil-gas.biz/new/990000443/

[Conan71]

quote:Originally posted by we vs us



So after all that, what you're focusing on is the money the bank originally loaned?  What happened to the original mortgage money?

Wevus, here's the interesting part:  the proceeds used to buy that $100K house in the first place could have been put back in a bank by the seller and been loaned back out to the new buyer.  I'm sure that's a gross over-simplification...

[Conan71]

quote:Originally posted by FOTD

The sub prime mess is yesterdays news. What shoe drops next?

While thousands of hopeful homeowners fall victim to our broken government, look how well Haliburton is doing...."Net income of the American oilfield services provider Halliburton Co. in 2007 was $3,5 billion, up 46% from $2,4 billion of the previous year. Halliburton reported that revenue was $15,3 billion, an increase of 19% from $12,9 billion in 2006. Operating income grew 9% to reach $3,5 billion. Halliburton's net income for the fourth quarter of 2007 was $690 million. This compares to net income of $658 million in the fourth quarter of 2006.
Revenue was $4,2 billion, up 20% from $3,5 billion in the forth quarter of 2006. Operating income was down 3% - from $923 million to $907 million. http://www.oil-gas.biz/new/990000443/

The Haliburton conspiracy is so yesterday, it's got a long grey beard.  How much do you think companies like General Motors, Springfield Armory, Lockheed-Martin, Boeing, Teledyne, and others have profited off Iraq?  Very few politicians in Washington can claim entirely clean hands when it comes to not having a vested interest of one sort or another in companies who have made money off this war.

Homeowners didn't fall victim to a broken government.  They got sucked in by their vanity and lender's greed.

Sure as ****, let the heads in DC start talking about a recession openly and companies will stop hiring out of fear and start figuring out ways to trim payroll.  Bam!  You get your recession.

The sub-prime collapse has so little to do with the bigger economic picture and how people and companies really are doing.

[cannon_fodder]

Wevus, at the end of the day value has disappeared from the market.  But MONEY has been added to the system.  Just like the stock, if A bough at 10 and sold at 20, B sold at 40, C sold at 80 and D sold at 100... there has been $90 in cash money added to the economy.  

If buyer E then rides the stock back down to $50 HE loses money.  But $40 has still been added to the economy in net.  What's more, if he bought on margin (mortgage) and defaults the lender is out the money.  But only to the extent that it failed to sell the security - if it sold that note over seas than our economy STILL gained $90  in spite of the $50 loss by E.  Though, to E that detail is not important.

I'm not arguing all is well nor that the man holding the bad did not lose out (he did), just trying to track the actual flow of capital in a simplified manner (all economics is simplified or your head explodes).
- - -

"Homeowners didn't fall victim to a broken government. They got sucked in by their vanity and lender's greed."

+.8, the government's policy to encourage home ownership and DEMAND banks make bad loans was certainly partly to blame (yes, FDIC banks are "encouraged" to make loans to 'poor' knowing full well they will default, then get called big bad meanies for taking the house.  Not the underlying problem in the sub prime issue, but a contributor).  But overall most managed to screw themselves just fine.
- - -

AOX:  relate to me how Halliburton doing well is a detriment to any homeowner.

I bet the 30,000 employees and 250,000 investors are happy they did well.  Houston and the State of Texas is happy to get the tax money.  The Fed is happy to get tax payments .  Their customers must be happy to give them so much business.

Why is it bad then a company does well?  Are you upset that Apple made money too?  You realize United Airlines made $22 BILLION - should we tax them extra too?  Citigroup & Bank of America saw killer profits and actually DID take people's houses.  GE again made a multi billion profit.  Pfizer too.  AIG, MS, Altria, Wal-Mart, Johnson & Johnson, IBM, P & G, Owens Corning... all made more than them.  Berkshire Hathaway consistently makes billions for decades.  Goldman Sachs... hundreds of companies made more money.

You need $8 Billion  in profits to be in the top 20 of US companies.

Deere had 4.5B
Williams Co had 4.1B
AEP, a utility, had $2billion in profits

So many companies made more money.  I'm guessing they aren't in the top 200.

SEARS.  There we go, they made about as much money as Sears.  Evil, evil Sears. Get over it.

[Conan71]

Cannon, indulge me for a sec.

Let's say someone sold 100 shares in XYZ at $75 per share through their broker.  I thought XYZ  would go up another $10 per share, so I bought 100 shares at $75 from my broker.

Next day, XYZ announces they've been cooking the books and they are filing for Chapter 11.

Stock plummets to $25 per share.

I've just lost $5000 in stock "value".  The $7500 I wired to my broker did not up and disappear like a fart in the wind though.

Someone else still has the $7500 they sold those 100 XYZ shares for.  Or perhaps they bought 1000 shares of ZXY for $7.50 a share and ZXY doubles in six months on news of an AIDS cure.

For me, I have not really lost the $5K so long as I don't sell the stock when it bottomed out and the company rebounds under new directors and the bad guys become white collar prison whores. []  That money went nowhere.

[Breadburner]

Subprime money is going to lower earning safe investments...Fannie mae...Freddie Mac....T-Bills...Municipal bonds....

[cannon_fodder]

Conan, in that example you are out the value.  The value has left the economy, but the money is of course still in play.  

At transaction time the seller had $7500 and you had $7500 worth of stock.  Now he still has the $7500 in cash but your value has gone away.  So long as you do not sell, you do not take a cash loss, but you and I both know it sucks nearly as bad to lose money on paper as it does to hand over cash.

Value is a much more fickle friend than cash.  Which is why stock markets, or anything else influenced by the herd, is a risky business.  So long as there is still value in the company even at 25% of the value, the economy as a whole is probably up over the long run - but you got stuck holding the bag.

[YoungTulsan]

quote:Originally posted by cannon_fodder

Wevus, at the end of the day value has disappeared from the market.  But MONEY has been added to the system.  Just like the stock, if A bough at 10 and sold at 20, B sold at 40, C sold at 80 and D sold at 100... there has been $90 in cash money added to the economy.  

If buyer E then rides the stock back down to $50 HE loses money.  But $40 has still been added to the economy in net.  What's more, if he bought on margin (mortgage) and defaults the lender is out the money.  But only to the extent that it failed to sell the security - if it sold that note over seas than our economy STILL gained $90  in spite of the $50 loss by E.  Though, to E that detail is not important.

I'm not arguing all is well nor that the man holding the bad did not lose out (he did), just trying to track the actual flow of capital in a simplified manner (all economics is simplified or your head explodes).
- - -

"Homeowners didn't fall victim to a broken government. They got sucked in by their vanity and lender's greed."

+.8, the government's policy to encourage home ownership and DEMAND banks make bad loans was certainly partly to blame (yes, FDIC banks are "encouraged" to make loans to 'poor' knowing full well they will default, then get called big bad meanies for taking the house.  Not the underlying problem in the sub prime issue, but a contributor).  But overall most managed to screw themselves just fine.
- - -

AOX:  relate to me how Halliburton doing well is a detriment to any homeowner.

I bet the 30,000 employees and 250,000 investors are happy they did well.  Houston and the State of Texas is happy to get the tax money.  The Fed is happy to get tax payments .  Their customers must be happy to give them so much business.

Why is it bad then a company does well?  Are you upset that Apple made money too?  You realize United Airlines made $22 BILLION - should we tax them extra too?  Citigroup & Bank of America saw killer profits and actually DID take people's houses.  GE again made a multi billion profit.  Pfizer too.  AIG, MS, Altria, Wal-Mart, Johnson & Johnson, IBM, P & G, Owens Corning... all made more than them.  Berkshire Hathaway consistently makes billions for decades.  Goldman Sachs... hundreds of companies made more money.

You need $8 Billion  in profits to be in the top 20 of US companies.

Deere had 4.5B
Williams Co had 4.1B
AEP, a utility, had $2billion in profits

So many companies made more money.  I'm guessing they aren't in the top 200.

SEARS.  There we go, they made about as much money as Sears.  Evil, evil Sears. Get over it.

CF, your illustration about stock buyer A, B, C, D, E, etc. talks about money now being "in the economy".  All that happened in that cycle was X amount of money was pulled out of the stock market.  Money wasn't created or lost.

The mortgage situation is different.  New money is actually introduced into the system when new lines of credit are opened.  With proper valueation of the collateral (in this case, people's homes) that would not neccesarily throw the economic system off.  But when loans are being extended based off of gross overvalueations, excess new money is created from nothing, introduced into the system, and it wreaks havoc in the form of inflation.

In my theoretical example earlier I was mainly trying to plot it out for myself to see if I understood the process - But I think I explained pretty well how inflation can occur.  Jimbo bought an overvalued house from Vinnie for $400,000.  Vinnie knew he cashed out at the peak (he had the house as in investment) - and he took his $400k haul and spent it on consumer goods.  Jimbo meanwhile, was talked into a loan much bigger than he needed, and 2 years later when it adjusted he had to walk away from a losing battle.  The banking system entered new money into the system based off an exaggerated value of its collateral.  That money went into the consumer goods market, weakening everyone else's dollars.  The bank had to auction the house for quick cash to avert crisis.  Houses are now on their way back to more realistic values, but of the credit extended based off the unrealistic values of the last few years - much of that money escapes when sellers cash out and buyers bite off more than they can chew.

The Halliburton connection is a generic one.  But what you need to do is follow where the newly created money goes.

Imagine, when new money with no intrinsic value is just entered into the system, it devalues the dollar as a whole.  The price of bread is based on supply and demand.  The price of $2.00 for a loaf of bread is based on supply and demand.  More dollars start circulating.  The supply of bread is the same.  People have more dollars, so they are easier to come by.  Demand for $2.00 bread increases because money is easier to come by these days as more of it is in the system.  Hell, the price of my home just went up 50%, I'll just take out a home equity loan and get a huge stack of cash for next to nothing!

The supply of bread is the same.  Money is easier to come by, at least for some.  The market then has to set the price of bread higher, or else there would be a shortage.  $2.00 bread becomes $2.25 bread.

Where did the new money go?

- If you are super wealthy and you own a company that sells building supplies, you made out like a bandit.  Tons of new construction was initiated, NOT because people had generated the wealth to finance it through traditional means, but because the fed just made the money easier to get, and in more abundant supply.  You profit handily, the new money flows directly to you.

- If you are somewhat wealthy - Perhaps you own a lot of properties, your wealth had great potential to benefit as long as you know when to hold 'em and know when to fold 'em.  Your assets inflated by the bubble.  Tons of false equity which you could leverage to acquire more assets during the bubble.  As long as you cash out when the time is right, you stand to make a hefty profit, mostly in the form of that newly created money.

- Upper middle class - You are "creditworthy" and probably own your home.  You benefitted by having easy access to the new money, by and large "on the cheap".  Low interest loans increase your buying power, and you end up buying more house than you could a few years ago.  You may have opted to take out some easy money in the form of a home equity loan.  You may still end up worse off after the bubble bursts, because you could end upside down in your house after the market devalues.  But hey, at least you did get to participate in the bonanza, and had potential to profit if you made some clever moves.

- Lower middle class - You may have had "subprime" credit - You got access to money with strings attached.  Times are tough for you, and you aren't really enjoying all of this so-called "prosperity" that Neil Cavuto assures you we are experiencing.  But banks were all-too-willing to lend you money, so long as you paid a hefty interest premium to make up for your unproven ability to pay bills consistently.

- The lower class - They have no participation whatsoever - They get no access to the new money.  Their lives consist of paying rent to slumlords and getting taken advantage of by predatory lenders and a whole array of exploitative businesses surrounding them and keeping them where they are.  When the cost of living inflates by 10%, their employer does not give them a 10% raise.

If you are deemed "uncreditworthy", you do not get to share in the same cycle of "prosperity" caused by the easy money.  But you still have to pay the increased prices caused by the devalueation of your dollar.  You still have to pay the increased prices caused by demand for goods being artificially high (due to money being cheap and easy for those who make the big orders).

Where does the new money go?

It generally migrates towards the wealthy.  And it typically ends up on Wall Street.  I used to have the same opinion about people just bringing up "but... but... Halliburton!" - seems like a generic way to make some statement about how corporations that turn a profit are evil.

Profits are not evil.  The potential of making a lot of money is the motivation that makes the capitalist system great.  The problem in this system is that the market is not free, it is manipulated.  Manipulated by the fed (by fixing the price of borrowing), and manipulated by the government (by taxing us and redirecting that money to whereever the lobbyists prefer).  When you ask yourself WHY would the fed manipulate the market, you must look at who benefits.  When you ask yourself WHY would the Bush administration, claiming to be fiscal conservatives, increase spending dramatically, you must look at who benefits.

Halliburton doesn't exactly come out smelling like roses when you follow the money that came from the unfair manipulation of the free market.

[FOTD]

quote:Originally posted by Conan71

quote:Originally posted by FOTD

The sub prime mess is yesterdays news. What shoe drops next?

While thousands of hopeful homeowners fall victim to our broken government, look how well Haliburton is doing...."Net income of the American oilfield services provider Halliburton Co. in 2007 was $3,5 billion, up 46% from $2,4 billion of the previous year. Halliburton reported that revenue was $15,3 billion, an increase of 19% from $12,9 billion in 2006. Operating income grew 9% to reach $3,5 billion. Halliburton's net income for the fourth quarter of 2007 was $690 million. This compares to net income of $658 million in the fourth quarter of 2006.
Revenue was $4,2 billion, up 20% from $3,5 billion in the forth quarter of 2006. Operating income was down 3% - from $923 million to $907 million. http://www.oil-gas.biz/new/990000443/

The Haliburton conspiracy is so yesterday, it's got a long grey beard.  How much do you think companies like General Motors, Springfield Armory, Lockheed-Martin, Boeing, Teledyne, and others have profited off Iraq?  Very few politicians in Washington can claim entirely clean hands when it comes to not having a vested interest of one sort or another in companies who have made money off this war.

Homeowners didn't fall victim to a broken government.  They got sucked in by their vanity and lender's greed.

Sure as ****, let the heads in DC start talking about a recession openly and companies will stop hiring out of fear and start figuring out ways to trim payroll.  Bam!  You get your recession.

The sub-prime collapse has so little to do with the bigger economic picture and how people and companies really are doing.

Halliburton's obscene profits are not conspiratorial. They are as real as all the dead and all the lies.

[cannon_fodder]

YoungTulsan, I understand what you are pointing out.  I'm trying to over simplify everything and break out that incident.   Truthfully, between my recent research into foreign markets at night for personal gain, year end stuff at work, year end stuff for my company,  and the growing depth of economic discussions here I'm getting kind of economied out.

[FOTD]

You and everyone else. It's called economy burn out though. You need recess...