Where Exactly Did It Go Wrong?

Where Exactly Did It Go Wrong?

Working in IT I hear that question a lot. Sometimes I even utter that question myself. Some people even insert the word “all” into the question when they utter it, but they are generally talking about only a small portion of the universe. Given the current financial crisis, I hear that question a lot.

Everybody backing some kind of Wall Street bail out is claiming nobody should be punished for it now, just give them a blank check to keep living as they have. If you don’t give them a blank check it will all go bad. Personally, I believe giving them any check without handing out mass quantities of prison time is where it will all go wrong for a second time. The credit markets aren’t frozen and aren’t going to be frozen. Anyone who listens to the news will find that small local and regional banks which were never large enough to play the high risk game are doing just fine. They are issuing loans, receiving deposits, and carrying on with business as usual. Only the mega-banks providing massive quantities of funds to companies and individuals taking huge risks are failing.

In short, the market is working and the pendulum is swinging back. For over a decade the pendulum has been swinging away from local and regional banks. People wanted the higher interest rates and all of the trendy free features they could get at the mega-banks, at least until the first mega-bank fell. As the dominos started toppling, people started pulling their cash out of the mega-banks and putting it into those once scorned local and regional banks. Since the mega-banks had been playing high risk games with the absolute maximum amount of funds they could invest, the withdrawals hastened the demise of mega-banks.

Ask yourself one question. Is the universe really any worse off when all of the mega-banks are gone? I think not. The same amount of actual money exists, it is just spread around to a lot more smaller banks. In the days before mega-banks, it was not uncommon for a business broker to arrange financing with loans spread across a group of banks. Even in the days of the mega-banks, this still happened. No, loans will still happen, people can still have their paycheck direct deposited to their bank account and people will still buy things.

What about all of those reports saying the demise of the auto industry is due to people not being able to get car loans? Just how many of you actually went to a BANK to get your car loan in the last 10 years? Bank notes for cars had about the same or higher interest rate than mortgages. Damn few people used an actual bank to get their car loan. Most went through the finance arm of the OEM, or a third party lending institution which was playing in the high risk financial markets. Just how many of you are still paying off a zero percent car note? When you sit back and think about it, that argument really doesn’t hold water.

Will auto sales reach anything near their prior level? No. We as a nation have adjusted to this type of change before. If you are over 40, you are old enough to remember when people traded cars every two years. Why? Some of it was prestige, but the reality was that most cars made back then (with the introduction of unleaded gas and the changes to paint) were shit. Once you got around 40,000 miles on them they started to fall apart. There were generally only a handful of cars out of each line which could make it to 100,000 miles without having to spend as much on repairs as you originally paid for the car.

What happened? Cars started getting better, mostly due to imports, and people started keeping them for five to seven years. For a time, there was a mindset in much of the culture which said you shouldn’t trade a car prior to getting 100,000 miles out of it. Then came all of the special financing and the status of driving a $70,000 SUV which got about 8MPG and a lot of that mindset went away. Detroit didn’t listen when everyone looking at the big picture said they were mortgaging their future. People who traded vehicles every two to three years were so massively upside down on their note, eventually even the OEM financing arm couldn’t roll together the financing for them. As soon as the first income hiccup happened for those people, the dominos started falling. Just how well off do you think the financing arm was repossessing a year old $70,000 SUV which was now worth $35,000 wholesale but had $130,000 note?

Where did it go wrong? It went wrong when we let Wall Street and industry analysts like the Gartner Group make decisions for us. Greed is their creed. Large companies making money from the complicated and not understood slices of bundled mortgages started buying them like no tomorrow. When companies not in the financial market wanted to boost their bottom line to look sexier Gartner told them off-shoring was the new Utopia. $10 per day labor. Parts is parts right?

Yes, it was a train wreck and I was preaching about long before it got here. People started playing the “Flip This House” game with money they didn’t have because they were buying into the same sales pitch Wall Street was using to sell mortgage backed assets “housing prices always go up”. They went up dramatically when people started buying into the “Flip This House” idea. But a lot of the people playing that game were in some way an IT worker. They worked a help desk, network admin, programming, etc. because those jobs paid enough to let them get the no money down risky mortgages. The other people who could play the game worked in the financial marketplace where they got healthy year end bonus checks which let them play the “Flip This House” game as well.

Along came Gartner, telling everyone to can their on-shore IT staff as part of the New World Order.

Well take a good look at the New World Order after Gartner told everybody they could run a train without any tracks.

Mega-banks are failing at a pace which rivals the DOT-BOMB flame out.

$70,000 sit rusting on dealer lots.

The used car market is now awash with repossessed cars that cannot be sold for anything close to the value of the note that was on them.

Most famous brokerage houses have ceased to exist, or are now a small division of another company and getting smaller all of the time.

The U.S. taxpayer (not the CEOs and members of the board) are being asked to cough up $700Billion just to keep afloat the very people who got us into this situation. Remember that brokerage firm who paid a golden parachute of $360 million to a guy who held the top job for only six months? Why should ANY of us be asked to bail them out?

The ONLY people we should be bailing out, are those who got talked into buying a house they couldn’t afford with an ARM that had a teaser rate. In that case, the government should outright screw the bank or company who issued the mortgage by forcing them to convert it to a 30 year fixed note at that teaser rate, not the rate it is now.

We were all told that without this bailout the stock market would crash. What happened? One day those companies who had played the game sold everything to try and cover some debts. Biggest one day drop we ever had. On the very next day, the “value” investors who never played the high risk game (or played it with some measure of control) came in to gobble up the solid companies whose stock price had now been corrected to reflect their actual value. Guess what. There will be one or two more days of that after Congress refuses to pass an ill advised bail out. A few more brokerage firms and banks will go under, then the “value” investors will start coming back into the market. “Value” investors play with cash, not credit. They only buy stocks that are cheap. Many of them are the ones who are supposed to be running our mutual funds.

Refusing any kind of bail out for Wall Street is the right thing to do for the world.

This entry was posted on October 1, 2008 at 5:07 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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