Did we learn anything whatsoever from the Savings and Loan fiasco of the 1990′s? Well meaning folks, true believers, as am I, in a relatively unfettered free enterprise capitalistic economic system, deregulated the S&L’s. They told them in effect, to follow the profit motive and be honest, not abusing their fiduciary responsibility.
Call me silly, but putting the fox in the henhouse while sternly telling them to guard the chickens instead of eatin’ ‘em shows a distinct lack of forethought. Just sayin’… It was well intentioned for sure. I’m not implying otherwise. It turned out to be a superb opportunity to learn from our mistakes, right?
Well, not so fast hedge fund breath.
Fast forward to today, say around 4 PM EST, when the ghost of Kate Smith showed up to personally ring the bell, while signaling the final curtain for a couple financial firms.
Let’s not get all technical here, OK? There’s no need, and besides it’s more boring than the last software manual you read. Wall Street types went into the offices of lender types, and said, “We think if you go along, there’s a lot more money on the table for both of us.” Whereupon the lenders replied, “We’re listening.”
The rest is history.
They offered lenders what seemed to be, at least to them, an unending supply of loan capital. Lenders did the math, looked at the bottom line of their Excel spreadsheets, and nodded in acquiescence. Who’d a thought lenders would climb into bed with Wall Street just to make more money? Go figure.
Meanwhile, back at RealityRanch, lenders were pilin’ up loans like chords of wood outside a Montana mountain cabin just before winter. Thing is, they weren’t stacking those logs against their own cabin. Fannie ‘n Freddie were buying those loans. It was their cabin. The lenders kept lending the same money over and over, taking the fees, often servicing them, and laughin’ all the way to the bank, uh, I mean their offices. 
They cared not for the efficacy of the underwriting, nor the veracity of the data they provided the ultimate investors in the loans — the very data those investors used in establishing the value of the loans.
In the Old School, we have a technical phrase for this as part of our nomenclature. It’s called ‘lyin’ bastards’.
BawldGuy Axiom: When dealin’ with others’ money, their interests should always be first — period — no debate.
Why should that principle even hafta be repeated?
‘Cuz there’s still so many lyin’ bastards in charge of others’ money, that’s why. Basic common sense regulation does not hafta be poisonous in nature. Yet again, we learn why eschewing obvious common sense is even more poisonous. The really maddening thing about it? It was so predictable.
Grandma said pretending never has a long shelf life. When you build on sand, you get what you get. When Wall Street, lenders, and many real estate folks made the decision to play along with the fantasy, today’s events became inevitable.
Still, the BawldGlass is half full. This too shall pass. And when it does, let’s all hope the lesson has finally not only been learned, but understood. This all stems from the whole ‘gotta get rich by next Tuesday’ mindset. The idea is to become wealthy through Purposeful Planning — SLOWLY BUT SURELY.
The foundation of reliable and verifiable fundamentals is the name of the game. Wealth is also inevitable when the investor doesn’t include fantasy in the mix, and follows a realistic and prudent Plan. Just sayin’…
It’s time for us to chat, isn’t it? Let’s figure out how we can get you ahead of the curve. The major players, the really big boys are already there. Contact me and let’s get you on the road to the retirement hurtling your way. Have a good one.
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…what’s that Jeff? The fat lady just sung about greed? Why yes, yes she did. Bailout? No, she’s done singing- she’s already eatin’ a hoagie.
Hmm… Kate Smith, hoagie’s… this kind of talk gets me excited for some Philly Flyers hockey.
Jeff, the things you say here about this situation… I know it is all good. But let us not leave out the politicians that seemed to give all this the green light.
One last thing in the form of a question… isn’t this reality that we face now the time when new wealthy people are made??
Forgive but Todd, I think this is a time more of preserving wealth rather than creating fortunes. Catching falling knives may be the way to build a cutlery collection but for every person that fills their cutting block there’s gonna be ten nursing wounds.
What he of the shiny dome is saying here is a combination of “if it sounds too good to be true” and “trust but verify.” Good advice in any market.
Lani — As usual, you crack me up while leaving solid shiny nuggets. For those who think It doesn’t have anything to do with eliminating the minimum regs on human nature, Kate’s performances have gone unnoticed.
Readers: If you’ve never been to agentgenius, another real estate site, yer missin’ out. Click on Lani’s name, above her comment. You can thank me later.
Todd — Robert’s correct about what I’m saying here. Still, he and I differ in degree when it comes to what investors should be doing today. Robert would remain motionless, protecting his capital, preferring to avoid the difficult process of dodging knives as he puts it.
I’ll surprise nobody by employing a baseball analogy here.
When a pitcher’s in a jam, with runners in scoring position, and the count full, he knows the ‘safe’ thing to do is throw a fast ball down the middle for a strike. Problem is, the batter knows this too.
So what the pitcher throws is an off speed pitch, which goes against conventional thinking. It also catches the batter off balance, almost always resulting in him making an out.
The pitcher had a clear choice. The real estate investor does too. There ARE solid investment regions out there, offering opportunities that make sense. Folks grabbing those opportunities will indeed be far ahead of those who choose to remain on the sidelines.
Does that mean Robert’s strategy is wrong? Not even. It’s much ado about comfort levels. We just disagree about the timing here. He’d throw a fastball down the middle. I refuse to give in if I don’t hafta.
I’m throwing a curve ball and headin’ back to the dugout with the lead still in hand.
And Todd? Even those who went to school on the short bus know our politicians have totally screwed the pooch on this one.
We just disagree about the timing here.
Absolutement mon ami. I even grant that timing is vastly overrated with your soon rather than later being the wiser action. And for the record, concerning timing, our genial host and I have been in lockstep with regards to SoCal Real Estate so the “donnybrook” over timing is more about when is best to get into other locales rather than if.
I just think there’s another knifestorm in the national market. Right? Wrong? Personally Jeff is more expert than I. This just might be that one instance of the blind squirrel (me).
It’s all about managing risk. Recognize that the fundamentals are what determine rate of return. Take yesterday, for example, where the S & P 500 stock index went down over 4% and Berkshire Hathaway went up .9%. Why, because people recognize that Mr. Buffett has properly structured his company for the long haul and our economy, even in a time of investment banks and hedge funds and banks failing still humms along at a pretty good rate.
Back to real estate, when will people not need a place to lay their head down at night? Use the correct metrics to determine proper value, look at the fundamentals (jobs, migration, etc.) and pull the trigger.
I don’t get this preserving wealth thing….unless you are a speculator instead of a investor?
I desire to preserve my wealth and I’m going to do that by managing investment risk. Are we not on the same page?
Given the volatility in the financial system I cannot ascertain what level of risk I’m exposed too in RE, therefore from my limited perspective, new investments in RE appear speculative with respect to other investment vehicles available to me at this time. I’m not a RE professional and fully realize that my position may be wrong. Therefore I also read what RE professionals are saying including this blog. Taking a bearish stance on RE doesn’t preclude me from purchasing RE, it just changes the math significantly.
The Option Adjustable and Alt-A reset charts peaking in 2011 intimidate me. I’m a big believer in demographics but current events have caused, and have the future possibility (certainty?) to cause further extreme disturbances to put it nicely. That simply has to go into the investment equation too. I spend a descent amount of time looking at balance sheets and was an early detractor, on this blog, of Countrywide. However, I never saw AIG coming and am not clear as to what the implications will be. It’s hard to pull the trigger based on demographics when these things keep occurring. Speaking of Buffett, he’s been very vocal about the dangers of derivative products in the financial markets and that appears to continue be problematic with no immediate solutions.
I don’t mean to be the dark horse tonight but wanted to express some of my concerns which I think many investors/speculators share. Well, I’m off to have a cold beer and let’s not forget to give some of our wealth to a good charity if our financial judgments prove sound.
Cheers
Sean,
Just one question; what happens to your investment property that throws off cash, is well placed, and attractive to renters, that you bought based on conservative rent assumptions, that is in an area that has population and job growth, if some banks go belly up and some people aren’t able to make their mortgage payments because of rising adjustable interest rates?
Whenever some one says “preservation of capital” or “go to cash” I think of my great aunt. She lived her whole live in southern Indiana; didn’t trust banks or electricity or even plumbing. After she died my father had to take care of her estate. She left a house without electricity (1960′s) or running water and inside the house she kept her cash. There was cash under the mattress, in the wallpaper, in between stakes of papers, in the cupboards, etc. This is always the image I conjure up. So if I seem a little harsh, just have a little laugh with me!
Sean — You, David, and I are what make up the market. This thread is superb, and I thank everyone for their reasoned comments.
Much appreciated.
Follow up from yesterday… Jeff… I’m a young hurler just trying to make a name for myself (to use your analogy for a second). Full count, bases loaded, yadda yadda… do I throw the back door slider at a time like this?? It is my ‘out’ pitch but I bet the manager wants me to throw the fastball.
This really is my first go ’round in times like this. I don’t need to be the most dominate player in the game, I just want my team to know that they can count on me.
You say that you’ve seen this movie before… I happen to be away from the home office ‘normalizing’ relations with my better half, half the country away and I’m stuck during the day watching the talking heads yapping and not really saying much. Are these the end of times like the politicians say?? I bet not and do see some cracks of light, but I think I’ve seen them before for a moment here or there at times. I know my own local market and it… well… you know some of that story.
I’m looking for signs of life, is there any out there??
Todd — Here’s a sign. Just got off a half hour conference call with a lender. Made quotes on non-owner occupied investment props using 10-30% down payments. Rates 6.375-6.5% with no points.
If that ain’t a sign, I don’t know what is.
Wait ’till this Friday, or early next week for how the stock market is really reacting. If things are so terrible, why is the market going back a forth? According to Bears, who never seem to shut up lately, we should be making 1929 look like an ice cream social a church.
Todd — Now to your baseball question.
If you’re a youngster, new to the bigs, and I’m the manager, my call will depend heavily on what you’ve shown me at AAA.
For instance, in youth ball, my pitchers were taught as early as 12 to ‘pitch backwards’, throwing off speed pitches in fast ball counts. Before long other coaches were tellin’ their hitters to guess off speed when it was hitter’s count. At that point I’d begin having my boys rare back and throw it right by ‘em.
Especially if the back door slider is your ‘out’ pitch, any manager wanting you to ‘give in’ ain’t playin’ in late October.
Same with real estate. Pitching backwards, imho, is fundamental to a pitcher’s long term success. What fundamental? Pitching is nothing if it’s not messin’ with hitters’ timing. Period. In real estate when ‘everyone’ is standing on the sidelines, ‘throwing the fast ball down the middle’, the experienced ‘pitchers/investors’ are looking for the regions/properties still offering solid and empirically documented fundamentals.
Make sense?
As always, yes you make sense. Thanks for the words.
I’m shaking off the sign for fastball right now.