Avoiding a repeat of such bad lending habits

[WhiskeyGirl]

This time, the excesses in housing prices and ownership were intensified by the invention of debt instruments with teaser interest rates; zero principal paybacks for years; the piggybacking of 20 percent secondary loans on top of the traditional 80 percent mortgage; and other step-up payment products that virtually assured rising defaults and foreclosures if housing prices ever fell. In some cases, the borrower was expected to refinance in a few years because family income did not support any step-up in payments.

The new demand created by these financial instruments pushed housing prices well above justified levels relative to other assets. Remarkably, the financing gimmicks intensified even as prices became unjustified —- a 35 percent pricing distortion, according to my estimates.

(snip)

We must do more work to remove destabilizing financial structures, such as those created by hedge funds using credit default swaps. Account redemptions leading to forced selling are the modern version of the margin calls that brought down stock values during the Great Depression.

(snip)

I expect GDP to grow by summer and job losses to end before 2009 does. Unemployment probably will be over 8 percent and optimism will be near generation lows. Thus, recovery will be slow. Housing prices may not regain their 2005 price levels in many areas of the country until 2015. Stock values may not regain that October 2007 high until early in 2012.

We still have much work to do to avoid a repeat of such bad lending habits and to unwind some of the destabilizing investment processes and instruments that add to market instability. Confidence must be restored, and that is not helped by choosing who should fail.

I believe we have avoided the depression, but this is the first time in my lifetime that I even thought another depression was possible.

http://www.ajc.com/services/content/business/stories/2008/11/02/recession.html

Has any candidate addressed the destabilizing financial instruments or structures?

[WhiskeyGirl]

Another ripoff?

Convert your financial service business to a bank holding company to apply for part of the $700 billion? 

GMAC Financial Services, which had cut off Bill Heard’s credit a few weeks before, is now considering converting to a bank-holding company to gain access to the federal government’s $700 billion bailout package, according to press reports.

The damage goes beyond the dealerships to suppliers, employees and customers. Consider Karen Lipp. A professional horse trainer in Alpharetta, Lipp was blindsided when Heard Enterprises filed bankruptcy.

Lipp learned Heard hadn’t paid the bank loan on the pickup she traded in recently to buy a new pickup at Tom Jumper Chevrolet in Atlanta, which was one of Heard’s locations. Nor had the company completed the paperwork giving her title to her new truck, she said. Now she owes $50,000 for both vehicles, even though one is locked up at the closed dealership.

“I feel cheated and lied to,” Lipp said. “You would think that if you play by the rules you’re protected, but you’re not.”

http://www.ajc.com/services/content/business/stories/2008/11/02/cardealers.html?cxntlid=inform_artr

How can people like Lipp apply for the $700 billion?  I don't think ANYONE is looking out for people like her.

[nonesuche]

Traditionally in the US oil, housing, and gas cycled into recessions first, then were the first to cycle out. With a global economy now all the rules have changed, so there is little predictable here.

GMAC is under the ripple effect from GM and Chrysler being so hobbled they might need to merge now. Honestly the unions in the US began this long, long ago - so I am not surprised by any of it or that GMAC is positioning to grab whatever funding they can out of the bail-out.