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Perhaps the greatest Ponzi Scheme Ever

#1
Bernarn Madoff has recently hit the headlines with the collapse of his Ponzi Scheme, masquerading as a sound investment within his company, BM Investment Securities LLC venture, and resulting in the disappearance of $50 billion+.

This, however, is mere chicken-feed when set against the losses arising from the housing market fraud. One could argue that this was not a Ponzi Scheme in the true sense, but as this market was based on the premise of incredible year-on-year returns, and could only survive as long as there was a continuous supply of new investors into the market, it sure looks remarkably similar.

The effects are remarkably similar too, but even more pronounced as they hit all segments of the market, from those in modest flats, all the way up to the super-prime market, and sweeping up those suckers from the but-to-fret market too. Capital (house values) has dissipated overnight, and will erode further over the next couple of years, with virtually no chance of a return to 2007 valuations for a considerable period of time, if ever. Why - because the 'money' that fed the great house-price sham was created through fractional reserve banking, a system that lent 'money' that did not exist, and a system that will surely disappear without trace as (central) banks return to more traditional banking.

Simultaneously, those foolish enough to withdraw equity from their property to fund current expenditure now find themselves caught in a triple whammy - diminishing capital, increasingly expensive debt, and the dawning realisation that they have merely brought forward future expenditure in order to fund a desire to 'have it all now' whilst maintaining an illusion of wealth and prosperity.

The home-based buy to fretters are also being squeezed on all sides - diminishing capital, pressure on LTV, diminishing rental returns, expensive debt, and extremely illiquid assets. Those who brought abroad have all this too, but with the additional problems of euro-denominated mortgages funded with Sterling, the reduced number of potential buyers due to the fact that much of this overseas market is in property that simply does not appeal to the local population, and a huge reduction in low-cost flights resulting in fewer potential victims on which to offload their property or to whom they can rent out their property.

So, is it all a scam or is it merely a case of bah humbug on my part?
 
#2
Sounds like bah humbug on your part.

The housing market has collapsed, many people have suffered. Its not down to one person making it happen or gaining millions/billions out of it.
 
#3
No, it was an analogy Dinger.

The Yanks call them Ponzi schemes, we call them Pyramid schemes.

Yet again, the fcuking estate agents and Building societies are desperately trying to talk up the market, with news of "Even more first time buyers buy houses"

No there are not, they can't get mortgages.
 
#4
The biggest pyramid scheme ever is surely National Insurance - using the money from newer investors to pay the old?

sm.
 
#5
Society of Chartered Surveyors say we need to help people borrow more to buy houses.

Isn't this whole mess caused by too many people borrowing more to buy houses (and incidentally increasing the % fees that estate agents and erm! Chartered surveyors) get?
 
#7
"http://blogs.telegraph.co.uk/edmund_conway/blog/2008/12/30/definitive_proof_that_the_bank_of_england_saw_the_financial_crisis_coming"

Crisis What Mucking Crisis ?

john
 
#8
pombsen-armchair-warrior said:
This, however, is mere chicken-feed when set against the losses arising from the housing market fraud. One could argue that this was not a Ponzi Scheme in the true sense, but as this market was based on the premise of incredible year-on-year returns, and could only survive as long as there was a continuous supply of new investors into the market, it sure looks remarkably similar.
Absolute scam.

Started way back in the 80's one would have thought the negative equity mini bust of the 90's would have been a warning then to both major parties that to seemingly base the UK's economic growth on the housing market would always end in tears.
 
#9
The re-runs of programs like "Property Ladder" on the box just now are even funnier when you think that the smug gits who continued to borrow silly sums for the next development are probably completely goosed.

Unlike:

The bankers
The estate agents/solicitors
The surveyors
The architects
The builder
and of course
The program maker.

It was always a one sided fight if you were guillible.
 
#10
The Madoff scam was obviously a scam. The f*cking auditors were a three man team with no other clients from Madoff's home town working from a tiny room in a shopping centre with no apparent visitors. Nicola friggin Horlick, back in the NASDAQ boom, said (when asked how to evaluate companies with no earnings), "Well, we just have to find another way to value them". Now she is moaning about the fact that she's lost client's money in the Madoff scandal, and somehow it is no fault of hers at all.

Housing? - The way to identify asset bubbles is to ask yourself - "What is the rental price of this underlying asset? What percentage of the purchase price of the asset is this? How much has the rental price increased during the period of time that the asset price has soared?"

These questions identify asset prices reliably, everybody knows it, but they all ignore this when a bubble forms, because they all think they can find a greater fool to take the asset from them before the collapse happens. You can't con an honest man. There needs to be a "something for nothing" attitude in place, and it'll happen again, and again and again...
 
#11
pombsen-armchair-warrior said:
So, is it all a scam or is it merely a case of bah humbug on my part?
No, our government would never do anything unethical.

gobbyidiot said:
Nicola friggin Horlick, back in the NASDAQ boom, said (when asked how to evaluate companies with no earnings), "Well, we just have to find another way to value them". Now she is moaning about the fact that she's lost client's money in the Madoff scandal, and somehow it is no fault of hers at all.
Funny how these people who have made so many millions playing the hedge fund game are the first to cry foul when the whole business is found out to be a big scam. "Not my fault guvnor, I'm innocent". Where do they think their millions have come from? People like Horlick have been gambling with other people's money for years and now they've been found out. Fortunately for her, she's probably got enough stashed away to live in luxury forever while other people lose their jobs.
 
#12
pombsen-armchair-warrior said:
So, is it all a scam or is it merely a case of bah humbug on my part?
It was a complex scam in the sense that it traded off individual and collective human folly and greed as amplified by builders, mortgage providers, middlemen, estate agents, valuers, lawyers, mortgage repackagers, investments banks, rating agencies and numerous willing investors in high yield subprime debt.

All of them had huge vested interests in keeping the whole unsustainable property and mortgage machine running for as long as they possibly could. Anybody with half a brain knew it would end badly but there were many younger people at all levels who seemed to think it would run forever and many of the older more experienced ones had too much to lose. The Bank of England claims it had little idea what was really going on but that is just rubbish: there were plenty of voices pointing out the abuses and stupidity in the market.

If you want to trace it all back to the prime reason why banks started lending to people who had no real capacity to ever pay back their mortgages or service the debt (why would any bank do that?) could be said it was Bill Clinton.

He forced US mortgage providers to lend to "disadvantaged" ethnic communities following a big campaign and lawsuits claiming the banks and mortgage providers were guilty of racial discrimination because in statistical terms they declined a lot of applications from ethnic minorities. Real reason: such applicants tended to have low incomes & shite credit histories but thus the sub-prime mortgage market started to grow and grwo and grow

By the end it was nuts. Long Beach Financial, wholly owned by Washington Mutual, lent to people with bad credit histories and no proof of income. To make it even better, they were asked to provide no deposit and encouraged defer interest payments for as long as possible! Thus a Mexican strawberry picker with an income of $14,000 was advanced a 100% mortgage to buy a house for $720,000.

But even that is not the end of it. Many of the current problems for banks were created by vast amplification of this underlying rotten debt through derivatives.

If you can be bothered, well worth reading link below in full. Written by the bloke who wrote Liars Polker, explains how investments banks created the sub prime credit default obligation market and found there were actually not enough idiots lending on stupid terms to satisfy it. So they created synthetic financial instruments to multiply that.

When the wheels fell off it created exposures for the banks hugely in excess of the actual shite lending at the bottom of the chain, which is why they are all in trouble.

"There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”) "

Or, as Warren Buffet said and was proved 100% right, Instruments of Financial Mass Destruction

http://www.portfolio.com/news-marke...11/11/The-End-of-Wall-Streets-Boom?print=true
 
#13
I rented from 1998 to 2008. Fixed rent. £390 pcm. It looked expensive in 1998 but by God it was cheap ten years later. It was a mystery to me for most of this period how anyone could afford a mortgage on any half decent sized property. In about 2003 I worked out that the rent we were paying would cover a £60k mortgage. You couldn't buy a shed in our town at that time for that money.

The biggest surprise in my mind was how long it went on for.
 
#14
EX_STAB said:
I rented from 1998 to 2008. Fixed rent. £390 pcm. It looked expensive in 1998 but by God it was cheap ten years later. It was a mystery to me for most of this period how anyone could afford a mortgage on any half decent sized property. In about 2003 I worked out that the rent we were paying would cover a £60k mortgage. You couldn't buy a shed in our town at that time for that money.

The biggest surprise in my mind was how long it went on for.
My rent is about 2.66% of what the supposed market value of the flat is. I think prices will have to come down a bit further before I'll be stepping up to the plate. It's so bloody frustrating though - nobody will listen when you try to explain before a crash. Try explaining now and people want to listen.

Before a crash the following words are nothing more than noise - "Suppose you had the cash to buy the flat. How much rent would you have to pay if you didn't buy it? Okay, what percentage of the purchase price is the rent? What do you think it would cost to maintain the property? Okay, what income could you receive if you invested the money? How fast do you think the rent will rise? How fast do you think property prices will rise? How fast do you think the value of other investments will rise? Now, do you think there is an extra cost involved in borrowing money, compared to having your own? Okay, do you accept that if it doesn't make sense to do something with your own money, do you agree that it can't make sense to do it with borrowed money?"

IQ tests measure processing, but most people have more than enough processing ability. The real issue is affective - most people's attitudes are totally f**ked. Warren Buffett had it right - there is nothing in finance that needs more than 130 points of IQ to understand (and I would put it at less than that, although it might take longer). So hundreds of millions of people are more than smart enough. The problem is, you have to have the right attitude - and that extra requirement gets the numbers right down.
 
#15
EX_STAB said:
I rented from 1998 to 2008. Fixed rent. £390 pcm. It looked expensive in 1998 but by God it was cheap ten years later. It was a mystery to me for most of this period how anyone could afford a mortgage on any half decent sized property. In about 2003 I worked out that the rent we were paying would cover a £60k mortgage. You couldn't buy a shed in our town at that time for that money.

The biggest surprise in my mind was how long it went on for.
That presumes a 100% mortgage.

At the risk of being labelled an old fart, when my wife and I bought our first house in 1978 it was a condition of mortgage that we had to provide about 30% of the price.

If I recall correctly that requirement applied across the country.
 
#16
smithie said:
The biggest pyramid scheme ever is surely National Insurance - using the money from newer investors to pay the old?

sm.


You folks are pikers--we have Social Security! Now THAT is an exercise in fraud on a grand scale!

I'm soooo looking forward to eating cat food and sleeping in a cardboard box when I reach retirement...
 
#17
Balleh said:
EX_STAB said:
I rented from 1998 to 2008. Fixed rent. £390 pcm. It looked expensive in 1998 but by God it was cheap ten years later. It was a mystery to me for most of this period how anyone could afford a mortgage on any half decent sized property. In about 2003 I worked out that the rent we were paying would cover a £60k mortgage. You couldn't buy a shed in our town at that time for that money.

The biggest surprise in my mind was how long it went on for.
That presumes a 100% mortgage.
At the risk of being labelled an old fart, when my wife and I bought our first house in 1978 it was a condition of mortgage that we had to provide about 30% of the price.

If I recall correctly that requirement applied across the country.
I remember trying to explain to someone that it doesn't matter whether you have a 100% mortgage or a 1% mortgage and whether you paid £1 for your house and it is now worth £1m, or paid £1m and it is now worth £1.

Any money you have tied up in the property, based on the present selling price of the property, has to be accounted for.

Suppose you paid £70k in 1985. Your 6% 25 year interest only mortgage is £4,200 a year. Your house would sell for £210k in 2005. Your house would rent for £700 a month in 2005, £8,400 a year. So you are much better off than you would be renting, yes? Renting would be twice as expensive, yes?

Well, no. You have £140k tied up in that property. That might pay you 6% (therefore £8,400) on its own. You would be £4,200 a year plus maintenance costs better off by selling.

But people say, "I only paid...", "That's nonsense", "You can't think like that..", "People don't think like that.."

Well, people do think like that. People called economists and accountants :)
 
#18
There are some problems with your maths. You aren't taking into account risk premiums for the various classes of investment. Owning your own home outright as also a much better unemployment hedge than having an income yielding investment of £8400 per year. You're also forgetting the tax you'll pay on that £8400.

I know you were only using example figures, and I know that there are good and bad times to buy houses, but people often forget risk premiums and unemployment hedging.
 
#19
interestednovice said:
There are some problems with your maths. You aren't taking into account risk premiums for the various classes of investment. Owning your own home outright as also a much better unemployment hedge than having an income yielding investment of £8400 per year. You're also forgetting the tax you'll pay on that £8400.

I know you were only using example figures, and I know that there are good and bad times to buy houses, but people often forget risk premiums and unemployment hedging.
In the UK it's true that the welfare state changes everything. If you think there's a chance you'll lose your job the rational strategy (arguably) at the moment is to put all spare cash into your pension and run a large interest only mortgage on a property with the lowest maintenance charges and best growth prospects you can find. Lose your job and the state pays you to hold an asset, when you can finally see retirement hopefully your lump sum from the pension will pay what you owe.

In the US it changes again - mean welfare state but you can generally walk away from housing debt, so borrow as much as possible......... :D

We are in the sh*t because politicians can't believe people are rational enough to change their behaviour on the basis of the rules.

Incidentally, if you are pretty certain that long-term unemplyment is around the corner, and you have used all your tax relief for your pension, you can actually sign a declaration that you are not entitled to any more relief and put everything you have into the pension. That way it doesn't count. That said, if the Benefits Agency spot this (unlikely) they can try to kick up hell, but in reality there isn't a lot they can do.

Mind, you don't then see the dough until you are 55, and they could raise that again.
 
#20
But what happens when you sell the house after paying off the debt? Surley getting a return on your out goings is better then getting sod all when you stop renting?
 

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