Global Market "Correction" Just Like Pork Chops And Sausages

It’s easier to understand the subprime mortgage meltdown and how it’s erasing gains in the global markets with the humorous little metaphor we heard offered on the BBC world service this morning from the editor of Britain’s MoneyWeek magazine. She likened the “eventuality” (seeing as we’re not quite ready to call it a crisis yet) to a butcher shop. It used to be that retail banks kept mortgages on their books for the life of the loan, but within the past five years, they realized that you instead of just eating the porkchop among your family, you can chop it into “tiny bits” and make them into “loads and loads of sausages” and sell them to everyone.

The problem is, if the porkchop is bad, instead of just your family getting sick, now there’s tons of bad sausages on the market making everyone sick. No one wants the sausages, we don’t know who’s got the bad sausages so all sausages are suspect, and the price plummets.

To mix agricultural metaphors, the porkchop comes home to roost in that we could see it becoming hard for small businesses to get loans, or for regular people with good credit to get mortgages, in the coming months until the banks and companies own up to the bad debt on their books.

(Photo: Kent Wang)

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  1. Lewis says:

    Neither the porkchops nor the sausages were “bad.”

    The fault lies with the people attempting to “eat” them.

    When we agreed to our mortgage we did something apparently rare and shocking: we reviewed the mortgage product we were being sold, reviewed our finances (and projected finances for the next 30 years) and finally at closing, reviewed the actual mortgage agreements before signing.

    No one sold us bad porkchops. We took personal responsibility for our decision to buy a house under the terms being offered by our bank. No one forced us, tricked us, or attempted to sell us pork dressed as filet mignon.

    Borrowers got in over their heads and stopped paying their bills. Now a lot of people are getting fucked one way or another, either in the equity markets, with their home’s resale value, with defaulting on their own mortgages, with the inability to take out home-equity loans easily to finance home improvements, or with any number of other trickle-down effects that are sure to result from the sub-prime fiasco.

    The pork-eaters bear the ultimate responsibility, not the pigs.

    BTW, I am a lifelong bleeding-heart liberal.

  2. iMike says:

    Link to original story?

  3. dbeahn says:

    Yes, and hopefully the recession that (inevitably) follows this sort of “get rich quick and take it in the ass later” sort of behavior by financial institutions won’t be more than a few years long…

  4. dbeahn says:

    @LewisNYC: The sausages were bad. The people “eating” them didn’t know enough about “sausages” to know that they were bad, and the people serving the “sausages” said things like “Oh, rancid is how sausage is SUPPOSED to smell….”

    Yes, there were a lot of people that shouldn’t have been BUYING these things, but there are just as many people that shouldn’t have been SELLING them. There’s a REASON that these sub-prime loans were being sold to people that couldn’t get a NORMAL mortgage. It’s because the people selling them KNEW they shouldn’t be selling them to these people.

  5. pinkbunnyslippers says:

    @LewisNYC: Amen to personal fiscal responsibility and not crying that you got “jipped” into spending 75% of your monthly income! ;)

  6. Ben Popken says:

    @iMike: I heard it on the radio.

  7. Lewis says:

    @dbeahn: Your points, I think, have merit but it still comes down to personal responsibility.

    If a mortgage officer was responsible for a pattern of approving loans with a low chance of performing, then he or she should not be a mortgage officer for much longer. (And on the macro level, if a bank makes bad loans, Darwin will prevent them from being a bank for much longer.)

    By the same token, the borrower has absolute responsibility to understand what he or she is agreeing to! ESPECIALLY with all of the news in recent years about BK reform. While there may be blame to go around, Consumerism (I think) is about taking responsibility for one’s consumption, and holding oneself to the same standard to which companies are held.

    (I know I am starting to sound like a fucking republican but I swear I am not.) :)

  8. ShadeWalker says:

    so wait… sausages are being recalled?

  9. ExGC says:

    @LewisNYC: Bravo Lewis. It’s astonishing how many people forget the two basic tenets of doing business – there ain’t no such thing as a free lunch and if it seems too good to be true, then it is. If the toadies in Congress will sit back and let this shake out, then the mortgage lenders that sold people a bill of goods will get burned. Unfortunately, the people too clueless to realize that interest rates can and will rise over time are unlikely to get any smarter. They’ll just absolve themselves from any responsibility, complain and sue. And only the lawyers will profit.

  10. JustAGuy2 says:

    @dbeahn:

    The “sausages” involved are mortgage securities, and the buyers are financial institutions. In this analogy, consumers are the pork itself.

  11. Trai_Dep says:

    Or, the butcher takes 120lbs of chops he knows will turn rancid tomorrow. He grinds them up that morning and sends them out to his distributors saying, “you should sell these today.” Countless other butchers heed the warning by offering a free steak knife to boost sales, thus clearing them out. Thus the letter of the law is followed.

    In microscopic print in the knife package, it warns, “It’d probably be better if one was to consume these particular meat products in a relatively quick fashion.” In red ink printed over a pink background.

    Promoters of the knives, paid on commission, take over selling the sausage, focusing more on their knives that what’s bundled with them. They begin more and more extravagent promotions until the knife package is festooned with coupons, balloons, rebate offers, free AOL accounts and get-a-free-iPhone-if-you-fill-out-this-survey forms and buy-12-and-don’t-pay-until-next-month offers. The warning, while present, is buried under 20 stickers, balloons, mock-ups of iPhones and tear-off coupons.

    The knife promoters hire 435,000 telemarketers to cold-call households to push the package. The promo pushes regular, safe meat is priced out of the market – it’s nearly impossible to find any meat that’s not bundled with the dumb knives and tainted sausages that will begin festering pus tomorrow. Only people who already own their own pigs or cows have access to un-sausaged meat.

    Mrs. Ricardo buys the sausages, figuring it’s a great deal. She prefers to feed Dezi Jr and Luci chops, but they’re not available. She feeds some of the sausages on the first safe day, but then each following day, she feeds them successively poisoned meat. Ricki Jr. and Luci die, puking blood. Dezi Sr is fired from the club he works at since his insurance company refused to pay for his treatment (pre-existing condition) and he’s too sick to work.

    When Mrs. Ricardo curses the heavens and the meat-sellers for killing her children, getting her husband fired and bankrupting her family, a few idiots say, “You should have read the miniscule writing on the steak knife package you threw away 12 days ago when you bought the sausages (that we knew were tainted but added a disclaimer on). That you had to buy since our manipulations resulted in no un-sausaged meat being available at any price. That we hyper-aggressively sold you and festooned with 2,000 stickers, balloons, iPhone mockups, rebates and glow sticks. You stupid whore.”

  12. Trai_Dep says:

    (sorry if it’s a bit long, but sound-bites are concise while the truth is sometimes more long-winded)

  13. gregero says:

    @LewisNYC:

    “If a mortgage officer was responsible for a pattern of approving loans with a low chance of performing, then he or she should not be a mortgage officer for much longer. (And on the macro level, if a bank makes bad loans, Darwin will prevent them from being a bank for much longer.)”

    Um, duh, and that’s exactly what started this whole thing, a bunch of mortgage companies went belly up. Everyone deserves their fair share of blame.

  14. Lewis says:

    @gregero: “duh’s” are much easier when you take a sentence out of context by quoting only the first part of a paragraph. My point, which I am sure you understood, is that just as we as consumers expect corporations to act responsibly, we should expect the same from our fellow consumers.

  15. InThrees says:

    Then I think we can all agree that the SPMD is due to the irresponsibility of both parties.

    However, historically consumers have tried to borrow more than they can afford, and the lending officers / institutions generally tried to avoid letting it happen.

    Until now. This scale of poor lending… it’s just staggering. I can’t even really fathom how anyone thought this was a good idea to begin with. I can understand one company or two companies experimenting, but an industry expecting people who barely make any money at all to suddenly cope with a $4000 mortgage payment? It’s insanity.

  16. Imaginary_Friend says:

    Trai_Dep, FTW. That was awesome.

  17. RogerDucky says:

    Noticed a few misuses of metaphors. In this metaphor’s case:

    The mortgages were pork.
    The super-special mortgage-backed securities are the sausages.
    The butcher is the people selling said securities.
    The buyers are the “general” public, consisting of investment firms, pension managers, and insurance companies, as well as some smallish investors.

    Hope this helps!

  18. RogerDucky says:

    Oh. In my opinion, the absolute root cause for all this?

    People managing corporate pensions were attempting to make up for years of underfunding, and insurance companies attempting to cover for their lack of actual money to pay out to people.

    They attempted to catch up around the 1990s — stocks were on fire, so they dumped tons of money into the market. Market crashes, so they got deeper in the hole.

    9/11, hurricanes, and various fires didn’t help matters any for the insurance companies, either.

    Of course, after being bitten once by the stocks, they were pretty scared of “risk.”

    Banks were scared of risks too. Specifically, they were afraid of people defaulting on mortgages. So they took a page from the insurance company’s play book and started selling mortgage-backed securities, promising great returns for a long time at very little risk to the insurance companies and pension fund managers.

    So, the bank gets the repayments earlier for a little bit less interest than doing it themselves, but they no longer need to worry about defaults.

    The insurance and pension fund people gets relatively decent interest for the relative risks that the banks used to shoulder, which isn’t too bad, compared to the stock market.

    Everybody’s happy, right?

    Problem is, the pension fund and insurance companies actually want tons of these “high-grade” securities because of how much money they have, but the banks didn’t loan out that much money to begin with…

    So, that tempted the banks to make out loans like crazy — they don’t care — they got the money from the buyers so they are “insured” from the risky people…

    As they say — the rest is history…

  19. RandomHookup says:

    I’m just really in the mood for a Sausage McMuffin right now.

  20. mac-phisto says:

    @trai_dep: LUUUCY! YOU GOT SOME ESSPLAYNIN TO DO!!!!

    it doesn’t matter that it was long. it freakin rocked.

    @LewisNYC: as JustAGuy2 pointed out, the sausage analogy refers to banks selling mortgages on the securities market, so being a good consumer isn’t applicable – unless of course you are referring to the people that invested in these securities.

    this is what makes your explanation for “bank darwinism” implausible. the banks (& brokerage houses) that were making bad loans were selling them as part of a portfolio that included a variety of loans – 15/30 trad., 80/20s, jumbos, 5/7/10 ARMs, balloons, etc. determining which portfolios are bad virtually impossible. this has resulted in a whole load of investors dumping any exposure they have mortgage securities, which has in turn “tainted” the entire industry.

    even prime borrowers are going to have a hard time b/c the well is dry. until something is done to promote investment in the housing market (government injection of money, rate increases, etc.), it’s gonna be damn hard to refi, buy (or sell) a house for the next couple years.

  21. skittlbrau says:

    @mac-phisto: Lenders have tightened up lending standards to where they should have been for the past few years. There is a reason why subprime borrowers cannot get other loans – they are usually terrible risks and have a history of poor credit.

    Maybe it should be damned hard to refi or buy a house and really make people think about what they are getting into. And the market isn’t as horrible as it could be – there is guaranteed liquidity of mortgages with principals below $417,000. This is going to really hose markets where jumbo loans are common (NYC, San Fran, etc).

  22. adrock75 says:

    When we were buying a place, we had the builders trying to force feed us these sausages and trying to get us to buy a bigger place than we could afford. There was HUGE pressure to take out one of these loans and buy a more expensive place.
    Luckily we knew better and while I’m all for personal responsibility, these lenders are relentless and I think shouting “PERSONAL RESPONSIBILITY” every time this comes up really lets them off the hook.

  23. Trai_Dep says:

    Also, before, mortgage lenders had a built-in check to issuing mortgages: fees & interest vs writing off a bad loan. Once the risk was pushed onto someone else, there wasn’t any countervaling force inhibiting making new loans.

    This was facilitated by i-banking houses on Wall Street. They could charge a lot of fees to package these loans and by plugging in the right “risk factor” into their spreadsheet, paper over underlying weaknesses. The more they packaged, the more they made. No countervaling force.

    New lenders entered the market oriented towards selling mortages at any cost, since they pushed the risk elsewhere. No countervaling force.

    New capital flooded the realty market, supercharging the demand side of the supply/demand equation, hyperinflating home values. No countervaling force.

    Even rational homebuyers were carried along, since all this “free” money affected prices. Anyone wanting to buy a home had to play along. And for a while it worked. As it always does during speculative bubbles.

    Government regulators were throttled by Republicans (and some Dems, but let’s remember who controlled the gov’t during the run-up and whose ideology is, let’s incompetently run gov’t to the ground then blame gov’t for being the problem).

    Everyone made money until the bubble ran its cycle. Rather than taking a small hit a couple years ago, the GOP let it grow to where it threatens the global economy, in all lending sectors.

    Borrowers also had a role in this, of course. But borrowers have always wanted more than they could afford since we were trading rocks. It’s the LENDOR that exercised caution, since their capital was at risk and it’s their JOB to make responsible loans. If they didn’t, they’d go bankrupt. Until Wall Street came up with this Ponzi scheme. And the GOP regulators let them.

    Is there anything they touch that doesn’t turn to crap?

  24. Lewis says:

    @adrock75: ” I think shouting “PERSONAL RESPONSIBILITY” every time this comes up really lets them off the hook.”

    Agreed. As another commenter put it better than I earlier, a business transaction should be bi-partite. No fair blaming one party for perceived injustice when the other party did not do his or her homework.

  25. mac-phisto says:

    @baa: i don’t know what to think about that. fannie mae is pretty much maxed out in size & regulators refuse to allow them to expand, & even though it places unneeded pressure on the market, i think it’s a good thing. fannie mae & freddie mac have also been having some other issues lately – accounting troubles, investor lawsuits, not to mention their own struggles with security portfolios ridden with poison sausage. it is possible (although extremely unlikely) that we could see a complete collapse of the secondary market.

    if that were to happen (&/or countrywide becomes insolvent), it will take government bailouts just to keep the train on its tracks.

  26. Elijah-M says:

    So mortgage lenders tried to make money by issuing variable interest loans to people who weren’t qualified to pay them back, or even understand the terms of the loans in the first place? Wow. Who could have expected that to backfire?

    Blame the people who took out the loans all you want, but this outcome should surprise no one. The lenders who issued these loans are presumably in a position to know better.

  27. saintjohnson says:

    I realize from my 1st loan (FHA), my HELOC, and a Re-Fi offer from a lend in May that the main problem with the “Subprime Meltdown” is knowledge.
    Alot of people were offered mortgages that looked like car loans and these consumers took those loans for face value. The problem occurred when people realized in hindsight that the entire loan was bad…origination fees too high, prepayment penalties ridiculously high, along with the balloon payment.
    With all of these things on the table that the buyer doesn’t have a clear understanding of what is at stake, legal representation is needed. But the only purchase close to a house that most people have experienced is an auto purchase and they are totally different, and I believe that a lawyer should be included in these deals to protect the buyer. The realtor’s job is to just show you a product…they’re no more than a highly educated GAP salesperson with a big ticket product. But when you walk into closing high from the feeling of becoming a first time home owner (which alot of these mortgages belonged to..) you’re already in a financial comatose so you’re just ready to sign.

    I drilled the mortage company that was trying to Refinance my mortgage…they were trying to take almost 5-7% (should only pay 2-3%) in origination fees along with a 3-5 year prepayment penalty and a ridiculous interest rate. They treated me as if I was desperate for a loan, but I wasn’t that desperate… They would’ve fleeced me and I would’ve been paying the same loan amount. Oh, and I almost forgot that they were trying to charge me fees for things that aren’t necessary for a ReFi or things that I paid out-of-pocket, i.e. the appraisal…

    “But how much money would you have cashed out in the new loan?” I would’ve had less cash than the mortgage company after the dust settled.

    Lewis, I can appreciate what you’re saying about consumer responsibility, but people don’t move into a house with the idea that they’re not going to pay for it. This mortgage lending house was built on the lenders’ greed and borrowers’ ignorance and it crumbling justifiably so.

    BTW, another thing with those balloon mortgages were the prepayment penalties… Lets say you knew about the balloon payment, but you didn’t realize the prepayment penalty was in your loan because the closing on a house is high pressure and that prepayment contract is at the back of the actual loan agreement. Now you’re between a rock and a hard place because your balloon payment kicks in 2 years before the prepayment penalty is lifted.

    All states don’t require a lawyer to represent the buyer to close a real estate deal, but there are at least 7 million reasons why state laws need to change now.