$$$ Lost & Found $$$

[Southwind17]

It was revealed today in the news that UBS is expected to declare a 2008 first quarter loss that will give rise to a total loss attributable to the sub-prime mortgage crisis of $37.5 billion. Apparently, Merrill Lynch’s losses are not much smaller, and there is clearly a long line of lenders, including Deutschebank, also licking their sub-prime wounds. Moreover, these are, apparently, not theoretical “opportunity” losses, but tangible bad debt write offs. Given this, where, exactly, has this money been “lost”, or more to the point, where can the money now be found? For every financial loser there must be a winner. Tangible money doesn’t simply disappear into thin air. Who, exactly, are the winners, and how has the money been “won”? No mention of them in the news features, only the losers!

 

[Jaggy Bunnet]

People who sold property at the top of the market and did not buy new property at those prices.

Basically the banks allowed people to overpay for properties - the winners were those who were overpaid.

 

[roger]

You dig a diamond out of the ground. It's worth $1000. Diamond prices drop 50%. It's now worth $500. You lost $500. There are no winners.

Wealth is created and destroyed. It's not a zero sum game.

 

[Southwind17]

People who sold property at the top of the market and did not buy new property at those prices.

Basically the banks allowed people to overpay for properties - the winners were those who were overpaid.

So how does this translate into whopping losses for UBS et al? ... and wouldn't such huge cash "injections" translate into inflationary pressure in the economy? The opposite seems to be the case.

 

[Southwind17]

You dig a diamond out of the ground. It's worth $1000. Diamond prices drop 50%. It's now worth $500. You lost $500. There are no winners.

Wealth is created and destroyed. It's not a zero sum game.

I disagree. You never had $1000 to start with. You've lost nothing tangible. UBS claim to have lost $37.5 billion in bad debt. That's cash out the door. I think natural resources and commodities are a different ball game.

Again, I ask: Where should I look to find the $37.5 billion that just walked out of UBS's vault, so to speak?

 

[shadron]

I disagree. You never had $1000 to start with. You've lost nothing tangible. UBS claim to have lost $37.5 billion in bad debt. That's cash out the door. I think natural resources and commodities are a different ball game.

Again, I ask: Where should I look to find the $37.5 billion that just walked out of UBS's vault, so to speak?

It's your theory, South. You tell us - where did it go? Mortgage holders don't seem to have it; banks don't have it; the government didn't get a cut (at least, no bigger than it normally gets). You could, I suppose, balance it over time by pointing to all those people who churned their real estate early on, but most look at that as water over the bridge.

It is in fact true that finance is not a zero sum game, as roger says. If you'd have sold the diamond when it was worth $1000, you'd have your tangible. You didn't; it lost, and now there is less wealth in roger's system. No one holds a bag of gain for the loss, it just is. Stock market wealth is exactly this way, until corrections bring prices back into line with worth. If you can hit it right, you gain, and no one looses; and, of course, the converse.

 

[Southwind17]

It's your theory, South. You tell us - where did it go? Mortgage holders don't seem to have it; banks don't have it; the government didn't get a cut (at least, no bigger than it normally gets). You could, I suppose, balance it over time by pointing to all those people who churned their real estate early on, but most look at that as water over the bridge.

It is in fact true that finance is not a zero sum game, as roger says. If you'd have sold the diamond when it was worth $1000, you'd have your tangible. You didn't; it lost, and now there is less wealth in roger's system. No one holds a bag of gain for the loss, it just is. Stock market wealth is exactly this way, until corrections bring prices back into line with worth. If you can hit it right, you gain, and no one looses; and, of course, the converse.

What's my theory? I don't have a theory, and nobody so far has offered a rational explanation. Unless I'm mistaken, when a financial institution "writes off" debt, which is the case with UBS, they're effectively agreeing to forego the return of funds invested - tangible funds, that is. So, where's the cash now? Remember, the loans were made largely against the security of the underlying assets. Those assets are now worth less than the value of the defaulted loans, largely driven by the lender's willingness to foreclose and cut its losses, presumably. So it seems to me that the original sellers of the assets are probably sitting on the money, which in essence amounts basically to a redistribution of wealth, from the UBS shareholders to the original property sellers, which could, in many cases, be the same people. Does this make sense?

 

[roger]

No, it doesn't make sense.

I have a house currently valued at 500K (say). I take out a loan against it of 500K to start a business. My business fails, and I can't pay off my loan Meanwhile, the housing market has crashed, and the house is now only valued at 300K. The bank forecloses on my house, and sells it for 300K.

Net result: I lost my house. Bank lost 200K. Destruction of wealth.

Google destruction of wealth. This is economics 101; pretty hard to cover in a post or two.

edited to add: ordinarily banks create wealth with loans. This is a case where they destroy wealth. Just depends on which way the market goes.

 

[Southwind17]

No, it doesn't make sense.

I have a house currently valued at 500K (say). I take out a loan against it of 500K to start a business. My business fails, and I can't pay off my loan Meanwhile, the housing market has crashed, and the house is now only valued at 300K. The bank forecloses on my house, and sells it for 300K.

Net result: I lost my house. Bank lost 200K. Destruction of wealth.

Google destruction of wealth. This is economics 101; pretty hard to cover in a post or two.

edited to add: ordinarily banks create wealth with loans. This is a case where they destroy wealth. Just depends on which way the market goes.

So what happened to the missing 200k hard cash you borrowed against the house? It must be lining somebody's pocket somewhere! Regardless, this is not a typical scenario. Most victims of the sub-prime crisis didn't borrow for a business - they simply bought a house. Same question, though, who's pocket is the borrowed money - the money that UBS has "lost" - now burning a hole in?

 

[Jaggy Bunnet]

OK, lets try again.

I own a house worth $500k. It falls in value to $300k. We all agree that I suffered a loss of $200k.

I own a house worth $500k. I sell it to you for $500k. It then falls in value to $300k. We all agree that you suffered a loss of $200k.

I own a house worth $500k. I sell it to you for $500k, which you have borrowed from a bank. The house falls in value to $300k and you are no longer able to make the payments on your loan. The bank forecloses, sells the house for $300k and you still owe the bank $200k. You have no other assets and the bank sees no realistic chance of you paying them back. They write down the value of their debt by $200k to $nil. The bank has suffered a loss of $200k.

 

[Southwind17]

OK, lets try again.

I own a house worth $500k. It falls in value to $300k. We all agree that I suffered a loss of $200k.

I own a house worth $500k. I sell it to you for $500k. It then falls in value to $300k. We all agree that you suffered a loss of $200k.

I own a house worth $500k. I sell it to you for $500k, which you have borrowed from a bank. The house falls in value to $300k and you are no longer able to make the payments on your loan. The bank forecloses, sells the house for $300k and you still owe the bank $200k. You have no other assets and the bank sees no realistic chance of you paying them back. They write down the value of their debt by $200k to $nil. The bank has suffered a loss of $200k.

That's exactly right, and the $200k that the bank has lost is sitting in your bank account, from the initial sale from you to me, right? Now, extend that scenario such that the bank's loss amounts to $37.5 billion, per UBS, and then add to that all the other banks' losses. Let's say, for debate's sake, it's $100 billion. That's effectively a $100 billion injection of hard cash into the economy. So who are the winners? The cash must be out there somewhere! I don't think you're suggesting the cash doesn't really exist, are you?!

 

[Modified]

That's exactly right, and the $200k that the bank has lost is sitting in your bank account, from the initial sale from you to me, right? Now, extend that scenario such that the bank's loss amounts to $37.5 billion, per UBS, and then add to that all the other banks' losses. Let's say, for debate's sake, it's $100 billion. That's effectively a $100 billion injection of hard cash into the economy. So who are the winners? The cash must be out there somewhere! I don't think you're suggesting the cash doesn't really exist, are you?!

In the last example, the winner is the person who sold the house for 500k. They can now buy the same house back for 300k, and be back where they were +200k.

 

[Jaggy Bunnet]

That's exactly right, and the $200k that the bank has lost is sitting in your bank account, from the initial sale from you to me, right?

Not necessarily. If I had borrowed $500k from the bank to buy the house (or release equity in it), then I used the cash to repay that loan and the cash is sitting in the bank.

Now, extend that scenario such that the bank's loss amounts to $37.5 billion, per UBS, and then add to that all the other banks' losses. Let's say, for debate's sake, it's $100 billion. That's effectively a $100 billion injection of hard cash into the economy.

No it isn't - see above. Assuming we both borrowed from the same bank, then the cash went precisely nowhere - you borrowed it, gave it to me and I gave it back to the bank.

 

[Southwind17]

Not necessarily. If I had borrowed $500k from the bank to buy the house (or release equity in it), then I used the cash to repay that loan and the cash is sitting in the bank.



No it isn't - see above. Assuming we both borrowed from the same bank, then the cash went precisely nowhere - you borrowed it, gave it to me and I gave it back to the bank.

With respect, you seem to be more confused than I am. Try answering the question as to where the $billions have been "lost" in the context of inumerable distraught Americans having lost their dream homes and UBS et al having to disclose huge write offs, with CEOs resigning as a result. You seem to be suggesting that the money has simply jiggled around a little, with much ending up back at the banks that lent it. That explanation doesn't wash given the doom and gloom surrounding the entire saga. Do you know the answer, or are you just trying to reconcile it in your own mind, like I am, but getting nowhere fast?!

 

[Zygar]

That's exactly right, and the $200k that the bank has lost is sitting in your bank account, from the initial sale from you to me, right?

No. An equity loss is a literal loss of money from the economy. It dissappeared. Completely. There is no remnant of it. The hard cash you claim exists was invested in the house at some point, and was liquidated with the sale. When the value dropped, the assets were lost. Period.

Now, extend that scenario such that the bank's loss amounts to $37.5 billion, per UBS, and then add to that all the other banks' losses. Let's say, for debate's sake, it's $100 billion. That's effectively a $100 billion injection of hard cash into the economy. So who are the winners?

There are no winners in this scenario.

The cash must be out there somewhere! I don't think you're suggesting the cash doesn't really exist, are you?!

Your sort of fuzzy math is precisely what caused the subprime mortgage issue to begin with.

 

[Southwind17]

No. An equity loss is a literal loss of money from the economy. It dissappeared. Completely. There is no remnant of it. The hard cash you claim exists was invested in the house at some point, and was liquidated with the sale. When the value dropped, the assets were lost. Period.

Houses are bought with hard cash, essentially, i.e. money transfers from the buyer's bank account (usually directly from the lender via a solicitor) to the seller's bank account. In practice, that cash could be used to buy physical commodities, and often is.

There are no winners in this scenario.

Well, I could cite one, who I'm sure is one of many, but it would be a little off topic.

Your sort of fuzzy math is precisely what caused the subprime mortgage issue to begin with.

I guess I should consider myself lucky that my fuzzy logic has never got me into financial difficulty then, unlike the victims of the sub-prime, be they naive borrowers or supposed intelligent lenders!

 

[Jaggy Bunnet]

With respect, you seem to be more confused than I am.

With respect, you are wrong.

Try answering the question as to where the $billions have been "lost" in the context of inumerable distraught Americans having lost their dream homes and UBS et al having to disclose huge write offs, with CEOs resigning as a result. You seem to be suggesting that the money has simply jiggled around a little, with much ending up back at the banks that lent it. That explanation doesn't wash given the doom and gloom surrounding the entire saga. Do you know the answer, or are you just trying to reconcile it in your own mind, like I am, but getting nowhere fast?!

Nope, I understand it thanks. Unfortunately you appear unwilling to listen to answers that don't fit your preconceived idea that someone out there is sitting on a big bag of cash that used to belong to UBS.

If you are actually interested in understanding, then reread the replies you have had with an open mind.

 

[timhau]

The NWO has it. It's how we finance our operations.

 

[Southwind17]

Nope, I understand it thanks. Unfortunately you appear unwilling to listen to answers that don't fit your preconceived idea that someone out there is sitting on a big bag of cash that used to belong to UBS.

OK, so it's just an "accounting" issue then, right, no real greenbacks involved?

 

[Jaggy Bunnet]

OK, so it's just an "accounting" issue then, right, no real greenbacks involved?

Nope.

Guess again.