[quote author="graphrix" date=1247490239]I'm actually sad that these loans are gone. They were created in a high interest rate environment, and when rates do come down you pay less on your average interest rate than someone who got a 30 year fixed near the lower average. It's too bad... lab monkeys on meth were allowed to sell these loans to people who do not even know what amortization means... and the coked up Wall Streeters had to be greedy to buy these loans up like they understood convexity... to ruin it all for people who understand this loan and know how to use it to your advantage. You know... the minimum payment doesn't always neg am, it might even force you to pay principal.</blockquote>
Welcome to our world of 10 second media based knowledge.
Go look back at Enron... the lesson learned from Enron was "stock options are bad"... Enron killed stock options for the rank and file employee (where, I would argue, options were an amazing tool to motivate employees and make them work towards the company's success). Now with AIG we're learning that bonuses are bad... so you can see what will happen, they will take out the bonuses and go towards larger base salaries.
In the first case it wasn't that options were bad... there was just outright fraud going on at Enron, and you also had employees who were motivated by a short term buck. So maybe some vehicle like a warrant based on 5 year shareholder return or something might be more appropriate than an option... instead now companies give out restricted stock, where the downside is much smaller, and the upside potential is also much less. Of course this is just for the rank and file... the Ken Lay types of this world were not affected because they still got the comp packages similar to what they had before... it was the rank and file guys at places like Microsoft, Cisco and Apple who suffered.
Now with the bonuses, they'll go to a salary. While this provides more transparency in compensation (something I'm a big fan of), I'm gonna guess those salaries will be based on "take your bonus and salary on your best year, and that's your salary"... aka they are now getting paid as if every year is a heyday. When things get better, their comp will go up more, and when things get worse, their comp will stay the same at worst. What a great life. People miss the point that bonuses can be a great motivating tool, but when you have bonuses not tied to proper goals, that's where the problem lies.
Finally, the other evil child we are all learning is derivatives. I had a chat the other day with someone telling me how they should just get rid of the whole commodities market. I explained to them that when used as they were intended, derivatives are actually an extremely conservative investment... even more conservative than buying stock in GE, Microsoft, or such... that the original goal of derivatives was to minimize risk... so that a farmer could make his money off of growing crops, independent (to some degree) to the price of the underlying crop they are growing... and likewise a company like Southwest could make their money flying people, and not off the spread in gas prices.
I'd say the same thing goes with the standard ARM (not even option ARM). People are seeing them in general as toxic as well... my first loan on my home was an ARM, and it worked out beautifully. Interest rates had climbed above historic norms, and I had a good downpayment on my house and bought a home I could afford the payments on. When rates dropped a few years later, I refi'd to a 15 year fixed at a rate below the teaser rate on my ARM (before the ARM could reset). I guess this is evil though...
But ya, ARMs are evil but at the same time Fannie Mae needs to allow 125% LTV loans to help people refinance and have < 10% downpayment on new purchases, backed by my tax money. Ya... go figure.
Delroy
