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The NY Times has a good article today which examines why we’re stuck paying hundreds of billions in bailouts to AIG.  The article is titled Propping Up a House of Cards.

It’s a good article, and it does a good job of explaining what happened, but I think it draws the wrong conclusion.  The NY Times says we need to continue the bailout of AIG regardless of the cost.  I say we should simply let them fail and let the house of cards collapse.

No, the result won’t be pretty, but it will be over. A lot of large banks will go under, both here and in Europe, but some will be left.  And the trillions of dollars of losses will have been taken by the people who invested in AIG and the banks that relied on them – and that’s the way it should be.

gk

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I was reading a story on CNN tonight. It was one of those stories that made me bang my head up against the wall because it feels so good when I stop.

I’m going to quote a bit of the story so you can see what pissed me off.

Take Joe Martinez of Bristow, Va., who fits the profile of the “responsible” homeowner Obama cited in the plan. The government contractor and his wife thought they did everything right when they bought their brand new $600,000 house two years ago. They put 5% down and got a 30-year fixed-rate mortgage they could afford.

So far, so good.  But unless they bring home $200k per year, they bought more house than they should have.  Their mortgage payment is about $4000 per month, and it shouldn’t be more than 25% of your take home pay.  That means they need an after tax/take home income of about $200K.  Having no information about their income in the story, I’ll assume they have adequate income.

Others in their neighborhood, however, couldn’t keep up with the payments. As foreclosure rose, the value of the couple’s home plummeted to $450,000, leaving them doubtful they’d ever recover their investment.

Martinez called their lender to try to get into the Hope for Homeowners program, which would reduce their loan balance to 90% of the home’s current value. But they were turned down because they weren’t in default.

So two months ago, the couple stopped paying their mortgage, hoping they could then qualify. But even if they don’t, they are willing to take the hit on their credit scores to stop throwing money down the drain.

“There’s just no point to stay here,” said Martinez, 29, adding he could rent the house across the street for half his monthly mortgage payment. “We don’t want to give up our home, but it’s never going to come back.”

Sounds to me like they just want out of the deal they agreed to.  If “they could afford” the payments but “the couple stopped paying their mortgage” anyway, they are crooks.  They are trying to scam the system.  And they should go to jail.

What difference does it make if your home is worth less than you paid for it?  This happens with cars all the time – is there some rule that says a home always has to go up in value?  No?  That’s what I thought.

You made a deal.  You agreed to it without anyone holding a gun to your head.  You signed dozens of documents at closing agreeing to do certain things.  Now you want out.  Tough shit.

Joe Martinez is a crook.  He should be arrested and jailed for attempted fraud.

If you read through the CNN story, you eventually get to this part.  Martinez isn’t interested in having his interest rate lowered. He would like to see some of his principal forgiven.  “Why would it be such a big deal for them to modify my loan?” he said, noting that his tax dollars are being used to finance the program. “Wouldn’t that stabilize the economy?”

Hey, I’d like some of the principal on my home forgiven too!  Those are my tax dollars going to pay off your mortgage too.  That’s a great idea Joe!  Let’s get the greedy bankers to simply “forgive” part of what we owe them – not because we can’t make the payments – but simply because we want them to.  Damn – I wish I would’ve thought of that first!

All sarcasm aside, that’s the behavior you get when the government starts giving money away.  Why is it so hard for the government to understand that people change their behaviors to take advantage of government policies?  It’s happened for thousands of years, yet they always forget to take that into account.

When something is taxed, less people do it.  Increase the tax on dividends and less companies will announce dividends.  Increase the tax on cigarettes, and less people will smoke.  Decrease the tax on income, and people produce more income.  Pass a law that makes it easier for people to get out of contracts, and more people will try to get out of contracts.  This ain’t rocket science – you can play along at home.

Here’s my simple, one step plan to solve the problem:

1. Pay the debt you agreed to pay when you signed on the dotted line – or lose the asset and go to jail.

Problem solved.

gk

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I read today where the President launched a new website to allow us to track where the “Recovery Act” money is going.  It’s at Recovery.gov.  On the website, President Obama says This is your money. You have a right to know where it’s going and how it’s being spent. Learn what steps we’re taking to ensure you can track our progress every step of the way.

There are also links on the site to “Contact Us” and “Share your Recovery Story“.  So I did.

Rather than simply send my comments to a website form that no one will ever read or respond to, I decided to send my comments to the site, but to also copy them here so people could see them.  Unlike comments here, comments to recovery.gov seem to disappear.  They don’t show up on the website, and you don’t even receive an email form letter saying “thank you for contacting us” or some other nonsensical crap that makes you feel like they saw your comment.

So I decided to copy my comments here for all to see.  Feel free to add your comments, both at recovery.gov and here.  I’ve decided to put my comments  in an “open letter” format.  So here goes!

An open letter to President Obama;

February 18th, 2009

Mr. President,

I left the following comment on your “contact us” form.

While it’s great to show a big picture view of where the money is going, I’d like more detail.

Which companies are getting the money for “Science and Infrastructure Relief”, just what is “Protecting the Vulnerable” and who is getting that $81 billion?

What is “State and Local Fiscal Relief” – which state and local governments are getting the money and how much?  Who decided how this $144 billion will be spent?  What projects is it being spent on?

I have dozens of other questions, and I doubt I can list them all, but in general, I want to know who is receiving every dime of my money.

Since I was responsible with my finances, I know it won’t be me, but I have a right to know if my tax dollars went to my neighbor to renegotiate and pay down his house.

Fess up, detail it, tell me which companies and individuals got my money.  That’s transparency – lets see if you keep your promise.

Since you also have a “Share your Recovery Story” section where you ask me to “Tell us how the Recovery Act is affecting you.”, I also took advantage of your offer to listen and posted how your stimulus bill is affecting me.  Here’s what I sent to you on that form:

How is the “Recovery Act” affecting me?  From what I can tell, the effect on me is that I now owe $5702.90 more than I did before this act was passed.  That’s $787 billion divided by 138 million (as of 2007) taxpayers.

That’s my share of what Congress and President Obama just spent.  That’s ridiculous.

It’s ridiculous because I lived within my means, didn’t buy a house that I couldn’t afford, and now I have to fork over my money to pay for people who couldn’t do basic math when they borrowed money.

They borrowed on credit cards, cars, consumer electronics and most of all houses.  They made $50K per year and somehow thought they could afford a $400K house.  With no money down.  On an “Option ARM”, or “Pik-A-Pay” mortgage.  And because they can’t add, I’m now paying part of their mortgage.

That’s how the “Recovery Act” is affecting me Mr. President.  And you can quote me on that.

Thank you for asking for my input Mr. President.  I hope that by reading it you have gained a deeper understanding on how your $787 billion spending plan is affecting me and the vast majority of Americans who are able to add and subtract.

gk

P.S.  You may quote these messages in any communication you like.  I don’t insist on attribution, please use the information however it best assists you in bailing out badly managed banks and companies.  Don’t forget the individuals who bought more house than they could afford using exotic mortgages.

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This needs to be read by more people, so more people can contact congress to let them know what they think of it.  I’ll post the reasons for my own thoughts later (I think it sucks!) but for now, here’s the text of the proposed plan according to the NY TImes.  Please read it and let congress know what you think!

gk

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.

(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

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It’s been done to death today, but a quick scan of the headlines tonight will make you think everyone is in on a huge April Fool prank.  UBS wrote down $19 billion and Deutsche Bank wrote down $4 bilion, so investors bought everything in sight, sending the market up almost 400 points to close at 12,654.

Everyone is once again saying that the worst is over, that they’ve finally accounted for all the losses, and that things are going up from here.  I hate to be the bearer of bad news, but they’re wrong – and it’s not the first time.

Most people probably remember the Bear Stearns meltdown, the AMBAC and MBIA fiasco’s, the comments from Standard and Poors about the worst of the writedowns being over – and the subsequent surges in the markets after each of them.  But you may not remember that this started last year.  A quick refresher….

Here’s a NY Times story from October 2nd, 2007 

The country’s biggest bank, Citigroup, will write off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier. Europe’s biggest bank, UBS, said it had written down $3.4 billion in the value of mortgage-backed securities and would suffer a loss in the quarter. Other banks, including Merrill Lynchand Bank of America, have issued similar warnings.

Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained. 

The Dow closed at 14,087, and the S&P 500 closed at 1546 on October 2nd.  The Dow close was a record high.

Here’s another NY Times story from November 14th, 2007.  According to the story:

Investors were buoyed by comforting words from top executives at Goldman Sachsand JPMorgan Chase, who said they were confident their companies would emerge relatively unscathed from the subprime mess. Lloyd C. Blankfein, Goldman’s president, said his bank would not take more write-downs on mortgage-backed securities, sending the bank’s stock up 8.5 percent to $233.04 a share.Shares in JPMorgan rose 6.3 percent.

The Dow closed at 13,231, and the S&P 500 closed at 1470 on November 14th.

Now comes todays’ news.  Stocks Surge on Hopes Financial Woes Are Easing is the NY Times headline today.  Another big surge in stocks with everyone thinking that the worst is over….

It’s not over.  I don’t think it’s even halfway over.  All those ARM’s and Option ARM’s that were taken out in 2005 through 2007 have yet to reset from their teaser rates. 

When they do (throughout the next 2-1/2 years)  there will be more losses.  Many more losses.  Much bigger losses.  And stocks will need to fall to reflect those losses.

gk

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It was quite a day today in the financial media.  I’ve read stories tonight about why it’s great for everyone that the Fed bailed out Bear Stearns, I’ve read stories about why it’s bad that the taxpayers are bailing out Bear Stearns, and I’ve read stories where I don’t think the author had a clue what he was talking about.

But one of the best of the bunch has to be an article at Minyanville.com about why the housing market is nowhere near a bottom yet.  On page 2 of the article John Mauldin has a good synopsis of the current situation.  He states:

• 8.8 million homeowners will have mortgage balances equal to or greater than the value of their homes by the end of March.
• 30% of subprime loans written in 2005 and 2006 are already underwater.
• Nearly 3 million homeowners were behind on their mortgages at the end of 2007, with 1 million at risk of imminent foreclosure.
• As of the end of last year, 5.82% (!) of all mortgages were delinquent, the highest level in 23 years.
• 0.83% were in the process of foreclosure, also an all-time high.
• When you look at just subprime mortgages, you find that 20% are delinquent (the number is rising rapidly), and almost 6% were in foreclosure.
• Finally, the average American’s percentage of equity has fallen below 50% for the first time since 1945.

That pretty much sums up the current state of the market, but he goes on to explain why it’s going to get worse.  I’ve said much of this before, but he says it better:

Mortgage lending standards became progressively worse starting in 2000, but really went off a cliff beginning in early 2005. The worst loans are those with two-year teaser rates. As the subsequent pages show, they are defaulting at unprecedented rates, especially once the interest rates reset. Such loans made in Q1 2005 started to default in high numbers in Q1 2007, which not surprisingly was the beginning of the current crisis.”

 It’s an excellent article and I encourage you to check it out if you like knowing what’s probably going to happen over the next few years.

gk

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I said most of this last week, but Paul Farrell probably says it better in this articleposted on MarketWatch tonight. 

I also talked about Warren Buffett a bit last week when he posted his annual letter to shareholders, but Mr. Farrell quotes both Buffett and PIMCO bond guru Bill Gross when he says “Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen“.

There are a lot of people saying that this is all overblown, that the Fed will handle it, that all we need is trust, etc.  But the more I learn about what’s going on, the more I’m convinced we’re in for a big crash.  Bigger than 2000, worse than Carter’s bungling in the late 70’s, worse than Johnson’s Great Society that wasted trillions of dollars.

Please read the article.  Earlier tonight I said that we’d be facing huge losses if just 10% of the mortgages defaulted.  According to this, I was way too optimistic.  Farrell says “There’s nothing intrinsically scary about derivatives, except when the bad 2% blow up.” Unfortunately, that “bad 2%” did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was “contained.”

Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a “bad 2% deal” to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It’s only a matter of time. “

AP is reporting that  “The Mortgage Bankers Association said Thursday the proportion of all mortgages that slipped into foreclosure set a record, 0.83 percent, from October through December. The previous high, 0.78 percent, came in the July-through-September period.”

We’re almost at 1%.  Watch what the foreclosure rate goes to over the next few months as all the ARM’s given out in 2005 start to reset.   Buffett’s view that “…derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”  will probably be proven right. 

gk

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I was reading about Bank of America’s buyout of Countrywide this morning, and I happened upon this article at The Wall Street Journal:

http://blogs.wsj.com/marketbeat/2007/11/30/we-are-all-subprime-borrowers-now/?mod=sphere_ts

I normally read a lot of opinions and I can respectfully disagree with those who look at things from a different angle than me, but this really ticked me off.  The writer (David Gaffen) says: “Expect lots of talk of the moral hazard, particularly now as it extends its reach (as it’s no longer just dumb bankers being covered for their financial engineering through the creation of the Entity, but a lot of regular people), and even a bit of snide, boorish comments from those saying everyone should take responsibility for their own actions (remarks most likely to come from millionaire commentators who have personal assistants to manage their lives).“

Pardon me Mr. Gaffen, but I’m not a millionaire, I don’t have a personal assistant, and I don’t happen to think that people who believe in personal responsibility are “snide” or “boorish” – but I am going to comment on your article.  I’ve heard and read many comments on the subprime meltdown, but most leave out the role of the person who ASKED FOR the loan in the first place.  I’ll use myself as an example.

I had to relocate for my job in March, 2007.  I’m not a saver by nature (thankfully my wife is and she keeps my spending in line!) but we had managed to pay off our old house in about 15 years, so we had a good bit (about $140K) to use as a down payment on our new home.   I couldn’t find a decent house in the area we wanted for that, so I needed to get a loan.  I talked to Wells Fargo and Bank of America, and decided to go with Wells Fargo because they had a lower interest rate for a 15 year fixed rate mortgage.

Both Wells Fargo and Bank of America pre-qualified me for a loan of up to $200K on those terms.  Both encouraged me to get an adjustable rate loan with a low (teaser) interest rate fixed for the first three years – they said they could loan me up to $350K if went with an ARM.  “You can get a much nicer home” was a recurring phrase I heard.  The realtor was also pushing me to look at more expensive homes, and had to be persuaded that I really did want to live in a house that was less than I “can afford”.

I found a nice 30 year old home for about $190K, so I borrowed $50K on a 15 year fixed rate mortgage.  My house payments – including property taxes and insurance – are about $500/month, and I’m working on paying that off early, hopefully within about 7 or 8 years.  Had I listened to those selling me the mortgage and the house, I might be writing this from a very nice $450K house in Knoxville, TN – that’s a huge house here – with a payment of about $1500/month with the teaser %3 interest rate for the first 3 years.  I could afford it, so why didn’t I do it?

Because that teaser rate resets in 3 years.  I don’t know what interest rates will be 3 years from now, but I guarantee that they won’t be 3%.  Let’s just assume that it resets to 6% – which is probably on the low side.  That would make the payments go to over $2000/month.  I don’t know what I’ll be making in 3 years, but no matter what, paying an additional  $500/month won’t be fun.

So I’m in a decent house, with payments I can afford – anyone who can tell the difference between “a bottle in front of me” and a “frontal-lobotomy” could have done the same.  Am I supposed to feel sorry for the dumb asses who bought more house than they can afford?  Or for the dip shits that bought a house when they can’t keep a steady job and are surprised when the bank tells them they have to make payments?  And they expect me (via the government) to bail them out because they can’t do math?

Perhaps this is “boorish” and “snide”, but I don’t ask for money that I won’t be able to repay.  I expect the same responsible behavior from others.  When someone asking for a loan LIES about their income, expenses, debt load, or whatever in order to get money from someone else, they are committing a fraudulent act at the least – and plain stealing at the worst.   These home “owners” (perhaps squatters is a better term) are getting the least that they deserve – they should go to jail for fraud or theft.

And lest you think I’m one of the fortunate ones born with a silver spoon, I’ll add this: I left home in 1980 with $20 in my pocket and a change of underwear in a brown paper bag.  Everything I have today I’ve EARNED with my brain and muscles.  I’m tired of people saying they just can’t get ahead, or they weren’t as lucky, or they never had a chance because the convenience store or fast food restaurant owner (where they work) is greedy.  That’s bullshit.  Most of them are just too damn lazy to do what it takes to get out of their current position – they don’t expand their knowledge, they don’t go to school at night, they don’t work 2 jobs to pay off their cars, they can’t (or won’t!) do the math that says they can’t afford that big-screen TV, that new car, those designer jeans, purse, or sneakers. 

This type of person (you know who you are) habitually spends more than he/she makes – and then complains of bad luck when they lose a job or have a medical problem that prevents them from working and servicing the debt that they’ve accumulated.  Dave Ramsey says “act your wage” and it’s excellent advice.  If you spend less than you earn and put 5% or 10% of your take home pay into savings each month, you can ride out any temporary issues that come your way.  And you CAN’T be taken advantage of by hucksters promising you a great house for super low payments.

Because of jerks who didn’t think about the long term consequences of what they were doing, my house will be going down in value for the next few years as thousands of homes in this area go into foreclosure and are put on the market.  But guess what – because I bought less house than I could technically afford – I’ll still be ahead.  And maybe your stupidity will turn me into a millionaire when I buy your house at a rock bottom price because you can’t make the payments. 

Any questions? 

gk

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