Feb 23
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“Crony capitalism” has been getting disapproval from such as Sarah Palin (who removed some notorious examples as Governor of Alaska) but seems less than newsworthy to much of the media. Maybe because their hero, our Prez is a big time target if complaints surface. The latest: Uncle Sams’s Fire Sale: Minimum Investment, $1 Billion explains how [...]
Jan 26
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We remember fondly Solyndra and the cohort of promising green companies extolled and funded by the Obama Administration on their way to bankruptcy. That was an rare accomplishment, actually showing that government money is deadly. But who would have had the chutzpah to predict that the man would be able to do it again so soon? [...]
Nov 7
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The well-paid Lefty media joyfully trumpet the Occupier bums’ “1 Percent” diatribes in pursuit of Obama’s class warfare tactics but who really knows the truth? The Tax Foundation does, courtesy (though I hate to say it) of the IRS data for 2009 and before. Here is that 1% in fact, no politics or spin: 1. [...]
Sep 2
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Congress and Bill Clinton passed the Community Redevelopment Act forcing banks to lend to low income homebuyers and then Senator Chris Dodd (D) and Representative Barney Frank (D) and cohorts leaned on those banks until they did it. Too many such loans weren’t repaid, giving us the housing bust. Now, in a bid to shift the blame from the government [...]
Well, we’re not quite at the oft-projected $2,000 mark, but we’re getting there…
Gold Tops $1,500 on Outlook for Escalating U.S. Debt, Dollar
Oh, yeah… “We’re all about promoting economic growth and job creation!” You Dems aren’t fooling anyone! When the financial experts (Standard & Poor’s) say you’re out of line, you can no longer blame “bi-partisan” crap, can you? Your reckless spending is taking this country down the drain! Wake up!
Here we go… The slippery slope that the U.S. just may never recover from… How sad… Will the Dems be moved at all by this? Do they even understand (or care) what a negative credit rating means?!! Assholes…
It is always nice to see politicians actually doing the right thing. Good for the House Republicans! Anyone with any sense knows derivatives require no government regulation. Simply put, if the investments are too difficult for you to understand, you need not get involved. Do your own homework and don’t look to a group of non-financial lawmakers to save you from yourself! My only hope is that they continue to “push” the rules right off of the table!
Apr 8
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Okay… It had a rocky start, at best, but how is this supposed to work under a Communist umbrella? Hong Kong’s park hasn’t exactly been a bed of roses for Disney, either. Will a Disney theme park in Shanghai again equal millions of dollars down the drain? Only time will tell, but I promise that [...]
Kudos to Mr. Branson and Virgin!
http://www.bloomberg.com/news/2011-02-17/virgin-america-to-start-flights-from-chicago-o-hare.html
It was reported today that China’s GDP is on target to overtake that of the U.S. in just fourteen years. Is anyone out there even the slightest bit concerned about this?!! Wake up!!! Oh, yeah, but let’s just tax the hell out of U.S. businesses until they have no choice but to leave! Let’s not protect our intellectual property! And, most of all, let’s continue to support other countries (rather than our own) with U.S. taxpayer funds! Oh, wait! There’s more! Tax the hell out of industrious Americans to the point where they will no longer have an incentive to work hard and contribute to new innovations! The list of our poor decisions is long…
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLzIiCGRPrP4
Let’s put the spending issue into perspective. Say I am a conservative, thinking good fiscal sense is the right path. My congressman (woman) may well be of like mind. Let’s say I support a high-speed rail system running through my city. Sure, data shows it would improve the economy and, perhaps environmental concerns, in my area. Yet, my congressperson says to me, “hey, it’s a great idea, but we simply cannot afford it at this time; let’s leave it on the table for another time”…
In the meantime, other, Democrat-controlled regions put forth similar plans, regardless of finances…
At the end of the day, the fiscally-irresponsible areas HAVE the expensive programs, at the increased expense of neighboring taxpayers, and the responsible parties (those who chose to wait) suffer because their time may never come, simply because they must now pay for the “greed” of neighboring districts and their default…
So, with this in mind… let me ask you this… Why should anyone ever wait? Republicans and Democrats are simply in a race to get whatever they can WHEN they can!
As long as ANY party chooses to spend more than they have, NO party can possibly act responsibly and hope to serve its constituents honorably, can it?
Thanksgiving is almost upon up. Prepare for Christ, Christmas songs, eggnog and family arguments about politics during and after Turkey Day. On to the news:
Is North Korea Moving Another ‘Red Line’? by the STRATFOR Editorial Board.
This was not the most pleasant thing to wake up to. North and South Korea are on the verge of a full-scale shooting war, yet there is little coverage of it on the news. They’re more concerned about Bristol Palin and Tea Party voters. Days like this make me wonder why I don’t just go to the local TV stations and start hurling these people off the balconies (I jest, sort of).
Geopolitical Journey, Part 5: Turkey by George Friedman, STRATFOR.
Friedman has been checking out places he considers to be potential hot spots for future altercations. He does a stand-up job analyzing what’s happening with Turkey politically these days, as they drift from being a friend to both us and Israel to drifting into the Islamist camp. Pity for them. They’ll rue that association.
We Don’t Quite Know What We Are Talking About When We Talk About Volatility by Nassim Nicholas Taleb, NNT Blog.
If you want to understand Economics and how the markets work in general, there is no one living right now more interesting to read (IMHO) than Taleb. He’s no-nonsense and loves to skewer the sacred cows on Wall Street. Make him part of your daily reading if you want your money info raw.
Syria-Lebanon: Israel is the source of terrorism in the Middle East by Channa Ya’ar, Israel National News via Voice of the Copts.
Christians in the Middle East get it. Copts get it. Maronites get it. Melkites get it. Why in the hell don’t our politicians get it?
Faking It: Taliban Negotiator Was A Phony by Rachelle Dragani, Time Magazine.
Yeah, this poseur fooled NATO and the Afghans, and is apparently a shopkeeper from Pakistan. Nice friend we have in Pakistan, eh?
Cross-posted at RudyCarrera.com.
“The American people have not become less capable of entrepreneurship,” Summers, who heads Obama’s National Economic Council, said in last week’s interview. “They have not become less dedicated to hard work, and the productive potential of this economy has not declined.”
Lawrence Summers, President Barack Obama’s top economic adviser
Willie: Some people are so blinded by the thirst for money, that it causes them to lose their values and do things they shouldn’t do.
ALF: Well, that explains Ghostbusters II.
And it also explains the current incarnation of “the rescue package” brought to us by the Obama administration. Paul Krugman sums it up today in the NY Times.
And the insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid?
I don’t know which possibility is worse.
All of these so called plans have one thing in common, socializing the losses while privatizing the gains. John Q. Taxpayer had his money siphoned away by corporations at the front end of this fiasco and is being asked to pony up again to keep the whole scheme afloat. Something really stinks here.
After being ridiculed by White House press secretary Robert Gibbs for trashing the Housing Rescue Bill last week on CNBC, Rick Santelli fired back during an appearance on Kudlow and Company. Viva capitalism!!
Remember 1997? If you have forgotten, here is a quick list of events from 1997-
Why am I reminiscing about 1997? Because the DOW Jones closed today at 7365, only 79 points above that November low of 1997. Over a decade of gains in the market have been obliterated (minus dividends). At this point, there seems to be no bottom in sight.
It’s not just that fact that the markets have dived to these decade old levels, but the rate at which it has happened. Paul Volcker today described the current situation as the “Mother of All Financial Crisis”.
I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world…
Jim Cramer illustrated the staggering losses of capital today on his Real Money blog.
The declines are so staggering that you find yourself thinking only one thing: How could we have ever trusted these pieces of paper with our nest eggs? Plus, the “terminal” value of some of these stocks, such as BAC, C, AIG, is catastrophic. They aren’t coming back
In the past, whenever everyone started to throw the baby out with the bathwater, it was time to cowboy up and start putting one’s money to work. This just feels different and it seems as if there are so many macroeconomic hurdles to clear before we see light at the end of the tunnel. The “stimulus” plan and “homeowner” plan are only patches that are delaying the inevitable market bottom. We need to find that bottom, and fast, or we just may find out that there isn’t one.
If you have an hour you must watch this PBS Frontline special. It gives a decent behind-the-scenes look at the dynamics of the market/banking meltdown related to the housing crisis and follow on credit crunch.
The folks at CNBC want so much for a bottom to be called…they have been calling bottoms for about a year. But if you listen to Roubini and Taleb, this deleveraging process will continue for quite some time. Cash is King.
From Utpal Bhattacharya in today’s New York Times:
Say I convince my friend Elvis to invest $100 with me, promising to double his money in a month. Next I convince my friends Simon and Garfunkel. They each give me $100, and I use the $200 to pay off Elvis. Elvis is impressed and tells all his friends. I take $100 each from four of them — John, Paul, George and Ringo — and use the $400 to give back $200 each to Simon and Garfunkel. Suddenly everyone wants to invest with me. I take money from eight of them, then 16, then 32, and so on. When a lot of people are involved, I disappear with the money that I raised in the last round.
The scheme that I have just illustrated is called a Ponzi scheme. It is named after Charles Ponzi, who raked in $15 million in nine months in 1919 and 1920. At the height of his success, Mr. Ponzi was hailed by those he was cheating as the greatest Italian who ever lived. “You’re wrong,” he said modestly, “there’s Columbus, who discovered America, and Marconi, who discovered radio.” “But, Charlie, you discovered money,” they told him.
What is being called the biggest Ponzi scheme of all time was uncovered just a few days ago. The Wall Street legend Bernard Madoff is reported to have told influential investors that he could guarantee them a 1 percent monthly return. That promise probably sounded too good to be true — and it was.
Unfortunately people conveniently neglect the fact that the greatest Ponzi scheme of all time is perpetrated by the Federal government and affectionately called “Social Security.” Right now, the people at the bottom of the pyramid are in their 30′s.
Fannie -hearts- the Dems! Ain’t love grand? Especially when it is captured on video.
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.
From a NYT article entitled New Agency Proposed to Oversee Freddie Mac and Fannie Mae, dated 9/11/2003. Oh by the way the new agency was proposed by the Bush administration and opposed by the Democrats. Barney and Mel are some of the guys involved in ‘fixing’ things. Be afraid, be very afraid.
Technically, this was yesterday, but my TiVo just showed it to me now. From Rachel Maddow explaining the bailout in layman’s terms:
Money is Halloween candy. And those Wall Street bankers are, metaphorically speaking, our six-year-old child who went out and got more candy than we’d ever seen or imagined. Trick or treat. And with all that candy sitting there, we parents — the taxpayers — hired a babysitter to supervise our child. Only instead of hiring a grownup who wisely fears what happens when six-year-olds do what they like to do best — eat all the candy, all at once — we instead hired a seven-year-old babysitter: the federal government. So what happened? The six-year-old ate more candy than it should have, on the seven-year-old’s watch, and got sick… all over the carpet.
And as we’re paying and sending home the babysitter, we get her take on the disgusting, huge mess of a crisis we’re now in: our seven-year-old babysitter turn to us and says, “Well, the problem here is that now you’re out of candy. You’re gonna need more candy.”
UPDATE: I wrote this post last week. I considered not running it as some might not appreciate the criticism. Well no comments so far. LOL. This London Times writer stole my stuff! BUT HEY, we are always ahead of the curve here.
McCain’s attack on Wall Street “greed and corruption” and call for greater regulation in response to last week’s financial crisis has added to concerns about the tenor of his campaign. A Wall Street Journal editorial warned that he would “never beat Obama by running as an angry populist like Al Gore, circa 2000”.
John McCain is of course no conservative. He has a decent record on life and he had the best geopolitical approach among the Republican candidates. I chose him because of his stance on Iraq and the political courage that showed. I am not a rabid sufferer of nativism and was not troubled by his stance on immigration. He had quite a bit of baggage in other areas, but on balance he was worth the gamble I thought.
The brand of statism he has been promoting lately has my gorge rising. He willingness to promote some kind of amorphous ‘service’ money hole with no clear direction at the forum last week was pathetic. He at times seems to be willing to out ‘collectivist’ his socialist opponent. One could, if sufficiently Kool-aid enabled, chalk this up to giving a sympathetic face to his campaign. He is the ‘reform’ candidate. OK if you say so.
His new populist rhetoric is extremely troubling. His blaming the evil oil, banking, insurance, investment industries is a bit too rich. He proposes non-specific regulatory reforms on an over taxed and over regulated economy. Obama demonizing business and industry is usual collectivist’s stock-in-trade. When McCain scapegoats business, and the people that run them, he is participating in the same class warfare that the Democrats participate in. He is selling out.
My friend Andre asked me a simple question. Of course I am not capable of a simple answer.
“The reason for this crisis is due to the government altering how the mortgage markets worked.”
I’m curious, PG, how the government is responsible for this. Is it somehow the fault of Fannie Mae and Freddie Mac (which for a long time have been private enterpises)? I tend to think that deregulation and the overabundance of loans that should never have been made through other private companies played for more of a role in this than Uncle Sam (other than his looking the other way for the last twelve or so years).
Andre, I was not specifically addressing the MACs in the quote of mine you pulled. The MACs are privately owned, but could issue securities backed by the government. They also were exempt from quite a few regulations. They are not private in any real sense of the world.
The foundation of my point in the statement you quoted was that the politicians, for their own reasons, decided it should be extremely easy to borrow money to own a home. Everyone should have the American dream. (Just like Obama will try to make higher education, and health care, free for everyone.)
They relaxed the lending requirements. They outlawed ‘redlining’, and other types of what they considered ‘discriminatory’ lending practices. In the end government, and privately, backed securities were covering loans with virtually no underwriting.
That is not the free market at work. No bank in their right mind would loan money with a contract consisting of: Stated Income, 100% To Value, and negative 1%, unless they government would back it. The government created that market through policy decisions. Hell, would you make those loans? (If one did not make enough of what once were considered questionable loans, then one risked losing Auto VA Approval and FHA and…)
Jose Canseco is doing something that he did not do much during his MLB career, walking….away from his Encino, California mansion. Is the jinglemail trend working it’s way up the economic ladder or is this just an individual financial crisis?
h/t Calculated Risk
As E the Wise and I had previously revealed here on Conclub, Joe Nacchio’s trial was another example of a politicized prosecution and the bigotry of the masses. Now, the Court of Appeals has thrown out the conviction and ordered a new trial. If Nacchio is as stupid as he was at his last trial, he will again hire Herb Stern to defend him. Stern will again do a piss poor job, and Nacchio will again be convicted. If he’s smart, he’ll hire an expert criminal defense lawyer (rather than a corporate specialist like Stern).
In response to Steve’s mortgage post, I thought I would throw this in. I read an article in The Atlantic about what are now becoming the new slums in America.
I took particular interest because I have 2 developments next to my property. One development of MacMansions has been finished for 3 years and out of the 30 homes, 6 are occupied.
The other larger development of smaller homes is already showing signs of decline as lower income people are renting the houses at a much reduced rate. There was originally “no renting” in the neighborhood, that has since been dropped. The problems that are plaguing the inner city are moving to the rural subdivisions.
At Windy Ridge, a recently built starter-home development seven miles northwest of
Charlotte, North Carolina, 81 of the community’s 132 small, vinyl-sided houses were in foreclosure as of late last year. Vandals have kicked in doors and stripped the copper wire from vacant houses; drug users and homeless people have furtively moved in. In December, after a stray bullet blasted through her son’s bedroom and into her own, Laurie Talbot, who’d moved to Windy Ridge from New York in 2005, told The Charlotte Observer, “I thought I’d bought a home in Pleasantville. I never imagined in my wildest dreams that stuff like this would happen.”
I’m in agreement that we have some very trying times coming down the road.
Call John Cougar! It’s time for the 2008 Mortgage-Aid Concert. Maybe with Jeff’s help we can get some muscle behind this production and make it happen. Mortgage-Aid 2008 brought to you by the Constitution Club.
All joking aside (although the more I think about it the better the idea sounds), the worst is still yet to come in the current housing crisis, which is frightening considering we are already at Depression era comparisons in debt to value on mortgages. 10.3 percent of homeowners in the U.S. (8.8 million) are underwater right now, and millions more are facing that reality with each passing day. With nearly 2 million ARMs set to adjust during 2008, this loss of property value virtually assures that those folks who want to refinance will be unable to do so and others who need to sell their homes for different reasons may have to bring money to the table to complete the transaction or find themselves stuck with a home they cannot sell.
Back in September, I discussed the issues facing those with subprime mortgages and looked at a potential plan to help mortgage holders facing possible foreclosure. The problem has grown so large today that even those with prime mortgages may need alternate solutions in order to avoid foreclosure or be faced with the decision to just walk away from their homes. The Office of Thrift Supervision is working on a plan that sounds similar to the plan I analyzed in September.
Under the regulatory agency’s proposal, still in its early stages, these borrowers would refinance into government-insured loans that cover the current value of their homes. The refinancing would pay part of what’s owed to the original lender. For the remainder, the lender would get what the plan’s backers call a “negative equity certificate.” The lender could redeem the certificate if the home is eventually sold at a higher price.
Banks would get to keep foreclosed property off their books while holding federally guaranteed mortgages and owners could stay in their homes rather than walking away from their obligations. Though not perfect, an option like this along with various other programs may help to keep the economy from sliding into the depths of a recession unseen since the Great Depression.
It’s scary out there.
This segment on tonight’s (1/27) 60 minutes is a decent primer on the problems being experienced in the mortgage and credit markets at the moment. One tactic highlighted by the story is that of “Intentional Foreclosure”. As the value of homes across the country fall, and some are forecasting a drop of 30 percent or more, look for a massive increase in the number of people who simply walk away from their obligation.
As always, the mainstream media is late to the party. 60 minutes segments are usually looked at as a market bottom, but don’t be too sure this time. We have a long way to go to unravel this credit mess.
World Financial Markets are getting crushed today. Tsunami Tuesday. Dow Futures are down over 500 points right now.
Update: Fed Cuts Rate by 75bps.
The Fed stepped up early this morning to cut the overnight lending rate to 3.5%. In its first emergency cut since 2001, the move seems to be a reaction to some major moves down in indices throughout the world resembling the period of trading directly after 9-11. It also hinted that it may further reduce rates at it’s regular Jan 29th meeting.
With the destruction of capital happening in the financial markets, it is only a matter of time before the pain really begins to be felt down here in the real world. 2008 scares the hell out of me.
Fox News Business Anchor or Porn Star
Most people probably can not tell the difference, as the New York Times is reporting than only 6,300 people per dayare watching the new Fox Business Channel. FBC is available in about 30 million homes as opposed to 90 million homes offering competitor CNBC ( which suprisingly has only 283,000 vpd) . Of course, as a start-up, it will take time to develop an audience which could be Murdoch’s reason for hiring porn stars attractive business analysts and anchors.
H/t to Don Luskin
In case you didn’t catch this already.
Mattel Apologizes to China over Recalls
LOS ANGELES – Mattel Inc. tried to save face Friday with Chinese officials, taking the blame for the recent recalls of millions of Chinese-made toys as it strives to mend a strained relationship with the nation that makes most of its toys and fattens its profit.
The world’s largest toy maker sent a top executive to personally apologize to China’s product safety chief, Li Changjang, as reporters and company lawyers looked on.
“Mattel takes full responsibility for these recalls and apologizes personally to you, the Chinese people, and all of our customers who received the toys,”Thomas A. Debrowski, Mattel’s executive vice president for worldwide operations, told Li.
When I first read this the family and I were eating at Chick Fil-a. My wife is starting to dread these little ‘discoveries’ of mine when we are together. Not only did she receive a fifteen minute history lesson on the historic arrogance of the Chinese and how they honestly believe that the universe revolves around them, but also a recap about how then Sec. of State Colin Powell had to apologize profusely and more than once because some hot shot fighter pilot was stupid enough to accidently ram one of our slow flying surveillance planes a few years back and paid for it with his life. The groveling at the time in an attempt to free our captured crew was gutwrenching but at least had a worthwhile objective. This pathetic lap dog effort played out on the world scene was downright embarrassing.
I also would like to take this opportunity to apologize to the Chinese for them poisoning thousands of our dogs and cats, putting anti-freeze in toothpaste, selling us shoddy goods and covering millions of our children’s toys in lead paint. I’m sorry.
Boycott China? How about boycotting Mattel?
Maybe Mr. Bernanke should have tried dropping something else out of the helicopter.
An event like this may have had more of an effect on the recent credit crisis than the rate drop by the Fed this week, at least according to Satyajit Das who just may be the world’s foremost credit derivatives expert. Using the dreaded baseball analogy, Mr. Das thinks we may just be listening to the national anthem at this point with all 9 innings of the game ahead of us…ultimately leading to a worldwide recession and bear market.
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.
These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper — the short-term borrowings of banks and corporations — which was purchased by supposedly low-risk money market funds. According to Das’ figures, up to 53% of the $2.2 trillion of commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages. When you add it all up, according to Das’ research, a single dollar of “real” capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion — or eight times total global gross domestic product of $60 trillion. Money quote…
While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as it did Wednesday, the evidence is not at all clear.
The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Lower rates will not help that. “At best,” Das says, “they help smooth the transition.”
One might have to “Think” outside of the box, but this electric powered car named the “City” just might show up in your neighbor’s driveway in a year or two. John Olaf-Willums, CEO of Think, is determined to shake up the automotive industry by offering a built-to-order vehicle with an assembly platform that will be easily scalable as the demand grows.
Willums’s pitch is this: He’s not just selling an electric car; he’s upending a century-old automotive paradigm, aiming to change the way cars are made, sold, owned, and driven.
Before you start thinking “never gonna happen just like all the other electric car prototypes in the past few decades” you may want to reconsider. His company has caught the attention of Google’s founders as well as inventor Dean Kamen, who is in the process of adding a Stirling engine to the battery powered vehicle, which could extend the range of a car like the “City” by hundreds of miles.
Could a car like this ever be more than a niche player in the U.S. market? Affordable electric vehicles that offer performance as well as extended range are close to becoming a reality in the U.S., but is the American consumer ready for such a drastic change in thinking? The “Think City” looks promising. Click here for more on the topic from the folks at Business 2.0.
Now that Congress has waded back into the Subprime swamp, what can we expect from those in the hallowed halls? Probably something akin to Sarbanes-Oxley, which tended to overregulate a problem that was already being cured by market forces. Some of the issues they are tackling are included in Christopher Dodd’s housing bill:
These reforms are definitely needed, but they do little for the folks who have already been affected by the practices of predatory lending institutions. There is plenty of blame to go around in this scenario, with each component of the market assuming some responsibility, including the borrower. However, as Fortune Magazine points out in the prior link, most of the blame should be laid at the feet of the Federal Reserve.
The chief charge against the Fed is that former chairman Alan Greenspan kept interest rates at very low levels far longer than necessary, which in turn sparked the bubble in housing prices and mortgage lending. Looking back, the Fed’s behavior does seem bizarre. It kept the key Federal funds rate at 2 percent or lower from November 2001 right through to the end of 2004.Those rate decisions showed that Greenspan had chosen to use the housing market as his main instrument to prop up the economy after the 9/11 attacks. Using monetary policy to encourage a rise in home prices would be a highly unorthodox move for a central bank. But evidence suggests that Greenspan was overly keen to use housing for exactly that.In 2002 he called mortgage markets a “powerful stabilizing force” because they allowed people to extract equity from their homes, and in 2004 he said that homeowners should consider using adjustable-rate mortgages to save on interest and prepayment costs. In 2005, when a record $625 billion in subprime mortgages were made, Greenspan gave a speech that blessed the creation of new loan products, including subprime home loans.
Greenspan did not force subprime mortgage buyers to buy mortgages from unscrupulous mortgage brokers who had access to virtually free money due to lax monetary policy created by the Federal Reserve, but the Fed was certainly an enabler in the process.
So as Congress considers regulating an industry that by all means is going through extreme market self-regulation at the moment, what can be done about those folks teetering on the brink of default and foreclosure as their Adjustable Rate Mortgages reset to levels that will not allow them to service their debt. First and foremost, what can those folks do right now? The Real Estate Journal suggests these three tips for fighting back.
These suggestions may only provide a stopgap until the inevitable happens. But what can be done on a much larger scope to help out those who are facing this rising tide. Many ideas have been floated, but this potential plan caught my attention.
“Nonetheless, it appears that mortgage defaults are the crisis du jour and that politicians will now fall over one another to do something about it. Under those circumstances, let me suggest an approach that I have not seen elsewhere: a debt-for-equity swap with sub-prime borrowers.
With a debt-for-equity swap, a troubled subprime borrower would give up 20 percent of the equity in his home in exchange for a 20 percent reduction in the outstanding balance on his loan. This would reduce his monthly payment of principal and interest by 20 percent.”
“The swap plan treats homebuyers as adults who made grownup decisions. It says that they can stay in their homes, but they have to give up some of their equity in order to do so. However, unlike the Baker plan, they do not have to revert to becoming renters.”
“To implement the swap plan, government would create an agency to buy equity from troubled borrowers. Call this new agency Bailie Mae.
When a borrower swaps with Bailie Mae, the borrower’s monthly payment of principal and interest immediately falls by 20 percent. Instead, Bailie Mae provides the other 20 percent of the monthly payment. The borrower still has to pay the full cost of other components of the mortgage payment, such as taxes and insurance.
As long as the borrower makes the new monthly payment, he stays in the home. When the home is sold, 20 percent of the gross proceeds go to Bailie Mae. At that time, Bailie Mae will be responsible for repaying 20 percent of the outstanding balance on the mortgage loan.”
“The beauty of the swap plan is that it keeps government involvement proportionate to the size of the problem. Suppose that the crisis is real, meaning that house prices need to fall sharply in order to restore balance in the market. In that case, the swap plan will put some of the burden on taxpayers, while leaving most of the burden on investors. On the other hand, if the housing market is close to reasonable balance today, then the swap plan will cost little or nothing. It would ease my worry about enacting an expensive solution for a non-existent crisis.”
The reasoning behind this plan seems to be sound, as all market participants including the Federal Government would have a stake in the process and the risk is spread out over those same participants. It seems so simple, but an idea like this will probably never see the light of day. Those folks who may have been pressured or deceived into ARMs deserve this type of help.
Another Day another win for Tiger at the BMW Championship at Cog Hill, the 3rd of 4 events in the newly created Fed Ex Cup Series created by the PGA to create a playoff type atmosphere in the world of professional golf. Tiger calmly shot a course record 63 while piling up his 6th win of the season and collecting the winner’s check for 1.26 million dollars bringing his total PGA earnings for the year to over 9 million dollars.
The top 30 players head to the Eastlake course in Atlanta for the final event of the Fed Ex Cup, with the winner’s share being the same as at each of the other 3 events, 1.26 million dollars. However, the biggest incentive may be a 35 million dollar bonus pool that promises to award the player who accumulates the most Fed Ex Cup points 10 million dollars, second place 3 million dollars and so on.
In addition to the prize money at each event, there is a $35 million bonus pool at stake, with the winner receiving $10 million. The second-place finisher gets $3 million, and payouts will be made all the way down to 150th place — or six spots outside the cutoff for qualifying for the playoffs. Here’s the catch: This bonus money is deferred. It will be paid immediately, but into a tax-deferred retirement account.
That came as a surprise to some players, who only recently learned that the payout would not be in cash.
“It would be really cool if we had this big check or we had cash to pay to the winner,” said Phil Mickelson, who begins in fourth place with 98,000 points. “I think that would be good. Instead … guys won’t see it for 20-plus years, and so it takes some of the luster out of it. You’ve got this corporation putting a $35 million check into this thing, and the players aren’t going to see that money for 20-plus years, until well after they retire. … I think that would make it even more exciting if we did something like Vegas used to do. Like silver dollars … or to have a big check like the World Series of Poker with piles of cash. I think it would be cool.”
What Mickelson and many others fail to realize is that with the power of compound interest, this money being deposited into a tax-deferred retirement accounts may grow into the tens of millions of dollars for the average player and possibly into the hundreds of millions for top players. It is even possible that someone like Tiger Woods could end up with a billion dollars in his retirement account. Remember, this does not even include the money they are making through endorsements and conventional tour earnings.
Even before this new deferred compensation plan came into place, the PGA was considered to have the best pension plan in professional sports.
The old pension plan – where the PGA donated money based on a formula of cuts made and place on the money list – was already considered the best in professional sports. According to Golf Week, in 2006, the average payment was $195,000 and Woods received $510,800. While that paled next to his total earnings that sum is worth $6,853,298 when he turns 60. He also received more than $100,000 in other bonuses.
That plan alone was so staggering that it required some political maneuvering to avoid IRS rules that apply to most high-end retirement plans. The PGA Tour is a non-profit and according to the Wall Street Journal, a line was slipped onto page 598 of a 650-page 2004 tax bill that would have adversely affected the plan. It offered “an exemption for any plan ‘established or maintained by an organization incorporated on July 2, 1974.’”
Guess which date the PGA Tour Inc. was incorporated?
So it seems as if the PGA has some friends in high places. I wonder how many of those friends have a membership at Augusta?
That, my friends, is a retirement plan. What are you doing to plan for your retirement?
Update: Tiger completed his quest to become the first Fed Ex Cup champion in stunning fashion, posting a 23 under score for the Pga Tour Championship to beat his closest competitor by 8 strokes. The reality of the situation was that Tiger only had to show up at the course on Sunday to claim his prize. Step 1 towards that 1 billion dollar retirement account goal is complete. The legend of Tiger Woods just continues to build.
As if the mortgage-market meltdown isn’t enough to spook investors, some market players are worrying about unusual options bets that some observers have dubbed “Bin Laden Trades.” The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500options, both puts and calls, that won’t pay off unless the market undergoes an extremely large price move between now and the options’ expiration on Sept. 21.
Someone is making some pretty big bets that the market is going to dramatically move in the next few weeks. As the article further notates, it is reminiscent of the action prior to September 11th when large out of the ordinary put contracts were placed on many of the publicly traded U.S. airline companies. So naturally, this is causing a stir on the street as it could be an indicator of an upcoming event…or perhaps it is just someone attempting to manipulate the level of fear already in the market.
Jim Jubak at MSN money gives us this great primer on the makings of the recent financial mess on Wall Street.
“In this case, the global investment community wanted to believe that Wall Street and other centers of financial engineering could manufacture investment-grade, long-term debt to meet the huge demand of insurance companies, pension funds and central governments for predictable, long-lived and safe interest-paying investments. Because the need for this paper was so great, these marks were willing to suspend belief. They knew in their heads that you can’t manufacture investment-grade debt. But in their hearts they wanted to believe. They needed to believe. They had to believe.”
“Despite the spectacular damage meted out to a few on Wall Street in the most high-profile crashes of hedge funds or investment pools, it’s the retirement pools of the world and the folks who pay into them and expect to collect from them who ultimately will pay. Every fund that crashes, every asset that goes from $1 to 50 cents takes a piece of the global retirement pie with it. At a time when the world needs every cent it can save to pay for its aging.”
I have to admit, that in my prior life in the financial markets that credit derivatives were amongst the hardest financial instruments to understand. “Invest only in what you understand” is a mantra that many financial consultants use when advising their clients. Unfortunately, it seems that many on Wall Street don’t heed their own advice.
“Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.So, all in all, when you work through the details and get down to the number that really matters, only about 0.6 percent of U.S. mortgages are currently in foreclosure. That’s up a hair from roughly 0.5 percent last year. That’s it.”
Perhaps the market, banks and media are overplaying the collapse of the subprime mortgage market. Subprime defaults are not the real issue in todays market mess. The whole subprime market could be repriced to zero and it would have a fairly small impact on the mortgage and banking industry overall. Most of the impact will be felt by the institutional investors who in some cases leveraged up to a 10-1 ratio (for every dollar of their own invested they borrowed an additional 10 dollars from the bank) and now are having a hard time unwinding the trades to come up with money to pay back the bank and investors who may be demanding to sell their stake.
Larry Kudlow offers a pretty sane analyis of the sitution.
“The biggest problem in the stock market is that the sub-prime virus has caused a temporary credit and trading freeze. Markets have already devalued mortgage bond prices, but the banks are loath to acknowledge price drops that would translate into sizable third-quarter profit losses. This is silly and shortsighted. Countrywide, for example, the nation’s largest mortgage lender, has seen its stock drop by 40 percent; Bear Stearns has fallen 35 percent.The sooner financial companies liquidate their losses, the faster markets will return to normalcy. The system is deleveraging, which in the long-term is a very healthy correction. Leveraged corporate loans are actually starting to trade-up once again, undoubtedly reflecting the money-good profits behind them.”
Meanwhile on main street…
“With a record 146 million men and women working, and the unemployment rate at a historically low 4.6 percent, the American labor force has increased its after-tax real income by a whopping $257 billion. Nominal wages for non-supervisory workers alone have sprouted by $296 billion over the past year, according to Wall Street economist David Malpass. Average compensation per hour has grown 5.2 percent.”
and…
“The pattern is the same for American business. After-tax corporate profits have grown $578 billion to $1.1 trillion over the past five years, which is why jobs, the economy, and the stock market have performed so well. Very simply, profitable businesses are creating the jobs that are providing the incomes for families to spend. It’s an enduring story: Second-quarter profits for S&P 500 companies increased more than twice what Wall Street expected. Meanwhile, the Federal Reserve reports that businesses don’t even need new loans. Corporate cash flow is so strong that firms are generating $987 billion in funds internally, which is actually more than the $973 billion they are investing in capital goods for new plants, equipment, and office buildings.”
Other that the short term losses in the stock market, those on main street will most likely feel the effects of this credit squeeze in two ways…the inability to refinance their homes in the near term or perhaps not being able to get a mortgage at all for a while. The longer the banks wait to address the issues on their books, the more pronounced these effects may be.
Since 2003, SHLD is up 808%. S&P 500 is up 56%. WMT is down 18%. TGT is up 86 %. JCP, the other turnaround, is up 298%. But SHLD shares have fallen about 27 percent in the past quarter as the company preannounced a bad quarter and has been caught in the ”hedge funds are bad” philosophy that has permeated the street as taxation issues and bad subprime bets come to the surface. As Cramer himself said the other day on TheStreet.com TV, sell the stock. Get out of it today….if you can’t take the heat. But he is not selling, and neither am I.
I for one never expected a great “Retail Renaissance” at Sears Holdings, with both Sears and Kmart being able to grow back into prominence as they were in the early to mid 1900′s. To think that would be a fool’s game. What has happened is about what I expected with the two companies. With Kmart, Lampert took a bankrupt company that was bleeding money and turned it into a cash creator. With Sears, Lampert has been trimming back the fat of 100 years of business in the attempt to make the company a cash creator as well. When Sears sold it’s credit card operations in 2003, many thought that would be the death knell for Sears as more than 2/3 of it’s profits came from owning it’s own card. However, by owning it’s credit porfolio it was subjected to much greater risk and as the sales continued to slide the cost to pay the interest to Sears bondholders became too great. After “merging” Kmart and Sears, Lampert has been able to leverage some costs and Sears has become viable on it’s own by just selling goods and services.
So, now under the Sears Holdings banner, Lampert has two companies that are creating cash. But he has done nothing else that was expected of him when he “merged” the two companies…selling of real estate or closing huge numbers of stores. There have been no purchases of other businesses with the cash being created by the retailers. He has shunned the business press and analysts by not providing monthly sales updates and only speaks to them at the annual meeting. So it seems as if the only way to value the stock is through retail sales with an added bump for the Eddie Lampert premium given to him as a result of his 20 plus years of investing performance. So as sales continue on their downward trend and no Lampert magic has occured yet, you get the latest performance. Interestingly enough, the shares have not been trading at a much greater rate than their normal volume (no fire sale if you will) and Lampert had about 1.5 billion dollars with which the board authorized him to buyback stock. He is getting that stock on sale right now. In fact, there has been a bluelight special on SHLD stock for about 2 months.
Take a step back and look at the stock of Berkshire Hathaway, Warren Buffett’s company. Some have speculated, including your’s truly, that Lampert would like to create his own version of that company. In 1965, Berkshire started trading at around 14 dollars a share. On July 27, 1977 it was trading at 100 dollars a share. 30 years later on July 27, 2007 the stock traded at 110,000 dollars a share. Sometimes it pays to be patient.
No, not those kind of rumors. I am talking about Wall Street rumors, with the latest being that Sears Holdings may be in the mood to acquire Macy’s. The result of the rumor…Macy’s shares climbed nearly 5% today while SHLD climbed nearly 3.5%. This is the 3rd Friday in a row that has seen unusual trading in Macy’s shares as the company has also been rumored to be taken private by a private equity powerhouse such as KKR.
Would Macy’s be a good fit for Sears Holdings? It seems to be a very promising buyout target.
Macy’s Inc., the second-largest U.S. department store company, is an “attractive” target for a leveraged buyout and may fetch $50 to $52 a share, Goldman, Sachs & Co. said.Macy’s cash flow and “valuable” real estate, as well as the company’s potential to cut costs and take on additional debt, make it a possible takeover candidate, New York-based Adrianne Shapira wrote in a note to investors today.
This sounds like the same scenario that attracted Lampert to Sears before the Kmart/Sears merger that created SHLD. And remember, Lampert is said to be raising between 3 and 5 billion dollars for his hedge fund at the moment, which combined with the nearly 4 billion dollars cash on hand for Sears Holdings makes for a pretty powerful warchest. Throw in some stock and debt and we have a nice little merger.
Of course this is all just speculation. One could also say that a well placed rumor was whispered to the market to create some momentum in a stock that has fallen from the low 190′s to around 170 dollars per share just yesterday. The quarter ends at the end of July, so this could all just be window dressing to prop up the old share price.
How do rumors get started?
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