The Financial Crisis Remedial Edition

For those of us who are not Nobel Prize winning or Ivy League educated economists here is the crux of the financial meltdown in terms we can all understand. Though there are those in the media and the McCain campaign that would have us believe that how we got to this point in history is unimportant I have always believed that those who fail to learn from their past mistakes are bound to repeat them. According to the endless line of economists that now appear hourly on our television screens the economic crisis is too complex for any of us to understand. I would like to take this opportunity to provide a simple explanation of this complex situation based on my own studies.

The financial meltdown by all accounts began with the mortgage crisis and this issue continues to fuel the loss of capital in our national and international financial institutions. So how did the mortgage crisis begin and how did it lead to our current situation? The mortgage crisis began with a noble concept, the concept was to try and provide home ownership to more Americans. It began with the Clinton Administration and continued with the Bush Administration’s “ownership society”. So how did such a noble idea lead to the financial meltdown of today? The problem is that when you open up a system flush with cash and do not provide the proper oversight the greed of some men will warp the good intentions of others. The market was flooded with capital but instead of providing the necessary oversight what little oversight that was present was removed.

The process began with the realtors; they sold houses that had inflated prices. Because of the housing market boom with the increase in capital and buyers the prices for homes were grossly inflated. A home that would have normally been valued at say 100,000 was sold at the inflated price of say 200,000. These inflated prices were based in 2 false assumptions; the first was that housing values always appreciate so that even though the prices were inflated the value would eventually catch-up to the price. The second was that the market was savvy enough to understand the intricacies of all of these new financing instruments or that the sellers did for that much. What we have since learned is that both of these assumptions were proven false. While housing values do historically tend to appreciate there have been times when they have not. Obviously like free booze at a wedding no one thought it would ever run out. It did. So we now have homes that are overpriced based on their true value, therefore any financial assumptions based on these values is flawed. It’s like you have a bank balance that shows 100 dollars when in actuality there is only 50 dollars in the account. It’s all good so long as you don’t have to pay more than 50 dollars.

The next domino was the so-called “sub-prime” buyers who the programs were originally designed to help. For those who have sterling credit and have had it their whole adult lives they have no concept of the thought process of those who do not share their credit ratings. If you have been turned down for credit for so long when you finally get the opportunity to get it, you don’t look at the terms. You are just happy to be able to buy something. Let’s face it folks our country runs on credit, without it you are considered unfit as a person. In the best of circumstances many of these “sub-prime” borrowers were put into homes with these new financing instruments they could not afford. Many of them were balloon instruments that provided affordable payments for a few years and then ballooned up to higher payments. This does not include those who were taken advantage of by predatory lenders. Many of these buyers could barely afford the payments they moved in with, so when the payments ballooned they were unable to make their mortgage payments. While this is unfortunate it doesn’t explain why our financial system went haywire. I mean we foreclose on those homes and resell them right? Wrong. Because these homes were not priced even close to their value all that inflated value was also lost with the original loan, because you are not going to be able to sell the home for that inflated price. So not only did the mortgage company lose the original loan they had an asset that was priced substantially higher than its estimated value. On a small scale these discrepancies could be off-set by other loans or fees; however on a massive scale there was no way to recoup all of these losses.

The final domino was that we allowed Wall Street to bundle these mortgages into securities and sell them. There were two problems with this idea. The first of course was that the price of the assets being held was inflated compared to their actual value. The second was the inherent incompatibility of the concept of using mortgages as securities. Let’s think about this. We sell securities in businesses; the main purpose of a business is to make money or to make a profit. The main purpose of a mortgage for most Americans is to provide a home for their family. While there are those who use their mortgages and homes to generate income and profit, this is not the case for most Americans and especially those who were in the “sub-prime” category. Many of these folks were first or second time home buyers who lacked the savvy to do so. So we have these massive security instruments tied to over-priced assets and to make matters worse we have these CEO’s and other officers who were aware of these pitfalls and pushed the situation to the brink. They not only continued to buy and sell these worthless instruments they leveraged their companies or borrowed against these assets that they knew were over-valued or in many cases questionable.

So you see on paper it all looked good. Everyone was making money and no one cared about the consequences. Then of course the day of reckoning arrived, they could no longer continue to count these worthless assets on their balance sheets. So now after all the profits have been made and all the inflated value has been sucked out of these assets these clowns come to the American public with these predictions of Armageddon if they are not rescued. They want to sell us all of these worthless assets at a profit. Do not be fooled if your home had value before this crisis it still has value. Those who should be worried are those who refinanced or bought overpriced homes in the first place. These are the homes that are seeing their value diminish as they should. Senator McCain wants us to come in and continue to prop up these over inflated homes to protect the banks. Why should I be asked to prop up the value of these people’s homes?

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The Missing Billions From The Housing/Credit Crunch

I have good news and bad news. The good news is that I am happy to report that we have located all of those missing billions from the mortgage/credit meltdown. You know all of those profits from all of those questionable loans that the banks made to the mortgage companies, who in turn with the help of the hedge fund managers bundled them together and presented them to an unsuspecting public as stable investment vehicles. That’s the good news. The bad news is that the money was found in the pockets and bank accounts of the ones who helped to start this fiasco. In what is becoming an all too familiar scene the authors of the mortgage fraud have walked away with billions in profits while the rest of the country prepares for tough times ahead.

Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.

Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.

Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”[1]

So here is what we know, the CEO’s of the main players in the mortgage meltdown made bonuses in the millions while they steered their companies to the verge of bankruptcy. The hedge fund managers made billions- this is not a typo- they made billions as they played both sides against each other. We have surpassed the avarice of the Gilded Age and have created a whole new level of greed not seen before in this country and maybe not in this world. If you thought we had reached the stage where a few super-wealthy families were influencing the economies of the world, you haven’t seen anything. There will be untold carnage left behind by these hedge funds as they grow larger and more influential. Imagine managing and moving around amounts of money that dwarf many countries GNP’s and how that will affect the smaller and more volatile economies.

This news comes on the reports of the MSM of how everyone lost during this economic meltdown, well I guess everyone didn’t lose. The biggest losers were the average homeowners and investors who have been made prey for those who will never have enough. How much is enough money? How much is enough cars, clothes, and stuff? The level of disconnect between what people actually do and what they earn in the area of investing and financing has reached the level of the absurd.

Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.

Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.[2]

All this money making and profit taking is news to me because I lost money from my investments across the board last year. How is it possible that the market you are investing in lost money, but you actually made money? And not just a little money, but a perverse amount of money that would even be considered exorbitant in good times let alone in falling markets. I am not a Rhodes Scholar economist, but I know bullsh*t when I see it. And what we are watching in America today is exactly that. These guys use borrowed money and bail-outs to generate these excessive profits all the while espousing the impending menace of the entitlement programs, government safety nets and their subsequent implosion. Give me a break! If these guys would pay half the money they and their corporations should be paying in taxes many of the ills they speak of would be non-existent.

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[1] http://www.nytimes.com/2008/04/16/business/16wall.html?em&ex=1208491200&en=b3c6700a81395afa&ei=5087%0A

[2] http://www.nytimes.com/2008/04/16/business/16wall.html?em&ex=1208491200&en=b3c6700a81395afa&ei=5087%0A

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The Cow Is Already Out Of The Barn

It is good to see that our elected officials are once again using their impeccable timing to save us poor working class folks from being ravaged by the wealthy. There is only one small problem the ravaging has already taken place. These same idiots who supported less or no regulation of business and the markets particularly think that now there maybe a problem with letting corporations and lobbyist write their own legislation and regulations? I’m shocked. Ok folks let’s have a quick recap, the reason we have Medicare, Social Security, and child labor laws is because if given a chance the greedy bastards that are the captains of industry will run this ship aground every time for short term profits.

Mr. Paulson said the government was going to demand greater “transparency” from banks and Wall Street firms, stronger risk management and capital management and a better trading system for complex financial derivatives, such as collateralized debt obligations, that managed to transform risky subprime mortgages into securities with Triple-A ratings.

Senator Charles E. Schumer, the New York Democrat who is a member of the Banking, Housing and Urban Affairs and Finance committees, was both positive and critical about the proposals, saying in a statement: “The administration is finally moving towards where Congress was last year. The good news is, they’re beginning to put their toe in the water when it comes to government involvement to help the economy.

The bad news is, they’re going to have to do a lot more than that to address the problem. We need government action not only to solve the current crisis, but also to prevent a future one.”[1]

So now that all the robberies have taken place the Keystone Cops in the Bush administration want to come in and close the barn door. But like as been stated many times by wiser folks than me, the cow is already out of the barn. The pillaging has been done and not only have they allowed it to happen, they are now in the process of rewarding the same people who drove our economy to the brink. This is similar to the CEO’s of the nations banks and mortgage firms getting raises for orchestrating the biggest economic meltdown according to ex-Fed Chairman Greenspan since WWII. So what is it going to take to wake up the American public to the lies being perpetrated by the wealthy and their political minions.

I once read that capitalism is expecting the greediest among us to do the right thing. Well guess what folks, they are not going to do the right thing. What makes it so bad is that the Bushies can orchestrate a “bail-out” for Wall Street overnight, but do you think they have any help in store for Main Street? Not a chance. So reward the very economic excesses that caused this debacle by bailing out the architects of it and leave those victimized by it to fend for themselves. Is this a great country or what? And rather than us taking to the streets to protest the inequality of these economic policies we sit cowering in our homes hoping that the next wave of lay-offs and foreclosures don’t have our name on them. In the mean time the people who not only have created this mess, but also have the most assets to weather this storm are treated to government intervention while this same government is pissing down our legs and saying not to worry we are on top of this.

I feel better already. The same clowns who removed the regulations and regulators now say they have a handle on this thing. I know according to Senator McCain how we end up stepping into crap is not important, but I beg to differ. If I don’t understand how I keep stepping into crap, guess what I ‘d better invest in a pair of hip-waders because I am going to find myself in heaps of it. The problem is simply this, we have been fed a bunch of BS by the robber-barons of today that more regulation will lead to more costs and lay-offs. Newsflash – How many lay-offs do you think are in the works now that the economy has been trashed by these clowns? The problem is not regulation. The problem is greed. It is the Government’s job to protect those who are weaker from those who are stronger. How many “Gilded Ages” do we have to go through to understand this?

[1] http://www.nytimes.com/2008/03/13/business/13cnd-paulson.html?hp

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A Riddle Wrapped in Mystery, Inside an Enigma

This line always comes to mind when I think about the American economy. The designers of this “economy” have wrapped so many layers on top of layers that I don’t think anyone truly understands it. Oh sure we have these “leading economists” and scholars who pontificate on the inner workings of capitalism, but I have come to believe they are no more reliable than the local weatherman. The problem with an economy as complex as ours is that no one can truly predict how one component will truly affect another. They have their theories and their models, but the reality is they don’t have a clue. The sad part about it is they don’t have to. Most average folks don’t understand it and have no desire to learn about it. For them if they go to work, get paid, and can pay their bills the economy is working.

The truth however is that it isn’t that simple. There are economic hurdles strategically placed to ensure that those with capital are able to increase it at the expense of those who don’t. While we claim a free-market enterprise, we really don’t practice it. We have created so many layers on top of each other without any insulation or safety nets that collapse is inevitable. The reason there is no insulation or safety nets is because Americans do not save money. If the American consumer saved money not only would they provide insulation and a safety net for themselves, but also it would force the financial markets to do likewise. Instead of promoting savings our markets have promoted spending, but not only spending but debt spending.

Think of it as getting the sacrifice of U.S. soldiers and the obliviousness of U.S. shoppers a little more in sync. The non-relation between expensive wars and exempt non-warriors, a mirage Bush has fostered, has become unsustainable.

Roach estimated U.S. net national savings at a tiny 1.4 percent of national income and household debt at 133 percent of personal disposable income. That last figure means middle class families are tapping into home equity - borrowing against their homes - to buy their kids socks. And if they can't pay the resulting never-sleeping debt, they lose not a room or two, but the house.[1]

So we have many people who have spent more than they could ever hope to repay based on market assumptions that could never have been met. The whole Bush recovery was based on lies, it was predicated on the continued debt spending of not only the American public, but also the American business community and government. In an economy that is built on false assumptions on top of other false assumptions when one of those false assumptions finally is proven false it takes the others with it. The false assumption that was exposed by the sub-prime crisis is not the only one and as we are seeing the whole economy is at risk. We are in the beginning of a recession; the only question now is how deep and for how long.

I read a piece in the NY Times about how we were not suppose to have any more deep and long-lasting recessions. The very problems our economy is dealing with today are the ones we were supposed to be able to avoid through business efficiency and lessons from past mistakes. The current crisis is based on market speculation. You remember the same thing that has caused previous recessions and the creator of the depression, so I guess the learning the lessons of the past is not reliable. According to the article, because of our economic moderation principles we were not going to experience the type of collapse we are seeing today, so much for moderation.

America does not know moderation. From a President that believes you can wage war without concerns for the economic repercussions to the homeowners and credit card holders who believe that consumption is the answer to all of life’s problems, we don’t do moderation very well. Now greed and conspicuous consumption we do those really well. And that is why the answer to our economic crisis in Washington is to promote more spending. I got it, let’s give out rebate checks for more spending to stimulate a broken economy. The answer to our current situation is not more spending it is more saving. We cannot continue to spend money like drunken sailors, it is time to bite the bullet and make the difficult choices that Bush and company have managed to stave-off for eight years.

For some odd reason saving money in America has gotten a bad name, the corporate profiteers have convinced Americans that we have an infinitely expanding economy, just like the universe and if we just keep feeding the engine of consumption it will continue to expand. I am not an economics professor or a Nobel Prize winner, but I can see the fallacy in that, I wish more of my fellow citizens could see it as well. The lessons learned by the survivors of the Great Depression have been lost on the “boomers”, we must as a nation begin to save money and provide better insulation of our markets. We must stop our addiction to debt spending both institutionally and individually. The problems of our economy may be complicated but the solution isn’t. Save money!

[1] http://www.nytimes.com/2008/01/21/opinion/21cohen.html

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Regulators, Mount Up

As the mortgage crisis continues to worsen and the big R word (recession) is showing up more and more in stories about the economy, it once again illustrates the true intentions of corporations and the Congressional minions who do their bidding. For the past three decades the conservatives and the corporations have been continually assaulting the regulatory arm of the Federal Government. Whether it is the inspectors that safeguard our food supply, our water, or our medicines all have been under attack. Although it is never presented in truth, but always in code, the fact remains that the goal has been to weaken our ability to regulate their business practices.

The code is couched in language like “big government”, free market, and self-regulation. The results of course have always been the same; pollution, tainted food and medicines, and loss of consumer choice. Because they have been so good at their marketing practices anyone who has the audacity to request regulation is immediately labeled a socialist or obstructionist. Every time deregulation has come to an industry the consumers have suffered, whether it was communications, travel, or banking. Deregulation requires us to rely upon the greediest to recognize the common good and to do it, instead of maximizing their gains. Why anyone would think that this would work is beyond me.

The scary part is that even when misdeeds are reported by the few regulators we have, they often times go unheeded. Whether it is Medicare fraud, war profiteering, or gas price gouging the response is often times the same; inaction on the part of superiors or a cover-up. How many stories have we read of government “whistleblowers” who were retaliated against by managers or supervisors, hell we even had to create a law making retaliation illegal? The latest in the long saga of ignored warnings is the mortgage crisis, it appears that almost a decade ago there were warning signs and alerts that were being ignored. This included a direct warning to Alan Greenspan, our economic guru and market manipulator. Although Mr. Greenspan has always claimed political neutrality, many of his policies were timed to benefit the current and past Republican administrations.

In order to keep the “recovery” on track for young Mr. Bush, Mr. Greenspan ignored warnings from a Federal Reserve governor and an advocacy group to investigate the growing lending crisis. Lenders were initiating risky loans as early as 2001 and were generating mortgages that would balloon into unmanageable payments for the borrowers. I remember when I first heard of the balloon mortgages, my first reaction was disbelief and slowly over time turned into anger. The concept to me seemed as solvent as the “junk bond” fiasco that took place two decades earlier, both were predicated on greed and the lack of financial knowledge of the consumers. Just because someone can get credit doesn’t mean they understand credit.

WASHINGTON — Until the boom in subprime mortgages turned into a national nightmare this summer, the few people who tried to warn federal banking officials might as well have been talking to themselves.

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.[1]

Because Mr. Greenspan was trying to create the illusion of prosperity to buoy the fortunes of President Bush, he refused to rein in a lending market that had gone crazy. In what is being called the pursuit of innovation and Mr. Bush’s “ownership society”, lenders were allowed to generate loans to low-income or sub-prime borrowers. While in theory this was an excellent goal, because it represented a market that had longed been ignored and discriminated against. However, when theory became practical application the sharks began to infest the waters. These consumers who were not credit savvy were placed into loans that promised initially low interest rates, but were back ended with astronomical rates that based on their incomes the consumers could not afford. Also included in many of these loans were predatory lending fees and clauses that bound the consumers to these high interest loans for years.

Customarily, mortgaged loans are generated by one institution only to be sold to another lender after about a year. Many of these loans were created with high buy-out clauses that prevented the loans from being sold or allowing the consumer to shop the loan for a lower interest rate. The good news is you finally get a home; the bad news is in three years you won’t be able to afford it. This is the results of the Republicans privatization of HUD. Rather than having the government regulate and assist with these new homeowners, the conservatives believe that the consumers are best served by private industry. The same private industry that ravaged the communications, healthcare, and airline industries was entrusted with the lives and homes of unwary consumers. Now, that shouldn’t have set off any red lights or alarms.

“Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked in a speech he prepared last August for the Fed’s symposium in Jackson Hole, Wyo. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.”[2]

The problem I have with corporate America and their Congressional minions is not capitalism, everyone is entitled to make a buck; no it is their greed. With these guys there is never enough money, power, or stuff. The truth of the matter is there was no Bush recovery; it was all smoke and mirrors orchestrated by Greenspan, the markets, and the corporations. This explains why even with a “so-called” recovery middle and poor Americans were still struggling and there was no consumer confidence. I just hope the next administration will have the courage of its convictions and will rein in the greed that has been allowed to run rampant for nearly a decade.

[1] http://www.nytimes.com/2007/12/18/business/18subprime.html
[2] Ibid.

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