Tuesday, September 30, 2008

The Day the World Didn't End- No Bail Out, No Worries

Well, we were told two weeks ago that we were days, maybe hours from a total collapse of the world's financial systems if we didn't immediately cough up $700 billion to overpay for bad loans. The bill failed and the world continues to turn. The market is actually up 450 points today, bringing the day net reaction so far to a 3% drop in the Dow, which, given current economic conditions, is probably still a bit over priced.

Maybe traders believe a bail out is inevitable. Maybe the reality is that credit's going to be tight for a while, some companies will fail, some wont, but we'll get through this with or without a raid on the treasury.

Pundits continue to spew that the public just doesn't understand. The public understands, they just don't care. The bank that's been raising their rates and putting the squeeze on them for months is begging for a bail out. Excuse me for not panicking. Alternatives have been put forward. Some have suggested offering a capital gains and income tax holiday on homes purchased in the next six months. That actually makes sense. It's lack of home sales that's at the base of the problem, so stimulate home sales by increasing the potential profit margin. It wouldn't cost the government a dime, since they weren't going to see any tax revenue from unsold homes anyway.

We have to clean up this mess before we rebuild. This is not 1929. Information, ideas, resources and talent flow more freely now than at anytime in history. We are well prepared and able to deal with a market downturn. As long as the system is perceived as fair, just, transparent and consistent, we can weather this storm and come out stronger. If the government steps in and changes the rules every week, all bets are off.

Monday, September 29, 2008

Thanks Nancy!

Just when it looked like the Republicans had caved, Nancy Pelosi saved the day by insulting them on national television. Twelve Republicans that had stated they would vote for the bail out, changed their minds and voted against it. Maybe it was the wrong reason, but it was the right decision.

Administration officials are petrified that the the current financial system may collapse. I hope they're right. We need a new one.

Congress may yet cobble together a more politically acceptable raid on the treasury, but the political atmosphere points to gridlock, at least for a little while. This mess needs to be brought out into the light of day. The people need to know what Washington has been up to for the past couple of decades. If it takes a few years of hardship to clean house in DC, so be it.

Sunday, September 28, 2008

The Deed is Done. Bailout Agreement Reached

Well, it looked as though Congressional Republicans were going to step up and stand on principal, but as it turned out, they moved a couple of commas around and pretended they looked after your interests. The bailout agreement has been reached and $700 billion tax dollars are about to be given away.

Of course, the healthy banks aren't going to participate. Better to absorb the loss than face the tax and equity consequences of participating in this rip off. The government will get bogus paper, issued by the now government owned Freddie and Fannie, by giving cash to the most incompetent lenders in the market. One of the stipulations in the bill is that the government renegotiate the loans that back this paper. In other words, they've been ordered to take steps to immediately devalue the investment they just made. If you are a mortgage holder and are not behind, you keep the deal you have. If you are in default, you get to negotiate a better deal. What do think that will do to the mortgage market? The feds get warrants in the companies that do participate (again, the weakest in the industry) and they'll have you believe we're all going to come out ahead on this venture.

They may be able to hide the losses since they now will own both the issuing authority and the bogus paper they issued, but you will NEVER see a return on this investment. Recall the Savings and Loan bailout was supposed to cost us around 50 billion dollars. In the end it cost 150 billion and that involved hard assets. There are many more middle men in this deal. Lawyers are going to make money. Taxpayers are going to get squat.

It was all designed to hide the fact that the government essentially ordered the give away of homes. Obama said today that the whole mess "started on Wall Street". Wrong. Wall Street is where it ended. They were the patsies intended to take the fall from the beginning. It started in DC. Now they're all laughing, all the way to the re-election campaign. They not only got away with it. They're going to be hailed as heroes for it.

The Community Reinvestment Act's Role in the Economic Upheaval

The Community Reinvestment Act was passed in 1977 as a response to discriminatory lending practices of banks and investment institutions. It was apparent that being a minority automatically lowered your credit rating and something had to be done to address it. The act tied the performance of banks in meeting the lending needs of the communities they served to access to deposit facilities and approvals for mergers and acquisitions. Mortgages could be insured through and sold to government sponsored entities, The Federal National Mortgage Association (Fannie Mae) and The Federal Housing Finance Agency, (Fannie Mae).

In 1995 the bill was revised to encourage more lending to low and moderate income borrowers. Freddie and Fannie were permitted to hold back just 2.5% of their investment outlays as collateral, vs the 10% requirement for banks.

The scheme as a whole set up a system whereby I could make a loan to you today, sell it to Freddie later, and be off the hook should you default on the loan. This of course encouraged lots of new lending, lax standards and less effort on validating borrowers claims on income, employment and assets. Institutions that were not covered under the CRA saw the massive amounts of cash flow being generated and followed suit, even though they had no implicit guarantee of a government bail out should things go south.

The pickle we're in now isn't the result of increased lending to minorities. It's the result of across the board lack of due diligence in lending encouraged by a bogus guarantee against failure. The problem was real, but the solution was flawed. Instead of developing real anti-discrimination standards that could be objectively measured by comparing approval rates of individuals in similar income, and asset brackets, discrimination was determined by how much money you invested in a particular neighborhood. The proponents tried to dilute the risk by having government sponsored entities buy, repackage and sell the loans in the market. I guess the idea was that if it all came crashing down, one could blame greedy Wall Street investors, since that's who the ball would ultimately be passed off to.

It's a government mentality similar to the thinking behind Social Security and soon, government health care. Of course the math doesn't work, but by the time the general public catches on, it will be "too big to fail". They'll get on board a massive government cash infusion (which will ultimately cause rampant inflation) and everything will be hunky dorey (at least until the authors are long gone).

I hope we learn the lesson that injustice and incompetence cannot be remedied by simply throwing money at them. Real, objective, measurable solutions must be developed that actually address the problem.

Saturday, September 27, 2008

McCain's "Read My Lips" Moment is Upon Him

Conservatives and Capitalists have had a tough time embracing John McCain. There is a general feeling that he either doesn't really understand or doesn't support their general principals. He was able to sway many with his choice of Sarah Palin as his running mate, but what's going on right now will overshadow all of that.

McCain has made a great show of waving a pen around and stating that he will veto any pork barrel bills that come to his desk and "make the authors famous". Yet he's about to be a party to the biggest pork barrell spending bill in the history of the universe: The federal bail out of failing banks.

Democrats tend to stay loyal to their nominee regardless of how they vote or what kind of trouble they get into. Conservatives and Capitalist within the Republican party are conservative and capitalists first and will not support a Republican they view as ignoring their core beliefs. You can ask George Bush Sr. about that one. After his famous "Read My Lips, No New Taxes" pledge, he was convinced to sit down with Democrats and hammer out a new tax increase plan. His second term was gone as of that moment.

Conservatives and Capitalists will not vote for the Democrat. They will either vote third party or not vote if this bail out thing passes with McCain's support. Yes, we would rather see the country fall into depression than see it abandon free market principals just because things got tough. We're funny that way.

If McCain doesn't throw himself in the path of this bailout and do everything in his power to stop it, this election is over as far as he's concerned. If he doesn't understand that, he doesn't understand his base. Depression doesn't scare us. Obama getting elected doesn't scare us. Being in any way connected to the nationalization of private enterprise is something we simply will not do.

Friday, September 26, 2008

Who Won Debate? Not Us

Okay, maybe not a great debate, an adequate debate? Alright, let's just call it a debate. If you were firmly in the corner of one candidate or the other before tonight, I doubt you heard anything that changed your mind. If you were on the fence, it depends on what your priorities are.

I think McCain scored points on national security. He repeatedly used the phrase "Senator Obama just doesn't understand...", and at times made a pretty convincing case.

Obama did seem to be on the defensive more often than not.

Neither candidate scored any points with me on the economic front. Both agreed that a multi billion dollar bail out was absolutely necessary. It's a familiar refrain from those who pay lip service to free markets in good times. When things get tough it's always "I firmly believe in free market principals, but......." Followed by a big but.

McCain could have been the populist hero if he had gone to DC and simply squashed the whole bail out on principal. Main Street isn't afraid of facing the consequences of letting nature take its course. It's the suits who are petrified. McCain and Obama both came across as just another couple of suits. Ironically, McCain talked about how important it will be to reign in government spending as he simultaneously proclaimed his optimism and gratitude that a bi-partisan mass raiding of the treasury will soon be passed. Obama conceded he might have to scale back or delay some of his other social engineering projects until this one is done. Yes, we are about to elect yet another leader of the largest economy in the world who has no clue as to how it works and no faith in its ability to adapt.

Monday, September 22, 2008

Back in the USSA!, Will the Bail Out Fix the Economy?

Congress is about to approve at least 700 Billion dollars in government spending to bail out the banks and investment houses. Rules were waived to allow Goldman and Morgan to change their status to Bank Holding companies and access 24/7 "emergency loans" from the fed within just 5 days rather than the normal 30.

Several thoughts come to mind immediately. First, the blatancy with which the feds have totally dispensed with the rule book tells me they are in absolute panic and the situation is far worse than they're letting on. Second, do you really think that once they give these ailing corporations a giant cash infusion, these banks are going to turn around and make that money available to the general public? They're going to pay off their strategic network partners so that after the whole house of cards comes falling down and it's time to rebuild, they'll be in good standing. Next, what does the federal government do when the airlines and the auto companies come looking for a hand out? How about the truckers and anyone else that is in dire straits right now or in the near future?

The feds are scrambling to rebuild a perception of normalcy, probably because if there is a run on deposits, there is no way the banks or the FDIC will be able to cover it. They've all borrowed against and committed money that doesn't exist and if things don't turn around, everyone is going to know it. If it get's bad, triple and quadruple digit inflation is not out of the question as the treasury starts printing money as fast as the machines can handle.

In the best case scenerio, the economy has a quick recovery and the federal government experiences a net loss of a couple of hundred billion dollars. Even that puts the "drop dead" date for dealing with things like social security and medicaid much closer than it was a few weeks ago.

Tuesday, September 16, 2008

....to thunderous applause

In the beginning there was much liquidity. Credit was loose and easy to come by. Home buyers were able to get loans well beyond their income level’s ability to repay. No matter, housing prices were going up. You just refinance every few years until you sell.

Then the buying slowed down. Housing prices fell. Interest rates adjusted. Borrowers fell behind. Many walked away or foreclosed.

The mortgage broker made money. The firm that made the loan and resold it made money. The firm that bought that loan, packaged it with other loans and resold them, made money. At the banks that bought the packaged loans and financial instruments tied to them, executives made money. Even the ones who were fired, walked away with big paydays. Even the borrower got use of the home and/or any cash received from the loan they couldn’t repay.

So who lost? The taxpayer. Just as we were seeing the light at the end of the tunnel in government spending in Iraq, the feds stepped up and bought out Freddie, Fannie, then AIG. Now they’re enacting a plan to take the garbage off the balance sheets of the banks and dump it in the lap of the taxpayer. The nation’s financial system is being nationalized...and Wall Street cheers as perhaps the biggest ponzi scheme in the history of the world comes to a successful conclusion.

The politicians aren’t card carrying communists. They’re just in fear of their jobs, their legacy, losing the approval they so cherish.

Allowing the financial markets to reap the fruits of their misbehavior and poor judgments would have been ugly, chaotic, caused years of calamity and harship and would have been justice. Lessons would have been learned that would not soon, if ever be forgotten. We would have survived. We would have come out stronger. What have we learned now? That practicing good judgment, paying your bills on time, living within your means, generating real value for an honest profit is for chumps.

To the small business person who is making it in this environment, without a government bail out, at least you should recognize that you have outwitted and outperformed the best and brightest at Shearshon, Merrill, AIG, Freddie, Fannie and a host of other Wall Street legends. The government may not recognize your accomplishment. In fact, you’ll be paying the bill for this mess. But for what it’s worth, I salute you.

Where do we go from here? It’s hard to say. The universe rarely unfolds the way I'd like it to, but that doesn't mean you can't spot opportunities. In a few months, the government will have a bunch of real estate on its books that it's going to want to unload in a hurry. Unlike commercial ventures, they'll go as low as they need to go to get them sold. Similar to the RTC situation in 1991, there's going to be a fire sale on real estate. If you've got some cash in the closet, take advantage. Recall that in the early 90's, once the RTC unloaded its inventory, the market recovered quite rapidly. Then again, looking out twelve months is tough business these days when the rules are subject to change without notice. Who knows? They may decide to regulate home prices next near, or next week.

In any case, capitalism may be out as a national economic policy, but as a personal lifestyle choice, it's always available. Just be aware of the changing nature of the environment.

Sunday, September 14, 2008

The Mixed Message of the Fringe

I must say after viewing the pilot episode of The Fringe, I think FOX has a winner here.

The premise is intriguing. Science and technology have accelerated to the point that amazing discoveries will be made, or already have been, by people totally beyond the control of any government agency. In theory, a genius in his garage could come up with new science and knowledge that could make him or her the most powerful and/or dangerous person on the planet overnight.

It's both plausible and disturbing. Not just from the view that powerful new science could end up in "the wrong hands", but that the public could be convinced of the need for tight government controls on knowledge, information and research and development resources.

It's a real dilemma. More freedom = less security. More security = less freedom. Are you more afraid of science "in the wrong hands" or an overbearing government?

Personally, I prefer to take the chance that bad guys might get hold of dangerous knowledge, and instruct the government to control, pursue and contain the bad guys, not the knowledge.

Wednesday, September 10, 2008

Dumb and Dumber? Biden says Clinton might have been a better pick.

Less than 24 hours after Barak's now infamous "Lipstick on a pig" remark, Joe Biden emerged from the media shadows to tell a townhall forum crowd that not only is Hillary immensely qualified to be the President and/or Vice President "Frankly, she may have been a better pick than me.".

Clearly Biden was sucking up to Hillary supporters, but what he said was that his boss' first presidential level decision, the choice of vice president, was a mistake. This after Obama went to great lengths to convince people that his decision had nothing to do with any personal animosity toward Hillary or the fact that she's a woman. He maintained he thought long and hard and picked just the right guy. The guy he picked disagrees.

The McCain campaign has to be loving this. The hits just keep on coming. They need to be careful though. At this point they should switch gears and focus on the McCain message rather than continuing to spotlight the opposition. If they keep trying to hammer on Obama's campaign for its mis-steps, they run the risk of becoming the bullies. Nobody likes a bully.

When your opposition is in self-destruct mode, don't get involved. Just go about your business and let it happen. Are the McCain folks sharp enough to do this? We'll see. This election is still wide open.

Tuesday, September 9, 2008

The Obama Campaign, How the Wheels Came Off

Before the conventions Barak Obama held a slight lead in tracking polls. Although is VP pick was a total dud, he did manage to get a slight bounce out of the convention, but it was very short lived. With McCain''s surprise pick of Sarah Palin for VP and a television audience for his own speech that surpassed Obama's, the McCain Palin ticket is now leading by an average of 2.5% according to the RealClearPolitics.com average of major polls.

The next two months is a total uphill battle for Obama. His pick of Biden for VP disclosed a "run the clock out" strategy that depended on gaining and holding a lead after the convention. The big speech at Invesco was the crescendo. That's his wheelhouse; giving a well prepared speech to an enthusiastic crowd. Now the only major public events left are the debates, a forum he doesn't do nearly as well in.

If McCain had chosen Romney or Huckabee, I think Barak would have been in like Flynn. Biden could have played the pit bull at his debate and I think he would have come across looking stronger than either of those guys. Regardless of where you stand on the issues, Romney and Huckabee are not good sluggers in a debate format. With Palin, Biden's in a no-win situation. She's a fighter, the crowd adores her. He's in a box. The VP debate will be a non-event.

So it all comes down to the Presidential debates. Unless McCain makes a major gaffe, I've got to give him the advantage here for one simple reason: He has a sense of humor, Barak doesn't. This is a format McCain is very comfortable in after decades in Congress, and he knows how to take and throw verbal punches without losing his cool. He's also got a lot less to lose. Barak is trying to create a great story. McCain already has one, win or lose. If Barak looks desperate, he's through.

It doesn't help that clowns like, until recently unknown comic, Russell Brand (evidently the spokesperson for the Global Community) are out there making total asses of themselves in the name of Obama. The host of the MTV video music awards implored America to "elect Barak Obama for the sake of the world." before going on to make some very nasty, crude comments about Bush, Palin and Palin's daughter. Expect a lot more of that kind of thing. The Democrats made a strategic decision many years ago to embrace any loud and obnoxious group or individual and bring them into the fold. They represented votes the other side wasn't going after. Now they're stuck with them. If they sense this thing slipping away they will come out in droves. It should be very entertaining.

It all adds up to another case of the Democrats snatching defeat from the jaws of victory. All they had to do was not come across as radical loons and they blew it. They invested heavily in losing the Iraq war and somehow thought the sluggish economy would give them cover to raise taxes and implement new, massive government spending initiatives. As if that wasn't enough, they came out square against new oil exploration while gas was peaking at $4/gallon. Now they're rubbing more salt into their own wounds by viscously attacking one of the most popular political figures to come on the scene in my lifetime. They could have just said "good for her" and went after McCain. But, emptier heads prevailed, and the rest is history.

I always worry, at each election cycle that this country may take a hard turn toward socialism. After watching the events of the past couple of weeks unfold, I've been sleeping pretty well lately.

Wednesday, September 3, 2008

Death of a Status Symbol

Back in the day, the guy with the cell phone was cool. Having a car phone was super-cool. In fact I remember a guy I used to work with that had a phone with him constantly and the antenna conspicuously mounted on his car. We later found out that both were phony, but it points out the status that having a mobile phone used to provide. Then came laptops and blackberries. I guess the notion was that you must be important if you need to be "in the loop" at all times.

Now that information tech has become all-pervasive, things look a little different. I saw a man at the grocery store the other day with a Blue Tooth in his ear, take a call while he was checking out. The feeling that came across me wasn't so much admiration as pity. The poor guy can't have a moment to himself in the grocery store. Information technology was supposed to be liberating. You could work from anywhere. Even the beach! Well, as it turned out, in many cases that just means your break isn't really a break and your day off isn't really a day off. We aren't getting extra time at the beach, we're just bringing our work with us when we go.

Of course, this loss of "me time" is self inflicted. You certainly can use technology to your advantage. But when you can no longer enjoy the sanctity of your own car, whose advantage are your really serving?

I think the new status symbol is the guy or gal who walks into the room without the cell phone, or the blackberry; someone who plugs in when and if it suits them, rather than being at someone else's beck and call 24/7. If you want to use technology to improve your quality of life, make it your servant, not your master.