Housing "Rescue" Bill

I'm sure by now almost everyone has heard of this bill and the different provisions in it. I like to think of it more as a plan that bails out the borrowers and lenders that made and took loans with little chance of being repaid. When a loan is made with no chance of being repaid by the borrower the lender should get ready for getting $0 back from that borrower - somehow the idea that the tax payer would run to the rescue and help the lender recover 90% of the current value of the home seems to be a different outcome than the natural one. The plan shifts some of the burden from the excess generated by bad debts to borrowers that did not have the ability to repay to honest and hardworking tax payers that did not live beyond their means.

The only rational for this rescue effort is to avoid a repeat of the "great" depression and may be it is worth it (I'm not educated enough to judge if we are tipping into another "great"-er depression) however regulators and the federal reserve officials were sleeping at the wheel when the economy was generating a lot of these loans (they only figured that an move during the boom would be an intervention with operation of free markets and innovation) - suddenly they have figured out in the bust that intervention with the operation of free markets is not only required but the only way out.

Oil, Oil & The Bubbling Oil

The past few weeks have been a little hectic at work and though I was planning on updates, somehow the blog just started falling behind. Everyone seems to have an opinion on the price of oil, it's impact and solutions and rather than making vague projections on where oil would be a month or six months from now, I thought it would be really nice to understand the source of the problem to some extent.

I'm leaning a lot more towards the federal reserve (although most polls don't even place the finger on them). The Fed decided to turn a blind eye towards inflation and expected it to moderate over time and lowered rates faster than would normally be required. The "strategic" liquidity infusions are nothing but boat loads of money printed and dropped from a helicopter that Ben is riding. The end result, a trashed international dollar, a bubbling hot commodity that everyone relies on and is imported to a large extent. There is only one word that comes to mind... "Irresponsible" actions from the federal reserve are the basis and the rest of it is all speculative demand which cannot be satisfied. There is no way to satisfy a highly speculative demand - The speculators will keep buying [if more money buys less, they buy less but keep throwing the money till they see it does yield viable results]. For now with the current fed stance, and response is to just look the other way and well for now they may not have any tools to combat it as well.

‘This Inflation Speed-Up Must Be Taken Seriously’

Source: Larry Kudlow

U.S. economist John Lipsky, who is the first deputy managing director of the IMF, is giving a speech today before the Council on Foreign Relations in New York that warns of the spread of global inflation.
Lipsky says, “This inflation speed-up must be taken seriously, as it creates potentially significant challenges to economic stability that could undermine prospects for restoring the combination of solid growth and low inflation that prevailed earlier in this decade.” He goes on to say, “To put the issue starkly, inflation concerns have resurfaced after years of quiescence.”
Lipsky, a former Wall Street economist and periodic Republican advisor, fingers the commodity boom as the main inflation culprit. I have written that since last autumn, I have become worried about inflation for the first time in ten years. The CPI has increased by 4 percent over the past five months. And I will finger the run on the dollar as the chief inflation culprit.
Along with the Fed’s excessive interest rate cutting, the emergence of the U.S. peso is the biggest driver of rising commodities and inflation.

Before people all gang up and start bashing me for using something Larry Kudlow says.... the only thing I found to be in agreement is the headline that the inflation speed up must be taken seriously. The current fed stance and strategy is confusing at best. The expect inflation to come down over time though most of their measures have not been anti-inflationary. With each passing day, inflation problem seems to be growing and getting worse. Spill from high energy and food prices should definitely to be expected at sometime unless efforts are made to contain inflation. Wages are under tremendous pressure at the same time and investments not yielding adequately to cover inflation (be it CD yields or other instruments). The only thing the consumer can do as a hedge is buy oil futures or commodities. King dollar... what king dollar are you talking about Mr. Kudlow... what we need is less of the TV and energy savings - may be they can black out a couple of shows for the nations benefit [Jim Cramer, Larry Kudlow and Lou Dobbs] and save energy.

Why CEO pay fed the mortgage mess

Source: MSN Money

If you're wondering how otherwise extremely bright people at the top of our country's best banks led us into the subprime mess, here's a simple answer:
There was too much money in it for them to resist.
We hear all the time that companies have to pay top execs tens of millions of dollars a year to "attract the top talent."

But dangling huge payouts in front of bank CEOs in exchange for short-term bursts of growth brought just the opposite: the worst performance by some of the best-paid execs in decades, taking a big toll on homeowners and bogging down the whole economy.
Countrywide Financial (CFC, news, msgs) chief Angelo Mozilo cashed out $400 million in stock options from 2003 to 2007. In 2007 and 2008, the company's stock fell to multiyear lows, and the lender may soon disappear.
Washington Mutual (WM, news, msgs) chief Kerry Killinger took home $24 million in 2006. A crash that started in 2007 as subprime-related problems surfaced has wiped out all shareholder gains since 2000.
The head of Merrill Lynch (MER, news, msgs) got $160 million upon his retirement last year; the head of Citigroup (C, news, msgs) collected $40 million. This happened in the same period both stocks plunged more than 40%.
And former Bear Stearns (BSC, news, msgs) CEO James Cayne got $39 million in bonus pay alone for 2004-06. He left in January of this year, just before his bank had to be bailed out with help from the Federal Reserve to avert a disaster that might have brought down much of the U.S. financial system.
Despite all the problems they helped create, these execs get to keep that loot. For that, blame lousy boards of directors for poorly designed pay plans that encouraged Wall Street's elite to take too much risk on the subprime mortgages that have caused so many problems.

A friend of mine forwarded this article and I thought this would be worthwhile looking into. I'm not quite clear in my mind in determining who the victim is/was or going to be. The pain as per my understanding is going to be broad and deep. The problems were driven by greed at each layer be it the CEO's of the investment banks that made efforts to push questionable loans through their banking arms or be it realtors that were hoping to make a quick buck or appraisers that were pushed to sign off on phony appraisals. Ir-regardless of the external forces, the consumer did jump on the band wagon and was willing to be put into loans they could not afford (One argument goes that if the consumer was financially educated, they would have walked away from the loans that would get them into trouble)... a statement that holds true only in some cases. Most people were hoping to make a windfall profit with absolutely np investment - something the bankers capitalized on and moved money by making comissions and drawing every cent from any source of credit they had. While the focus is on stating that CEO's did not put their foot down and stopped questionable loans from being made because they had personal interest in increasing revenues and growth (albeit in the wrong direction) - at the end of the day, even they will be losers. Some will have their reputation tarnished so badly that they may never head any financial organization - some may end up in prison if a direct co-relation can be made where CEO's were involved in scamming the broader banking system.

All in all... now that the party is over, there is a lot of blame to go around and while corporations struggle for their existence... and homes are lost in this game... the fact is that life goes on and people come out smarter in the end. The bankers are yet to squeeze the hands of the builders which is currently happening as part of the credit crunch.... and the fact remains... the home builders are not as important in the entire economy as they thought to be (during the boom, people were afraid of landing housing because it would destroy civilization) - guess what... they were wrong.... builders stopped selling homes quite a while back and they're running on money they made in the boom time - all the money the bankers lost is safely parked with the builders while the banker loses his/her shirt.... builders expect the banker to show mercy and give back the easy loans ....and in reality the builders will be squeezed so hard and for so long that they'll be the ones begging for mercy.

Bernanke: Foreclosure woes require action

Source: CNN

"Price declines have become one of the biggest contributors to high default rates, Fed chief says. Stopping foreclosures is in 'everybody's interest.'"

"NEW YORK (CNNMoney.com) -- The wave of foreclosures sweeping the nation are driven in part by a nearly unprecedented decline in home prices and require a concerted government and private-sector response, Ben Bernanke, chairman of the Federal Reserve, said Monday.

"Realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment," Bernanke said in a speech before the Columbia School of Business."

Well... I have only one thing to say... Bernanke in a couple of seminars said there were typical high school questions being asked of him... Here's something he just does not get... there are many people that literally robbed the banking industry... It is not that they did not understand that they were getting into mortgages they could not afford to repay... the strategy was to cash-out refinance till it could be done and then throw the keys to the bank. Unfortunately he is just one of those Ivy league school people that just doesn't get how it works in the real world. There was absolutely no intention to repay and the banks played along making their little commissions along the way. Now the federal reserve wants to jump in with tax payer funds to buy all the toxic junk that will never be repaid - I'm not sure what Bernanke thinks he's trying to do and with all due respect... he needs to get out more often in the real world and see how much people made in the past couple of years and stop trying to figure out how to use tax payer funds to keep the party going.... we have other institutions such as social security that needs it's own bail out - the wall street firms will all be fine (a few less or all broke will absolutely not make much difference).

As regards getting the genuine people out of the debt burden... the sooner they are free the faster the economy can recover - it's our social responsibility to free the ones that are put into a debt trap they were not supposed to be in - be it by way of foreclosures of bankruptcy - trying to make them get crushed under the debt burden will only bring more pain and suffering across the board - it's better for investors to lose rather than to enslave the entire economy to the investor. The federal regulators did absolutely nothing when crazy things were going on in the housing market so they have a lot of blame to share.

Bublicious Fed And Countrywide

Two major things that caught my attention were the fed efforts to "prop-up"/"bail-out"/"fix" the banking sector and the credit crisis (whatever we like to call the creature these days) and Countrywide's debt ratings and holders. On the first one, someone asked me when the fed would be done last week and I said "soon"... the reason being not that the "crisis" is going to be over soon but the fact that they'll be broke. The fed has so far since August 2007 spent around $600 billion from their strategic budget and amassed all kinds of junk. They have another $200 billion to throw at the problem before asking for more funds to help "prop-up" markets. Eventually they'll be asking the congress and the tax payers for some more "funny" money [in some way, shape or form]. A couple of days back I glanced at the I-Bond's and was surprised to find out the fixed rate had been pulled to 0.00% so it's quite an achievement for the Bernanke fed and looks like they don't want to raise any money from the tax payers ... why would I like to give money at a fixed rate of 0.00% to the treasury???

Countrywide case is even more hillarious. When BofA decided to take over Countrywide (looked like another fed orchestrated "bailout") ... someone said to me ... now all the countrywide debt holders are safe to which I did say... that is not the way things work here in America ... the person didn't believe me at first when I said.. BofA will take the assets and leave the debt in countrywide and bankrupt countrywide [that's what is going to happen to it] - the heart and soul of the subprime toxic junk was countrywide so it will have a lot of junk which can even eat up BofA.... Now that's becoming more of a possibility and a likely strategy that BofA might do. Countrywide's debt holders will just be able to hold on to a piece of history and that's all it will be worth.

Q1 2008 Bank Report Card

I thought I'd make it a pretty post but didn't feel like spending any more time on it. So how did the good, smart and "prudent" banker do... Let's look at some numbers they reported.. and compile the hall of shame..

Citibank : lost $5.8 Billion.
Merrill Lynch - lost $2 Billion.
Wamu - lost $1.1 Billion.
Wachovia - lost $393 Million.

We now look at those that said they did not end the quarter by having just lost money.

Suntrust - (Net Income Down 44%) +$290.6 Million.
Bank Of America - (Profit Fell By 77%) +$1.21 Billion.
Wells Fargo - (Profit Fell By 11%) + $2 Billion.
JP Morgan Chase - (Profit Fell By 50%) +$2.37 billion

The banks need to be renamed from Money Banks to Money Losers and an irresponsible bunch of overqualified fools that were ripped off by ordinary people. I wonder why the CEO's of these banks should be paid anything to do what they do - just lose money - give it to a little kid and the kid would do the same.