Mismanagement, corruption, greed, irresponsibility, stupidity and ignorance. Pick one, or pick them all. It tends to make us feel better when we have someone to blame. It’s even fun to point fingers when you see suffering, as long as you aren’t the victim, because I suppose this reminds us that we were better and smarter.
“Bailout?” you might be thinking. “Hah! Why would I want to spend my tax dollars bailing out Wall Street millionaires, large banking institutions run be rich executives, or even all of those foolish home buyers who lied on their stated income loan applications or bit off more than they could chew? I was better and smarter. I saved and invested responsibly. I didn’t refinance my home to take lavish vacations or buy other homes I couldn’t afford. This isn’t my problem.”
Except it is.
When I was a child, my brother and I would fight. Mostly, he would fight, and being seven years older, I would get punished. Boys will be boys. He’s just a kid. He doesn’t know any better.
I’m feeling a little like that today, as I am sure many of you are. Whether you misbehaved or you were the model citizen, we are all in trouble. Whether you have (had) your child’s college tuition invested in stock accounts or you need to make your weekly run on the grocery store, whether you need to sell your home or you were hoping to buy your first home with the 10% down payment you have been struggling to save and which is no longer enough, this has not been a very good week. And next week may not
be much better.
It may not be your fault, but the economic crisis has definitely become your problem, and your neighbor’s and mine. How we got here is not our biggest fish to fry this morning, and doing nothing will change nothing. There will be a time to stand on principle, but now is not the time. We can go back to blaming people tomorrow.
{ 20 comments… read them below or add one }
Jakob
09.30.08 at 7:33 am
Why? I just checked mortgage rates. The 30-year is at 5.91% today, down from last week. And the dow is back up 250 points right now. Hardly Armageddon.
I don’t see enough evidence that taxpayers should pay $700B to Wall Street. Sure financial companies are going down, but responsible people are still getting loans at reasonable rates. I say let the irresponsible companies fail. That’s what’s great about this country. We let bad companies fail so that new ones can take their place. Propping up failing companies with taxpayer money will only prolong this.
I’m glad congress listened to their constituents and voted this down. I will continue to call and email until this thing is completely dead.
Steve Berg
09.30.08 at 7:39 am
Jakob - You have a very narrow view of the world.
Jakob
09.30.08 at 7:53 am
I believe in not bailing out irresponsible people OR companies. If that’s narrow than so be it. Four of the five San Diego Congress members agree.
“Only Rep. Susan Davis, D-San Diego, voted for the $700 billion plan. Voting against was Democrat Bob Filner of San Diego and Republicans Duncan Hunter of Alpine, Darrell Issa of Vista and Brian Bilbray of Carlsbad. ”
http://www.signonsandiego.com/news/politics/20080929-1828-bn29sdcongo.html
Keith
09.30.08 at 12:22 pm
A couple of thoughts:
-the US economic problems were already in evidence before the latest credit crunch. We will likely have a recession with or without the bailout. Nothing changed this week on that front.
-I don’t think institutions are failing because of credit issues per se. They are failing because they have made very bad investments, and they were over-leveraged. They made those bad decisions a long time ago, and the chickens are just coming home to roost now.
-Institutions that have been operating on a sound basis in the last couple of years continue to do so. Banks still make loans, but they are less likely to do so at terms that are silly. That, in my mind is a return to normalcy and is best for all of us in the long run.
-Credit issues are forcing many institutions to borrow money from the Fed that they previously borrowed from other institutions. That is not good, and we likely need to find a way to fix this. Hopefully our political leaders can find the gumption to find that fix without burdening the taxpayer. This is completely possible.
-The worst enemy of the economy is fear. Our current leaders are trying to sow fear to get what they want. This is shameful.
Keith
Sven
09.30.08 at 1:26 pm
I’ve been following this pretty closely, and I’m 150% convinced that this bailout is a bad idea. We’re essentially devaluing the dollar more and taking up a huge amount of debt in order to give a bunch of irresponsible banks money. There are still responsible banks out there that are not going to go out of business. Everyone with deposits in WaMu now has an account with JP Morgan/Chase, and they lost nothing. BoA, Citibank, Wells Fargo, JP Morgan, and many other smaller banks are doing fine. They had a rough patch, but now they are purchasing all the good stuff from all the bad banks, and they’ll be stronger because they weren’t as loose during the boom days. Banking is and will increasingly have a slump like the tech sector did and real estate is having. That’s life… We weren’t trying to bail out fogdog.com when it was going out of business.
On the flip side, this is good because it will reduce faith that the super wealthy have in investment banking. People with 10’s or 100’s of millions of dollars are way beyond the FDIC limits, and they need a place to invest their cash. Right now, they have been flooding to treasuries because they don’t trust investment banks, but that’s not going to last. The 1.3% return isn’t that exciting. I predict that if investment bank confidence stays low, people will be more apt to put their money in purchasing (gasp) houses/condos to rent (which will help real estate) and venture capital (which will create jobs). If we make the investment banks look like a “can’t lose because they’ll get bailed out” investment, it’ll take longer for the real estate slump to correct itself.
As long as Fannie and Freddie are owned by the government, any conforming loan will still be very attainable. For a short time, million dollar homes will be harder to buy.
John K
09.30.08 at 4:03 pm
I’m with Kris and Steve on this one. I work in the commercial finance industry and there is no liquidity right now. When Caterpillar, GM, and other main stream businesses can’t refinance or finance their operations, layoffs will start to begin big time. Unemployment in Cal is almost certain to increase big time over the course of the next several months. Consumers are tapped out. Big time deleveraging will happen. Hedge funds borrow short and are getting killed now. They will have to sell assets at dirt cheap prices. Asset prices go down. The rich will still have cash. The rich will take advantage of the sale prices over all asset classes. The main street, middle class guy is going to be squeezed further. You may think you are going to punish Wall Street but main street is going to really feel the pain. Not like Wall Street hasn’t suffered a bit: have you looked at stock price charts for AMBAC, MBIA, FNM, FRE, AIG, LEH, MER, C for the last few months? Most sectors have been complicit in this mess, consumers, banks, politicians and Wall Street. Banks and Wall Street have suffered. Main Street is next. Without the “bailout” main street will suffer more.
Sven
09.30.08 at 5:46 pm
John K,
I think the issue is that no-one wants to lend to Caterpillar because their business is fueled by the homebuilders and no-one wants to lend to GM because they have been teetering on collapse for a while (because they aren’t competitive with Japanese and Korean automakers). I have an extensive bond portfolio, and I’m always looking for new corporations that I believe in to lend money to. The issue I have right now is that rates are on the floor because any worthwhile company has pleanty of people looking to buy up their bonds.
Don’t believe me, check out the bond yields for the following companies: Viacom, Valero, GE, AT&T, etc… You can’t touch anything over 7% unless you want to lend to some bank that you don’t trust or unless you want to tie up your money for 30 years. Even Merril Lynch notes are going for about 9% for a 1 year note right now. (and they are completely saddled with bad mortgages)
Let’s give you some specific example, going off my current bond chart:
(maturity date - Yield - Company)
9-1-2009 - 5.896% - General Electric
6-15-2009 - 5.1% - Caterpillar
9-15-2009 - 4.9% - Safeway
9-15-2009 - 4.861% - DaimlerChrysler
I could do this all day. Any reasonably strong company is still faced with historically cheap access to money.
Now here are the whiners: (all teetering on going out of business… gee I wonder why they can’t borrow money)
2-1-2009 - 172% - National City Bank
9-1-2009 - 60.8% - American Gen Financial
12-15-2009 - 39.75% - Citigroup
I could do that all day too.
The bottom line:
1. People who want to buy a house can get historically low rates on a conforming loan right now and banks are happy to give it because Freddie and Fannie will happily buy those loans. You do have to qualify though (gasp). If you credit sucks or you can’t afford much of a down payment, there’s always FHA loans.
2. Corporations that aren’t screwed still have historically cheap access to money because investors are desperate for a reasonable return.
If SDG&E said they needed to borrow some money and were willing to pay 10%, I’d give them 20k with no questions asked. If Merril Lynch offered me 100% annual return, I still wouldn’t give them a penny. I don’t consider credit markets “frozen” when bad companies can’t borrow money.
John K
09.30.08 at 7:30 pm
Good points Sven. A lot of what you write make sense. I still believe there is a liquidity crunch that will hurt us. I don’t usuallydone like to copy and paste comments, but I will nonetheless. It is getting late and I need to attend to some kids. Atlanta Fed President Lockhart is much better articulating the points I would like to make. Also, I’ve been a big follower and reader of Merril Lynch’s North American Economist, David Rosenberg. He has been very bearish about our economy for a long time. While he works for a large financial company he has strongly advising against owning financial stocks for a long time. Months ago he was warning against “value traps” where financial stocks were concerned; they were cheap but he thought things were gonig to get cheaper. If the bailout/rescue passes this week then we will still have a lot of problems and a lot of deleveraging to endure. I doubt most would call me rich, but I’m comfortably in the affluent camp I guess. Like you I’ve been prudent and very conservative. I do worry about the middle class getting harmed more, but it seems like the middle class wants vengence against Wall Street. I will sit back and see what happens. I won’t lose any sleep over it since I went to a 60% cash position months ago, but I hope we don’t worsen the real problems we already have and will have for a fairly long time.
http://www.frbatlanta.org/invoke.cfm?objectid=B3C99FE6-5056-9F12-127F4982E2794934&method=display
I hope whatever happens this jolt to the financial markets will cause the average citizen to pay more attention to our economy. We will need to make other hard choices soon re entitlement spending before the baby boomers all retire on us. Of course, many retirements will probaby have to be delayed now.
Jakob
09.30.08 at 8:22 pm
The administration is telling us we won’t be able to get a credit card, a car loan, and a mortgage if we don’t bail out Wall Street. When we check the facts those claims simply don’t check out. There is still plenty of money and credit out there for responsible investments. Where have we seen this pattern of fear-mongering to shape opinion before? WMDs anyone?
Now maybe I’m wrong and Paulson and company see something I don’t. But he needs to show us before I can get behind this bailout.
BTW, the latest proposal to raise the FDIC insurance limit to 250k is a very good idea to calm people and businesses. Maybe even go to 1m insured until this environment of fear stabilizes.
Hu Flung Pu
10.01.08 at 12:53 pm
I’m a director of two banks that have no exposure to subprime residential and little exposure to construction and development. Both banks are overcapitalized and lending money… to creditworthy borrowers on strict terms. The banks that are having trouble today either got overleveraged, made dumb loans or a combination of both. These banks should fail or be forced into mergers where shareholders are wiped out and debt holders burned.
The current bailout proposal is insane. There are much simpler ways of getting to the root of the problem involving far less money, but the Establishment isn’t interested because they won’t admit to the real problem: Housing prices are still too high. So long as the Officialdom continues to believe that the root of the problem is falling housing prices (falling housing prices are a symptom of the problem), they will not come up with proper solutions to the crisis. Apparently Doing Something (no matter how hairbrained) has taken precedent over Doing Something That Will Work. The latter takes a bit more thought and time - and doesn’t do much for Hank Paulson’s investment banking buddies. Which is why we’ll get stuck with Doing Something… and will regret it a few years down the road.
Smithers
10.01.08 at 11:11 pm
“Hu Flung Pu” …
Now, that brings back some great memories from my high school days. There was I.P. Freely, Mister Completely, and, of course, Claude Bawhls.
Noboby wants short term pain, so we throw another couple of trillion on the debt pile for the eventual (not if, just when) BK of the U.S. We are collectively (often individually) pathethic. I don’t know why the NAR is doing the (”don’t blame just pass it”) campaign. Since one in three adult Americans is a realtor(s) (something like that - I may have understated), I don’t see how this helps their membership.
Guess we’ll find out.
Greg Cooper
10.02.08 at 4:39 am
I’ve been trying to stay out of this and just read and learn something but it all hit me on the way home last night. I stopped by one of my banks. No cash. NO CASH. The tellers looked ashen and beat up. One was in tears. People had been coming in all day and taking out large sums of cash and Chase had not been expecting it. Many did not get their cash, got angry and will be in MORE of a panic today (Thursday). I go to my second bank. Same story. They had requested more from their HQ but had not gotten it yet.
I realize there’s a great deal I don’t understand about all of this mess but what I do understand is if large numbers of people are taking their money out of banks, justifiably or not, something has got to be done. If we don’t get the populus calmed down fundamentals won’t mean squat by early next week.
Kris Berg
10.02.08 at 7:50 am
Greg, And that was a lot of my point. It is interesting how the “screw ‘em” song and dance changes as soon as it gets personal. And, if you are not personally feeling affected by this, you are either living in a cave or very, very fortunate — for the moment. I don’t have the answer, and I am fairly certain that the bill on its way to the House isn’t the answer, but it is something. Let them fail, let them lose their home, that will teach them… I don’t see that as a responsible response to the current situation. Many will do just that with or without the government’s “help,” but the issue is much deeper.
By the way, thank you for all of the very thoughtful and informed comments. It is a lot to think about. I do see both arguments, but no matter how long and hard I look at this, I still can’t see everything just “working it self out” without some significant measures being taken on the national level. It is going to cost us all, but we are going to pay a much bigger price if we sit idly on our little soap boxes screaming its not our fault.
Smithers - In California, the number is about 1 in 50 adults, but that number is shrinking. And for the record, my position is mine, not NAR’s. I am painfully aware of the long road ahead, but just letting boys be boys with no parental intervention got us here. How can we possibly think that leaving the whole thing unsupervised is suddenly going to result in a better outcome?
It’s early. Go easy.
Smithers
10.02.08 at 8:27 am
Kris,
I said nothing about “unsupervised”. I’m ok with supervising. In fact, where FDIC guarantees were involved, an obvious lack of supervision took place.
That’s not what this is about. This is about a huge hand-out of money. Biggest ever. I realize that much of what the government does is hand-out money. It’s called wealth re-distribution. I’m not saying all wealth re-distribution is bad. I’m just calling it what it is. The government takes away and gives away. Politicians derive their power by being controllers of who gets taken from (and how much), and who gets given to (and how much).
The government gives away to whomever politics dictate be given to (e.g., the old, the sick, the victims of natural disasters - if enough of them to make a political necessity, etc). the government also gives to individuals and companies astute enough to play the game (e.g., AIG, GM, Ford).
The government takes away in the form of taxes: pay or go to prison (citing in re “Snipes”), and takes even more away from the future (citing in re $10Trillion+++ deficit).
In this case, those who “play game” knew exactly how to play it: stir outright panic and confusion and urgency. The government could grease the skids in the form of loan garantees for companies/individuals that qualify (I think that is Jacob’s point) without bailing out shareholders and bond holders (and, yes, 401K bag holders - I am one of those).
But, this is extorting a huge transfer of wealth from the future to the present bankers. Will it cause me personal grief if not passed??? Absolutely. But it will cause more - much more - for me and my kids (and you and your kids) in the long run if it does pass. I know you love your children and want them to lead happy lives. Why do you want to do this to them? Why can’t our generation take the lumps instead of passing them on to our kids?
If wall street bankers and bond traders deserve a bailout then everyone deserves a bailout. Make a profit? great, we’ll tax you and give it to those who did not (plus borrow four times as much to give that away, as well). Why work for the government, when the government will work for you?
Sorry about the rant, but that’s I how I feel. This has precious little (nothing) to do with residential real estate in Scripps Ranch, and I do appreciate your lending your blog for folks like me to voice their opinion.
Steve Berg
10.02.08 at 9:37 am
This is a tough one. We can all theorize what will happen with or without, but the fact is that nobody (even our brightest economists are just guessing now) seems to really know for sure. Normal economic theory (on both sides of the aisle) is approaching a new frontier. A case can be made for both sides. From a real estate perspective I can say that there is no doubt that “main-street” was/is as much or more of the problem as Wall Street as evidenced just by the sample size of imprudent homeowners that Kris and I have run across who have already gamed the system, bailed from there “primary” homes, while still retaining one or have sequestered away a sizable amount of cash from their LOC that was based upon a ridiculous appraisal. Multiply these samples by a few million more who have done the same thing and we should not be surprised to find ourselves in this bind.
Smithers - One question: Why do you consider the government purchase of the devalued mortgage securities to be a giveaway? These notes are secured by assets (homes) that, while admittedly now devalued, are not worthless. If purchased at a discount, which I believe is the plan, there is a decent chance that they could be worth more in the future, even if it takes a few years to get there. To me this is an investment, not a giveaway, and it gets cash back into a cash-starved credit system.
Smithers
10.02.08 at 9:56 am
Steve,
There is a reason that the market price is so low. Your LOC “theft” example is a very good one. Much (most, all?) of the Heloc loans may indeed have zero secured value - if you can’t get some of it back from the borrower, it’s gone. Will anyojne bother to go after these people? Will there at least be taxes owed to help re-coup some of the loss that the government is refunding to the bank shareholders and bondholders? Oh, how unfair that the government tax heloc money (I hear the whining - not yours - as I type this).
If purchased at a “discount” …. the government is going to buy way-overpriced crapola. It may have some value, but the Paulson’s of the world want the government to pay a trillion more - get those bondholders and shareholders some money so they will not hold us hostage. “It might go up in value in the future”? - if that was believed, it would already be taken into account in the current market price.
The bankers/bondholders need a sucker, the ultimate bagholder: the last one in to pay the full price in the pyrimid scheme. Only the government, using its credit card, would do such a dumb-a$$ “investment”. The bankers/bondholders have leverage: “pay us back the losses incurred from our stupid decisions to give away LOC money, or we will hold our collective breath and withold credit from even the credit-worthy.”
You know it. I know know. They know it. Just add it to the U.S. credit card balance - let someone else pays that. It’s the American way.
Keith
10.02.08 at 12:49 pm
Steve,
You just asked the intelligent question, “why do you think this is a giveaway?” If we can understand that answer then we can craft more fair solutions. I can provide my viewpoint through an example. Suppose a bank lent $100 on a house that is now worth $40. Let’s assume that the loss of $60 puts the bank in peril in that it now has assets less than liabilities (its “bankrupt”). We don’t want this mythical bank to go out of business because it creates unemployment etc. A reasonable solution might be for the gov’t to buy the loan for $80, which is $40 more than it is worth. However, the gov’t also insists that it gets a, say, 20% equity stake in the bank in exchange for the excess it has paid for the loan. This generates a win-win situation. The bank gets enough money to stay in business and the government gets a piece of the ownership of the bank. If the bank does well, then the govt gets its money back at a later date when it sells the 20% equity stake.
This is just an example. Many other methods are possible if we take the time to create a fair program that addresses the credit problems while protecting tax payers.
Sven
10.02.08 at 12:53 pm
Greg,
I hate to doubt your story, but it doesn’t make any sense. A buddy of mine just withdrew 40k in cash from WaMu right before JP Morgan acquired them. He did this to go under the FDIC limit, but there was no issue with them not being able to come up with that money. Now Chase, is owned by JP Morgan who is freaking wealthy right now. They just got all the retail banking from WaMu for pennies on a dollar ($1.9B a fraction of what they were trying to buy it for in March), had a sweetheart deal for all the good stuff in Bear (only having to take on $13b in bad stuff, with taxpayers taking the other $20b in the shorts), and they are considered one of the best capitalized (quite possible, the overall best) investment banks in the world. If your story is true, and Chase didn’t have enough cash lying around for people withdrawing yesterday, I really can’t see any tellers crying over it either. Chase is so well capitalized that they would just be telling people to come back tomorrow when they could get another truckload of cash in. In other words, I don’t believe you. You should have tried the story citing some Mom&Pop bank. Right now the market cap on JP Morgan is $165 Billion. If they were having a run on them right now, it would be 1/1000 of that. (and it would be national news)
Steve,
This is a giveaway because if the assets had a higher value these banks would not be selling them to the US Government. The mortgage baked securities are being revalued based on now depressed property prices. What a lot of people aren’t understanding is that the reason we are having so many banks go under this year is because of legislation that was enacted last year. A law was passed last year requiring that banks “mark to market” their assets. Suddenly, all these MBS’s needed to be revalued at the current property prices (security values), and this made many banks upsidedown on their balance sheets. The bailout plan has a provision that in 5 years, the president is supposed to act to recoup any losses from the banking industry, but you and I both know that this will get brushed aside in 5 years. At least the SEC will now have the authority to suspend “mark to marketting” if this passes, but it’s something that should exist. It just needed to be implemented in a more gradual way.
Greg Cooper
10.02.08 at 1:16 pm
I don’t know if I’ve been this conflicted about something in a long time.
Sven, I realize that the “no cash” scenario seems silly as it did to me. I asked the teller who these people were and why they were doing it. She told me some were just scared and some had more than the $100K guarenteed amount and were taking it our for that reason. I have a co-worker, not a stupid guy (did 11 million in volume last year) who took all of his $ out yesterday and had a 5 foot steel safe delivered to his home today. I was dumbfounded when I heard that. On the news last night a story about a safe company in Indianapolis that sold more safes in the past week than in the past 6 months. It doesn’t make sense but it’s still happening. By the way the banks were Chase and Huntington in my experience and Regions per an email from a coworker.
Considering I’m grudgingly for this, I still have to say in all candor I can give you 50 examples (based on fraud no doubt) where homes with notes over $100,000 are probably worth 5K in parts of Indy. Do we throw the bill out because of all of the fraud and screw the legit home owners right now? I’m also not thrilled about the money going to the Puerto Rican rum distributors and the Wool association as part of this bill (yes, it’s true and God knows who else). I don’t know what the right answer is but being proactive by nature, I think not doing anything is ultimatly worse than doing something however imperfect it may be.
Many of you have great suggestions. I don’t have the answers…just the frustration of feeling like it may well be a lose - lose.
Larry Yatkowsky
10.04.08 at 11:25 pm
We up here in the Great White North are fretting about our southern friends. We sense repercussions will cross the 49th in due course. Our banking system may make it a little less painful, but it is a small world where money knows no borders.
What’s to be said about it all?
It’s never much fun cleaning house after a great party.