Wednesday, April 29, 2009

Is the Country Still America?

It's kinda hard to tell these days, with all the encroaching socialist agenda, if we're still living in a country nominally dedicated to the idea of creating a land of opportunity, where individual work can make you successful, instead of just political connections and corruption. They say all good things must come to an end, and sadly the US apparently is not immune from this age-old adage, no matter how much many good men and women have sacrificed to preserve America this long.

Take, for example, the Chrysler situation. The government is arranging a "pre-packaged bankruptcy" for the company, after giving them tens of billions of taxpayer dollars to squander on a failed enterprise. What, you ask, does a pre-packaged bankruptcy mean? Apparently, it means the government takes the company, gives it to whoever it wants, and gives its previous owners the finger.

In this case, the union retirement organization (effectively, the union) is getting a 55% stake of the company: makes sense, the unions are some of the largest and most financially generous supporters of the Obama administration. Fiat is getting a 35% stake, although I'm guessing this (like the BofA/Merril merger) is a shotgun wedding, with Fiat playing the part of the target: after all, it's tantamount to business suicide to put a huge investment into a failing company for a minority stake, where the majority share holder is the primary financial reason the company can never be viable! The US government is getting a token 8% stake, which they will write off in a year or two once the sheeple forget that some idiot put tens of billions of taxpayer dollars into the previous failed incarnation of the company, and the new iteration is failing again.

What about the existing bondholders, with a $6+ billion claim on the company's assets (which they valued at roughly $3 billion if sold off in pieces)? Well, they will likely get a $2 billion payoff from the Obamanation, a pat on the butt, and a lesson-learned that it's very risky to invest in US businesses in the Obamanation, when any day the government could snatch your assets away and give you the shaft in return. The corporate owner gets nothing, although they would expect the same thing in bankruptcy court if we were following the laws in our old pre-socialist country, so that's a wash. The executives get the boot, because they are wealthy capitalist pigs, which the government can apparently now replace at will in the People's Republic of America.

The real winners, of course, are the UAW workers, who had the good sense to get in bed with the current administration, and are now getting a great return on their bribes and "political contributions". Not only do they get to keep all their outrageous retirement plans and benefits (backed by the taxpayers, of course), they also get to keep working for full compensation despite the substantial reduction in demand for cars, and the horrible product quality which caused Chrysler to lag those other auto companies in recent years. Plus, they get to be a continued back hole for taxpayer money for the foreseeable future, another perk of their special relationship with the Party.

I miss America already.

Monday, April 27, 2009

Obama's Blunder May Kill US Auto Industry

5. an outcome of events contrary to what was, or might have been, expected.

An example of irony:

A socialist president, in a bid to help the domestic economy while appeasing his union supporters, vows to preserve the US auto industry as a vital part of the US economy. He then pledges US taxpayer money, in virtually unlimited quantity, to support the auto industry while they can be "restructured" to be economically competitive again. In doing so, he creates an perception that no matter how bad the losses are, the auto companies will continue to exist, spending taxpayer money.

Emboldened by this, the domestic auto makers make token efforts to control costs, while launching new "reform" plans which rely on significant concessions from their partners and workers to be successful, and keeping all their employees and executives fully employed and compensated (regardless of the actual work to be done) during the "restructuring" process. Also emboldened, the union is willing to hold out forever for the most optimal compensation package, because the president has already vowed to not allow the company to go bankrupt, which is the traditional check against out-of-control union demands. As a result, the company maintains the status-quo indefinitely, while continuing to bleed the taxpayers.

Eventually, public opinion sways to the realization that the auto industry is a dead industry which can never recover (regardless of the potential to return to profitability as an independent business, the deadlock created by the government creates this reality). The public demands that the government stop wasting money paying for corruption and complacency (which, at this point, they are). Under political pressure, the government is eventually forced to allow the auto companies to fail, writing off the losses and decrying the "fact" that they couldn't have foreseen the extent of the problems which caused the eventual failure.

Irony, I suspect you will find fertile ground in the Obamanation.

Friday, April 24, 2009

How to prevent future housing bubbles

Ok, I know this is far to early to be thinking about this: the government is still hemorrhaging money as fast as it can bludgeon future generations, many large banks have yet to collapse or be nationalized under the strain of enormous gambling losses, and America hasn't even yet seen the massive inflation effects which will inevitably result from all our reckless and ill-advised "bailout" payoff schemes. However, in the spirit of Warren Buffet's "well duh, the way to give loans that don't fail is require 20% down, always" (paraphrase), I give you the simple steps the government could do to virtually assure that the current debacle is not repeated. As a bonus, my steps do not require massive new ineffectual oversight, more enormous wasteful spending, or a complete conversion to a socialist economy, so they are already way better than anything Obama or the despicable scum in Congress are likely to propose.

Step 1: Require that the GSE's (all of them: Fannie, Freddie, FHA, etc.) only buy/give/underwrite loans where the buyer (not sham charities, government, etc.) supplied at least 20% cash for a down payment, and had documented income over the last two+ years of at least 1/3 the purchase price of the home. The real rule might have to be slightly more complicated (eg: small business owners might be allowed to use average documented income over the last five years instead), but that's the basic idea. Other people (non-GSE's) can do the rest of the loans, and charge for risk appropriately. This will supply liquidity for "normal", "affordable" purchases, while not allowing the GSE's to become the entire market, or take on excessive risk chasing profits.

Step 2: Require any securities containing any part of any RE loans not meeting the above criteria to be rated no higher than 'A' by the credit rating agencies (ie: a level which does not permit "safe" funds from purchasing them). No more enormous unwitting sources of funding for sub-prime garbage means much less demand for sub-prime junk, which means the banks will have much less incentive to give out loans they don't think will be paid off.

Step 3 (optional): Require any financial institutions originating any RE loans not meeting the criteria in step 1 to hold at least 20% of the original loan directly on their own books (no off-balance sheet hiding) until maturity. This probably wouldn't be required, but would add an additional check against "risk indifferent" loan origination, in case the banks circumvent the restrictions implicitly created by Step 2.

That's it: simple, cheap, no more sub-prime housing bubbles and subsequent disastrous crashes, while still allowing financial innovation and capitalism. File it away under great solutions which will never be done because they are so fundamentally opposite the political agenda of the current government regime.

Wednesday, April 22, 2009

Freddie Mac CFO

So the long-time CFO of Freddie Mac apparently committed suicide; I feel for his family and friends.

That said, I don't really get why he would have been exceedingly stressed as he apparently was, or why he was feeling so much pressure that he felt he needed to end his life. Let's examine the situation:

The GSE's (Fannie Mae, Freddie Mac, etc.) are in conservatorship, which means they are being controlled by the government. Currently, the government is using them to artificially under-price risk in the housing market, in order to prolong the market downturn and magnify the problems it causes; you could argue about their motives, which may or may not be pure and/or idiotic, but that's what they are doing with the GSE's at the moment. As a result of this, the GSE's will cost taxpayers hundreds of billions of dollars, and possibly trillions depending on how long they continue to operate in their current manner, but all of this is more or less known and expected, at least among the people with any consideration of the situation.

Despite this, the company is still operating more or less as usual, with respect to their business and compensation. In fact, they just completed their latest round of bonuses, amounting to nearly $300 million in total, so their employees should not be struggling, at least financially. Some executives have left, no doubt enriched by the 15+ years of profits during the pre-bubble and bubble years, and presumably the ones that stayed have done so either to continue being well-compensated for what is essentially easy work (since the government is mandating their lending criteria and rates, there's not much risk analysis work to be done, which would normally be the "hard part" of the business), or feel the need to "help" the government by staying on and doing their proxy business. Either way, it should be a fairly low-stress environment: you're doing easy work, helping the government, and getting very well compensated with guaranteed essentially government employment.

There are a lot of banking executives who have stressful jobs right now, and many of which are probably sweating a lot these days; after all, the banking industry is about a terminology change away from being nationalized entirely, to the detriment of the shareholders. The auto industry is also suffering, and some major players may be gone or changed in a few months. Many small businesses are already gone or on the brink, with no demand support to replace the contraction of consumption to keep private industry afloat. The GSE's, though, are expected to lose tons of taxpayer money, are not going away, and are not even controlling their own business practices: they essentially have no responsibility, no accountability, a mandate to operate inefficiently and wastefully, and continued normal employment with continued huge bonuses. If ever there was a cushy job, that should be it, right?

Sure, there's small annoyances to go along with it. For example, as the CFO you need to be sure everything you submit to the SEC is correct; that shouldn't be a problem, though, since you have more oversight anyway and people expect your books to look horrible (as they do). You have people picketing your house at the moment, but that's just a PR issue: you need to be a bit more pro-active about making sure people understand that Congress is implicitly approving the bonuses (though the oversight of the GSE's), not you just paying yourselves; as a bonus, you could likely expense the PR campaign to Freddie Mac. You may feel like you need to keep working hard to keep the economy afloat, but that's a self-imposed delusion: all the GSE's are doing is prolonging the downturn, and it would be better for the economy if you just went to work and played games all day. You might feel pressure from Congress and the executive branch, but it's a rudimentary business skill to not stress about things you don't control; remember, the government is running the GSE's, not you, so don't sweat it. And if all else fails, if you're feeling overwhelmed or caught up in some political in-fighting or something, just leave: you should have plenty in the bank by now to live comfortably for a long time, and some other political appointee can take the job. As even Hank Reardon eventually figured out, the best response to escalating absurdity, pressure, and government interference is to just walk away.

I don't want to minimize his death: obviously it's going to be devastating for his friends and family. However, it all seems suspect to me; out of all the people affected by the economy, his position does not seem like one which would impart enough stress to bring someone to that point. There may be more to this story, we shall see.

Saturday, April 18, 2009

Oh yeah...

So I was watching the NBA playoffs today, and interspersed with the movie previews, endless repeats, and other DVR-FF-fodder, I saw some commercials for Cadillac. I looked at a CTS five years ago, and I kinda like the way they look, so it occurred to me to wonder why it was that I didn't like Cadillacs. I mean, they look ok to me (subjectively), they have all the usual luxury features, a good warranty (now featuring taxpayer-backing), and are competitively priced. So why is it, I asked myself, that I'm not at least a little interested in owning a Cadillac? So I considered...

Now in the commercial, they point out that all Cadillac vehicles come equipped with OnStar. I'm not sure that's something you really want to have, much less emphasize. Let's review: you get one year of service (then you have to pay for it monthly, or it becomes non-functional*). Second, it was initially pitched as a navigation system replacement, but that's pretty ridiculous: people want a nav with map data, not a help-center person reading directions to you. Third, you can call them to have them unlock your car for you, or take other remote actions; I'm sure this appeals to forgetful people (maybe), but personally I'd rather have a car with functions to help me, not let the car company remote control the car. All-in-all, not really a compelling feature, and in some cases (eg: me), not really a positive feature.

* I say non-functional, but that's not entirely true. As has been suspected since inception, and officially revealed since a couple of years after the introduction, the company (and by extension, the government without a warrant) can activate the system remotely and listen to conversations in the car without your knowledge. I know that's just what I want in my car, and I'm sure you do too, right? I mean, I never have personal conversations I wouldn't want the government, my car company, and who knows who else listening to, right?

Ok, so let's say you're not overly concerned with the built-in listening and remote control device which comes standard (and you can't get the car without); is there anything else to dissuade you from being a proud Caddy owner? Well, there's also the dealership experience. Most dealerships share multiple models (eg: Pontiac/Cadillac/GMC), so you'll be dealing with the standard GM dealership people, which are like... well, [used] car salespeople. I mean, when I had a Pontiac for five years, they were nice enough people most of the time, but you'd never confuse the experience for that of a "real" luxury car dealership (eg: Lexus, BMW, MB, etc.). I mean, all dealerships are trying to nickle and dime you, but at the Lexus dealership you don't care as much, cause everyone's extra polite, the amenities are great, and they go out of their way to do everything they can to make you feel like a luxury car owner.

Then, there's quality. Now GM has gotten a lot better over the last ten years: their cars used to be really horrible, now they are only sub-standard. Where ten years ago a car might have multiple problems driving home off the lot (eg: my Pontiac), now you might go a year or two before noticing anything major. Sure, you'll be annoyed from the first month by fit and finish issues, bad design, and minor annoyances which pop up, but it should run for at least a year or two before any major problems. Of course, it is engineered to break around year five, so don't think you're buying anything for the really long-haul. Even if it's still running by then, it'll have major issues, stuff will be wearing out, and resale with be in the toilet; I know, I've been there a couple times. Unlike, again, say, a real luxury car, which keeps right on going like it wasn't designed to break. Score another against the Cadillac experience.

So, I have reflected, and thought about if my knee-jerk thought of "nope, not buying that brand" was justified. I think I can sum up my conclusions with "oh, yeah...". Part of me wishes it were not the case, since I'm apparently going to be footing the bill for the abject failure of GM as a car company, but at the end of the day, they make bad cars, and I'm not going to buy one again until/unless significant changes are made (which don't appear to be forthcoming). Until then, while I acknowledge that Cadillac has mad some good commercials recently, and may have some good deals (on paper), I will not be owning one.

Thursday, April 16, 2009

Some Inconvenient Truths

It's hard to not be in the protesting spirit this time of year. Firstly, it's tax time, which means we once again get to painfully reflect on just how much of our hard earned money is being taken away from us to fund extraneous wastes, or even worse, to pay salaries for people who would take away our freedoms and liberty. Second, we're in the midst of what will likely be at least the second worst recession in modern America (since the Fed was founded, which may be related), and "hard time", perceived or just rumored, do wonders to stir the protesting spirit. Third, our country is being run by a socialist, and a lot of people are waking up to the fact that it might be nice to maybe try to educate their fellow voters on how not to vote socialist, lest you wake up in Communist America in a few short years. And while I think there's a lot of value in making the voice of reason heard, there are a few inconvenient truths which are hard for me to ignore.

First, and probably foremost, is the problem that the current protests are based on an amalgam of various gripes and special interests, fueled by general discontent, which although can be well-stocked on anger and outrage, will likely lack the staying power to accomplish real change. For example, the government is spending away the country's future economic prosperity on frivolous agenda special-interest items, yet I'd bet you'd be hard pressed to have even 50% of the protesters be able to explain why that's bad. Moreover, the real subtle root causes of economic problems, like the systemic under-calculation of inflation or misrepresentation of unemployment, are not only not well understood, but not even "hot button" issues. Sure people are upset, but I get the feeling it's a lot of "bandwagon" frustration looking for something to attach to, rather than a real core understanding of what's really wrong. And let's face it: bandwagon frustration got a socialist into the presidency of the US, so it doesn't have a stellar track record.

Second, there's the problem of demographics. There are three types of people who are most injured by socialist policies and mortgaging our country's future for short-term waste, broadly speaking: responsible parents, who care about their children, want to take care of them, and aren't just popping them out for welfare or otherwise abdicating their parental responsibilities; entrepreneurs, who want to start businesses, work hard to grow them into profitable entities, and reap the rewards; and hard working skilled workers, who practice a trade for which they have studied or trained hard for, and are consequently compensated. What do all those types of people have in common? They are all likely to be working, in one form or another, on any given day, rather than having lots of free time to stand around waving signs and shouting slogans. That's not going to work out well for continued protests; unlike some groups of people (*cough*unions*cough*), those people cannot afford to stand around for days at a time, not working.

Third, there's the problem of goals: that is, what do the people protesting want? It's hard enough to get our government "representatives" (as an aside, is there a more incorrect term in politics today than that? I don't think so) to pay attention to anyone not waving lobby money in their faces like they were crazed strippers; but even assuming you could, what specifically do the people want the government to do? Some people want the Fed abolished: a noble goal, but I doubt you could get a 50% vote for that. Some people want reduced wasteful spending, but you probably wouldn't get agreement on what to cut out, beyond the obvious (eg: Polosi's jaunts around the country on Air Force jets). Many people want the banks to not get bailouts, but I don't think many people are smart enough to craft a plan to pick up the pieces if that happened; not saying it's not possible, just saying it's not easily expressed on a protest sign. The best outcome would be to get some smart, preferably non-socialist people running the country; but if the majority of the country really wanted that, they wouldn't have elected (and re-elected) the idiots we have. In short, I don't see the uniform thing the protesters want to achieve, and without that, it's likely just a lot of well-meaning noise.

That said, I'd say I support the protests: even though most people probably don't understand why what the government is doing is wrong, they come out for their own reasons, and that's a good thing. Hey, the news media caught on, and the government noticed enough to get the propaganda machine saying the protests were just partisan politics, so at least they are a little concerned about a possible uprising. At the end of the day, the more people who show up, and the more press they get, the slightly more likely we'll get better leadership eventually, so that's good too. Let's just hope it's not too little too late in the Obamanation.

Tuesday, April 7, 2009

Irresponsible and incorrect reporting

Man, false and misleading news reports are really aggravating. Not that the news media doesn't generally bias stories and publish opinion articles as fact, but when they just throw in obviously false tidbits in the middle of otherwise "normal" reporting, it really emphasizes how corrupt and deceptive the news media can be. Take for example this article from Bloomberg, which has this gem thrown in:
... banks remained reluctant to extend affordable loans.

Now, I haven't done an extensive survey, but every bank I looked at (from big to small) had published loan rates, openly available, which is highly suggestive (anecdotally) that they are very willing to extend loans. Given that rates are at historical lows, I would go as far as to say the are very eager to extend affordable loans, although I'll concede that "affordable" should not be in the original sentence, since the affordability of a loan has nothing to do with the banks' offerings, and everything to do with the borrowers' financial situations.

In other words, that statement is blatantly false. Banks are more than willing, if not eager, to extend affordable loans. Perhaps what the author, one Courtney Schlisserman, meant to say was "I have no idea what I'm writing about", or "unfounded populist BS goes here", or "I'm sorry, my head is up my ass, I'll have to get back to you." Or maybe she truly is just dumb as a brick, and wrote whatever thought happened to be floating through the gossip grapevine at the time because it sounded cool and insightful. Either way, this garbage doesn't belong in anything purporting to be related to "news", and Bloomberg should be ashamed of itself on behalf of it and all other "news" media outlets spewing similar populist garbage as facts.

Monday, April 6, 2009

Irrational exuberance

Something which has always fascinated me is people's ability to believe things because they are the general consensus, often in the absence of (or to the contrary of) direct empirical evidence or logical analysis. Sometimes it's an intentional and well-considered delusion, such as the willingness to believe in religious beliefs in the absence of any method of proof or ability to substantiate any of the claims. Sometimes it's cultural, such as willingly adopting beliefs of a group to fit in. Sometimes it's a defense mechanism, like the unwillingness to accept inevitable negative outcomes. And sometimes it's subconscious and pervasive, like getting caught up in group-think conclusions because that's what everybody else thinks, or that's the way it's always been in someone's experience.

The last of those seems to happen a lot when it comes to economics, or other "high level" macro trends which people don't think they can understand. Also, however, in those cases people can think they do understand, and have a rational basis for their beliefs, when in reality their beliefs are nothing more than cultural consensuses which have been repeated enough that they became "common sense", and seemingly circularly justified (eg: it's true because everybody thinks it's true).

For example, consider this article, which points out a very interesting (but unrelated) point about how the actual unemployment rate is much higher than the reported rate. There's an interesting quote in the article, from one of the underemployed, which is oft-repeated by various other individuals, so much so that it seems to be the common "wisdom" in the US currently:
“The economy will come back some day, but the unknown is whether it’s sooner or later,” said Hueser.

Let's examine the premise, that the economy will come back some day, and see whether or not through logical analysis we can deduce at least if it will likely be sooner or later. We know that the US has the highest production costs for manufactured goods, high business taxes, strict environmental laws, and decades of over-consumption; all of these contribute to a negative business environment. We know that the business environment is getting worse: taxes are going up, new energy taxes are being considered, health care costs will increase once medical care is socialized, and unions are looking to make gains under the current government. We also have a banking system which will take years to fix (due to the government's efforts to nationalize the banking industry and hide problems), and a housing market which will similarly take years to bottom out. We have a trillion dollar "stimulus" pork spending package, but that does little to help demand in the private industry, and is mostly for government expansion of helping states delay fixing gaping budget gaps (both of which will cause more problems next year, when the stimulus money is gone). On top of all that, we have a $11 Trillion national debt, which is projected to grow by another $10 Trillion in ten years, even before all the unexpected extra wasteful spending outside of the normal budget procedures.

Given all that, I'd say it's unlikely the economy will recover any time soon. If Obama is allowed to instigate full socialism, I think analysis of other countries which have gone down that road would enable someone to reasonably conclude that the economy will not ever recover (at least in the sense of back to where America was prosperous and people outside of the government were wealthy). It's pure irrational exuberance to state that the economy might recover "soon", yet people accept it as a possibility without thinking about it. It's like claiming that housing prices might bottom out in the next year: it's a fanciful idea, but there's no rational basis to support even the possibility; yet people are allowed to still claim it without ridicule, because it's ingrained in the group-think. There are many more examples, of course, eg: socialism can work, this politician will be good for us, government bailouts are necessary, terrorists can't hurt us because they are far away, etc. They are all flat wrong (or at least with no rational basis to support them), but yet people keep coming back to thinking they could be right.

Fascinating, these cognitive impairments we humans have...

Saturday, April 4, 2009

Of TARP money and socialism

One of the currents in the economic news these days is about the TARP money the government put into the banks, nominally to recapitalize them. There's starting to be reports of banks giving the money back, and other reports of the government not allowing them to return the money. If you weren't following the story, you might wonder why the government wouldn't want our money back: after all, we're about to pass a budget which puts the country in debt for another $10 Trillion dollars over the next ten years (essentially doubling the realized national debt), and creating an unbearable debt burden that we'll never possibly be able to pay off; you'd think we'd be excited about, or at least interested in, the ability to reduce the crushing outflow of taxpayer money. To understand why the government isn't interested, you have to look at the whole picture.

Back when the government was forcing banks to take TARP money, they had a simple a good reason: if everybody took the money, it would obfuscate which banks needed it to survive, and which were red herrings. This was perceived as good, because if banks were known to be insolvent, there would be an expected backlash against pumping money into them (which they would then turn around and steal through bonuses and whatnot), and they would be less able to borrow from the private sector. So instead of creating a negative stigma around the banks which took the money, the government just forced everyone to take some.

Now, we have an administration which wants to control the industry. Under normal circumstances, this would be infeasible: as Obama astutely noted when talking about the banking bailout, he would have preferred to do a socialist takeover of the entire industry (well, many industries, but banking in this case), but the long-standing negative social perception in America about socialism prevented him from taking his preferred course of action. Now, however, the news media has stirred up a commotion about bonuses and compensation, while the banks have been trying to preserve their bottom lines (at the expense of making idiotic business decisions which the people and the government clamor for), and they have been vilified. Not one to let a crisis go to waste, Obama has capitalized on this to launch full force into a socialist control scheme of every company which has government bailout money (which is most of the banks now, and the major auto companies which would otherwise already have failed due to their horrible business management, but soon will be most companies in the country).

This, of course, has prompted the banks which are not insolvent to try to give the money back. No deal, says the government: we want to control you, and until we have a public mandate to instigate full socialist control of all the industries, we'll have to make due with controlling you because you took government money (which we forced you to take). It's a pretty good scam, and one which only a malicious government could pull off.

So if you're a bank and you don't want to live under the boot of Comrade Obama, what do you do? Well, here's what I could do: get the full amount you owe now, in cash, and put it into escrow for the government to pick up whenever it wants it. Be really public about it: "here's the money", "when you want it", "we stand on our own", etc. Try to turn it into a marketing opportunity as the bank which paid back the TARP money; the public won't really make the distinction between escrow and officially back to the government, and you can try to get an advantage over banks which still have the TARP money. You can also claim you don't have TARP money for regulation purposes either, since it's in escrow and you've relinquished your claim to it. It may not hold up over the long run, but it would be the right thing to do, and a step in the right direction in the fight against the socialist tide, and collapse of the country as we know it.

Meanwhile, the Obamanation marches on, bravely forging the destruction of America, one socialist goose-step at a time.

Of toxic assets and accounting

Disclaimer: I'm not an accountant, I have no particular insights into the accounting that went on during the housing bubble, and my observations are entirely based on my reading and personal analysis. Naturally, they conflict with those of most of the other talking heads and respected prognosticators. ... and I don't care.

Recently, I was reading the fascinating article written by the software developer who helped write the applications which were used to create CDO's (sorry no link). In it, he talked about how he created the software, the small amount of guilt he felt for being indirectly a part of the housing bubble and collapse, and what his software essentially allowed the banks to do. The last part was the most interesting, as it kinda shed some light, for me at least, on what the so-called "toxic assets" actually are.

See, most people think the assets are bad home loans, but that's not really true. As far as I can tell, what the banks did was take a home loan, a break it into two parts (conceptually): a bond paying a fixed return slightly under what the mortgage holder was supposed to be paying, and another financial instrument which was essentially an insurance policy that would pay out the value of the first bond if the actual mortgage holder defaulted. For this, a small part of the mortgage interest was diverted to the second financial instrument, kinda like an insurance payment. Then, because the first bond was insured, it could be rated AAA (the highest rating), and sold as an investment grade asset.

Now, the banks knew some loans would be expected to fail, and obviously if the loan failed both bonds would lose value. However, the bank could mitigate that risk by simply standing behind the second bond: by holding it on their books and guaranteeing it with the bank's assets, it was a solid insurance policy, which made the first bond good even if the loan failed. Which, in turn, allowed those bonds to be traded everywhere, held as investment collateral, etc. The other secondary bonds were held by the big banks, because they couldn't really sell them (nobody wanted the risk exposure), and they were well-paying assets while the bubble was going (they paid a fixed return with no immediate cost, like insurance policies). Which brings us to today...

The secondary bonds, essentially insurance policies backed by the bank, which are now looking like they will almost certainly need to be redeemed, are now called "toxic assets". Assets, because they are still paying a little bit of return from the underlying loans which have not yet failed. Toxic, because they can't be sold at face value (for obvious reasons, as they are not returning very much and their expected future returns is declining every day), and because they represent potential huge liability. The banks' accounting is based on them having future value, the pessimistic view is if they all default, the banks will be liable for trillions, and nobody knows where the real value will be (because nobody knows how the housing market will change in the future). Meanwhile, the banks have been holding them as "illiquid" assets, with mark-to-fantasy accounting valuations based on a bubble housing market, because if they mark them to actual market they would be insolvent.

When Lehman Brothers was allowed to fail, the government immediately realized the scope and magnitude of the problem, and it scared them so much that they have been blackmailed into handling out trillions of taxpayer dollars to the remaining banks ever since. When Lehman failed, the CDO's it held became value-less (because the bank had no more assets to back them which were not already claimed by secured creditors). That immediately caused all the primary bonds backed by those secondary bonds to drop in market value, because they were immediately backed only by the underlying mortgages and not by insurance any more. Since the underlying housing market was already bad, they immediately lost huge value. Since they were investment grade assets while Lehman was solvent, they had been purchased and were held by "safe" investment funds, such as money markets, pension funds, etc. These all realized the immediate loss in value, "breaking the buck" on several money markets, prompting the Treasury to offer an insurance program for the remaining money markets to save the market, etc. It was a wake up alarm for the industry.

The reverberations were huge, too. The regulators look a look at how much potential liability there was in the system, and took a fat dump in their collective pants. Treasury scrambled to figure out how to best funnel taxpayer money to the remaining banks to prevent a cascading failure of everyone (which would wipe out most people's savings, due to the AAA ratings for the primary bonds). The Fed "printed" $10 Trillion in direct injections and guarantees, the government started bailing out banks, the GSE's did everything they could to keep the housing bubble inflated and fight the natural market correction, and everything else is current events.

As a footnote to the ongoing catastrophe (which has been and continues to be not the market correction, but rather the government's abject and complete failure in dealing with it, before and after the bubble popped), the FASB just relaxed the accounting standards to allow banks to fantasize a little more with their valuations for the toxic assets they can't sell. This inexplicably caused their valuations to increase, because somehow being allowed to lie more about the asset valuations makes the banks worth more money. It's a crazy world we're living in.

Thursday, April 2, 2009

FHA loans failing, shocker

In a surprise to single-celled organisms everywhere (and nobody else), the government admitted that the FHA loans it gave out (with your money) are starting to fail in alarming numbers. Well, actually, that's not entirely accurate: they have been failing for while now, everybody knew they were going to fail, and someone just had a slow enough news day to write an article stating the obvious. Uh, I mean, wait, who could have known that these 3% down loans (where we let the seller pay the 3% directly or indirectly through a sham "charity") we gave out to people who couldn't substantiate income or savings necessary to actually afford the actual house would fail? Wait, what, everyone? Oh, right, cause it's fricken obvious. Maybe the first clue you were giving out below-market loans for above market purchases might have come when your market share went from like 2% to like 50%, and you went to Congress to steal another few hundred Billion from the taxpayers... but I digress...

No, what I really wanted to comment on was my suggestion for how to prevent this sort of criminal theft disguised as abject failure in the future. See, the crux of the problem is that while everyone, their mothers, their living pets, and their pet rocks could tell that these were idiotic loans to make, the FHA still went to Congress to take more money, still kept "lending" it out, still kept their ultra-low down-payment requirements, and kept right on funneling money from the taxpayers to the sellers (primarily banks) like it was no big thing; neigh, like it was the righteous thing to do! I mean, it takes a certain amount of gall and/or stupid to claim that (for example) imposing a new crippling tax on all energy consumption will help the economy recover (like Obama's claim about his carbon tax scam), but it's a whole new level of gall/stupid to call your theft the "right" thing to do.

Anyway, here's what the government should do (in an ideal world, of course, where we had a government "for the people"): make everyone in the FHA organization, from the counter-level clerks up through the Congress-scum who give them more money to flush, personally and jointly liable for all losses the FHA loans incur above the national average percentage for prime loans. After all, these are carefully controlled, well documented, sound loans with comprehensive oversight, right? If you really want to give them more money, there should be personal fortunes on the line; and if you don't believe that the money is safe, you shouldn't be involved in the process.

It would be a win/win/win, really. The taxpayers could recover a portion of their losses if the loans go south, from the very people who caused those losses in the first place. Plus, the should-be criminals who were stealing taxpayer money to hand out to deadbeats and scam artists would find themselves broke, and likely out of a job. Finally, we could take a $300+ Billion chunk out of the enormous waste of taxpayer money the government has been dropping on our heads recently; it's not much, but every little bit helps. Oh, and I forgot: it would also make housing more affordable to lower-income people by reducing inflated purchases and valuations, which accidentally fulfills the stated goal of the HUD and FHA in the first place, which kinda got lost in their crazed crusade to bankrupt the country by blowing bubbles. Funny how things work out.

Wednesday, April 1, 2009

Google wins

Google wins this 4/1, applause, congrats all around for their masterpiece. In case anyone out there missed it, here are some links: homepage, code writing, map, etc. Tremendous work, bravo.

Notable mentions:
/. (traditionally solid)
Blizzard (great production quality, as usual)