My "Outrage List" Keeps Getting Longer And Longer
By Mike Larson
15 November,
2008
Money
and Markets
Dear Subscriber,
I don't know about you. But I started keeping a mental "Outrage
List" a while back. The idea: Chronicle all the ridiculous statistics,
all the lies, all the questionable practices, and all the dubious
"rescue packages" Wall Street and Washington keep shoveling
onto the public's lap.
And boy oh boy, is it getting long these days!
Heck, it's getting to the point where I need to pop a Valium before reading the headlines or watching the tube — because if I don't, I might just put my shoe through the TV screen!
Just Consider What Has Happened in
Only the Past Few Days and Weeks ...
American
Express manages to get approval (from the Federal Reserve) to become
a bank holding company in the blink of an eye. This kind of thing
usually takes weeks or even months. And20within 24 hours, the reason
they did so leaks — they want to reach into your wallet and
pull out some bailout money, too! Amex is reportedly seeking $3.5
billion in taxpayer funds.
General Motors operates for years churning out gas-guzzling SUVs and
Hummers. Ford also stakes its future on big trucks like the F-150
— instead of choosing the same prudent path as competitors like
Honda and Toyota, who focus on fuel-conscious sedans and compacts.
GM (via its financing arm GMAC) even goes a step further. Not content
to stick to car loans, it decides to branch out and make billions
and billions of dollars of crappy mortgage loans.
Then, when
the utterly predictable consequences of this foolish corporate strategy
come home to roost, GM and the other automakers come back to the trough
like pigs looking for slop. Only in this case, we're talking real
money — $25 billion or more.
Treasury Secretary Henry Paulson and Fed Chief Ben Bernanke urge Congress
to create the Troubled Asset Relief Program — with as little
debate and oversight as possible and a price tag of $700 billion.
They warn of financial cataclysm if the government doesn't start buying
up mortgages and mortgage related assets from banks.
Yet just a few short weeks later, they totally change course. They say "Never mind — we're not going to buy up assets after all. We're going to buy up stakes in small banks, big banks, insurers, and God knows who else, with the money. We know the last 20 or so 'solutions' to the credit crunch didn't work. But this one will. Really. We mean it."
Fannie Mae and Freddie Mac make a huge deal abo ut a new program to modify more mortgages. We get the mid-afternoon press conference, the intraday ramp in the stock market, the usual stuff.
Citigroup, JPMorgan and other lenders get in on the action too, issuing
glowing press releases about foreclosure moratoriums and other plans
to keep borrowers in their homes.
But in reality, many lenders and mortgage servicers have ALREADY been
trying all kinds of loss mitigation strategies and loan modifications
(loan term extensions, temporary interest rate reductions, and so
on).
Yet ...
They Haven't Managed to Stop the Nation's Foreclosure Rate From Rising.
Why? It's Simple ...
1. All those modification efforts can't overcome the negative impact of surging unemployment.
2. Many borrowers lied about their income and their assets in the
first place, meaning they can't even make the reduced payments their
lenders are offering.
3. Others were speculators and second-home owners, who don't qualify
for relief.
4. Home prices are falling so far, so fast, that millions of borrowers
are underwater — owing $20,000, $50,000, even $100,000 more
than their homes are worth. They have little financial incentive to
stay in their houses — even at a lower monthly payment —
because they know they won't breakeven for years, if ever. And many
of them know darn well they can rent for less ... sometimes much less
... at a house or apartment down the street or across town.
5. Still others have loans that were ultimately sliced, diced, and
repackaged into complex securities — now owned by various Ferrari-driving
hedge fund managers who leveraged up to buy junky paper just a few
months after they got out of B-school.
6. Because of the "miracle" of this financial alchemy ...
which made Wall Street rich beyond measure ... these borrowers are
stuck. Their loan "servicers" WON'T modify their loans because
they're afraid of getting their pants sued off by the investors who
own securities derived from those underlying loans, securities that
in some cases can lose value if the loan terms are changed.
The
Hole Keeps Getting Deeper ...
And Deeper ... and DEEPER ...
How about the bottomless pit known as AIG?
The company made a bunch of stupid decisions to insure crummy mortgage-related securities against default. It clearly had no idea what the heck it was doing, and managed to lose a whopping $24.5 billion in the most recent quarter. But instead of going broke, they get thrown a helping hand courtesy of, well, you and me. The tab for that bailout keeps on rising — approximately $150 billion at last count!
Then there's
Fannie Mae and Freddie Mac. They take on hundreds and hundreds of
billions of dollars of mortgage and interest rate risk. They pile
headlong into the derivatives market, dig deeper into the riskier
subprime and Alt-A part of the mortgage business, and continually
operate on relatively small capital cushions.
Furthermore, they keep carrying billions and billions of dollars of dubious tax-related "assets" on their balance sheets and claim that means they're in decent shape.
But soon after, the two companies are essentially nationalized.
And those tax assets? Fannie Mae just slashed their value by 78% to
$4.6 billion.
Why Can't the Government Just Cut
The Crap and Level With Us?
Sometimes I just can't help but ask myself that question. I mean, I know it makes for bad politics. But like the old saying goes, honesty is the best policy. And we're just not getting it from Washington and Wall Street.
Inst ead, policymakers and industry officials have been offering up a steady diet of B.S. about this credit crisis and the housing bust for the greater part of two years now ...
> "It's just a subprime mortgage problem."
> "There's nothing to worry about, the problem is 'well-contained'."
> "Major banks and brokers will never fail. It'll just be
a few small institutions."
> "Home prices never go down."
> "It's a great time to buy or sell a house."
That's what you've been told by officialdom. And all of it — every last bit of it — has proven to be dead wrong.
On the other hand, we've been doing our best to give it to you straight the entire time, no matter the consequences. This morning, I'm going to do it again ...
I'm Going to Tell You the Brutal Truth You Won't Hear From Washington or Wall Street ...
You can't just wave a magic wand in Washington and wish all t his stuff away.
You can't reverse years and years of reckless overspending, overborrowing,
and overlending — even with hundreds of billions of dollars
of taxpayer money.
You can't keep borrowers in homes they should have never bought in the first place.
You can give banks and consumers billions and billions of dollars
... but you can't make them lend and spend it. If they know the economy
stinks, they're going to lose their jobs, or that there's just too
much risk out there, they aren't going to do what you want them to
do. Instead, they'll do what is PRUDENT — repair their balance
sheets, hunker down, and rebuild their capital base over time.
The harsh
reality is that the economy is cyclical. Busts follow booms. They
have for hundreds of years. And those busts are healthy over the longer
term, even if they're painful in the short-term. They set the stage
for healthy, productive growth.
Unfortunately, the Fed has consistently gotten in the way of that
curative process in recent years.
It went totally overboard under Alan Greenspan after the dot-com bust, driving the cost of money into the gutter. Thanks to that reckless monetary policy, and the reckless disregard for prudence throughout the lending industry, we experienced the biggest housing and mortgage bubble in the history of the U.S. We also saw too much dumb lending and asset inflation in the leveraged buyout business, in the commercial real estate arena, and in the emerging markets.
Now, we have to suffer the consequences. They're baked in the cake.
The government can try to ease the pain of that process. That's what
all these bailouts are about. But in case you haven't noticed, they
really haven't worked. We've gotten brief bounces in stocks, brief
periods of economic expansion, temporary improvements in the credit
markets.
But they don't stick. They fail.
What to Do Now ...
I know this is a sobering big-picture view. But it has the added benefit of being true — unlike a lot of the garbage you're hearing from your elected and unelected leaders.
Someday, we'll see the depths of the recession's eyes. Someday, we'll
get to the point where enough companies have failed, enough homes
have fallen into foreclosure, enough lenders have gone under, and
enough debt has been crunched to get a real bottom in the markets
and the economy. Then we'll be ready for our country to grow in a
healthy, sustainable fashion for the long term.
But we're not there yet. And judging from what I'm seeing, my outrage
list appears doomed to grow.
The best way for you and me to avoid ripping our hair out? Tune out the B.S. Focus on reality. And invest accordingly — with heaps of cash, inverse ETFs, put options, and other protective positions.
Until next time,
Mike
