patrick.net

It is fine to bailout the banks.

We had exactly this discussion at tea this morning. The majority opinion, which included a Chinese fund money manager, a regional transportation manager, and a French journalist (diversity of background), was that it will be another S&L bailout.

I am the perpetual optimist, and would like to think that people will be held responsible for their actions, and am thinking (wishing??) that there will be repercussions for those who bought things beyond their means and the greedy folk who lent to them knowing there would be no hope of repayment. I am thinking repercussions such as losing the house and jail time or major fines for fraud (depending upon the extent by the individual).

Just what the hell can you do now?

Become a subject of the Grimaldis? Try San Miguel Allende?

Bruce,

Argentina is nice, the currency exchange is good, food is good.

Yah, there will probably be a bailout of the banks. I don't know if there is a 'right' way to do it, but I hope that however it works out, the executives of the failing institutions get held accountable in some way.

For instance, for subprime lenders, I'd like major stakeholders with influence on operations to be held personally responisible from any moneys they have recieved from stock sales. Never going to happen, but it just bugs me that a##wipes sat there selling off their stock for millions of dollars while saying "All is well!" until their companies tanked this year. They purposefully used a bad business plan to make massive short term profits at the expense of long term viability of the company, and they knew it. That smacks of stock manipulation on a grand scale.

After having visited much of eastern Oregon over the weekend (and actually seeing some SUN!) I'm feeling much more positive these days! So positive in fact that I'll go so far as to say a bail-out isn't going to happen. At least not on a scale FB's and FL's (lenders) desperately need to see.

The only thing I can possibly see actually working is to create programs where FB's on the verge of default are allowed to do some kind of "exchange of collateral" where their neg. equity is rolled over to a loan they CAN afford (just w/an extra 10 years or so tacked on).

Of course none of this can take place without a reduction in FICO score so lenders may be able re-coup some of their losses through higher int. from FB's other forms of credito (auto loans, plastic etc.)

As per the FDIC spokesperson (thus far) the SPMD (Sub Prime MeltDown) has been "an earnings event" NOT a regulatory event! It's just hard for me to imagine any kind of a "quick turnaround" for RE b/c they have a solid percentage of their potential buyers addicted to "Zero Down" howmuchamonth financing platforms and coming away from their closing w/ZIP and/or a short sale who will have the down payment to re-ignite sales on the other end?

While I want to believe that people most responsible for this mess (Fed, banksters, Casey Serins, etc.) will be held responsible, I am under no illusions about how our system currently works.

If the MBS/CMO crash in subprime & Alt-A extends to supposedly "safe" AA/AAA tranches (including GSE-issued paper), you can bet your depreciating dollars there will be a Fed/Congressional bailout a-la LTCM/S&L. While they may allow small-fry lenders to go tango uniform, there is no way the federal government will allow the banking system or its sacred-cow GSEs to fail.

The government does not "care" about individual FBs per se; however, if there are enough of them screaming for help, so not underestimate the power of pissed off constituents to bring political pressure to bear. Everything counts in large amounts, right?

Of course, for any massive bailouts to occur, Fed/Congress must figure out a way to finance it. Instituting an obvious penalty on responsible people, such as a renters' or savers' tax, would be as politically unpopular as letting FBs and big banks go belly up. So, my guess is, they will try to go the "stealth tax" route and just monetize the GSEs & banks' bad debt, and strong-arm lenders into generous "work-out" solutions for FBs (converting costly option-ARMs into very low-rate FRMs). This would be by far the easiest and most politically palatable solution.

Exactly how this will play out on the general economy is debatable, but I would expect significant non-housing inflation for the foreseeable future. Whether or not any of this new liquidity will spill over into working-class wages is anyone's guess, but never underestimate the power of the federal printing press, or the desperation of politicians facing angry voters.

Seriously, I think the S&L bailout was viewed as just barely acceptable to the public only because the FDIC, after unconscionable delays, restored monies to the affected depositors - people who were in no sense responsible or contributors to the problem.

The present case touches on so many entities, I think it's not likely that any bailout could be either effective or timely. There are sharper minds than mine, I know, looking at what is possible. I can't help thinking of two examples which color my opinion: New Orleans and the Gulf Coast are of necessity repairing themselves. And Barings Bank is gone.

Just curious--would a bank bailout inevitably weaken the dollar further?
And, how what message would that give to those offshore holders of US Treasuries?

Nate,

Well it certainly "shouldn't" be tolerated! One of the evils I can see playing out is for congress to authorize some sort of "Negative Equity to Original Cost Basis Depreciation Acceleration Clause". This would allow FB's that haven't even sold (thus no taxable event) to actually write off their "loss" to the tune of 12-15-30K a year vice the old 3K.

This to me is unbelievable to even consider! Since we've basically turned the "primary residence" into a preferred/tax deferred/tax free investment w/ZIP cap gains how can we now turn around and say you can write off HUGE chunks of neg. equity (that never REALLY existed to begin with?)

HARM ... thanks for the nice graphics. It was added within minutes of putting up the post. Were you expecting this topic to come up eventually and had it ready ? ;-)

@StuckInBA,

Thanks, glad you liked it! I didn't have it ready, just Googled "government help" and that image was on the first page of results.

"you can bet your depreciating dollars" LOL!

Yeah, uh, that about sums it up now doesn't it! :)

You have to wonder out loud w/as many FB's as there are going to be out there if the Feds allow them to "re-nogotiate" their new (and much lower cost basis) will local gub'ments have a hissy fit based on lower future tax revenue? NFW this can end pretty.

I agree with HARM on this point. I think it's reasonable to expect that the GSE's will be offered a bailout. This way the hedge funds, big wall street firms etc can sell the MBS back to the Fannies and Freddies. The bailout might also be offered to banks who hold the loan.

For the average Joe, tough luck. If you bought a house you are screwed. If you didn't, you are screwed as well due to depreciated USD.

OT, but the Mortgage Lender Implode-O-Meter just hit 36. Back in December (when it first started), you saw maybe 1 or 2 lenders go TU in a given week. We're now seeing 3-4 per week, so the trend is definitely our friend --and accelerating.

StuckInBA,

I see your point. Wouldn't that scenario imply capital flight?

I'm beginning to get the impression that we are all the idiots here. These FBs who've been borrowing and spending like there's no tomorrow will be let off easy, and those who chose to actually exercise financial restraint, save money, and be honest with loan borrowing are going to be left in the same position as we were before. We will be holding onto cash and renting, while your typical FB will have at least enjoyed "owning" a home for a few years before reality sets in, their loans reset, and they get foreclosed on. Meanwhile, unscrupulous lenders and the lemming-like investors who jumped on the MBS bandwagon will get the big fat government bailout.

I guess that's the Amerikan way!

HARM,

I noticed that as well. Keep in mind Aaron Krowne is just tracking the larger players. On a local level these guys are going under before I can finish this post. Many of them use (or should I say used) wholesalers that were feeding from the same trough.

Someone pointed out that after even these larger players go (2) consecutive quarters operating at a loss they will be cut-off from funding as well. So that will make June real interesting!

skibum,

To an extent I'll have to agree but even in hindsight.... I can't say that I would've changed a thing! We're on the right side of the equation here!

Some time back I discussed the fact that the "old" VA Loan was basically worthless b/c anybody could run out and find "zero down" financing. Even if FB's can fabricate a way to walk it won't do them a lot of good. They'll have nothing for closing costs (let alone a down payment). Most will have to tough it out as long as they can since they rolled their plastic and auto loans over Stanley Johnson style.

The thing is that they have been running the new turbo driven printing presses all this time; a whole year since M3 ceased to be publish. I just wonder how much they have printed so far (scary). I get the chills evey time I see the dollar index drop another notch; we're in the upper 83's right now!

I think all that were involved should have there salaries garnished for the rest of their unnatural lives. They should be removed from their houses, all assets taken away and only allowed to keep enough money to stay alive (only eating Ramen). This should go on until all their debts are paid off with interest. I am sick of how there are so many that are abusing the system at the expense of the rest of us!

Bruce :

By capital flight do you mean out of USD ? Then it might happen. But to where ? We may see gold rise along with other metals and commodities. Neither the Euro nor the Yen is without problems. The Yen may rapidly rise due to short covering, hurting the carry trade more and thereby speeding up the flight out of USD. That's another death spiral.

All that is true. But there are not that many "good" alternatives to USD. So I think there may be some cushion to the falling USD.

Depreciating dollars!

All right, if these turds expect me to bail them out, AND cause my vacation costs to sky rocket I am going to have to do something about it.

I just have to figure out what.

StuckInBA,

I suppose I meant several things but, yes, out of USD. And into whatever is perceived as sinking least. I feel sorry for the stuffing in that 'cushion'.

Did anyone see Cavuto on Business this past Saturday? Cavuto, who is the eternal optimist, changed his tune and said that in the next 2 weeks, we should expect a major blowup of a hedge fund which has been investing in subprime markets He feels it will have major repercussions in the stock market.

Even the WSJ is turning on housing:

http://www.burbed.com/2007/03/11/why-your-home-isnt-the-investment-you-think-it-is-wsjcom/

Will Time Magazine soon have a cover where people are walking away from a house, instead of hugging it?

Will that be the turning point?

Will Time Magazine soon have a cover where people are walking away from a house, instead of hugging it?

Will that be the turning point?

When this happens, be prepared to start making offers. This will mark the exact market bottom.

The thing is - and this is I suppose a consequence of my petit bourgeois mores - I've always felt uncomfortable with offshore investing. Too unfamiliar. But I'm not sure I'm prepared to make such a fine point of it as to sit by and observe a shrinking dollar.

Michael Shedlock says he anticipates deflation and devaluation in tandem, reasoning that the losses of income and avenues for borrowing will stop consumerism in the US cold, and that the FED's attempts to reinflate will fail along the lines of the Japanese model.

I simply don't know. Clarity's a little hard to come by just now.

The SF Bay Area Craigslist ReduceOMeter is holding steady at 122 listings (March 9-10).

Here's an interesting way for "financially solvent" folks to make themselves "insolvent".
Like a Bridge (Loan) Over Troubled Waters

For Van Boughner and Phillip Gomez, the countdown has begun. The Los Gatos couple closed escrow on their new Santa Cruz home Feb. 15, and figure they have about five months before paying for both their new mortgage and their old home equity line of credit will be too expensive for them. At six months, Boughner jokes, he'll start calling friends for personal loans.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/03/11/REGE6OHVQ01.DTL

"instead of hugging it"

How about taking a hardy p#ss on it? :)

How will a bailout proceed? I don't know, but I suspect that it will take a long time for anything to get done. It took several years for congress to modify the AMT after a lot of dot com "millionaires" got screwed by having to pay taxes on money they never received. I suspect it will take even longer for FBs to get any kind of relief, since their plight is much less sympathetic and they are even less likely to be able to lobby effectively.

Imagine a typical scenario (loosely based on a recent post on Ben's blog). Typical FB bought a $700K house with $0 down. They used an ARM with an initial payment of $4K month, which is now adjusting to $6K. (Presumably they got a first for $560K and a "piggyback" second for $140K.). The house can not be sold for $700K (even forgetting about costs of sale) and there is NFW the FB can make the new payment. The FB has been turned down in her efforts to refi.

The FB will go into default. The first lender will foreclose and the property will be sold. The "piggyback" lender will end up with little, if any, of the sale proceeds. The lender can't pursue the borrowner, because California is a nondeficiency state. They will be forced to write off the deficiency and issue a 1099 to the FB. If the property sells for $600K (net of atty fees, etc.), then the FB will have, $100K of phantom "discharge of indebtedness" income, upon which they will owe, say, $35K in taxes.

Will the IRS forgive this $35K as a bailout to the FB? Possible, but I wouldn't bet on it. Will the IRS bail out the piggyback lender? I doubt it.

If the housing market (or significant portions of the national market) drops more than 20%, threatening even first lenders' positions (and the integrity of the GSEs and the whole mortgage finance industry), then all bets are off. At that point, I would not be at all surprised if congress bends over backwards to bail out the industry. Ultimately, even JBRs would benefit from such a bailout, if they desire to become homeowners (assuming they don't have enough cash laying around to finance 100% of the purchase price of their new home).

SP,

Yah... I know the idea is laughable. But wouldn't it be nice? If a Mid-level worker made a gaffe that caused a company to have to rebuy 8 billion in loans, you can bet he wouldn't be walking away with a boatload of cash.

PAR said:
Great timing EBGuy. I posted a Shiller quote a few days ago. He was asked when a market typically crashes and he said that it’s right about the moment that the local press starts running stories that embarrass people (e.g. Florida swamp sales in 1920s). This morning there was one in the Merc and now one in SF Gate… The ball is rolling.

I will try to remember this story (about the bridge loans) in six months and see if we can get the author to do a follow-up article. I doubt the "bridgers" will be so forthcoming.

Looks like rent or buy is beginning to hit the MSM; maybe this will help temper fortress SF. BTW, the A.(nswer) is everytihing one could hope for.
Rent or buy -- timing is everything
Q: It always amazes me when people reflexively say that buying a home is better financially than renting. Is this a fundamental law of physics? I currently rent a house for $2,100 a month, and to buy a similar house in my neighborhood would double my expenses.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/03/11/BUG08OI8UT1.DTL

All the while I have been sitting on the sidelines (many years now), this has been my single greatest fear. We are no longer a country with personal responsibility or accountability.

Today, everything is someone else's fault and it is the government's responsibility to provide a "safety net". All these people who were flipping properties and making money considered themselves to be geniuses. Now that things are no longer looking up, they would like other people's tax money to be used to bail them out.

This is atrocious. People who take risks should pay if they took bad risks. If they don't, the next time a bubble comes around there will be more speculation not less.

Does anybody think the LA wildfire is prophetic in any way?

Does anybody think the LA wildfire is prophetic in any way?

I dunno, but i just read more about the Citrus Freeze recently. I had no idea that we taxpayers helped bailout those impacted by the freeze. Including helping pay mortgages of workers who lost their jobs from the freeze.

Siriam,
This country hasn't valued personal responsibility and accountability for a very long time now. From the S+L bailout, to the LTCM bailout, fiscal responsibility hasn't seen the light of day for decades now. I could take a cheap shot and argue that this all started when the Boomers "took power" in government, but I won't...
:twisted:

eburbed :

Do you have a link ? Was the bailout part of some standard farmers' subsidy or was it an entirely new pool of money diverted from the taxes ?

This putative "citrus bailout" doesn't come close to being the worst case of government bailouts. How about the constant flood of money (pun intended) to people who insist on rebuilding in hurricaine or flood territory after a natural disaster has wiped out these homes? Should the government continue to encourage development in high risk areas? I guess if we extend that argument, though, no one should be living in the Bay Area unless they are in a building able to withstand a magnitude 8+ earthquake?

And this bailout will happen while the money pit of Iraq War is getting deeper and deeper...
I think there will be a bailout but am equally curious how the politicians can spin this one. More importantly how willing American public is to turn a blind eye on the imminent financial obligations like Social Security, Medicare and Iraq War as long as their home equity is growing.

skibum,

For the most part I'll agree, there's nothing new here about dodging responsibility, however we do have a double standard. One is reserved for big business/government and..... we have a completely different standard for small business and private individuals.

Look how long we've kept AT&T on life support!