Archive for September 29th, 2008

The bailout: Obama’s windfall

September 29, 2008

Strictly my POV:

All of the pundits are saying that the cost of the bailout will hamstring either Obama or McCain — whoever gets elected.  (see http://www.politico.com/news/stories/0908/14027.html)

McCain wouldn’t be able to cut (or hold) taxes;  Obama won’t be able to afford his expensive social programs.  I disagree — especially if Obama’s “$500 for everybody who votes for me” campaign succeeds.

First, Obama will use the cost of the program to justify even more tax increases.  The increases will hit more people and will be bigger.

Second, the $700 billion will become a permanent layer of the national debt.  It will never be paid down.  Any proceeds received from closing, renegotiating or reselling the toxic loans will simply be redeployed to other spending programs.  Think Iraq – it was originally off budget.  Now, there is talk of how to put the $10 billion per month to better use. 

Mark my words.

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MUST READ: The NY Times called the mortgage crisis … September 30, 1999

September 29, 2008

Excerpted from NY Times: “Fannie Mae Eases Credit To Aid Mortgage Lending”, Steven Holmes, September 30, 1999

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September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, Fannie Mae is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action … will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.  

These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

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Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

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In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

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Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

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Full article:
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

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Thanks to Chris Wargo, MSB MBA ’05 for the heads-up

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Young & Cynical vs. Old & Green

September 29, 2008

Excerpt from Marketing Daily “Boomers: The Greenest Generation” September 9, 2008

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While conventional marketing wisdom holds that it’s the idealistic Gen Y shoppers who are most committed to buying products that are less harmful to the environment, a new study finds that baby boomers are the greenest generation.

Both male and female groups 55 years and older are above-average users of environmentally friendly home goods in the U.S…Conversely, men and women from 25 to 34 years are among the “least likely to buy” category, compared to the national average…

One reason that older shoppers may be more committed, says Peter Meyers, ICOM’s marketing vice president, “is that they are spending more time in the store, looking at packaging and reading product claims. They know what they’re buying.”

Another possible explanation, he says, is that Gen Y is simply becoming more cynical, and is more likely not to believe a marketer’s claims.

For marketers to continue to be successful with earth-friendly claims, he says, especially with the economic slowdown, “they’re going to have to start considering price as a key issue, as well as finding ways to back up claims more clearly, to build trust.”

Edit by SAC

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Full article:
http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=90191

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Huh? Most Adults Give Children’s Schools Good or Excellent Ratings

September 29, 2008

Excerpted from Rasmussen Reports:”Most Adults Give Children’s Schools Good or Excellent Ratings”, September 12, 2008

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81% of adults rate the performance of their children’s schools as good or excellent. Of that percentage, 47% of adults rate their children’s school as excellent.

Just four percent 4% give their schools poor ratings.

The positive grades span across both men and women, blacks and whites and party affiliation.

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However, the majority of adults (52%) think schools place too much emphasis on standardized testing.

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When it comes to , 53% say students receive just the right amount of homework …22% say students are assigned too much homework … 21% say they are not assigned enough.

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86% believe PE should be required

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Full article:
http://www.rasmussenreports.com/public_content/lifestyle/general_lifestyle/most_adults_give_children_s_schools_good_or_excellent_ratings

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Who’s Paying for CEO Excess?

September 29, 2008

Excerpted from New York Times, “Need a Job? $17,000 an Hour. No Success Required”, by Nicholas D. Kristof, September 18, 2008

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Richard Fuld, the longtime chief of Lehman Brothers, took home nearly half-a-billion dollars in total compensation between 1993 and 2007.

Last year, Mr. Fuld earned about $45 million, according to the calculations of Equilar, an executive pay research company. That amounts to roughly $17,000 an hour to obliterate a firm.

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Three decades ago, C.E.O.’s typically earned 30 to 40 times the income of ordinary workers. Last year, C.E.O.’s of large public companies averaged 344 times the average pay of workers.

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These Brobdingnagian paychecks are partly the result of taxpayer subsidies. A study released a few weeks ago by the Institute for Policy Studies in Washington* found five major elements in the tax code that encourage overpaying executives. These cost taxpayers more than $20 billion a year.

Edit by DAF

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Full article:
http://www.nytimes.com/2008/09/18/opinion/18kristof.html?ref=opinion

*IPS Report, “Executive Excess 2008: How Average Taxpayers Subsidize Runaway Pay”, 
 executiveexcess2008

IPS Site: http://www.ips-dc.org/reports/

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Been paying your mortgage, sucker ?

September 29, 2008

Excerpted from WSJ: “Rescue Includes Steps to Help Borrowers Keep Homes”, Sept. 29, 2008

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Ken’s POV: Just imagine a non-citizen investor (e.g. a “flipper”) who lied on his mortgage application, didn’t put any money down  and hasn’t made any monthly payments.  He’ll get his mortgage adjusted.  You won’t

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The bailout package includes more aggressive steps to help troubled borrowers keep their homes by requiring the government to do more to reduce loan balances and interest rates.

The bill calls on the government, as the owner of mortgages, mortgage-backed securities and other assets backed by real estate, “to implement a plan that seeks to maximize assistance to homeowners and use its authority to encourage the servicers of underlying mortgages, and considering net present value to the taxpayer, to take advantage of…available programs to minimize foreclosures.”

Such measures could reduce monthly loan payments for homeowners and, in theory, increase the likelihood that borrowers keep up mortgage payments. It could also slow down the growing number of foreclosures.

The modifications are designed so that the payments on a borrower’s mortgage don’t exceed 38% of gross income.

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Although the latest plan may evoke anger among taxpayers who pay their mortgages on time, economists say helping those in trouble could benefit all taxpayers by blunting the impact of the financial crisis on the housing market and local communities.

Getting borrowers back on track could help reduce the cost of the bailout to taxpayers. In recent years, troubled loan portfolios have yielded about 32% of book value, compared with more than 87% for loans in which the borrower is current.

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There are more questions than answers about how effective the government’s program will be. If the government buys entire loans.

Another crucial unanswered question is how many borrowers will be helped by stepped-up loan-modification efforts. “There’s a great deal of skepticism about the ability of modifications to improve the performance of loans.”

Deutsche Bank recently looked at subprime loans packaged into securities, most of which were modified in 2008. It found that roughly 35% of the loans were at least 60 days past due roughly six months after the modification.

“Investors think these loans will all redefault in a year or a couple of years and the losses will be higher.” Historically, modifications haven’t done that well.

One fear is that if mortgage companies or the government, is too liberal in offering help, more borrowers who might otherwise stay current on their loans will fall behind to get a better deal. “What we don’t want to do is undertake some kind of program that changes the behavior of those many, many people who undertake extraordinary effort to pay their mortgage and make sure they can stay in their home.”

As many as 40% of homeowners, or about 20 million households, will owe more than their home is worth by the time the housing market stabilizes.

[Chart]

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Full article:
http://online.wsj.com/article/SB122265697254684627.html?mod=article-outset-box

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Voter opposition to bailout plan creates an opportunity for McCain … does he have the stones ?

September 29, 2008

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According to Rasmussen Reports, only 25% of voters favor the bailout plan.  Obama supporters are most skeptical of it. (More data and the link are below)  All of which creates an bold political opportunity fo McCain — as articulated by Dick Morris.

Note: Probably by the time your read this, the die will have been cast — one way or another.

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Excerpt from: “MCCAIN’S TRUMP CARD”, Dick Morris,  New York Post, September 28, 2008

During Friday’s debate, John McCain assiduously and inexplicably avoided using the issue that might have won him the debate and the presidency: opposition to a taxpayer-funded bailout of the financial crisis.

Congress is about to pass – and the president is about to sign – a bill that the American people detest by 2:1 margins. When Americans realize that there is, indeed, an alternative to handing over $700 billion to financial institutions as a reward for their failure, opposition to the idea will swell even further.

The bailout ideas proposed by the House Republicans and trumpeted by former Speaker Newt Gingrich make eminent sense. Indeed, they make so much sense that it is as if the roles of the parties have been reversed. It is the Republicans who are demanding that the banks and financial institutions pay for their own bailout, granting them only a mixture of loans and premium-paid insurance, while the Democrats want to pass the hat among the taxpayers to buy their dirty paper.

In an unusual act of political foresight and skill, the normally dead-headed House Republican leadership has crafted a platform that can carry the party to victory in November. All that remains is for the Party’s candidate – and perhaps even its president and Treasury Secretary – to get on board. McCain can recover at the negotiating table the economy issue he lost in Friday’s debate. He needs to have the courage of his convictions and insist on a bailout without requiring taxpayer-funded purchase of defunct mortgages from failing institutions.

The difference in the bailout plans is, of course, largely cosmetic. Dead paper is dead paper whether it is on the books of the government, purchased from banks, or on the books of the banks, insured by the government. The game is the same: Through loans or grants fund the deficient debt service on the defaulted mortgages until homes can recover their value in the cyclical real estate market.

Loans are politically viable. Purchase of bad debt with tax money is not.

The Democrats and our politically-challenged president have failed to appreciate the difference between spending and lending. Treasury Secretary Paulson can be excused for not realizing it. Politics is not his thing.

But John McCain must realize the crucial distinction and must use his leverage to stop a taxpayer-funded bailout, insisting instead on loans and insurance.

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If McCain stands firm, the Democrats will either have to pass the bailout package on their own, without Republican votes, and rely on Bush’s signature on the bill to provide a fig leaf of bipartisanship – or they will have to cave in and pass the Republican package.

Either way, McCain comes out ahead.

If he gets his way, he gets credit for the bailout. If he doesn’t, he can spend the campaign attacking Obama and the Democrats for spending $700 billion of taxpayer money.

If the Democrats don’t adopt either course and play a game of chicken with the Republicans, their Congressional status as the majority party dooms them to taking the blame for any ensuing collapse.

Voters can count. They know that Reid and Pelosi are Democrats and that they control Congress. With this power comes responsibility.

And if the Democrats do nothing – that is they fail to use their majorities to pass a bailout or to cooperate with the Republicans in adopting the GOP version of the package – it is they who will get the blame for the catastrophe which will follow.

The Democrats don’t dare take that chance.

The cards are dealt for John McCain. All he has to do is have the guts to do what he didn’t have the courage to do in the debate: Play the hand.

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Full article:
http://www.vote.com/mmp_printerfriendly.php?id=1115

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From Rasmussen Reports, Sept. 27, 2008

The more voters learn about the proposed $700-billion taxpayer-backed Wall Street rescue plan, the less they like it.

Just 24% of U.S. voters now favor the plan first proposed by Treasury Secretary Henry Paulson [and modified by Congress] … 50% oppose it, and 25% are undecided.

72% say they have followed stories on [the financial crisis], including 37% who say they have been following the news Very Closely.

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House Republicans, who regard the unprecedented government involvement in the financial markets as nothing short of socialism, are demanding significant downsizing of the plan and other changes.

The White House and Democratic leaders argue the plan to buy up bad mortgage debt from private firms is the surest way to free up credit for all Americans, but many GOP legislators fear the potential losses to taxpayers. Congressional Democrats are worried about voter opposition to the plan and don’t want to pass it without significant Republican support.

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Both men and women oppose the bailout plan two-to-one. Likely McCain and Obama voters reject the plan by similar margins, although Obama supporters are slightly more skeptical.

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Full Report:
http://www.rasmussenreports.com/public_content/business/general_business/support_for_bailout_plan_now_down_to_24

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