Interesting quote about the stimulus package…..
by Tom on January 31, 2009
in Market Musings
Paul Kedrosky: Sowell on Slow Stimulus
“Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.”
– Thomas Sowell on the CBO’s analysis showing only $26bn of Obama’s $355bn public works package will be spent this year, 30/01/09.
$400,000
Tom here with two confessions to make:
- I work for a bank that has received some bailout money.
- I would very willingly work for $398,000 per year.
Senator: Cap pay at $400K for Wall Street ‘idiots’ – Jan. 30, 2009
An angry U.S. senator introduced legislation Friday to cap compensation for employees of any company that accepts federal bailout money. Under the terms of a bill introduced by Sen. Claire McCaskill, D-Missouri, no employee would be allowed to make more than the president of the United States.
The Bad Bank Scenario…
Tom here…..
Two reasons why I don’t think the bad bank scenario will work:
- It doesn’t solve the problems that banks are facing. There are many other problems the banks are dealing with.
- Meredith Whitney says it won’t work. She’s got a track record that is pretty impressive on that subject. Read more about what she said below….
Meredith Whitney to banks: Deal with it – Jan. 30, 2009
The end goal is to get banks lending again, but Oppenheimer bank analyst Meredith Whitney doesn’t think that separating the bad from the ugly will get money flowing. Instead, she says banks should bite the bullet and start selling their good assets.In an interview with Fortune Friday, Whitney argued that a “bad bank” does not attack the fundamental problems eating away at these firms.
“The bad bank is a covert way to recapitalize banks by paying more for the assets than the market would, she said. “Then the banks might be able to write up the value of the securities. This would give them, on paper, more tangible equity. In theory they would look stronger.”
But Whitney believes the banks will remain weak, even if their books look healthier, because they have to deal with a lot more than just bad assets: As consumer and business spending slows, banks will still incur losses on their “good” loans; they would be forced to set aside more cash, which would cut into earnings; and there’s also the simple fact that a recession means less demand for their business.
How many banks will close today?
Calculated Risk has the story of Magnet Bank.
I also heard that Frontier Bank in Greeley Colorado got shut down.
Working on some thoughts about what the future of banking is going to look like. More on that later……
Calculated Risk: 2009 Bank Failure #4: MagnetBank, Salt Lake City, Utah
2009 Bank Failure #4: MagnetBank, Salt Lake City, Utah
A few thoughts on the Wall Street Bonus Issue…..
by Tom on January 30, 2009
in Market Musings, banks
Tom here with a few thoughts on the Wall Street Bonus issue….
- I don’t believe that the people on Wall Street realize how upset those on Main Street are about what’s happening.
- The fact that they paid bonuses in 2008 when the companies got bailed out by the government is just wrong. Paulson and company should have set things up with the bailouts so that none of the upper level executives at these companies got bonuses.
- It’s a sign that things aren’t well in the financial industry.
- Read what Yves says at Naked Capitalism. She’s got a good handle on it….
I think Rodney Dangerfield says it well too!
Tom Vanderwell
naked capitalism: Congressional Sound and Fury Over Wall Street Bonuses Sure to Signify Nothing
However, the Congressional hyperventilating is a shameless diversionary tactic. Let us turn to philosopher Rodney Dangerfield:If you steal $1000 from a convenience store, you go to jail for ten years. If you steal $100 million, you get called before Congress and called bad names for ten minutes.
The Fed Translated – just a few days late…..
by Tom on January 30, 2009
in Market Musings, banks
Tom here…. Sorry for the delay, but better late than never….. (my comments are in bold)
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. Nothing new there and no surprises. Can’t go lower than zero and certainly can’t raise them right now. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Here again, no big surprises. I think the surprise is going to be the amount that rates go up once the economy does recover and inflation becomes an issue. I’ve been talking to a large number of people who want to use a home equity line (at prime or prime minus .5%) to pay off their mortgage. They would lower their rate down to around 3%, but my recommendation would be to do that only if they can plan on paying the balance off within 1 to 3 years. My feeling is that any longer term than that will make it too expensive because of the way rates are going to jump up. For more thoughts on that, see what I wrote a couple of weeks ago about the “W” recovery.
Information received since the Committee met in December suggests that the economy has weakened further. No surprise there. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, Really? Which ones? in part reflecting government efforts to provide liquidity and strengthen financial institutions; If you look at Bank of America and Citi, you can’t tell that the financial institutions are stronger, nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. Translated – we hope things get better later this year, but we really don’t know, so don’t blame us if it takes longer.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. Inflation could persist below rates that foster growth. What does that mean? That means that deflation is more of an issue than inflation.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. We’ll do everything we can! The focus of the Committee’s policy is to support the functioning of financial markets We’ve got to get the banking world moving or we’re in really big trouble! and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. They say this like it’s a good thing but a high level of the Fed’s balance sheet isn’t a good thing. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. We’re buying mortgages in order to keep Fannie and Freddie going and to try to lower rates. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. Read that last sentence carefully. Does improve conditions in private credit markets mean lower rates? Not necessarily. It means that if the Treasury market and associated credit markets seize up, the Fed will buy Treasuries to keep things moving.
The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.
FRB: Press Release–FOMC statement–January 28, 2009.
Summary – The Fed essentially said, “They’ll do what they can” to keep the markets moving and to get the economy back on track. They didn’t say that they were buying any particular assets to lower mortgage rates or lower any other costs of credit. They will do what they can to keep credit moving but they aren’t promising that what they are doing will lower rates.
I don’t always agree with him, but I always appreciate what he’s saying…..
by Tom on January 30, 2009
in Guest Posts, house prices
Today’s guest post comes from a good friend of mine who has appeared on here a number of times. Jeff Brown from Brown and Brown Inc. is an investment property Realtor in San Diego. He and I have really come to enjoy (at least I do) the discussions we’ve had and the things we’ve learned from each other. Check out more of what he writes at BawldGuy.com
I’ll give you a hint, I don’t totally agree with him on this post, but you’ll have to either scroll down to read why or actually read the whole thing to find out why. Do go read the comments on his site for this post too. Very insightful….
How To Get Real Estate Flyin’ Off The Shelves Again — This Would Help Big Time · BawldGuy Talking
The last couple months or so I’ve been having some interesting, sometimes funny, sometimes very lively conversations with some pretty knowledgeable people. They come from all over the country. Both genders. Over 70, under 30, and everything in between. Two had experience with Fannie/Freddie — one with each, and both impressively high on the regional pecking order in their area.I asked all of the The Question: If you were King how would you go about healing our real estate problem?
Caveat — Told ‘em not to take the concept of ‘King’ literally. Within the fabric of what’s possible in our political/economic system. In other words, the had to be realistic — more or less.
I won’t go through the whole laundry list of their suggestions, or as one lady put it, her fixes. Some ideas were beginning to sound pretty solid ’till they kept talking. Wow, what some folks think is possible boggles the mind.
One guy though was like listening to my own thoughts on the subject, which of course led me to conclude he was no doubt on to somethin’.
If he wants to ID himself he welcome to, but I didn’t feel comfortable doing it myself.
I’ll keep him anonymous as I don’t wish either to embarrass him or violate his professional privacy.
I’ve been thinkin’ this for awhile now. Here’s what we both thought would work. And no fair being disappointed when you see how simple it’d be to execute. This problem’s genesis isn’t akin to figuring out the final answer to whether or not we’ve ever been visited by aliens.
Here’s what I’ve been thinkin’ for quite awhile now. It’s so simple, so doable, and so easy to execute as to be maddening. In fact, I’ll go a giant step down the road. There are vast amounts of what I now refer to as ‘Hostage Equity’. That equity investors would love to exchange, tax deferred into much more property, but due to the above mentioned limitations, they simply don’t have the option. No loans — no tax deferred exchanges.
First we expand FHA loans to investors. 10% down payments minimum — and absolutely no negative cash flow allowed. The down payment would rise ’till the underwriter agrees the property would be paying for itself with market rents, reasonable operating expenses, and vacancy rates. But there are plenty of small income properties around the country that would easily cash flow with only 10% down. The underwriting itself would be stringent but not blood sucking in nature. In other words, the property and the investor/borrower qualify using reasonable standards — or no loan. The interest rate would be 4.5% fixed for 30 years, plus mortgage insurance if the down payment is less than 20%.
Second, and maybe even more critical, is the lifting of Fannie/Freddie’s silly, arbitrary limit on the number of loans an investor can have. Four? Are they seriously thinking they’re helping with that policy? It’s like the well meaning folks in charge of the then infant Federal Reserve, in response to the crash of 1929, who decided higher interest rates and a depressed money supply was the cure. What? No leaches? That worked out well, didn’t it now?
There should be no artificial limit to investor loans period. Some of these policies are just plain stoopid.
Let’s use an example of how this policy is impacting the nation’s lending problem not to mention the unsold supply of very salable property.
How ’bout a couple with half a million in cash, massive liquid reserves, mid-700’s for credit scores, and a hankerin’ to buy a bunch of income property? Problem is they already own their own home. Strike one. They still own their first ever home too, having kept it as a rental. Strike two. Finally, eight years ago they bought a couple duplexes as part of the Plan to grow their capital. Strike three — and they’ve not even grabbed a bat and left the dugout yet. They lose — the sellers of several income properties lose — the lender hasn’t made several solid loans (and received the fees) — and the taxpayer will surely end up holding the bag for much of the unsold property.
Sound ridiculous? Of course it does. I deal with this Keystone Kop Krappola daily.
Now let’s explore what they’d be able to do if my plan was in play.
They’d be buyin’ $2-3 Million in investment property in all the right places. They’d have $30-50,000 in completely tax sheltered before tax cash flow. $60-100,000+ in yearly depreciation. Not to mention the capital growth as real estate markets emerge from this correction as they always have and always will.
‘Course it’d be sooner if they’d adopt this plan.
If we go all Solomon on ourselves and slice it down the middle, they’d acquire $2.5 Million in property. This would mean, using a few of the growth regions I currently favor, that 10-12 pieces of real estate that have been sitting around bolluxing up the economic scenery, would now be in solid productive use. They wouldn’t be vacant, ‘cuz there’d now be a family living in them. The lender(s) would have, give or take, a couple million bucks out makin’ them a profit instead of gathering mold on their books. Their bottom lines would look a whole lot sexier too. Duh.
Others would see what’s possible and do the same. There are literally thousands of real estate investors, big, small, and tweeners, who’d love to be able to acquire more real estate while the gettin’s hot. But they’re stopped before they get outa the starting blocks because either they can’t find a lender in the area, (Hellllllo FHA) OR they’re too successful as real estate investors and, golly Aunt Bea, we don’t want that, right? After all, who do those thousands of investors think they are anyway — Americans investing for their retirement? Guess they should be waiting on all that money they’ve been makin’ with their 401(k)’s, right? (Ouch!)
FHA is beggin’ folks to borrow money with only 3.5% down payments, and credit scores of under 680, but our example investors can’t buy more units ‘cuz they’ve already proven themselves to be solid citizens and great risks? Do the math. My plan would have investors with about 3-6 times the ’skin’ in the game as the folks FHA is wooing. Am I the only one waiting for Rod Serling to begin his narration?
What’s the government gonna think of next, indoor plumbing?
The Einsteins who’ve saddled us with this ridiculous and artificial loan limitation, just won’t learn what Grandma taught me so many moons ago. I liked it so much it’s become my favorite axiom.
BawldGuy Axiom: About the time the farmer got the old mare to work without eatin’, she died.
It’s funny, but it’s not, is it? How long before those in charge show up for work one day and find the old mare layin’ in the field — cold, stiff, and very dead.
OK, enough. I’m confident this approach would begin working almost overnight. Will it happen? Not if somebody tells the government yahoos in charge how much sense it makes. So, everybody, ‘mum’s’ the work, OK? Cool.
Think your ready to make a move? Been wondering if you and I should talk? Stop wonderin’ and start clickin’. The Contact BawldGuy button’s there so we can get together easy as pie. Have a good one.
Okay, Tom here again. A couple of things that I don’t quite agree with Jeff on:
- FHA was set up to encourage home ownership of primary residences. It was not meant to be a place for investors to get financing and I think it would be a mistake to change the charter of FHA to allow that.
- From what I’m hearing, the losses that the mortgage backed securities are taking on investor properties are substantially higher than they are on owner occupied. Like I’ve told people before, if you had to choose which payment to make, the one to keep a roof over your wife’s head or your tenant’s head, which one would you pick? Investment property loans are inherently riskier and last week Friday we saw that Freddie Mac is asking the government for another $35 Billion. All is not well in the mortgage world. Therefore, I don’t believe that it would be wise to go back to 10 properties or to go “unlimited” as Jeff proposes. Would it spur buying of additional properties by investors? Yes it would. But read some of the comments that were posted on this story on his site. I think there could be unintended consequences to unlimited investor loans.
- I’ve always told people that, whatever the limit was, the limit was there because the secondary mortgage market is essentially saying that if you own more rental properties than that, it’s considered a business and should be financed commercially. I did a primary residence loan once for a client who owned 80 rental properties (imagine analyzing 27 pages of Schedule E on his tax returns). It was his full time business and should be correspondingly financed either privately or through commercial loans.
Am I saying that I totally disagree with Jeff? Nope, not saying that. However, do I think it’s wise to let FHA get into the investor loan business? No I don’t that either. Can there be a middle ground? Definitely.
What do you think?
Bad Bank Plan?
Hmmm, it seems like we might not have a bad bank plan after all?
Tom
‘Bad Bank’ Plan Hits a Snag, CNBC’s Gasparino Says
Plans to pool toxic assets into a U.S. government-owned bank may have encountered a problem, CNBC is reporting.On Tuesday, stock markets rallied on hopes the ‘bad bank’ would help clear up the problems that a plaguing balance sheets.
The original report and the follow-up were from CNBC’s Charlie Gasparino. Late Thursday, he said officials are holding round-the-clock meetings with senior bank executives about the plan and are unsure how it could work.
He said the announcement of any ‘bad bank’ is likely weeks away and may not even occur.
Do we even know this would work?
Tom here….
A couple of thoughts to through into the mix about the whole bank bailout…..
- $4 Trillion is a lot of money!
- Do we know that removing the bad assets from the banks will enable them to return to good health?
- Do we know that banks will start lending again if these assets go away from their “books?”
- Do we know that the price (assuming there is a price) that the government will pay for these assets is a fair price given the realities of today’s markets?
- Are we prepared to deal with the banks that go under because suddenly they are undercapitalized?
- Do we have enough safeguards to make sure that the government (you and I) don’t give our money to the banks without the appropriate safeguards to make sure it doesn’t go to the worng places.
Until we know the answers to at least some of those questions, we need to be very careful in throwing more money at everything……
Tom Vanderwell
Bank Bailout Could Cost Up to $4 Trillion: Economists – Financials * US * News * Story – CNBC.com
The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a “bad bank” that buys up souring assets.The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.
Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.
“Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset,” they wrote in a note to clients.
Answering a Reader’s Question
by Tom on January 29, 2009
in Market Musings, banks
Tom here….
I got a request today from a reader of Straight Talk to make a few comments about cramdowns and why the banking industry is opposed to them.
First – what’s a cramdown? A cramdown is what happens when a bankruptcy judge can unilaterally reduce the amount that is owed on a primary residence. So let’s say that John Doe files bankruptcy, all of his other debts (depending on the type of bankruptcy it is) go away. The bankruptcy judge currently doesn’t have the right to change the mortgage. A cramdown gives the judge the right to say, “In addition to the rest of the bankruptcy issues, I’m going to reduce the principal balance on the mortgage from $180,000 to $100,000 because……”
So what does that mean?
It means that all of the “normal” calculations in terms of what can be expected out of mortgage portfolios are suddently at the mercy of the opinions of a bankruptcy judge. That means that it’s very hard to predict and calculate what they can expect to get out of the loan. Normally, they can predict that when a loan goes to foreclosure, they can get ____ % of the loan amount recouped from the foreclosure. When they are dealing with the “mercies” of a bankruptcy judge, all of the normal calculations get thrown out the window. So what if the normal calculations get thrown out? That means it’s very hard to calculate the value of the mortgage backed securities that the banks are holding and/or trying to sell.
So why are banks opposed to it?
1. Because, with the bad press banks are getting, being at the mercy of a bankruptcy judge doesn’t bode well for them to not lose too much. I can just see a bankruptcy judge vs. Countrywide?
2. Increased losses, or increase uncertainty of losses creates more financial stress on banks that don’t need any more financial stress. This would be the impact that would happen on existing loans in the “system.”
3. If it happens going forward (on new loans), the increased uncertainty in regards to losses will make for higher interest rates. That’s not something that anyone needs right now.
So, there’s an answer to some thoughts about cramdowns. Are there times when it makes sense? I think so, but I think it would need to be a meet in the middle type of thing.
Hope that answers more questions than it raises. If I can help further, let me know and I’ll respond when I can.
See below for some additional thoughts I wrote a couple of weeks ago…..
