The Economy?

Back in September the Federal Government saw fit to bailout the banking industry with a $700 billion package. The quest was two fold, first to stop the banks from failing. Secondly, the government aimed to stop the rate of home foreclosures that displaced citizens at a rapid clip unseen in American history. So what has the Government accomplished to date? Nothing. Why?

The first relief plan was acronymed “TARP”. This plan was loosely drawn and signed out of haste by Congress despite the Congressional fight and delay. The second party to the deal, banks, signed it in even more alacrity due to the fact that they felt they were going to loose their shirts. The banks probably knew going in that the money would not work the way Congress was hoping.

To date $290 billion is out the door. $125 billion to 9 of the biggest banks, $125 billion to smaller banks. $40 billion to my former employer AIG, thank God I left, but I truly feel for my old buddies who are really in a bad position. I’m now with a competitor and we are poised to take market share from the formerly known “largest” insurance company in the world, AIG.

To break it down to its simplest form, the banks rather spend the money on merging so that they don’t collapse, as opposed to helping homeowners stay in their homes. The banks rather have foreclosures than to sell a block of mortgages to the Government for less than what they expect to get if they hold the homes. See, these mortgages are held in bundles, called Collateralized Debt Obligations (CDO’s) and can’t be broken out home by home. CDO’s are bundled up according to risk into “tranches” (bundles) So some tranches may be AAA rated prime paper or mezzanine tranches which are lower rated AA or BB papers. There is no way to break out the failing loans from the bundle to dump on the Government unless the home is actually in foreclosure. Once in that stage, the loan servicers are not able to agree with the Government on how to save the homeowners by changing the terms of the loan. Loan servicers are paid according to the money they obtain in collection activities, as opposed to how much they loose to the Government. So homeowners get no relief.

Now the TARP money is going to AIG for losses associated with Credit Default Swaps. These
Swaps are risk transfer contracts, or insurance. Companies who hold accounts receivable from their clients have an exposure to losses from customers not paying their debt. So AIG began selling “Trade Credit”, which is insurance for default on accounts receivable. AIG bet that only a small percentage of these insurance buyers would suffer insurable losses that AIG would have to pay. Yet, in a bad economy, the house of cards may fall all at once. So when the economy turned bad and many companies default rates increased, they filed claims to be reimbursed by AIG. This used up much of AIG’s cash holdings. Insurance companies are required to hold a minimal amount of liquid assets. If they are not in compliance with these regulations, they must liquidate assets to satisfy requirements or turn in their license and fold.

Now the Government is looking at bailing out the U.S. auto industry as well as American Express. Okay, the auto industry to save jobs, but American Express? I despise credit card companies, if it were not for them, many people wouldn’t have even been a sub-prime borrower to begin with.  Can you say “Bankruptcy Reorganization” boys and girls. If a company has a bad business model, shall we through good money after bad.

To address my main concern of homeowners and property values, I’d have all homeowners who go into foreclosure file for bankruptcy immediately so they may stay in their homes. As well I’d have the Whitehouse decree a restriction of Sheriff’s duties to remove people from defaulted homes only after the trustee sale is complete. The government shall offer to buy the home from the bank at $1 above the highest bid. That way they can renegotiate new terms and the homeowner can remain in the home. Once that is completed, have the bankruptcy court dismiss the case without concluding the bankruptcy. This will force banks to negotiate with the Government better terms as they attempt to save proceeding and processing cost.