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.
Is America becoming a Socialist country?
Karl Marx- Father of Socialism
All of the wars we’ve fought within the last 100 years, were in defense of Capitalism, “the only way”. Socialism = bad. Now we may have to eat our words and place a higher sense of sin in the killings in the name of Capitalism. People who never doubted America should take a fresh look at our motivations.
Basically Capitalism is the ideology that markets should only be controlled by businesses. As markets get larger, consolidate through mergers and competition they gain power relative to the Government. Hence you have a country that is controlled not by the people, as in a democracy, but by the corporations, as in lobbyism or special interest. Capitalism breads a concentration of power at the top where 90% of the assets/resources are controlled by 5% of the population. In a Socialist economy, the assets of the country are theoretically controlled by many of the citizens through heavy governmental participation in markets.
This idea of Socialism is normally very bad from the perspective of those in power. They like the structure they’ve “enjoyed” up to this point. That’s why they are called conservatives; they’d like to conserve their current power and wealth. Liberals tend to want to spread the wealth of America more evenly throughout the citizenship through redistribution of wealth by way of tax code.
Yet the confusing part is that we have people on the right wanting to own stock in the companies that
obtain a part of the $700 billion. The Government wants to not only take bad assets off the balance sheets of American corporations, but they want stock in these companies. Now, I consider myself in the center politically and I think that is going too far unnecessarily. The government’s participation in Corporate America needs to be limited to Regulation. Let me repeat that word just to piss off right wingers,
“R E G U L A T I O N!”
The all mighty Harvard educated CEO’s of this country do need DADDY to tell them right from wrong. Regulate. That is totally opposite of being a GIRLFREIND, which is to say that the stockholder Government want to partake in profiting as well. They sell this to the American people as a good thing for citizens to have the Corporations accountable to the stockholding Government and have to forfeit some of their profits to the American people for bailing them out. Yet this is no how it will play out. The Government is going to get in bed with the Corporations. That’s one of many problems with incest, you can’t be in bed with whom you are to discipline. That’s a dysfunctional family. At every turn this Country continues to go in the wrong direction.
Ask yourself, is Congress for you, or is Congress for corporations? Congress has a strange opportunity to package a marketing scheme to sell corporate ownership by the Government to the American people. They will pull the wool right over your eyes if you let them. If Congress was for you, they’d want to be the corporations DADDY. If they are for corporations, they want a piece of the action. Do you think 100% of profits realized by this Government investment portfolio will be going to your pocket? Reduce your tax by 100% of the returns? NO. If you think yes, please explain to me why.
How about the corporations interest in giving shares to the government, good idea for them? Yes, no, yes, no… Sure, if you are battling Washington and paying out tons of lobby money, why not get them in the mud with you as a partner. Now you both are dirty scum and there is no more DADDY to REGULATE. Can you say CONFILCT OF INTEREST BOYS AND GIRLS?
This country is soooo close to absolute greatness, but we will never get there. God bless America, we need blessing because our sin is GREED. As for me, I love America with all my heart. Just like a son loves his crack-head mother.
Just words & thoughts
The Troubled Asset Relief Program is relief for whom???
The Secretary of the U.S. Treasury is authorized to establish the Troubled Asset Relief Program (or ‘‘TARP’’) to purchase and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions determined by the Secretary.
“WOW” what an interesting time to be an Economist, or a US citizen for that matter. My take on it is this:
First of all we must realize that we can point fingers and refuse to help bail some water out of this sinking boat, but that wouldn’t be smart given the fact that we all are in the same boat.
I break the population into three groups, which are overlapping because any of us can be in two of the three groups, and over time, some may find themselves within all three groups. This makes finger pointing really a waist of precious time.
Group One: The Money owners who are the lenders. They range from banks, insurance companies to individual investors that have money in the market to loose if people don’t pay their mortgages.
Group Two: The pissed off people who are stuck in the middle. These people are not suffering big losses due to sub-prime investing. They also are not struggling to pay their mortgage. They are upset because they get no direct and immediate benefit from the “bailout”, yet as tax payers will have to foot the bill. They are the most upset of all over this fact.
Group Three: Those who will need assistance to maintain their mortgage. That’s all I’m going to say about them. With the exception that people from group two may find themselves in group three if they loose their job, or they have an adjustable note and have not realized that they may be in danger in the future.
Now that we’ve established the players, lets talk about the rules to this new game.
First, we must save liquidity in the markets so all business’ have short term capital to pay payrolls instead of layoff or file Bankruptcy. (Bankruptcy happens due to the fact that most business debt has cash requirements that state, if your cash falls lower than X amount, we can call your loan due immediately. Lenders do that so they can try to get their money from borrowers before the bankruptcy locks cash and assets away in court)
Secondly, we must place a stop loss backboard on corporate balance sheets in an effort to save corporate stocks from crashing. With this done, companies are less likely to lay people off, and job loss will be minimized.
Thirdly, we must stop the rate of home foreclosures. The more empty houses on the market, the lower real estate prices fall (Normal supply and demand curves, you remember from your Econ 101 class). By stopping the foreclosure rate, we can provide more price stability in the market and stop the bleeding of household net worth. As long as people feel less rich, they will be hesitant to pull out that wallet and continue to demand goods and services.
“TARP” has no caps or values that determine what the Secretary of the Treasury must work with. It gives him extraordinary power and control. Many are concerned that he may bail out these financial institution at high values, which is expensive. This helps Corporations get top dollar for their mistakes at the expense of tax payers. Some feel the Secretary may turn around and sell these debts or the Real estate to the private sector. This would be the worst thing he could possibly do. He would just prolong this crisis and transfer all the wealth away from the average citizen to the wealthy.
We can not have the Government own homes and begin to foreclose on citizens, that would be bad business. Imagine how you’d feel if the U.S. Government took your home.
So the question is:
How can the government own your mortgage, protect the tax payer (who is now the shareholder) from a deep loss on the investment, And at the same time protect the homeowners from losing their homes when it is obvious these particular homeowners are struggling?
Well according to Senator John McCain’s plan as he states in Tuesday night’s debate, much of the burden of paying to keep troubled borrowers in their homes will shift to taxpayers. McCain’s original plan called for lenders to write down the value of these mortgages and take those losses. But the Republican presidential candidate unveiled a new $300 billion plan in response to the first question of the debate. He said,
“I would order the Secretary of Treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished values of those homes, and let people make those – be able to make those payments and stay in their homes.”
Basically the banks and corporations would sell assets to the Government at a high premium. The Government would then devalue those properties and restructure loans at low current market value so that Americans can stay in their homes. I don’t know about you, but if I do participate with my taxes, I want to rest assure (even if it is a false sense of security) that I will get most if not all of my money back in tax breaks on the back end. McCain’s plan guarantees that tax payers will be giving hundreds of thousands of dollars to the Banks and forgiving homeowners for something they are both at fault for. I don’t think McCain “gets it”.
My suggestion to the Government regarding asset acquisition
For purchasing assets from Banks we should start by paying 100% of the principal amount owed on each transferred loan. As well, pay 0% of any interest or fees that have accrued. This 100% will decrease as institutions shift more debt. For example:
· The first $100,000,000 in transferred debt would be purchased at 100% outstanding principle loan amount
· The second $100,000,000 in transferred debt would be purchased at 85% outstanding principle loan amount
· The third $100,000,000 in transferred debt would be purchased at 70% outstanding principle loan amount and so on…
The Government could adjust the sliding scales percentage breaking points as they see fit, but this scale encourages participation at the same time discourages abuse by the institutions. There is a portion of these loans held by banks that they’ll need to make a judgment call to hold on to and renegotiate more favorable terms for the homeowner. With this plan, they have an opportunity to rethink their burden and not just dump on the American tax payer.
My suggestion to the Government regarding asset management:
#1. How are we going to keep people in homes that they can not afford?
#2. How are we going to foreclose on those who simply can not keep up even with renegotiated terms?
#3. What is the Government going to do with the hefty inventory of empty homes that have already been foreclosed on? If they sell them to the public, we’ll have corporations buying blocks of them at deep discounts at the tax payer’s expense. Potentially the same institutions that sold a home for $400,000 may buy it back for $150,000.
The Government should do the following:
Notify all homeowners that are in homes that have been transferred to the Government. This notice will give them a web-site they can go on (A real estate Inventory web-site) or they can call a hotline to speak with an advisor that will walk them through the web-site information gathering process.
Real estate Inventory web-site- The purpose of this site is to plug in personal financial information in order to generate a Tier number for each borrower. The Tier numbers will represent the amount of mortgage a borrower can handle per month. For example, Tier #1 is for persons who can afford less than $2,000 per month (including taxes and insurance), Tier #2 would be for payments of $2,000 to $2,400 and so on. They can attempt to renegotiate the terms of their loan. I’d suggest all loans be at a fixed rate of 5% to 6%, re-amortized up to 35 to 40 years.
Once a borrower has a Tier number he/she clicks on the inventory icon on the web-site. They will have to put in their password, Tier number and zip code. The web site will pull all homes that are owned by the Government within the borrower’s monthly price range. The list will be from closest zip code to the farthest zip code.
This will elevate the complications of dealing with current home values (which no one knows), as well as past sale price. Borrowers will have to move into a home that they can afford within any area they’d like to move.
The inventory of houses transferred by banks would be listed as Red, Yellow or Green.
Red indicates that homeowners are still in the home and trying to remain.
Yellow indicates that homeowners do not qualify for that Tier payment and are in the process of moving.
Green indicates that the house is available to be viewed by relocation borrowers who did not qualify for their home. (After a certain period of time at this status, the Government can allow real estate agents to list these properties on the Multiple Listing Service for open offers by the public)
This Government Act has split the real estate market in two. The first one is the normal market with buyers and sellers (private real estate market). Their elasticity curves are both relatively unitary elastic. The second market is the Public properties (Government real estate market), where the supply curve is perfectly inelastic. The Government will have a set amount of inventory to control. If they allow private parties and the general public to bid on and buy these properties, that will further reduce the Demand curve in the regular market. This will continue the destabilization of the private real estate market.
By keeping the inventories and the demander separate in two markets it will in essence maintain affordable homeownership for the owners of transferred Government real estate. Most importantly, it will continue the stabilization process within the private real estate market.
The Government may consider having current real estate brokers handle transactions of the Government market by allowing them to work as agents of Government market demanders (who are displaced due to their Tier ranking) to find them properties that are currently listed on the Multiple Listing Service that have a special Government designation.
Just a thought! Thank you for indulging me,
I’m Jermaine Harris
