Tuesday, October 14, 2008

Out on Bail

What would you say if I told you I wanted to name my first 2 children Ball Sack and Ass Rash? Would you agree with said nomenclature? Think about it for a second. I’ll wait. Still not feeling those names? Thought so. There is absolutely nothing wrong with those names other than the negative connotations commonly associated with their usage. It doesn’t matter that my little Ball Sack may grow up to be President of Ball State University. Or that Ass Rash graduates from John Hopkins and eventually discovers the cure for the common Hernia. You would probably always have a problem when you heard their names and rightfully so. Now what would you say if I wanted to put forth an economic stimulus package and I called it a Bailout for Wall Street? Now who do you commonly associate with the word “bail” and “Wall Street”? Most likely, convicts and rich, greedy individuals. Now would you be in favor of said package? Think about it for a second. I’ll wait. Thought so.

Much has been made of this 700 Billion dollar bailout and I will try to explain the causes for it, as well as the benefits and disadvantages as best I understand it ( I already see you guys falling asleep but stay with me for a minute)*.

The Simplified Explanation - It works like this; Investment banks have incurred tremendous debt due to the depreciation of mortgage backed securities (tremendous debt is the understatement of the year). Investment banks gambled that the value of these securities tied to mortgages would appreciate over time, which is typical of the housing market and the basis for which most investments are made. Not a far fetched concept at all. Sub prime loans, which egregiously permitted banks and homeowners to profit from increasing property values, were then made available to high risk individuals who ultimately defaulted on these loans (this is where government deregulation that allowed these loaning practices to exist comes in). The rationale was that banks would profit when they received more money in fees from all these new loans and homeowners would benefit when they sold or refinanced at more favorable rates once the property appreciated. As mortgage after mortgage fell into foreclosure due to the inability of the homeowners to repay (caused by volatile adjustable lending rates), lending markets grew apprehensive. Lending qualifications grew more stringent to ensure new loans had an increased likely hood of being repaid. So basically, if your credit score currently doesn’t match Doogie Howser’s S.A.T score (math, not verbal), make your self comfortable in your momma’s basement ‘cause you aint going nowhere.

The “Are You Smarter Than a Fifth Grader” Explanation - Assume you asked your friend Larry the Loan Shark for 50 bucks to buy a comic book. You told him you could sell it for 100 and pay him back 75 and he is all for a profit so he agrees. Since every one has been going crazy over comic books lately, you are confident that you will make Larry’s money back plus a profit. To spread out (leverage) your debt responsibility so you don’t incur the full loss in the event you can’t sell the comic book, you decide to sell partial ownership of this comic book to your other boys, Moe and Curly. They agree provided they can sell off their ownership at any time. As time progresses, you and Larry notice that less and less people are capable of buying this comic book so the comic’s value becomes undetermined. Larry starts to worry that you will not be able to pay him back. He loses confidence in you and is now skeptical of loaning money to anyone else to buy comic books, or anything else for that matter (Larry also wants to break your legs). Moe and Curly also lose confidence in your ability to sell the comic and sell their ownership back to you. Now you have to bear the full burden of the comic book’s value, or lack thee of. Although it may have value in the future, no one knows for sure what that value is. In this scenario, you are the failing investment bank and Larry would be the credit loan industry. Moe and Curly would be investors in the stock market who are now screwed and scared to death of you and anyone like you (and also want to break your legs).

So what are the benefits of this bailout and will it work? The plan is to have government use tax payer’s monies to buy these mortgage backed securities from banks and once the housing market regains stability, the government will sell these securities back to banks at either a net profit or a minimal loss. According to our brain trusts on Capitol Hill, allowing the market to persist under current market conditions will cause a recession, tremendous job loss, and cripple the entire financial universe (“the sky is falling, the sky is falling!!”). No one currently knows the value of these securities which is what makes this all so risky but since the housing market is cyclical, one can assume it will work. Or can one?

There are so many things wrong with this scenario that I don’t even know where to begin. Let’s start with the fact that the monkeys who are trying reform the system, and will undoubtedly inject cronyism into the process of placing value on these assets (to my understanding, Goldman Sachs has already been commissioned to valuate and manage these assets) are the same no talent ass clowns who are partially responsible for this mess. Goldman Sachs and other investment banks lobbied the SEC to release them from rules put in place to minimize risk exposure and hold reserves. This is EXACTLY what caused investment banks to fail! Does the word irony mean anything to anyone on this planet!? This is about as rational as having a former Goldman Sachs CEO who used to earn 40 million in annual salary (less bonus of course) lobby for executive compensation reform. No one would stand for it right? The last 3 CEO’s of Goldman Sachs, along with Paulson, have all ended up in government positions http://en.wikipedia.org/wiki/Henry_Paulson, so as these guys play musical chairs between corporate America and government, we all grab our ankles, assume the position like Marsellus Wallace, and wonder how this could have ever happened. We may as well appoint Usama Bin Laden to oversee the construction of the new World Trade Center.

Another reason this bill may not work is because the current sell off of stocks is fear driven and no amount of government intervention can revive investor confidence. The market is correcting itself and really should be allowed to do so. Investment banks that were liquid and making money in non mortgage related sectors of their businesses have since lost value on the open market, merged with other banks, and even filed for bankruptcy, which really makes no sense. If you are in a dual income household and one person loses their job, you may have to tighten your belt but you don’t commit suicide. That is what we are doing now. Investor fears are the driving component of this and I believe it is partly due to the media (you knew it was coming). Everyone in the office has at least 3-4 different news sources from which we extrapolate data, and formulate our own ideas. We could all run our own network right now. Fears spread faster when you are whispering in the collective ears of 40 million people. When Jim “Mad Money” Cramer has to retract and apologize for a statement because it may spark a run on the market, it’s time to stop paying attention so intently and behaving irrationally.

All the rumors circulating currently are not 100% true. Banks have not stopped loaning to each other. They are however charging higher interest rates because they are extremely skeptical of repayment. Up until very recently (as in the past 2 days), the LIBOR rate, http://www.bloomberg.com/apps/news?pid=20601087&sid=aYSYBqZHENF8&refer=home which measures and determines interest rates banks charge to each other worldwide (including mortgages) was not high at all. Banks were still loaning each other money. The trouble mainly resides in non bank financial markets. Commercial banks are still very liquid. This is blatantly apparent by the fact that every failing or troubled investment bank has merged or been taken over by commercial banks (Bear- JP, Merrill – Bank of America, Lehman - Barclays, etc).

This is where it gets personal for me. Everyone really needs to quit bitching and moaning about the bail out being funded by taxes. Tax payers (as in all of you) have been paying taxes for years and had no idea or control over how your prior offerings were allocated. How come you are all of a sudden vigilant citizens who know what’s best for the economy? It is in fact your money and you do have every right to decide how it gets spent, except for one thing; you had no idea how it got spent before so please, shut the fuck up! Just remain socially comatose and allow your elected officials to continue to act as executors to your estate. The funds in your bank accounts, 401K’s and taxes paid are all managed by individuals you have never met before and you obviously didn’t have a fucking clue what they were doing with it. It is because of your indifference and gluttonous ways that we are all suffering. Is it any surprise that the fattest country in the galaxy is suffering from taking on more than it can carry? Please put down the 5, 5 dollar, 5 dollar foot long and pick up a friggin’ book already! We live on imaginary money and we are all fine with that. Whatever you make annually, you will probably incur at least 3 times the amount of debt, just because. This system is built on debt / credit. You want a degree and a house? That’s gonna cost ya. You wanna keep up with the Joneses? That’s gonna cost ya. Will you die without a house and a Benz truck? Probably not but who am I to tell you how to live? You have this “pursuit of happiness” spiel indoctrinated in you and you just so happen to define happiness the same way your neighbor does; with heated leather seats and dual sun roofs. Do you realize who sold you your American dream? Fannie MAE and Freddie MAC (reminiscent of how men will never be able to express their eternal love without dumping major cash in the DeBeers family’s pocket). I wonder why that is? Do we really have to collapse under our own weight before we start living below our means? Taking prior human behavior into account, the answer to that question is a resounding “Move to Canada while you still can!”

Government (as Governor Palin would say), you guys have got to be kidding me. You are really utilizing the current economic crisis caused by shitty legislation on your behalf as a platform for partisan agendas? You really took 2 days off for the Jewish holiday before amending the bill that you initially proposed, then voted down while your constituents lost billions daily? You really can’t figure out why the market has lost confidence in you and is non responsive to your attempts at correction (the Paulson Effect)? Are these actions not the moral equivalent of your behavior during Hurricane Katrina? Your congressional oversight committees are staging political theatre and making pompous statements to former investment banking CEO’s like “In case you haven’t figured out your role here today, you are the villain”. I’m sure in a few years I will see someone who sat on that committee running for office making claims like they “took on the greedy investment banks” in some hackneyed political ad. Over compensated CEO’s may be the proposed scapegoat for your theatrics but we the people are the only ones who will ultimately suffer. The CEO’s will be ok financially. What about the security guards, mail room employees, food service employees, and small business owners who also rely on corporate America for employment? Me personally, I have lost my bonus from prior years, my job in a few weeks potentially (thank you NAFTA), and the promotion I worked for all year and was scheduled to receive in a month. So if you are asking why I am so livid, there is your fucking answer! Thanks to all you assholes, “My dude, I’m a need a job” (no relation to the president of Iran)!

* I ask that no one make any financial decisions based on any information on this blog for I am not a Certified Financial Advisor and I probably don’t have a full grasp of this complex situation. Please consult a trained professional at Lehman, uh, I mean Bear, uh, I mean Merrill, on second thought, I may prove myself to be Adam Smith by the time all this is over (look him up, I don’t feel like explaining).

PS. All this was predicted by the very idiots it affected the most. Look at the sources in this article dated 2005. http://seattlepi.nwsource.com/business/248140_boomsover12.html

P.P.S. What AIG execs are currently doing with their bailout funds. http://www.nydailynews.com/money/2008/10/09/2008-10-09_aig_executives_cancel_planned_california.html


culty cult kwel said...

anyone that was a fan of comics in the 90's know that giving your friend $50 in hopes it will turn into a $100 a dumb move.

every up there is a down and markets will crash

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