I am angry
I am angry. For the past year, our credit markets have been hanging on for dear life. The officials we have elected to oversee the operation of these markets are doing everything they can to keep them alive. Now, at this critical time of need, we are unwilling to act? Nobody likes a bailout, nobody. The most common complaint I hear regarding the plan is, “Why don’t we let Wall Street pay for their mistakes? Why should we bail them out?”. Lets break this down into pieces to see if enough people have already ‘paid’ for their mistakes…
1. The Borrower. A lot of irresponsible people borrowed too much money for too much house with too little to qualify. Many are in foreclosure, the remaining are underwater – meaning they owe MORE on their mortgage then on their home. They HAVE paid the price – they lost a TON of money.
2. The Mortgage Broker. These jobs no longer exist. These people made a quick buck selling mortgages to buyers without regard for whether it was financially prudent. They got paid for the bad loans they made. Their jobs are gone. These loans are no longer being written. We cannot get back the commissions they earned, but these jobs are GONE. They should be ashamed. They own a huge chunk of the responsibility for this mess.
3. The Lenders. As the Mortgage Lender Implode-O-Meter has been documenting, nearly all of these firms (286 as of this writing) are no longer in business. Bankrupt. Wiped-out. Adios.
4. The Investment Banks. Bear Stearns packaged the most of this toxic mortgage debt. Bear is gone – bought by JP Morgan for almost nothing. Lehman Brothers packaged the second most amount of this toxic debt. Bankrupt. Merrill is also gone – bought by Bank of America. Morgan & Goldman remain, as a shell of their former selves. I’d say these banks, and their employees have paid dearly.
5. The Ratings Agencies. These companies are operating on life support. They have shattered the trust of the investment community and it will take a long, long time to gain that back. I’d like more regulation to fix this broken model – so they can never sell their ratings again.
6. The Insurance Firms. These firms have been downgraded and are barely surviving. Their insurance is considered worthless, and most muni bonds no longer even bother with them. They Paid Dearly.
7. Investors. How much should investors pay? This is the only group left. Their assets are marked down to .20 cents on the dollar. All this group did was buy the paper they were sold. Do they need to be wiped out? Is that what we want? I am not convinced this group needs to pay any more. They learned an awfully hard lesson and were misled on the safety of this debt. They have paid.
8. U.S. Government. Via various agencies & policies, our government has encouraged home ownership for a long, long time. Mortgage interest deductions. Capital Gains tax breaks on homes. Fannie. Freddie. Ginnie. The list goes on. All of these activities are geared towards encouraging home ownership via economic incentives. Unquestionably, these incentives drove many toward piling up mortgage debt that was treated favorably by our government. We need to rethink this. A comprehensive review of the U.S. Government’s tax policy & regulatory structure with regard to home ownership is needed NOW.
I am still angry. Enough is enough. There is obviously plenty of blame to go around. Lets put this dismal episode of greed and speculation behind us, reform our financial system, and start rebuilding our economy. I’d like us to start today. Suffering a long, drawn-out recession may allow more to ‘pay’ for their mistakes, but I for one do not see the need. Putting millions of people out of work so that this debt is driven to zero does not help anyone. One thing is clear, that solution will cost a whole lot more than $700b.
** Editors note – Although I do not ‘like’ the Paulson Plan (I doubt Paulson himself ‘likes’ it), I do see the need for immediate, substantive action by the Fed. My preference is for the Fed to ‘fix’ the Discount Window so that they are somehow able to liquidate this bad/frozen debt. Any solution requires some ‘pricing’ of the frozen securities – a difficult task. My suggestion is to ‘price’ the various securites via reverse auction, and accept them as collateral for up to 12 months. This way, banks can restart operations. The future gain/loss on their debt holdings will be theirs alone – as it should be.
Filed under: General
Posted on September 26th, 2008 by Bob Brinker