Sunday, December 2, 2007

Handy Financial Dictionary

I thought yesterday was quiet, but today is even more so. It should be an interesting week. We may get some details on the "Reset Freeze" proposal by mid week. With a little over a week to go before the next FED meeting it bears watching if Gold and the Dollar continue their respective turns down and up.

Quick Reference Financial Dictionary
I imagine that not all readers of this blog may be familiar with a bunch of the people and terms that make up much of the financial reporting jargon. I will attempt to provide a quick reference for use in analysing news items.

Federal Reserve: (FED) government entity that controls US money supply. Main goals include making sure inflation is removed form all inflation reports, inflating asset bubbles, re inflating asset bubbles, supplying quick cash to insolvent banks, and maintaining a charade of confidence in the banking system.
Fannie Mae: government entity tasked with providing home loans guaranteed by the US government. Initially designed to help lower end borrowers gain affordable housing, now accepts any and all mortgages that they can. While unable to provide any financial statements, able to avoid delisting through said government guarantee. Also known as "too big to fail" or the "Trillion dollar gorilla".
Subprime Loan: originally referred to loans made to borrowers that had no business getting a loan at all, now applies to any loan that is falling behind on payments. Serves as a scapegoat for foreclosures and losses so the media does not have to say "all home loans in trouble".
SIV, CDO: creative packages designed by brilliant people to spread toxic mortgage paper all over the world. Now extinct, but the remains of those that lived will cause financial losses for years to come.
Homeowner (circa 2003-2006): Usually exists with no actual money in the home, and now is underwater due to falling home prices. While often seen berating "renters" now has the unique opportunity to rent from a bank for a very long time.
Treasury Department: Headed by Hank Paulson, serves as Goldman Sachs' government conduit. Known lately to be behind several market manipulation schemes including a SIV Superfund and the now famous Rate Reset Freeze program. Constantly in the news with the message "everything is all right, please keep spending".
Derivatives: a process thought up by brilliant people to spread risk and increase leverage up to 100 times. Numbers are unknown, and where they reside is not known. Possible losses unknown. Basically a big unknown.
NAR: (National Association of Realtors) group that provides home buying assistance and market projections. Due to fact that sales volume makes up their paychecks via a 6% commission, it is always a GREAT time to buy. Also a serial bottom caller in the housing collapse.
Bailout Plan(s): Any of the myriad of proposals to stem the foreclosure tide sweeping the nation. Dressed up as help for the homeowners to hang onto the American Dream, in reality all serve to keep the banks' dream of being paid back alive. Usually ill thought out, and unlikely to make any difference.
Taxpayer: poor sap on the hook for all the money that was wasted on homes over the past 4 years.
Consumer: Backbone of the US economy. Expected to spend every single dime they earn, and then tap into credit to spend more to "keep the economy robust" or something. Usually no practical financial sense or restraint, will spend until physically barred from credit.

That's a short list that should help you navigate the news and current events. If you have some you would like to add, leave them in the comments section and I will publish a reader list in a future blog.

What is So Hard to Understand?
I get frustrated with all the hand wringing and bailout proposals aimed as propping up property values. The problem is very simple and I will use small words so that the FED and the markets can understand:
  • Home prices are too high. They have to come down.

That's it. Home prices are still out of whack by any measure known to man. There is no fix for this other than to have home prices come down. It's not hard to understand is it? So what's the problem?

The problem of course is that nobody wants to face that fact. Until the housing market participants accept that prices have to come down and quite a bit there will be no resolution to the current dilemma.

Please take a moment to vote in the new poll!

Have a good night.


Russ said...

Check this one out from blownmortgage blog:

"you may want to consider this piece on ‘protecting’ your home equity with a home equity line of credit; "

He didn't really mean that but these are the lines pushed by mortgage brokers these days. Funny. Like a new loan will stop your equity from disappearing when prices drop.

They start making a simple problem ridiculously complicated.

I coouldn't resist quoting your blogs quote when I learned that he was in Massachusets.

getyourselfconnected said...

Thanks for the link Russ! Thanks again for linking my blog in the comments section. I really think the weight of common sense may be able to overcome irrational exhuberence if we all keep pounding home the facts.

Anonymous said...

The numbers I've seen so far is that this will help 2/3rds of these borrowers so I think it is probably safe to say it will be less then 1/4-1/2. The problem is this is not to help these borrowers but to help the banks stretch out the write downs over a period of years rather then months. It is being advertised as help the borrowers but that is not the true reason this is being attempted.

In the end the taxpayer will eat this shit sandwich but it may be a couple years down the road.

As for a HELCO I have had that told to me also but with the caveat, don't tap it. It is there in case of a job loss or some other emergency event which is out of your control and causes you not to be able to make your payments short term. It goes like this: You can't take care of tomorrow if you can't take care of today. Also if your home value falls you may not qualify to get one of these depending on your debt level. A lot of business men also have these due to fluctuating income steams. This is not good advice however to J6P who will go blow the money.


Debbie said...

Maybe another category: specuvestor?

Anonymous said...

Thanks for sharing. Like on all occasions, on the prosperous and strategic on object!