Tuesday, March 4, 2008

Bernanke Says "F#ck You" to Responsible Borrowers

Today was one of those days that when you either read or hear news you simply think you misheard it, or believe that it is fake! Truly amazing stuff going on today in the financial world.

Citigroup Needs MORE Cash?
Citi was ripped apart today to the tune of almost 5% after comments made by some middle east fund executive made some people realize some truth. From Yahoo Finance:
"Samir al-Ansari, chief executive of the $13 billion government-owned investment firm Dubai International Capital, said Tuesday at a private equity conference that it will take more than the combined efforts of the Gulf's wealthiest investors -- the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal -- to save Citigroup"
So the same group that gave (threw?) away a ton of money to Citi a while back now think the bank will need even more cash to survive? How did that "investment" work out for you? What other countries can Citi get some fast cash from?

In the same article we get an example of why anyone playing the "financial stocks look good here" game has no business talking when people can hear them, here you go:
"Meanwhile, Goldman Sachs analysts issued a note saying a modeling miscalculation led it to overestimate its profit forecast for Citi. Goldman on Tuesday lowered its prediction of a first-quarter profit at Citi of 15 cents a share to a first-quarter loss of a $1 a share. It also reduced its 2008 full-year profit estimate to $1.35 a share from $2.50 a share."
Now I am not sure what a "modeling miscalculation" is, but to go from a 15 cents a share 1st quarter profit to a ONE DOLLAR LOSS is a big screwup. That is a factor of 10 that was miscalculated. The point I am trying to make is that there is no clear way to value banks right now. There is too much hidden assets that are severely impaired to make any kind of a guess at what shape a bank is in. All the talking heads on CNBC saying that using historical standards the banks look cheap here assume that everything is out in the open and not subject to change. Obviously, as the Goldman example shows, things are changing very fast!

Bernanke Says "F#ck You" to Responsible Borrowers
I strongly suggest you take a minute and read over the comments in full to fully appreciate the diarrhea of the mouth that Bernanke had on display today.

I have spent the last hour reading over various takes on the speech that Bernanke gave today that called for banks to write down principle of loans for troubled mortgage holders. Some reactions include tentative support (Market Ticker believes it will force the banks to eat their bad loans), to outrage. I imagine you can guess my feelings from the title of the post!

Bernanke made a suggestion that banks should begin a process where principle of outstanding loans are reduced in situations where the mortgage holder is facing foreclosure and is also lacking in any equity to speak of. Last night I joked that the only bailout plan that would work would be one that replaces the 10% plus appreciation rates for home prices, but this plan is not far off!

I do not know where to start with this absurd idea. There are several questions I have up front, and then some musings on possible implications of any such large scale restructuring.

  1. What would the qualifying criteria be?
  2. How much principle reduction? How can it be figured?
  3. How in the world can you selectively reduce some loans, but not others for the same loan types in the same areas?
  4. How does the taxpayer pay for the massive bank losses this promises to cause?


Examples are easy for this plan. Say Joe and Bob both live on the same street and bought the same model of Toll brothers home for the same price, say $400K. Both put zero down however, and have basically no equity. Joe has a 30 year fixed rate, and is paying on time. Bob took out a liar loan with a teaser rate, and now facing a reset he cannot pay for the home and is facing foreclosure. Bernanke has the bank lower the outstanding principle on Bob's loan to $300k, and freezes the teaser rate as well. Now Bob has some added incentive to stay in the home, as he will be paying less for it, and at a lower rate.

Sounds good until Joe uses Zillow or checks out the public records and sees what just happened. Joe is paying a higher rate and he is paying more for the same house than Bob! It's easy to see here what is going to happen. Either Joe is going to suddenly be unable to pay for his loan, thus requiring a rework himself, or he is going to burn Bob's house to the ground. It's that simple. This selective rewarding of total jackasses will only precipitate the kind of social acrimony and even outright vicious anger not seen before. The shear lunacy of this plan shows us that Bernanke is thinking in terms of academics and charts and not the real world.

The idea seems good if you are thinking in a vacuum. The problem will occur in the real world application of the idea. With the Internet wired up to up to the minute records, everyone in an area is going to know what kind of a deal was handed out, and then all hell breaks loose.

I have already heard all the garbage about this would help all owners by avoiding blight and empty houses. Please. The greater good has never been an American pastime, and it will not be now. The basic fact is that this plan says "F#CK YOU" loud and clear to anyone that had a down payment and is paying on time. It almost implores you to do whatever is necessary to qualify for a "reduction". It is so easy to see how much harm this plan will do, so why is Bernanke even mentioning it? I dunno, but that guy is starting to worry me.

I am not even going to ask how Bernanke thinks the ultra leveraged banks can take that kind of a hit and survive. This is another problem. You know those losses are somehow going to be paid for by the taxpayer, so why not unveil that plan at the same time? I just do not get how the FED HEAD can go out and talk this kind of silly poo poo and get away with it. I wish I could get Bernanke into the "Thunderdome" and settle this. "Two men enter, one man leaves" and this dumb idea can stay in the cage with him!

Please get some discussion going here in the comments section, as well as anywhere you can get people to talk about this. Again, without a vote and without any consent or even debate a plan that is sure to have serious repercussions for all is being thrown around like it makes some kind of sense. When will it ever end?

Have a good night.

1 comment:

Anonymous said...

"I dunno, but that guy is starting to worry me."

I think and have thought for some time that Big Bone Benny may just have a psychological disorder and being his academic career was spent studying the great depression in his sub conscious mind see him self as being the FED chairman during the great depression. Kind of like the fire fighter who is also and arsonist. Somehow I almost think he is going to put us into one whether he consciously realizes it or not.