Thursday, January 8, 2009

Clowns and Cramdowns

Weather says more snow for Saturday night. This year is off to a banner start for snow and ice. If I build an igloo in the back yard, do you think I can get a cash out refi? What if I put in granite counter tops?

Light Posting and a Small Rant
I have to admit that part of the light posting has been my own disgust with all the events as of late. All that is going on is preparing to spend trillions of dollars with no plan and no way to gauge success. By the amount of public protest to this (absolutely none) I can only guess that people want to be left alone. As long as they can go to some job and make some money and carry on with some semblance of what they think is a "normal" life they are very willing to allow anything to get it. So what if the US government colludes with banks to allow dead beat home mortgage holders get a 50% reduction on their loan so they can stay and pay? If that causes you to pay a)higher taxes b)higher interest rates c)higher property and state taxes d)still pay 100% of YOUR mortgage e)pay more for everything as the dollar falls and f)encourage even more aggressive scams like home price escalation in the future that is well and good because you will not be too bothered. Not enough to miss a TV show anyway.

A simple query? What ever happened to morals? Responsibility? Right and wrong? I know, never heard of them, right? Our banking system purposely put us all at risk using our butts as collateral so they could say "save us or else". Well, I for one choose "else". I guess most people would rather watch TV than defend themselves. In the end we all get what we deserve. Exactly what we deserve.

PIMCO's Bill Gross Still a Shameless Hack
I have an open ended invitation to Bill Gross of PIMCO for a steel cage match. Ever since the beginning of the current debacle Mr. Gross has bought up troubled assets that he believes the government (you and me) will have to save and then cheer leads for a bailout. I firmly believe Mr. Gross (and many, many others) need an object lesson in this reality: It is easy to take money from a bunch of people, but very hard to take it from ONE person. While Mr. Gross calls for the transfer of tax money to support PIMCO positions, I have challenged him to a match; My money against his, winner takes all. Then he might see that stealing other peoples money is not so easy, and way less fun.

Anyways, Bill is at it again with his latest missive where he at least calls things as they are. Full article here.

Some key excerpts:
"PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks, and senior bank debt; Aaa asset-backed securities such as credit card, student loan, and auto receivables. These have been well-advertised PIMCO strategies over the past 6 months but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well – unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot."

I imagine PIMCO is well versed in the "never be allowed to fail" list as none other than Alan Greenspan is a major advisor to the company.
Final summation:
"There is legitimate concern as to the ultimate destination and outcome of our “bailout nation.” Realistically, quantitative easing, a two-trillion-dollar expansion of the Fed’s balance sheet, and the near certainty of future budget deficits approaching 6-7% of GDP should alert bond investors to once again become vigilant as was the case in the 1980s and 90s. Vigilantes we should be, but that is a battle to be fought in the Treasury market where low yields offer little reward and increasing risk. For now, our Ponzi-style economy and its policy remedies encourage bond investors to mimic Uncle Sam and its global compatriots. Buy what they buy, but get there first. Andrew Mellon would surely have disapproved. Liquidation was his game. Wimpy? Well, he’s gonna have to start paying for those burgers on Monday, even in a bailout nation."

I get sick just reading this guy. He admits we are a Ponzi economy built too much on asset prices. He correctly targets that the bond market should be revolting to all this. He then says "Don't bother me the TV is on" and takes pass on any real reform ideas. Clown.
Full Disclosure: I have no affiliation or position with PIMCO, as I do not associate with clowns.

Now Why Do You Think Citi Would Agree to Mortgage "Cramdowns"???????
The CNBC heads and other media outlets were practically wetting themselves in excitement when the news hit the tape that Citi (symbol C) had agreed to a plan to allow bankruptcy judges to reduce mortgage principal during a proceeding. This process is known as a "cramdown" and it gets its name because the judge has authority to cramdown the throats of banks and bondholders the new lower loan terms above any legal objection (well, mostly). Many think this is a sure fire way to staunch the bleeding in housing, as many losers, I mean troubled home flippers, I mean solid citizens that have had a small setback may stay and pay the new bill. From CNBC:
"Citi Supports Plan to Adjust Mortgages in Bankruptcy
Citigroup became the first major bank to support a controversial plan to let bankruptcy judges alter mortgages in a effort to prevent more housing foreclosures.
Until now, banks have been ardently opposed to the proposal, which key Democratic lawmakers hope to attach to President-elect Obama's economic stimulus legislation.
The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis.
Under the change, bankruptcy courts could alter the terms of mortgages, subject to certain conditions:
1) Only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment. All loans, and not just subprime, are eligible.
2) Borrowers have to show they made a “good faith” attempt to work with the lender before considering this bankruptcy provision. Bankruptcy cannot be the first option, and borrowers have to prove it wasn’t.
3) Bankruptcy judges can strip away a lender’s credit or rights if they violated the Truth in Lending Act or other state and federal laws."

Now way would Citi be so ready to accept what is certainly going to be a disasterous hit to their portfolio? I mean who would not try bankruptcy if they could reduce their mortgage by 25, 35, or 50%? There are likley to be alot of takers and Citi knows this. There can only be one answer here.

Citi is not going to take the hit. There is going to be some kind of backstop to this plan provided by the FED/Treasury. I promise that there will be some kind of deal where Citi has to eat the first 10% of any cramdown and then the government will pick up the tab on the rest. We will have to wait and see that I am right. Try about two weeks from now. Just remember when you brush your teeth tonight that the US government picking up this new tab is the same fool that you see in the mirror. We the taxpayers get to help out our fellow man in an all new way. What a country!
Full Disclosure: the only bank stock position I have is the backdoor kind where my taxes are being used to bail them out. Other than that I have no position as I do not buy shares in insolvent companies.

Have a good night.


watchtower said...

Good post.

Mish has a good post also over at Financial Sense titled :

Is the Stock Market Cheap?

"Looking ahead to 2009, 2010, 2011 there is simply no driver for earnings like we saw in 2002. Enormous leverage, creative financing, and the housing bubble are all gone and are not coming back."

Lisa said...

Cramdowns will be fought by the rest of the banking industry, as this deal with Citi will set a precedent. This Citi deal is not a "done deal". I honestly hate the financial socialists right now.