Robbing the Future to Pay for the Present

Pretty major snowstorm up here in the northeast today. I left work at 11am and was home by 12pm, and the snow started at 1pm. By 2pm a 20 mile commute was taking about 3 hours! You would think residents in this area would figure this stuff out by now, but then again it is the same folks that bid up home prices and pay for gas with a credit card.

I am going to give the readers here at Economic Disconnect a present idea that is totally free! If you have ever gone through the blogroll you may have made a stop at the site I have marked as "Hilarious Pictures". The site is named ICAN HAS CHEEZBURGER (http://icanhascheezburger.com/)
This site is totally non-political, totally work safe, and outrageously funny! How many sites can you say that about? I suggest you present it to anyone that needs a laugh or anyone you like. All will find the content very amusing. And it's free!

Snowstorms and Holiday Office Losers
I interrupt the usual financial blogging for a brief commentary on the most annoying people in the world. The people I am talking about are the ones that:

• Come in late (around 10am) and leave early (around 3-4pm) all year long


• Take well over 1 hour lunch breaks


• do about 1/2 the amount of work you do on a consistent basis


• Have innumerable doctor and dentist "appointments" all year long

What is it about the person above that during the holiday's they then decide that they will work full days the two weeks right up to Christmas? Why during a major snowstorm do they insist on "toughing" it out at work? Why is it that they suddenly feel the need to comment on you using your vacation time at years end as "slacking"?

Sadly, you probably know the answer. It is these type of people to whom perception is everything. Style and looks over substance if you will. They are not really fooling anyone, especially a good manager, with their silly antics but the charade makes them feel like they are making a real effort. All about appearances? No real meat? Fake and pathetic? Yes to all and it sounds just like the US economy! Join Economic Disconnect in saying "You Suck" to those that qualify!

Robbing the Future to Pay for the Present
Saw this article over at Calculated Risk, and it was sad and expected at the same time:

Employees Raiding 401(k)s, CFOs Say
The economic slump will cut into employee bonuses, new survey results show, even as many workers are already taking hardship withdrawals from their retirement funds.
Alan Rappeport CFO.com US
December 5, 2007
The weakening American economy is beginning to take its toll on corporate employees where it hurts the most: their salaries and savings.
The latest Duke University/CFO Magazine Global Business Outlook Survey, which polls 573 finance chiefs in the U.S. and 1,275 globally, finds that year-end employee bonuses will fall by 10 percent this year compared to 2006. That decline could be especially painful at a time when more employees are dipping into their retirement accounts in order to pay bills. The survey finds that nearly 20 percent of companies have seen increased hardship withdrawals from 401(k) accounts, often to cover mortgage payments or to avoid personal bankruptcy.
"In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s," Mark Anderson, CFO of Granite City Electric, told CFO magazine in October. "What has happened with housing and the economy has really blown up for people at the lower end of the spectrum."
We can debate the merits of various investment options here at Economic Disconnect. We can argue about how much the housing bubble might hurt the economy. We can even debate what will be on Friday rock blogging! But what is not debate able, what is abject lunacy, is the withdrawal of retirement funds early to pay for current expenses. No financial consultant anywhere would ever suggest such a thing. If you are being advised to do this, or feel you have to do this I would suggest taking a "time out" and getting yourself together.

Retirement funds in all their iterations rely heavily on compounding and long term return building. Accessing that money carries heavy up front penalties, and even worse, severe long term penalties through loss of growth. I must disagree with Mr. Anderson from the article when he states that the housing problems and economic issues are hitting the "lower end of the spectrum". 401k's and retirement plans are the hallmarks of a professional job, meaning a bit higher end than the lowest rung of the employment ladder. If there is indeed anything worth raiding, the fact is that person has a significant salary that has been used to finance the fund. This is a key point. The mainstream media would have you believe that all the problems are "subprime" and the people with economic problems are "those type of people". The sad fact is the culture of consumerism has swallowed people whole at all levels of society. It is people like you, me, and our neighbors that are in over their heads with debt, mortgages, car payments, credit cards, etc. This is another example of Economic Disconnect that I try to highlight here.

When you take money from a retirement fund, when one takes money from home equity, when someone pays for food and gas with a credit card, they are robbing the future to pay for the present. People look at retirement age folks and people like their parents or friends' parents and see them with a paid for home and reasonable income from a retirement fund and they assume they will have that too. They will not have any such thing if the capital in those assets are accessed and spent. This is a long term problem of the current debt and credit mania that has yet to be recognized as a major issue.

The Dollar on a Comeback!
The dollar has shown some real strength as of late. The talking heads I saw today attributed it to the "flight to quality" or something to that effect. Whether the dollar is indeed undervalued right now, or if shaky credit conditions mean buyers want dollars for their perceived "quality" is inconsequential. The fact is, just like the market playbook calls for rate cuts irregardless of anything else, when things get dicey foreigners and other buyers will buy dollars. It is all they know. It is what is in the playbook. Fundamentals make no difference to a playbook buyer. The dollar will probably continue a run here. That means Gold is in trouble. The money tsunami from all the central banks should have pushed gold sky high. The inflation numbers today also were strong for gold. Future aggressive rate cuts should also be pushing gold. None of it is. Will it keep up this way? I am not sure. But you have to respect what is happening and not get hung up on what you want to happen sometimes.

Holiday Wishlist
As we get closer to the gift giving time of year, I like to put out the items I really want!
I would love a true, authenticated Martian Meteorite. Imagine holding in your hands a piece of rock that was expelled from the SURFACE OF MARS, made the long journey towards Earth, made it through the atmosphere, and was found! That's quite the trip! Real authentic martian rocks are both rare and pricey. What an amazing thing to hold though! This is one I was able to find. The Zagami Meteorite, at $2600 for a small slice!:

ZAGAMI Achondrite, Shergottite, (SNC). The Zagami meteorite was the second Shergottite witnessed fall. This meteorite fell in Nigeria in 1962, on October 3rd. It is a basalt, and is one of the SNC grouplet from the planet Mars! A single stone fell, narrowly missing a farmer working in his field.

Have a good night.

Lost in Translation-24 Hours in The Life of the Federal Reserve

Have you ever been tickled to the point at which it really has to stop because it is staring to hurt? That's the feeling I have after the last 24 hours of FED madness! At first it was funny the orchestrated dance of the markets after the 25bps disappointment, then it was hilarious when the FED revealed their all new "liquidity injection" plan this morning and the markets took off. The slow bleed down during the day and the cratering of the financials finally was too much tickle for one day, and I needed it to stop. It has been quiet for a couple hours now, so maybe now I can concentrate.

This Should Help the Mortgage Lending Environment!
Calculated Risk has wonderful coverage of a new bill that will be on the agenda for early next year, brought to you by the geniuses in the US government:
http://calculatedrisk.blogspot.com/2007/12/house-judiciary-committee-approves-cram.html
The post covers a story in the Houston Chronicle about what could be called "Cram Downs".
Excerpts:
House Panel Approves Bankruptcy Bill
By ALAN ZIBEL AP Business Writer © 2007 The Associated Press
WASHINGTON — Seeking to provide more aid to troubled borrowers, House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.
The bill fiercely opposed by the lending industry but supported by Democrats and consumer advocates was passed by the House Judiciary Committee 17 to 15, with one Republican supporting it.
Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.
Most Republicans said the bill would harm the market and called for Congress to show restraint. "What we're doing is putting a sledgehammer in the hands of borrowers," Rep. Chris Cannon, R-Utah.
The bankruptcy bill has been far more controversial, and industry groups quickly criticized the House vote. Bill Himpler, an executive vice president with the American Financial Services Association said in a statement it would "inject massive risk" into the lending market.
There is so much wrong here that I cannot really spend the time it commands. Please see Calculated Risk and the always exceptional comments section for red meat analysis. The take home points are that if this comes to pass two things are going to happen; 1.) rates for mortgages are going MUCH higher to offset the cramdowns, and 2.) mortgage lending will tighten even more than it has already. Keep point two in mind as we head towards the next commentary section.

Lost in Translation-24 Hours in The Life of the Federal Reserve
In last nights post I detailed the markets and the FED dance as a result of the 25bps "disappointment". I theorized that the markets would throw a fit at a reasonable level, and that would in turn allow the FED to pull a rate cut "surprise" to prop things up. I mean hardly even 14 hours go by and we get the headline:
Report: Fed May Overhaul Liquidity Rules
Wednesday December 12, 7:33 am ET
Report: Fed Ready to Open Liquidity Facility That Would Auction Loans to Banks
NEW YORK (AP) -- The Federal Reserve may soon announce new support for banks in the form of loan auctions that would provide liquidity directly to the nation's largest financial institutions, according to a newspaper report Wednesday.
The Fed, under a plan that could be announced as early as Wednesday, would provide loans against a wide range of collateral, allowing banks to avoid the stigma of existing discount window loans, the Financial Times reported.
The report follows an adverse reaction on Wall Street to a quarter-point cut in the federal funds rate Tuesday. The federal funds rate is the interest charge on overnight loans between banks.
Isn't that a dandy?! I guess my trusty crystal ball is still working!
That was from 7:30 am, and the markets were all giddy over the news. As the day wore on though, things slowly bled out. Here's the end of day headline:
AP
Stocks Erase Sharp Gains Sparked by Fed
Wednesday December 12, 5:40 pm ET By Joe Bel Bruno, AP Business Writer
NEW YORK (AP) -- Wall Street closed only moderately higher in an erratic session Wednesday as investors remained unconvinced by a Federal Reserve plan to work with other central banks to alleviate the global credit crisis.
Investors erased a 272-point gain in the Dow Jones industrial average that followed the Fed's announcement of an agreement with the European Central Bank and the central banks of England, Canada and Switzerland to confront what it called elevated pressures in the credit markets. The Fed said it will create a temporary auction facility to make funds available to banks and set up lines of credit with the European and Swiss central banks for additional resources.
This move is the biggest concerted liquidity injection since the aftermath of the 2001 terrorist attacks and helped boost investor sentiment a day after the Fed disappointed Wall Street with a quarter-point cut in interest rates. Many investors had hoped for a half-point reduction to help the economy weather the credit and mortgage crises.
Now at this point you may be wondering how my call could be correct when the markets went nowhere today? Glad you asked! The FED was too cute by half today. The plan will allow banks to borrow at the discount window in a hidden fashion, while providing the kinds of absurd worthless mortgage paper they need to unload as collateral for the loans. Ths will serve as a temporary help, but not a TOTAL BAILOUT. Of course as the markets read over the plan, as it takes them a few hours to read 3 paragraphs, they found out the small numbers involved as well as the 6 month loan term. Not nearly good enough. Also, what you have to understand is that market players have only one playbook. A fancy loan plan by the FED and ECB does not fit any model that they know, and so it was a non event. The markets still want and fully expect RATE CUTS. That is all they know or think they understand. Expect more pressure to come to bear on the FED to make an emergency cut before the next FOMC meeting.
In the same story I again found a lapse of journalism so amazing it deserves a mention here. here is the key excerpt:
"I think it's certainly a strong measure to ease this credit crunch, and I think it will encourage banks to use the discounted borrowing. If banks won't lend to each other, then at least the central banks will lend to them," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago."
So the problem is that banks will not lend to each other? Why not? Is Mr. Ablin asked the question? Of course not. If banks that are aware of all the hidden offsheet wizardry at play here will not lend to other banks, why should the central banks line up to offer money? We don't get that kind of answer even though the question is staring us in the face.

FED Closing Observations
Both moves by the FED over the last 24 hours were "Lost in Translation" (a wonderful film by the way). The 25bps disappointment engineered the kind of fake selling the boys on Wall Street use to protest. The FED moved too quick with a measure that smells of desperation and panic. The market needed time to rally and build in the "surprise cut on the way" mantra I detailed last night. Things got pretty messy today indeed.

The problem right now is not a lack of liquidity, it is a lack of solvency to borrow a term form Mike "Mish" Shedlock. The FED cannot supply capital, only liquidity and there lies the problem. Rate cuts and cash infusions can only mask the underlying problems of the banks. Consider:

• Banks need to hoard whatever cash they have to make up for massive losses
• The only capital the banks have is either worthless, or almost worthless mortgage paper
• The paper cannot be used as capital for loans from other banks, as they have the same crap and know what its worth
• The FED cannot take all the paper as collateral because the perhaps TRILLION dollars needed to cover it will NEVER be paid back

So there is no "credit crunch" nor a "lack of liquidity". There is a lack of hard assets that are worth any where near what is being lost by the banks. Short of a total and complete Federal Bailout Plan on the order of magnitude never seen before, the situation will continue its slow death.

Have a good night.

FED cuts Expected 25bps, Markets Throw Pre-organized Fit

It is days like today that I really get a chuckle out of the financial world. Sometimes events unfold in such a way as to let you see what's going on behind the scenes. Today seemed like that kind of day.

Mortgage Losses "Contained" to the Summer Still Showing Up
I think when all is said and done the word "contained" will disappear from the vocabulary of the financial world. The well known subprime problems were well contained until they were not. The disaster that was the major banks and lenders earnings shortfalls were supposed to be contained to the August-September credit crunch. Here are a few headlines from the past few days:
H&R Block 2Q Losses Widen on Mortgage Meltdown
Freddie Mac expects $10-12 billion credit losses
Mortgage Problems Force WaMu to Close Offices, Slash Over 3,100 Jobs and Drop Subprime Loans
UBS takes new $10bn subprime hit
Now I am not a rocket scientist (merely a molecular biologist) but I am pretty sure it is now December, its cold, and it is not summer anymore. Who would have thought losses would continue after this summer? It came like a freight train out of no where! I think the new wording will probably be something like "loan losses restrained to 2007" as the word restrained at least rhymes with contained so it rolls off the tongue. Of course any economic commentator's opinion that said the losses were contained is not worth a bucket containing piss, but that will not stop them from talking now will it?

FED cuts Expected 25bps, Markets Throw Pre-organized Fit
Obviously the big news today was the FED cut interest rates 25bps, as well as the discount window by the same. The FOMC statement was the usual baloney, and it still actually mentioned inflation that according to the FED numbers does not exist anyway. As they say over at Minyanville, it's not the news but the reaction to the news that matters, and that is what provided a glimpse into the markets today.

First off, 25bps was what was expected. FED futures only were showing a 30% chance of a 50bps cut. If the market really wanted a cut of 50, they should have fixed those futures more because you know the FED hates to disappoint! But alas, its all in the dance. Here is the reality of the situation in regards to the FED:

• They WANT to slash and burn rates down to the 2-3% level
• They WILL cut that deep and that hard, probably by next September
• They NEED to prevent a panic on the dollar
• They REQUIRE some iota of credibility

Now how is the FED going to get to 2-3% on the FED funds rate and not bury the dollar and lose all credibility? Glad you asked!

The answer is: The MARKET will help them out! (Reciprocal Bailout? Feedback Bailout Loop?

The sell off today was as fake as any I have ever seen. The players put out an instantaneous drop, and then closed on the lows. The DOW was off 294 points. By staying under 300 points any major panic was averted. It was in effect a "pre-organized fit" to protest the 25bps cut. All the usual suspects were out in force saying all the same things:

• The FED is behind the curve
• 25bps will not help the housing market
• FED is asleep at the switch

You have heard it all before. I will not debate whether 25bps as opposed to 50bps is really going to make any difference at this point, you know the answer to that one. The point is that all the whining and the fake selling provides cover for the FED. The markets will regain ALL of today's losses this week. The reason will be a new line about how the FED will have to get more aggressive with rate cuts because the markets are tanking, even as they are still solidly positive for the year!. After a bunch of headlines and complaining, perhaps next week another large down day will occur. Then the FED can jump in with another cut and claim the instability of the market demanded action.

It really seems that clear to me. There is no chance the markets will not rally into years end, regardless of today. The FED cannot wait until the late January meeting to make another move, and nothing moves markets like an "expected" surprise rate cut.

I could be very wrong. This could be the start of the major downturn that is surely to come. It just doesn't feel like that. It feels fake and all for show. With a little less than 3 weeks in the year, we will not have to wait long to find out.

Housing Market Participants-Question

With housing being the dominant factor in the economic mess we are faced with, I may start a regular section that asks one question of the real estate industry that needs to be answered before a bottom can be realised. Today's question:

• With the rampant mortgage fraud and inflated appraisals that were common during the boom, are the price gains from said actions to become permanent? If so, why?

Simple as that really. I have a new poll up, please vote!

Have a good night.

The Consumer is a Willing Partner in Their Own Demise

That was a busy weekend for me! Sunday was capped off with the New England Patriots victory over the Pittsburgh Steelers. The 3rd quarter was all that was needed to be seen, as the supposedly "old and tired" defense shut out the Steelers and the offense really turned a corner. With 3 weeks to go I cannot see how the Pats will not go undefeated for the season. Fun times.

My Personal Shopping Experience
One Saturday morning every year in December the wife and I get up very early (6am) and head out to do the bulk of our holiday shopping. I will list my shopping impressions for what they are worth:

• The mall we were at was basically empty from 7am-10am. After 10am however the place was swarmed with people, and by 11:30 both the wife and I had enough of being bumped into and pushed around by rude people. If there is some kind of consumer recession, it only exists before 10am!
• Maybe I am just getting older, but it seems to me that the SAME stuff has been in all the stores for the last 5-6 years. Unless you are into electronic doo dads there are very few new ideas out there as far as gifts go.
• Paying with cash is a real confusing thing for clerks to handle. After spending about $300 at Macy's on various items, I payed with cash and it required a manager to come over and check over the money like it was counterfeit. I quipped that due to the FED printing tons of money it was kind of "fake" in a sense, but by the look on his face I don't think the manager reads financial blogs! Side note: I laugh when people get all worked up about things like the Patriot Act and the government possibly watching them. The same folks pay for everything with a credit card or a debit card, and the mountain of information that the retail sector shares about your habits is enormous. Cash is anonymous.
• While the FED says there is no inflation, I definitely spent more this year on a comparable amount of items.

Anyways, that was my 1 day. The rest I will do online, so the powers that be can know my every move. My trusty tinfoil hat does prevent them from accessing my thoughts however.

NAR Forecast - Show Us the Model!

Everyone and their brother have piled on the NAR housing forecast, and it is just too much of a joke to leave alone! Headline from AP:

AP Trade group lifts outlook for 2008 home sales, insists US housing market is stabilizing Monday December 10, 2:03 pm ET By Alan Zibel, AP Business Writer
WASHINGTON (AP) -- Bucking conventional wisdom, a trade group for real-estate agents on Monday said the battered housing market is on the verge of stabilizing and inched-up its outlook for 2007 and 2008 home sales. The revised monthly forecast from the National Association of Realtors, which followed nine straight months of downward revisions, calls for U.S. existing home sales to fall 12.5 percent this year to 5.67 million -- the lowest level since 2002. Last month, the association predicted 5.66 million existing homes would be sold this year, down from 6.48 million last year.
The Realtors' group also forecast sales will rise slightly in 2008 to 5.7 million, up from last month's prediction of 5.69 million. The Realtors group also forecast the median price for U.S. existing homes -- the point at which half sold for more and half for less -- will sink by 1.9 percent to $217,600 this year and rise 0.3 percent next year to $218,300.

Now I understand that the NAR is a biased voice in this forecast, but that is not my gripe. Look at the silly numbers that they are pushing. The new estimates for sales volumes are basically unchanged from their last forecast, and this is a new positive outlook? The NAR plugged whatever numbers into their model and came up with a 0.3% increase in price for 2008? Why not go for .5%? For the NAR to have any credibility (it doesn't) they should present their model used to arrive at the estimates. That same model missed home sales for 2007 by a cool MILLION units, but I am sure its a fancy model. My own model forecasts the NAR to miss sales units by 25% and price by 5% both to the downside. I did not even need a calculator, I just subtract from their fancy numbers!

The Consumer is a Willing Partner in Their Own Demise

In my post from Friday evening, I had observed that the banks and the FED are attempting to provide cover and time so the losses from the housing bust do not swallow them whole. One of the best things about blogging is the comments section, and Economic Disconnect benefits from the discussions. Loyal reader Kevin had this thought (reproduced with his permission):

"The players would have you believe that the entire financial system will collapse without a home price prop put into place."

Unfortunately they are going to have to find some kind of prop or at least away to slow the deflating bubble if possible or that is exactly what will happen. The financial system it seems to me would collapse. I don't think Paulson, Bernanke or anyone else involved thinks this will keep housing prices from falling or the borrowers from eventually defaulting anyway as they are just trying to slow the decent with a longer time frame and trying to replace it with another expanding sector of the economy which unfortunately will probably lead to another unintended bubble. The consumer was used by Greenspan to give corporations time to clean up their balance sheets after the dot boom crash, now it will be their turn to give the consumers time to clean up theirs with pehaps subsides, and tax incentives to get corporations to borrow, spend money and invest even in the face of falling demand. The alternative to that is government spending, or massive tax cuts, but as a county we are basically broke so I don't know how that will work out.Every river in Japan has a cement bottom as a result of their r/e and stock market collapses they also lend money for less the 1/2 percent interest - it could happen here and would be somewhat foolish to eliminate it as a possibility IMHOP. That doesn't mean I like it though. Kevin"

I had never considered Kevin's excellent observation of what happened in the aftermath of the 2000 Crash. Greenspan and company used easy money to ignite spending by the consumer as a prop for the collapsing business investment. The reason interest rates were kept so low was to stoke the artificial demand for credit. The losses form the dot com bust were recouped by jamming cash into the consumer's hands to buy homes, SUV's, vacations, etc. The consumer was all to happy to play along. The US consumer was played for a fool by the credit bubble, and like a champ played the part to perfection!

Along the same lines, reader Rob had this to add (reproduced without permission, but it is my blog!): "Hasn't the Fed already signaled its willingness to take our country down the path of the Japanese? Hyper-inflation through artificially-inflated reserves seems to be their medicine, and you can't blame them; a natural (albeit magnificent) correction would leave Americans questioning how we got here in the first place, and that would lead them to the doors of none other than the great Federal Reserve System. The bargain-basement lending rates of the Y2K era (which merely compounded the near-permanent Greenspan-put) should have been the Fed's last attempt at using multiplicative credit to maintain our bubble economy, but here they are again."

Again, it is amazing that readers of this blog are better and more insightful analysts than anyone on TV or in most Newspapers. My take home point is this; The FED used artificially low interest rates to engineer demand that simply was not there. This was done to keep the US economy from a recession due to over investment by business in the late 1990'-2000. The FED sees the US public not as citizens that need to be protected, but as a debt vehicle. The easiest path for a spending explosion was the US consumer and the FED delivered the goods. While business was able to shore up their act after the stock bust, the banks went wild with mortgage loans. How long must we now wait for the banks to get well? How can the US consumer keep piling on debt now that the home ATM is over drafted?

While I have some sympathy for the troubles some people are in right now, its a very small amount. The US consumer was a willing partner in their use as a credit multiplier. Now that things have become untenable the consumer will have to pay the price. Perhaps next time the public may see that they are being manipulated and used by big business and the government and may say "No Thanks" to the next debt bomb they are offered. I Doubt it., but you never know.

Have a good night.

No Country For Grown Men

Posting may be short tonight and light for the next couple of days. Plenty of holiday type stuff to do as well as the Patriots taking on the Steelers in the late game Sunday. After the wild week this week, a break may be needed! Instead of the usual headline type stuff, I just wanted to post a thought I had today while checking over all the news.

No Country For Grown Men
The coverage today was all about the Rate Freeze Plan. It was almost palpable when the realization came that the plan is a window dressing only. I had hoped that the heated discussion of the merits of the plan would ignite a large scale "timeout" where even average folks would mull over things for a moment. Judging by the feedback on various media sources, an overwhelming majority are basically sick to their stomach about the rate freeze idea. Most have concluded that all things real estate were overdone, and that things must correct over time. I was pleasantly surprised by this.

The problem is that government officials and the banks/lenders were out in force slamming the plan as, get this, NOT DOING ENOUGH! They want more help in propping up a failed financial scheme that has run out of time. FED rate cuts, expansion of Fannie and Freddie, and various freezer plans are not hinted at, but outright demanded by the industry. The players would have you believe that the entire financial system will collapse without a home price prop put into place. The craven demands for aid coming from the very people that brought this all about is both sad and a perfect commentary on our society today. If you read the article on Herb Greenberg's blog I linked to yesterday you understand that this was indeed round one. Round two will be so disastrous for the banks that it is hard to imagine the wails of pain they will cry when things really turn south. And this brings me to my main point.

Enough is enough. Not one of the entities involved in the scam that was mortgage lending has any desire to help you. The FED could care less about your job, your finances, your life. The entire machine right now is running full speed to keep you spending and keep you in debt that is just barely serviceable. Not one thing should be done for the banks and the lenders until a full and clear accounting has been done on what the hell was going on for the past 4 years. Answers that must be found:

• The models you were using relied heavily on ever increasing home prices. Now that home prices are in decline, what do the models say?
• How much money will be lost if home prices fall 5%? 10%? 20%?
• How much of a pay cut across the industry will you take to help offset the costs of the losses?
• Why were people given loans without any documentation, income verification, and no money down? How exactly did you think they were going to pay for the loans?

I am sure you can think of a bunch more. The point is that there are serious questions that need to be answered. Instead of acting like this will all go away with a few rate cuts, all involved need to come clean about what is going to happen as home prices keep falling. To steal and change the title of a new film, the USA right now is "No Country for Grown Men" in that we are led by people that think they can handle everything and keep the public in the dark. It has worked great so far. When the next calamity in the housing bubble happens, and it will, they may find that the little children they are in charge of want some answers.

Friday means Rock Blogging!

The immortal Jimi Hendrix with "All Along the Watchtower":

My personal favorite Led Zeppelin song, and one amazingly no one seems to ever have heard, "No Quarter". Amazing song:

Black Sabbath with the bluesy but all metal "NIB" another favorite:

Have a good night.

Subprime Bailout Plan - If You Have to Ask, It Isn't Shock and Awe

Now today was the kind of day that is exciting! The blogosphere is on fire with commentary, analysis, and feedback. This is the main reason why I get all my news online. There is simply no other place that you can get real time information as well as active discussions involving experts, scholars, and financial small timers like myself.

Subprime Bailout Plan - If You Have to Ask, It Isn't Shock and Awe
Remember on the eve of the start of the second Iraq War, the military said that the use of "shock and awe" would end the conflict swiftly? Remember how the early going was anything but? That's my reaction to the Subprime Rate Freeze Plan that was detailed today by the same administration. Touted as a tool to help troubled borrowers across the country, the plan is laughable as a useful tool of any scale. Indeed, if you have to ask it isn't shock and awe!

The Plan
Tanta over at Calculated Risk has an enormously long post on the finer legal and technical aspects of the plan (warning: easily will take over 15 minutes to read entirely)
http://calculatedrisk.blogspot.com/2007/12/plan-my-initial-reaction.html
Punchline: "Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
There was allot of detail provided, but the take away points are both extremely limiting and laughable all at once
(lifted from Housing Panic (http://housingpanic.blogspot.com/2007/12/flash-oh-my-god-this-is-so-funny-heres.html)
* Mortgage had to be issued between January 2005 and July 2007
* ARM must reset January 2008 to July 2010
* You must not have more than 3% equity in your home
* Home must be worth more than the mortgage
* You must have income
* You must prove that you can make the payments
* You must not be more than 60 days past due
* Program is voluntary with the lenders - government has no authority or legal status

From my trusty back of the envelope calculations, I would hazard a guess that maybe as low as 20,000 people could possibly qualify, and a high end around 50,000. The MAJOR stumbling block is going to be the "Home must be worth more than the mortgage" qualifier. That one by itself will severely limit any deal making.

What's it All Mean?
The Cardinal rule that they teach you in fancy management schools is this; "In a crisis situation, you CANNOT be perceived as doing nothing. Any action is better than no action in this circumstance." That about sums it up. This action was done for the following reasons to varying degrees:

• Extends a new lifeline to troubled banks and lenders by giving the appearance of an improvement in the situation
• In a similar manner, prop up stock prices going into years end
• Make an effort to appeal to voters so the Republican party is not hurt in the coming election
• Restoration of some confidence in the system

I am not saying that any of the above will be accomplished. Certainly long term none of it will. But this was not a long term plan. It is a concerted effort to change the headlines for a while. In that it may be effective. Witness the market rally today. The plan will take a long time to make any improvements, and on a limited scale, but mortgage and home stocks like CFC and TOL were bid up aggressively for no reason. Wall Street never met a rally it didn't like, not even one with an STD.

Doom and Gloom Fix

If you are of the sort that likes to read behind the scenes information, there was a great post today over at Herb Greenberg's MarketWatch blog. Mr. Greenberg has been in contact with a mortgage insider through correspondence for some time, and the letter he posts today is the most clear and honest picture of the issue going forward I have ever seen. It is a must read and I will not forgive anyone that does not take a look: http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

That's it for tonight. Fun day today. Please leave some comments and keep the discussion alive. I also have a new poll up, so please vote!

Have a good night.

Rate Freeze Plan-Sowing the Seeds of Conflict

I am not even going to bother covering the ADP employment numbers that were released today. If anyone thinks that jobs are being created at a steady clip in construction and financial services at this point there is no talking to them. Funny thing about the number is the markets rallied strongly due to a better than expected number. Earlier in the week markets rallied in the belief that a bad number would give the FED enough cover for a 50bp rate cut next week! It's Deja Vu all over again, and I feel like its late 2000 with any data point meaning a rise in stock prices due to some kind of reasoning. Do writers and talking heads even have an idea how ridiculous they look when they flip flop on a number like this? Does anyone care? Probably not.

Rate Freeze Plan-Sowing the Seeds of Conflict
Today we got the official word that some details of the rate freeze plan that surfaced last Friday will be unveiled tomorrow afternoon. I don't know about you but I have 2 bad feelings about it already; The Government came up with it and what far reaching and meaningful plan can be made up in 2-3 weeks?
Anyways, here's the headline:
AP
Five-Year Mortgage Rate Freeze Looms
"Wednesday December 5, 5:16 pm ET By Martin Crutsinger and Alan Zibel, Associated Press Writers
Bush Mortgage Plan Will Freeze Certain Subprime Interest Rates for 5 Years
WASHINGTON (AP) -- The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.
Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010
Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes -- to ensure the break is not given to real estate speculators."
Already we have a problem. The point of the plan was that it was going to be a blanket plan so individual workouts would not be done. How does Paulson plan to go about only applying the freeze to owner occupied units? I remember a fellow named Casey Serin that had 7 homes that were owner occupied by him, so who is going to make sure speculators are not cashing in? Maybe they will cover that detail tomorrow. Probably not.
"Under the typical subprime loan -- those offered to borrowers with spotty credit histories -- the rates for the first two years were at levels around 7 percent to 9 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent."
Again, the recent press releases keep hammering home a clearly false scenario. A rate of 7-9% is not an ultra low teaser rate. I can remember ads on the radio even 3 months ago that offered teaser rates in the 3-5% range for even seriously troubled borrowers. So why keep pushing out such false high rate numbers? Glad you asked. For the rate freeze plan to work at all, it is going to require that people paying the higher reset rates and new buyers that will have to pay higher fixed rates with stringent loan qualifications believe they are on a somewhat level playing field. I cannot stress this enough. No one in their right mind will pay 6-8% on a loan while the neighbor is frozen at a sweet 3-5% rate. New buyers, faced with paying higher rates will not offer anywhere near the same price for a home that a fixed teaser freezer has. This will result in instantaneous home price declines on a large scale. The math does not change, but one more time because I still have seen this point made in any media anywhere:

• Teaser Freezer borrower has the rate set at 4%. He paid $300k for the home. His monthly bill is set at $1200 for up to 5 years. New (previously unfrozen) borrower can only get a rate at 8% due to new lending requirements. Heck, he may even have to put 5% down! To offer the $300k price, the new buyer will have a monthly bill of $2400, double the amount. Unless new buyer is a very special kind of fool the government hopes for in this plan, he would only offer $150k for the home, and pay the same price of $1200.

My point is that this plan is foolish and unfair for all the reasons discussed elsewhere. Moral Hazard, rewarding poor behavior, bailing out lenders that really screwed the pooch. I think an unintended consequence is going to be a real conflict between the haves (Teaser Freezers) and have nots (New buyers). Teaser Freezers will be under no pressure to lower their prices, and new buyers would be insane to step into a poor financial deal.

Another potential problem will be neighborhood anger and resentment for the Teaser Freezers. There is nothing like a moron getting a break that you cannot get because you have half a brain to make the average American extremely angry. What kind of consequences might this have?

I am assuming that because the plan is going forward, not one lawsuit is going to be filed about forced modifications from the holders of the bad mortgage paper. That would be a first in all of history, lawyers letting possible litigation get away from them! We will see how laid back the teacher union and state government pension plan lawyers are when they are informed that losses are a sure bet!

Tanta over at Calculated Risk is working on a post that will cover the details of the plan far better than I can. When it is posted, I will link to it. I am sure it will be thorough and insightful.

Mortgage Player Talk
I like to check out the hot topics over at the Mortgage Grapevine (http://www.brokeruniverse.com/grapevine/ from time to time. I thought it would be good to see some reaction to the news today.
Thread 482381 If Feds reset and freeze rates go ahead and close shop
http://www.brokeruniverse.com/grapevine/thread/?thread=482381
Some comments:

that's basically what will happen!!!
by #1stunner December 4, 2007

I disagree. Are people going to quit buying houses? Are folks not going to shed that ARM as soon as it´s feasibly possible or do you think they will just sit on it forever?The best possible conditions for a buyers market and you want to close up shop? I´d think twice about it.
by Mac December 4, 2007

Get a grip. You owe it to your family to stay calm. This is a good development. Not many will be helped by it but the media will think the problem is fixed. they will move on to Paris Hilton and you can get back to business.
by Uhhhhdel December 4, 2007

Uhhhhdel wants to get back to business without the nasty media writing about the silly loans he had been writing for the past few years! Imagine, scrutiny of lending! Too funny.

Have a good night.