Time to bail?

| Ted Landau's User Friendly View
I know I'm supposed to write here about things having to do with Apple, or at least technology in general. But today, it's hard to write -- or even think -- about anything other than the failed bailout plan and the 777 point drop in the Dow. Perhaps I can tie it all together by pointing to the huge plunge in Apple's stock today.

Anyway, I normally have pretty clear and strong opinions about the controversial topics of the day. And I would be the first to admit that my views tend to be firmly planted on the left side of the fence. Still, in this case, I confess to feeling as if I am three feet under water and the answers are circling in the air above me -- beyond my understanding and out-of-reach.

It's hard to figure out what to believe when you have left-wing pundits, such as Paul Krugman and David Sirota, taking a position against the bailout bill that sounds remarkably close to what the most right-wing Republicans in the House are saying. At the same time, Democratic leaders in the House and Senate appear aligned with the stance taken by, of all people, President Bush. When was the last time that happened?

Between the conflicting jumble of opinions and the complexity of the economics, it's hard to figure what to support.

Why should we save failing institutions who took reckless risks, while paying out huge executive salaries and employee bonuses, and yet do little or nothing to help relatively blameless individuals in similar straits? How did we even get to the point where so many institutions are "too big too fail"? Can we blame it all on Bush for eliminating virtually any hint of regulatory control? Why do we keep "privatizing profits and socializing losses"?

On the other hand, when your house is on fire, it's probably not the best time to try to figure out who or what is to blame. Or how to prevent the next fire. First, you need to put out the flames. But is $700 billion dollars too much or too little "water"? Could it just make things worse? Should we be looking at an entirely different quick fix instead? Or is it too late for that?

Do we really need to do something immediately to prevent the entire economy from going into meltdown (as today's drop in the Dow might suggest)? Or are politicians exaggerating the threat just to scare us into passing something we really don't need? Or is rejecting the bailout tantamount to biting your nose to spite your face -- punishing those Wall Street jerks at the same time that we watch our own savings and jobs disappear?

In truth, I believe that nobody knows where the road to recovery actually lies. It's all a guessing game. After all, how many of these same politicians were able to correctly predict the current situation? None. So why should we have much confidence now?

Ask any of these politicians or pundits how much of their own money they would be willing to lay on the line in a bet that their position turns out to be the correct one. My guess is that you won't see much money in the pot -- assuming they have any money left after today's debacle.

Meanwhile, while the political Neros fiddle, Rome burns.

The day will hopefully come when all of this is a distant memory. But don't count on that day coming any time soon. This is a systemic problem, one that is shaking the foundations of Wall Street to its roots. No matter what we do now, it will be a long time before our economy returns to anything that resembles normal.

Buckle up. It's going to be a bumpy ride.

A personal note: I will be on vacation until October 20. See you when I get back.

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Comments

Perry Clease

Not being a banker or economist I have some questions.

Are there big banks and financial institutions that are doing well?  Banks that could step up and lend money to businesses and individuals, after vetting of course, to keep the economy going. I can’t help but think that this a kind of natural selection to get rid of the irresponsible institutions.

What would happen to a mortgage or loan if the bank closes?
——-

RPV

Stop choosing the left or the right. Choose AMERICA! Choose FREEDOM!

dualie

I’m just completely skeptical about this whole thing.  Over the last several months President Bush told us that the “fundamentals are sound”, that the economy is robust.  He did this three times over a period of nine months.

Then, in the middle of an election campaign when the Republicans are trailing slightly in the polls, there is suddenly a crisis we haven’t seen since the Great Depression.

Excuse me if I smell a rat.  Are we going to believe the same Wall Street shysters and scammmers who tell us they need a bail out when it was them who got us into this mess in the first place?

Richard

Please. I bought a house in late 2001 when all this frenzy was starting. I had saved money that had been taxed as income, as investments, and as savings to make a downpayment of over 20%. I went with a fifteen year, fixed-rate mortgage with no points and chose a house that wouldn’t stretch my resources. Good thing, too, because I got laid off three weeks after I moved in. I was out of work for over four months before I got another job. I never missed a payment, thanks to the savings. I never asked for a handout. If I shouted “Why me?” it was in the privacy of my own home. I also started paying down the principal. After refinancing, I was taking the extra $300 a month and applying it to the principal.

And now, after all this, I’m supposed to bail out a bunch of idiot financial “experts” because they were underwriting risky loans to idiots with bad credit history who weren’t responisble enough to save money for a downpayment? Screw ‘em. Screw the mortgage companies, the people who chose the loans, and the insurance companies like AIG who underwrote them. We already reward bad behavior and stupid decisions far too often in this country. Let the people who defaulted go back to renting crappy apartments and mobile homes, and let the people who rode the real estate bubble like they rode the .com bubble go work for those $8 an hour jobs I see advertised here. And let the insurance companies and insurance executives go to some place that is more in line with their ideas of government bailouts, like Moscow or Havana or Mogadishu.

r
[quote comment=“4298”]Stop choosing the left or the right. Choose AMERICA! Choose FREEDOM!

Which America and Freedom to what ???

America the Raped and Freedom to Manipulate the markets??????

trinniboy68

if we say we believe in a free society then why should i give my money to people who have proven that they cant take care of there own. if my daughter plays with her food than that means she isnt hungry or is done i dont then give her more. LET THE MARKETS CORRECT THEMSELVES. why will i give people money credit that have a proven record of bad credit worthiness. if wall street had a fico score it would be -500 by now they gets nothing from me and you should demand the same.THEY GOT CAUGHT and should pay the consequences. i would rather go into the next year with incertaincy and no debt than to have the ladder.

sandalon

Sorry folks, this is truer than you would like to believe.  America is done, and its hypocritical invasion of Iraq was the sore that exposed the disease.  We just passed the 7th anniversary of the destruction of the World Trade Center.  Now will come the destruction of the economy.  Sorry to break the bad news, but soup lines will not cure this one.  A bailout will not cure it either.  This sorry excuse for a free country is about to end, just as the president of Iran predicted.  Too bad, too late.

Steve

I am an economist, and it appears to me that the financial markets are in danger of seizing up. I was against the “bailout” as proposed, but recognize that liquidity and confidence in the financial system are essential. I don’t want to subsidize stupid decisions which was exactly what the Bill before the House would have done. It makes no sense to buy bad loans at par (more or less) in the faint hope that they will actually be repaid. Below is the text of an e-mail I sent to my Senators.

>>As one of your constituents, put me down as opposing the banking system bailout as currently constituted (the Paulson plan or any variant thereof). I would like to offer an alternative plan that will likely pay for itself over time and perhaps make a profit.

1. It is vitally important that banks have sufficient capital/reserves to make loans to creditworthy borrowers. For a variety of mostly technical reasons, the Paulson plan doesn’t do this.

Instead, allow the Federal Reserve (or Treasury) to purchase senior preferred stock that pays a slightly above market dividend from “troubled” banks. The amount of stock should be roughly the same as the difference between the par value and market price of whatever tiers 2 and 3 loans the banks currently have on their books. The above market rates give the banks an incentive to retire the senior preferred stock as soon as possible (thus returning the money to the Fed/Treasury). This new capital will allow the banks to offload their bad paper to someone willing to take some risks in collecting the debt.

2. Homeowners who overpaid for their homes are another problem. There are subprime and Alt-A (stated income or liar loans) loans that are far in excess of a house’s market value. The principal of these loans should be reduced to market value (or slightly below) and the payments adjusted accordingly and the Treasury should make up the difference to the mortgage holder. BUT, the Treasury should also receive a warrant for the amount of the principal reduction, which is to be repaid on the sale of the house. This warrant should carry over to subsequent owners until it’s fully paid.

3. Get rid of Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Home Loan Bank Board, and any other Federal Agency that pretends to know something about home mortgages. The private market can construct something like this on its own. And do a better job of it.

The above is, of course, is only a sketch of a plan. But something like it is vastly preferable to what Sec. Paulson has proposed. And it ought to work.<<

We’ll see.

Steve

Blame goes back to congress when Billy Clinton was in office, he’s even admitted that the conservatives sent up red flag warnings but the liberals pushed it through.  This wasn’t a republican/democrat thing it was fiscal conservatives vs. liberal spenders no matter of their party affiliation.  Our banks were told to loan the money, and they did, then they also got greedy.  Now we, and our future generations, will pay the price.  Sadly neither of our candidates knows squat about running a business or balancing a budget, so basically we’re screwed again.

As for time to get out?  Hell no! Now is the time to invest, but in the right businesses.  Selling your stocks in this market isn’t a good idea, long term is what matters.

Old Greg

My grandparents built a house during the depression, and had a $2000 mortgage with the local bank. They took in tenants, and worked very hard. When they both of them lost their jobs in 1929, they asked the bank to foreclose. Instead the banker accepted $1 (one dollar!) per month from them until they found jobs again, it took two years. My grandmother found a job first, they paid $5 for a year , then went back to their regular payment. It’s called “forbearance” and the bank took a hit. But my grandparents kept their house, and the bank got it’s principal back, minus a little profit. No bailout required, just person to person, check the greed at the door. A little common sense can go a long way.

Steve

[quote comment=“4306”]I am an economist…

Very well and logically said, but we know our Government logic will fly out the window.

Ken

It has been said that democracies only last about 200 years because in that time the people learn that they can vote themselves generous gifts from the public treasury .

I have no empathy for the people that got the Liar loans, the NINJNA-No Income, No Job, No Assets loans. They were renters before they got the no down payment, interest only loans.
They have invested $0 in the home—the payments were similar to what the rent payment were previously. They will not be hurt—they will simply be back to the renters they were before the Liar loans.
The people that took money out of their homes…well I have a little more empathy for them, but…..what did you do with that money? You bought stuff, that you couldn’t afford.

Ken

Steve—well put. If only the “leaders” would listen, and act for us, not themselves, the party, or their future employers.

Maybe we could arrange to saddle a little of the debt/your mentioned investment on the gracious pension plan all the politicians get.

Terrin

I am a bankruptcy attorney. I suspect any other such person in my profession would tell you that the bailout solution is another attempt at protecting the rich at the expense of the poor. Everyday I hear stories of people who were making good money only to be let go as their employers either go out of business or ship their jobs overseas. These people are typically proud responsible people. They approach their creditors and ask for a little help in the form of reduced payments until they can get another job. Yet, the creditors, whether they be credit card companies or mortgage companies, will not negotiate. Instead, of saying, “Yes, valued customer, we will let you temporarily make a smaller payment without considering your payment late”, they instead charge a penalty and double the interest rate. The deals they do offer are a joke. For instance, Credit Card companies will say after you are late on payments for several months we will forgive 50 percent of the money you owe us provided you pay the other 50 percent in the next thirty days. If people could afford to pay half their balances that quick, they wouldn’t have any trouble making the minimum payment. Fact is these companies are driving consumers into Bankruptcy. These companies in the name of greed write off billions of dollars of debt that consumers for the most part would be willing to pay if the companies were a little more flexible and provided them some more time.

The proposed bail out forgives the failed polices of these greedy and inhumane corporations. Don’t get me wrong, some sort of bailout might be necessary to stabilize the market. However, Congress should require companies to be more flexible in their dealings with Americans who are victims of poor government oversight and greed. I met at least ten people a day who are forced to file bankruptcy because companies will not work with them to pay the debt back on terms they can afford. The bailout proposal changes none of that.
[quote comment=“4302”]if we say we believe in a free society then why should i give my money to people who have proven that they cant take care of there own. if my daughter plays with her food than that means she isnt hungry or is done i dont then give her more. LET THE MARKETS CORRECT THEMSELVES. why will i give people money credit that have a proven record of bad credit worthiness. if wall street had a fico score it would be -500 by now they gets nothing from me and you should demand the same.THEY GOT CAUGHT and should pay the consequences. i would rather go into the next year with incertaincy and no debt than to have the ladder.

Terrin

Oops, I put that last quote in the wrong post.

The problem with the letting the markets correct themselves approach is that why should innocent investors like myself have to pay for the lack of government regulation and corporate greed? I didn’t invest in the housing market, yet my stock is tanking when if the market was operating as it should my stock would be going up. I am 25 percent poorer today then last week not because of reasonable anticipated investment risk but because of a hidden problem that has nothing to do with my area of investments.

al

“It makes no sense to buy bad loans at par (more or less) in the faint hope that they will actually be repaid.”

Is there any language in the bill that says these loans will be purchased at (more or less) par?  My understanding is that they would be bought at ‘current’ valuations which at this point in time means cents on the dollar.  I don’t think a bank that is sinking from the weight of toxic mortgage-backed assets is in a position to demand much in the way of concessions.

We are so quick to demonize our leaders, myself included, but as much as I hate what Bush has done to the country these last eight years, I am with him on this.  (And just saw pigs fly on my backyard)  I don’t think anyone is looking to rescue these so-called fat cats.  Just look at the pound of flesh that Paulsen extracted from AIG.  There was nothing concessionary in that deal.

Gentlemen, these protestations about rescuing idiots from the consequences of their own bad choices is truly just cutting off our nose to spite our face.

JonGl

Here’s a good reference to understand what has happened:
http://online.wsj.com/article/SB122212948811465427.html

The problem is really simple. Some politicians with power insisted that banks give loans to people who couldn’t afford them. The two FMs were set up to take over those loans, and people like Barney Frank were in charge of oversight, which they did not give. I remember a time when banks would actually _check_ to make sure you had the income to cover your loans. Those times, apparently, are long gone, because that would be “discrimination.” The result is what we see today.

-Jon

kurt
[quote comment=“4298”]Stop choosing the left or the right. Choose AMERICA! Choose FREEDOM!

Stop whining America, YOU caused this, YOU wanted this, You did NOTHING to avert this. Be at least big enough to stand up and take ownership.

And don’t be dumb, nobody forced the banks to get into this mess, it was pure unadulterated greed on their part.

Yours truly
The World

kurt

Actually a crash is good. Perhaps the recovery will be much quicker. We’ll get through this, but it won’t be easy. What a rush!

kurt

Hell, buy shares now, everything is on a massive sale and I mean massive. In 5 years time, you’ll be smiling. smile

rwahrens

Folks, you need to listen to the financial experts.

Everywhere you turn they’re telling you one thing - the main problem now is that NOBODY’S LENDING MONEY!!

The credit market is dried up and it is almost impossible to get a loan.  Why?  there’s too much bad debt floating around in some very large lenders’ balance sheets.

If that bad debt isn’t dealt with, that credit will stay where it is - in the owners’ pockets.  What happens next?  Will those lenders go out of business?

No, but a lot of other folks that NEED that credit will.  Folks you do business with - folks you work for - folks that buy the goods you sell.  Maybe the one that folds is YOU, because you can’t get the short term loan you need to pay your workers.  Or it’s your boss, cause he can’t get that short term loan to pay YOU!

Have you got more than 100,000 bucks in the bank?  FDIC won’t pay you if your bank fails because of this.

That’s quite a nose you’re cutting off there!  In spite of your face.

Come on, stop thinking shallow and think about the overall situation.  The bill, as written, won’t bail out the fat cats, they are forbidden from getting any of the federal money to pay their golden parachutes.  The taxpayers also are to get stock in the companies we bail out, so we get paid back when the market picks back up.  - and that 700 Billion isn’t slated to go out the door all at one time, either.

Perhaps your clue should be that the solution was supported by a bipartisan group - and most of the ones that killed it were backers of McCain.

Gene

[quote comment=“4309”]My grandparents built a house during the depression, and had a $2000 mortgage with the local bank. They took in tenants, and worked very hard. When they both of them lost their jobs in 1929, they asked the bank to foreclose. Instead the banker accepted $1 (one dollar!) per month from them until they found jobs again, it took two years. My grandmother found a job first, they paid $5 for a year , then went back to their regular payment. It’s called “forbearance” and the bank took a hit. But my grandparents kept their house, and the bank got it’s principal back, minus a little profit. No bailout required, just person to person, check the greed at the door. A little common sense can go a long way.

When I get to Heaven I want to meet your grandparents and their banker.

Terrin

The good professor’s view is BS. As I say, I am a Bankruptcy attorney in the State of Michigan where we have the highest unemployment and foreclosure rate. Most of the defaulted mortgages here are a result of the loss of high paying jobs associated with the automotive industry in the last two or three years. For the most part, the people who held those jobs where not getting sub prime mortgages because they had excellent income and credit. I’d say the root problem is the loss of jobs to overseas countries and the mortgage companies unwillingness to modify the loans.

Moreover, their is no regulation concerning those people selling mortgages and those building houses. A big selling point of mortgage companies selling adjustable rate mortgages has always been well you can refinance in a couple of years when the rates adjust. However, when real estate values tank because of over building and a loss of jobs, you cannot refinance.

The solution to the current problem is to encourage people to keep their homes by re-modifying the loans to reflect fair market value of the loans. The government would then back up any loss to loan company. There also needs to be regulation controlling the amount of new construction as well as tax incentives offered to keep jobs here.


[quote comment=“4321”]Here’s a good reference to understand what has happened:
http://online.wsj.com/article/SB122212948811465427.html

The problem is really simple. Some politicians with power insisted that banks give loans to people who couldn’t afford them. The two FMs were set up to take over those loans, and people like Barney Frank were in charge of oversight, which they did not give. I remember a time when banks would actually _check_ to make sure you had the income to cover your loans. Those times, apparently, are long gone, because that would be “discrimination.” The result is what we see today.

-Jon

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