First of all, Merry Christmas and Happy Holidays to everyone! Looks like it's been over 2 months since my last post - so much has happened and I have been severely slacking and I apologize for that. I do have a quick update relating to my very first post about the a-hole that wouldn't shake my hand at kickball. We played his team again in the semi-finals and we took 'em down! He even shook my hand at the end of the game and gave me a pat on the back - he probably reads this blog and didn't want to be ridiculed again.
Since I have been pretty bad about keeping up with this blog, I have decided to invite an extremely knowledgeable financial guru to add posts from time to time as well - I think he goes by Grand Master B., CFA. Between the two of us, we should be able to have something written every few weeks. We probably won't agree on everything either, so it should create some interesting discussion. He will be posting a blog this week on the auto bailout - I just read it and there is some great info. I will have a follow-up to this post soon as well. As always, questions and comments are encouraged. Have a safe and happy new year - 2009 will be a more productive year for the Notorious HIG blog.
Cheers,
Notorious HIG
28 December 2008
16 October 2008
Positive Thoughts on the Bailout
Looks like this whole blogging thing is more time consuming than expected, especially when the site is blocked at work. I would love nothing more than to steal work hours to blog throughout the day, but no such luck. Before I get going on some positives on the bailout package, I have a quick positive on the kickball situation. I went up to my cowardly friend and asked if he was ready to shake my hand last night. I think that was a positive step. That is until he gave me the cold shoulder yet again! He still would not put his pride aside and shake a friendly guy's hand at a bar. I should have updates on this every week since I now know how easy it is to get this kid going. I will make a valiant effort to bother him every week for the next few months. Now back to finance...
Since my last post, a lot has happened in the markets. This seems to be a recurring theme. We had a massive sell off last Friday. Then the G7 met and came up with a worldwide, comprehensive plan to help support the world's financial markets. Finally other central banks (even that lazy Trichet from France) agreed that action must be taken. The markets liked this news and we had the biggest point gain in history on Monday. We gave most of that gain back on Tuesday and Wednesday and had a decent recovery today. It's been difficult to follow and understand the action in the markets over the last few weeks due to the extreme volatility. For the first time in a very long time, 700 point swings throughout the day are becoming a common occurrence. It is the longest, wildest roller coaster I have ever ridden in my life. As much as I would like to talk about the intra-day action in the markets, I promised in the last post to focus on a few of the positive items in the U.S. bailout package and other positive steps that have been announced recently.
1. Ability to buy illiquid mortgages from the banks - I have already discussed the positive implications of this part of the bailout in my post entitled "A Glance at the Fed Bailout" on September 28th, so I will say no more on that topic.
2. Raising the FDIC insurance level to $250,000 from $100,000. This is a very important item in the bill. In the past, if you had more than $100,000 in a bank account at one institution, anything above that 100k was not insured by the federal government. So if the bank went under, there would be no guarantee on that money. This is a big issue, especially for small businesses who need to have well over that amount to finance their every day operations. When rumors came out about Washington Mutual being in big trouble, people with money at Wamu, especially more than $100,000, began withdrawing cash. This is commonly referred to as a run on the bank. Before JPMorgan decided to buy Wamu, billions of dollars were withdrawn. As discussed earlier, banks cannot operate without these deposits. These runs on banks caused big problems during the Depression and the S & L Crisis in the 80s and 90s. If you Google bank runs, you can probably bring up images of people waiting in lines at the bank to withdraw money. That problem today is even more prevalent since we can withdraw all of our funds electronically. It only takes a click of the mouse for me to pull all of my assets out of Sovereign Bank (soon to be Banco Santander). By raising the insurance limits, people will feel more comfortable leaving their money in the banks and these "runs" will hopefully subside.
3. Taking an equity stake in 9 of the largest U.S. financial institutions. Part of the $700 billion bailout gives the Treasury the ability to inject capital directly into the banks in exchange for an equity stake in the bank rather than simply buying distressed assets. This is the method that many of the governments in Europe have decided to implement. The U.S. followed suit on Wednesday by agreeing to inject $250 billion into 9 U.S. financial institutions. So what the hell does all this finance jargon really mean? The Treasury is basically buying senior preferred stock in the 9 companies. The Treasury will therefore now be an equity holder in the banks. They will get paid 5% per year on this money for the first 5 years and 9% thereafter. This is a win/win situation. The Treasury is making money for the taxpayer on this investment and the banks are able to borrow money at a very cheap rate for 5 years. The idea is that the banks will begin to lend out some of this money to unfreeze the capital markets and get the financial system back on its feet. There is more to the agreement, including the issuance of warrants, but I just want to get the most important points across.
4. The FDIC will now guarantee senior unsecured debt of eligible institutions issued before June 30th of 2009. This is also happening in Europe. This is a very big deal. This means that banks can raise money by issuing debt that is FDIC insured. This insurance will lower the cost of borrowing for the banks and also encourage people and institutions to invest in this debt. Typically during a difficult period in the market, debt (bonds) are considered safe investments. If a company is liquidated, the bond holders are the first ones to get paid. This crisis has been much different. Even the bond holders of U.S. companies, especially financial institutions, have been severely punished due to the lack of confidence between banks. When the Fed let Lehman Brothers fail, every institution holding Lehman Brother's bonds took a big hit. These same institutions then took a look at their other bond holdings and began to get rid of the debt of other banks that they thought were unsafe. If one of these banks wanted to issue new debt, they had to do so at very high interest rates in order to attract investors. This new insurance should lower the cost of capital for the participating institutions and bring back at least a little confidence in the system.
5. The last part of the package I want to discuss tonight is the Fed's recent announcement to enter the commercial paper market. Check out investopedia.com for a pretty good explanation of the commercial paper market. It is one of the most vital parts of the every day operations of businesses in America. Commercial Paper is basically very short term debt issued by companies to help finance their payrolls, inventories, etc. The market is huge and gives businesses access to capital at very low rates to help them operate. Over the past few months, this market has basically frozen up. Here's an example: Joe Plumber used to sell commercial paper to Barack McCain in order to finance his purchases of toilet plungers. He was able to borrow the money at a very low interest rate, so it made perfect sense. When the financial crisis began to trickle down into other businesses, Barack McCain began to get nervous about Joe Plumber's business, so he stopped buying the commercial paper. In fact, everyone stopped buying Mr. Plumber's paper (not toilet, commercial). Joe now has no financing and no way to buy more plungers to keep his business going. This is happening across every industry in America right now. This market is well over $1 trillion, so that's a lot of money to have frozen up. The Fed has announced that they will begin buying highly rated commercial paper from companies - I believe the facility will be set up in 2 weeks. This should help to unfreeze some of this vital market.
As stated previously, the credit markets will not be fixed overnight. We must be patient. It is important to understand that times are tough and will be for a while. But I think it's equally important to focus on some of the positive steps that are being taken. It's great to see governments and bankers all over the world working together to help get us through these difficult times. I'm sure the pain will continue, but I will make sure that I focus in on some of the positives as well. Hope this helps and as always, please feel free to ask questions if anything is confusing. Enjoy your Friday everyone.
Since my last post, a lot has happened in the markets. This seems to be a recurring theme. We had a massive sell off last Friday. Then the G7 met and came up with a worldwide, comprehensive plan to help support the world's financial markets. Finally other central banks (even that lazy Trichet from France) agreed that action must be taken. The markets liked this news and we had the biggest point gain in history on Monday. We gave most of that gain back on Tuesday and Wednesday and had a decent recovery today. It's been difficult to follow and understand the action in the markets over the last few weeks due to the extreme volatility. For the first time in a very long time, 700 point swings throughout the day are becoming a common occurrence. It is the longest, wildest roller coaster I have ever ridden in my life. As much as I would like to talk about the intra-day action in the markets, I promised in the last post to focus on a few of the positive items in the U.S. bailout package and other positive steps that have been announced recently.
1. Ability to buy illiquid mortgages from the banks - I have already discussed the positive implications of this part of the bailout in my post entitled "A Glance at the Fed Bailout" on September 28th, so I will say no more on that topic.
2. Raising the FDIC insurance level to $250,000 from $100,000. This is a very important item in the bill. In the past, if you had more than $100,000 in a bank account at one institution, anything above that 100k was not insured by the federal government. So if the bank went under, there would be no guarantee on that money. This is a big issue, especially for small businesses who need to have well over that amount to finance their every day operations. When rumors came out about Washington Mutual being in big trouble, people with money at Wamu, especially more than $100,000, began withdrawing cash. This is commonly referred to as a run on the bank. Before JPMorgan decided to buy Wamu, billions of dollars were withdrawn. As discussed earlier, banks cannot operate without these deposits. These runs on banks caused big problems during the Depression and the S & L Crisis in the 80s and 90s. If you Google bank runs, you can probably bring up images of people waiting in lines at the bank to withdraw money. That problem today is even more prevalent since we can withdraw all of our funds electronically. It only takes a click of the mouse for me to pull all of my assets out of Sovereign Bank (soon to be Banco Santander). By raising the insurance limits, people will feel more comfortable leaving their money in the banks and these "runs" will hopefully subside.
3. Taking an equity stake in 9 of the largest U.S. financial institutions. Part of the $700 billion bailout gives the Treasury the ability to inject capital directly into the banks in exchange for an equity stake in the bank rather than simply buying distressed assets. This is the method that many of the governments in Europe have decided to implement. The U.S. followed suit on Wednesday by agreeing to inject $250 billion into 9 U.S. financial institutions. So what the hell does all this finance jargon really mean? The Treasury is basically buying senior preferred stock in the 9 companies. The Treasury will therefore now be an equity holder in the banks. They will get paid 5% per year on this money for the first 5 years and 9% thereafter. This is a win/win situation. The Treasury is making money for the taxpayer on this investment and the banks are able to borrow money at a very cheap rate for 5 years. The idea is that the banks will begin to lend out some of this money to unfreeze the capital markets and get the financial system back on its feet. There is more to the agreement, including the issuance of warrants, but I just want to get the most important points across.
4. The FDIC will now guarantee senior unsecured debt of eligible institutions issued before June 30th of 2009. This is also happening in Europe. This is a very big deal. This means that banks can raise money by issuing debt that is FDIC insured. This insurance will lower the cost of borrowing for the banks and also encourage people and institutions to invest in this debt. Typically during a difficult period in the market, debt (bonds) are considered safe investments. If a company is liquidated, the bond holders are the first ones to get paid. This crisis has been much different. Even the bond holders of U.S. companies, especially financial institutions, have been severely punished due to the lack of confidence between banks. When the Fed let Lehman Brothers fail, every institution holding Lehman Brother's bonds took a big hit. These same institutions then took a look at their other bond holdings and began to get rid of the debt of other banks that they thought were unsafe. If one of these banks wanted to issue new debt, they had to do so at very high interest rates in order to attract investors. This new insurance should lower the cost of capital for the participating institutions and bring back at least a little confidence in the system.
5. The last part of the package I want to discuss tonight is the Fed's recent announcement to enter the commercial paper market. Check out investopedia.com for a pretty good explanation of the commercial paper market. It is one of the most vital parts of the every day operations of businesses in America. Commercial Paper is basically very short term debt issued by companies to help finance their payrolls, inventories, etc. The market is huge and gives businesses access to capital at very low rates to help them operate. Over the past few months, this market has basically frozen up. Here's an example: Joe Plumber used to sell commercial paper to Barack McCain in order to finance his purchases of toilet plungers. He was able to borrow the money at a very low interest rate, so it made perfect sense. When the financial crisis began to trickle down into other businesses, Barack McCain began to get nervous about Joe Plumber's business, so he stopped buying the commercial paper. In fact, everyone stopped buying Mr. Plumber's paper (not toilet, commercial). Joe now has no financing and no way to buy more plungers to keep his business going. This is happening across every industry in America right now. This market is well over $1 trillion, so that's a lot of money to have frozen up. The Fed has announced that they will begin buying highly rated commercial paper from companies - I believe the facility will be set up in 2 weeks. This should help to unfreeze some of this vital market.
As stated previously, the credit markets will not be fixed overnight. We must be patient. It is important to understand that times are tough and will be for a while. But I think it's equally important to focus on some of the positive steps that are being taken. It's great to see governments and bankers all over the world working together to help get us through these difficult times. I'm sure the pain will continue, but I will make sure that I focus in on some of the positives as well. Hope this helps and as always, please feel free to ask questions if anything is confusing. Enjoy your Friday everyone.
07 October 2008
Financial Bill or Chinese Buffet?
So sorry for the lack of posting on my part, especially during the pure and utter mayhem in the markets over the last week or so. I was hiking with my old man all weekend and did not what to ruin a great weekend on Sunday by thinking about finance. My apologies again - let's get back to it...
In my last post, I compared Congress to a bunch of fifth graders. It looks like I was giving them too much credit. They are more like 5 year olds. If a five year old won't do something and your patience is wearing thin, what do you do? You bribe them with candy! If Congress is too stupid to pass an incredibly important and time sensitive bill, what do you do? You bribe them with pork (evidently not too many vegetarians in Congress)! This bill had more pork than Chinese Buffet. Here are a few of my favorites: Tax breaks for a company that makes wooden arrows, tax breaks for alternative energy, tax breaks for Nascar. If you want some good thoughts on this bill, please take a look at the last comment on my last post by "thefreshmen." The post describes a lot of frustration that people are feeling today.
Even though our elected representatives made a once 3 page bill over 100 pages long, they did in fact pass the legislation. I totally disagree with the manner in which it was passed, but what's done is done. After the bill passed, the stock markets and credit markets have continued to come under pressure. Today the Dow closed below 9500 and the S&P closed below 1000. We are about 40% off of the highs hit only 1 year ago. Many people are asking why the market is dropping if this bill is in place. Shouldn't the mortgage problems now be solved?
Ladies and gentleman, these problems do not get fixed overnight. The Treasury now has to figure out which mortgages to buy and at what prices. If you have been following this blog, you already know how complex and difficult these securities are to price. It is going to take a little while for the Treasury to begin purchasing securities. And it is going to take even longer for the effects of these purchases to trickle down into the rest of the mortgage market. After all, Rome wasn't built in a day. We have become a society unwilling to wait for anything. This is a perfect time for Americans to relearn that long lost virtue called patience.
Another plausible explanation for the continued weakness in the market after the passing of the bill is the fact that investors are now focusing on the fundamentals of the economy rather than on whether or not the bill will be passed. On Friday, the Labor Department announced we lost 159,000 jobs in September. That is the worst number in 5 years. Manufacturing and auto sales data have also been extremely week. I do not want to bore you with the numerical details, so I'll just say flat out that the economy is weak and is continuing to slow.
Monday was also a horrific day on Wall Street. The focus on Monday was Europe and the European banks. Fortunately for the U.S., we have one national government and one central bank. The Fed was therefore able to pass legislation that encompasses the entire U.S. mortgage market. As discussed previously, the Fed realized that they could not save the system on a case by case basis. They needed broad-based legislation. Unfortunately, Europe does not have that luxury. The European Central Bank (ECB) carries out the monetary policy for its 15 member countries. That means that 15 very different economies governed by 15 unique governments are all affected by one central bank. This makes it very difficult for the ECB to pass a broad based bail out package for its member nations. It also makes their decisions on monetary policy very complicated. What's good for Germany may not be good for France, what's good for France may not be good for Greece, etc.
Last week, Ireland was nervous about people pulling money from their banks, so they decided to guarantee all deposits:
http://www.smartmoney.com/breaking-news/smw/index.cfm?story=20080930110502
What effect does this have on the rest of Europe? People pull their money out of other banks and deposit them in the Irish banks since the deposits are guaranteed. That means an immense amount of pressure is put on other European banks. After the announcement from Ireland, several other EU members followed suit with their own types of guarantees. I hope this clearly illustrates the problem in Europe right now. To get through this with minimal pain, they need to work together on a solution. The European bankers actually met today for precisely this purpose. I am about financed out for the night, so I'm not sure what kind of progress was made at the meeting today.
Just one more quick note before I go to the gym to see if any other CEOs of financial firms are getting punched in the face on treadmills (Google "Dick Fuld Gets Knocked Out") - Take a look at the following article if you still do not believe the close ties between Main Street and Wall Street:
http://biz.yahoo.com/ap/081007/meltdown_retirement.html
Sorry for the negative sentiment in this post. I will try and focus in on the positive steps that the Fed has taken in my next post and discuss how they may help us out of this mess.
Don't forget to watch Saturday Night Live, I mean the presidential debate, tonight! Until next time.
In my last post, I compared Congress to a bunch of fifth graders. It looks like I was giving them too much credit. They are more like 5 year olds. If a five year old won't do something and your patience is wearing thin, what do you do? You bribe them with candy! If Congress is too stupid to pass an incredibly important and time sensitive bill, what do you do? You bribe them with pork (evidently not too many vegetarians in Congress)! This bill had more pork than Chinese Buffet. Here are a few of my favorites: Tax breaks for a company that makes wooden arrows, tax breaks for alternative energy, tax breaks for Nascar. If you want some good thoughts on this bill, please take a look at the last comment on my last post by "thefreshmen." The post describes a lot of frustration that people are feeling today.
Even though our elected representatives made a once 3 page bill over 100 pages long, they did in fact pass the legislation. I totally disagree with the manner in which it was passed, but what's done is done. After the bill passed, the stock markets and credit markets have continued to come under pressure. Today the Dow closed below 9500 and the S&P closed below 1000. We are about 40% off of the highs hit only 1 year ago. Many people are asking why the market is dropping if this bill is in place. Shouldn't the mortgage problems now be solved?
Ladies and gentleman, these problems do not get fixed overnight. The Treasury now has to figure out which mortgages to buy and at what prices. If you have been following this blog, you already know how complex and difficult these securities are to price. It is going to take a little while for the Treasury to begin purchasing securities. And it is going to take even longer for the effects of these purchases to trickle down into the rest of the mortgage market. After all, Rome wasn't built in a day. We have become a society unwilling to wait for anything. This is a perfect time for Americans to relearn that long lost virtue called patience.
Another plausible explanation for the continued weakness in the market after the passing of the bill is the fact that investors are now focusing on the fundamentals of the economy rather than on whether or not the bill will be passed. On Friday, the Labor Department announced we lost 159,000 jobs in September. That is the worst number in 5 years. Manufacturing and auto sales data have also been extremely week. I do not want to bore you with the numerical details, so I'll just say flat out that the economy is weak and is continuing to slow.
Monday was also a horrific day on Wall Street. The focus on Monday was Europe and the European banks. Fortunately for the U.S., we have one national government and one central bank. The Fed was therefore able to pass legislation that encompasses the entire U.S. mortgage market. As discussed previously, the Fed realized that they could not save the system on a case by case basis. They needed broad-based legislation. Unfortunately, Europe does not have that luxury. The European Central Bank (ECB) carries out the monetary policy for its 15 member countries. That means that 15 very different economies governed by 15 unique governments are all affected by one central bank. This makes it very difficult for the ECB to pass a broad based bail out package for its member nations. It also makes their decisions on monetary policy very complicated. What's good for Germany may not be good for France, what's good for France may not be good for Greece, etc.
Last week, Ireland was nervous about people pulling money from their banks, so they decided to guarantee all deposits:
http://www.smartmoney.com/breaking-news/smw/index.cfm?story=20080930110502
What effect does this have on the rest of Europe? People pull their money out of other banks and deposit them in the Irish banks since the deposits are guaranteed. That means an immense amount of pressure is put on other European banks. After the announcement from Ireland, several other EU members followed suit with their own types of guarantees. I hope this clearly illustrates the problem in Europe right now. To get through this with minimal pain, they need to work together on a solution. The European bankers actually met today for precisely this purpose. I am about financed out for the night, so I'm not sure what kind of progress was made at the meeting today.
Just one more quick note before I go to the gym to see if any other CEOs of financial firms are getting punched in the face on treadmills (Google "Dick Fuld Gets Knocked Out") - Take a look at the following article if you still do not believe the close ties between Main Street and Wall Street:
http://biz.yahoo.com/ap/081007/meltdown_retirement.html
Sorry for the negative sentiment in this post. I will try and focus in on the positive steps that the Fed has taken in my next post and discuss how they may help us out of this mess.
Don't forget to watch Saturday Night Live, I mean the presidential debate, tonight! Until next time.
29 September 2008
WTF Congress
Have you ever watched the show "Are You Smarter Than a Fifth Grader?" Rumor has it, the show was originally going to be "Are You Smarter Than a Congressman?" The networks realized that too many people would win money on this show, so they replaced Congressman with a slightly more intelligent breed of Americans: Fifth Graders.
I was surprised and very disappointed that the bill did not make it through Congress today. Many will blame Nancy Pelosi for turning the issue into a partisan issue during her speech this morning. I personally think at a time like this, there was no reason to take a cheap shot at the "failed policies of the Bush Administration." There will be others who blame the Republican members of Congress who may have switched their vote to 'Nay' because they took offense to Pelosi's comments. In either case, it is the same old political blame game. This brings me to the topic for tonight's post: ACCOUNTABILITY.
Throughout this financial crisis, elected officials have constantly blamed the other party for the problems we are having now. Everyone on so called "Main Street" is blaming Wall Street for the situation we find ourselves in today. Homeowners are blaming CEOs of large Wall Street institutions for the problems they are having paying their mortgages. The fact of the matter is, nobody is admitting that they screwed up and that it is time to move on and fix the errors of the past. Let's take a look at some of the things that have happened over the past few years that have helped lead us into this difficult environment.
-In the late 90s Banks were encouraged to make loans available to middle and lower class people to buy homes because it was the "American Dream." Fannie and Freddie were influenced into buying subrime and Alt-A mortgages. This was done under a democratic administration.
Accountable parties: All members of congress and the democratic administration during that time. Enough of this bipartisan nonsense. Both parties should stop pointing fingers and admit that bad decisions were made. The executives of Fannie and Freddie should also admit that they were wrong. They should have exercised the appropriate due diligence and realized that these assets were not worth the risk in the long term.
-Alan Greenspan's Fed lowered interest rates substantially after our last recession. With interest rates at 1%, people begin taking home equity loans out to purchase second and third homes. Once the real estate bubble popped, many of these lines of credit were decreased due to the declining value of the house that served as collateral for these loans. This was done under a Republican Administration.
Accountable parties: Members of the Fed who should have foreseen the problems that ridiculously easy access to credit could cause. Many might be offended by this, but the people who bought second homes also need to be held accountable. Nobody forced you to buy a house or a car that you couldn't afford. Take some responsibility for your actions and don't expect all of the blame to fall on a few Wall Street executives. I hope people will think twice now about taking out a loan to buy something that really isn't necessary and that they cannot afford.
-With interest rates low, banks lent money to pretty much everyone with a license. Understanding the risk of lending to people with bad credit, they couldn't simply offer fixed rate loans to everyone. Instead, they created products with a teaser rate that adjusts upward significantly after a few years. I imagine the pitch went something like this:
Couple With Bad Credit: "We can only afford around $500/month."
Mortgage Agent: "Well at 2% for the first 2 years, your payment will only be $200."
Couple With Bad Credit: "What happens after that?"
Mortagage Agent: "Well in years 3-5, the payment goes up to $400. After that, it will adjust to 15%, which is around $1,500/month. But don't worry about that. You will be building credit for the next few years and should be able to refinance in a few years."
Couple With Bad Credit: "We really want this house and it sounds like we will be just fine. Let's do it!"
Accountable Parties: The mortgage lenders were obviously at fault for creating and selling products that people did not fully understand. The government was also at fault for not regulating this market. And by government I mean both Democrats and Republicans, so stop pointing fingers. There were members of both parties in Congress at the time and both sides failed to act. The Couple With Bad Credit should also take some responsiblity for their actions. I understand that many were misled into taking out a mortgage. In the end, you have the final decision and should hold yourself accountable for at least part of the problem.
I could go on and on with more examples and the same recurring theme would emerge: there are multiple factors that have led us to where we are and there are many people to blame. Regardless of who is at fault, one thing is for certain. We are in the middle of a financial crisis that needs to be taken care of ASAP. Let's hope Congress can stop bickering like 8 year olds and take some action. I don't know about you, but I want the people that represent me to do what is good for the country, not what is good for the presidential election or their reelection bid that is coming up soon.
One more quick comment regarding Wall Street vs. Main Street. If you think that we should not take action, stick it to the Wall Street firms and let them suffer the consequences of their actions, I want you to do the following tomorrow:
-Look at your 401(k). It probably is getting hammered this year. Then think about the 70 year olds who are retired and have seen their nest egg get clobbered.
-Think about your family and friends who actually work in the finanical industry. The CEOs of these companies will still have a lot of money if they go out of business. But your average Joe/Plain Jane might end up jobless and might have their retirement accounts completely wiped out.
-Think about small businesses who need loans for their day-to-day operations. What happens to these businesses and their employees if the banks stop lending?
The point is, Wall Street and Main Street are totally connected. So please Congress, stop bickering about Wall Street vs. Main Street. And stop the partisan bickering as well. Let's act like adults and get some legislation passed and restore our confidence in the financial system. As we all saw today, time is of the essence.
With all the stress and nervousness in our country today, don't forget to relax a little and find time for a good laugh. The video below always puts a smile on my face, even if we lost $1.4 trillion in market value today.
http://www.youtube.com/watch?v=cwvVh0_ZelI
I was surprised and very disappointed that the bill did not make it through Congress today. Many will blame Nancy Pelosi for turning the issue into a partisan issue during her speech this morning. I personally think at a time like this, there was no reason to take a cheap shot at the "failed policies of the Bush Administration." There will be others who blame the Republican members of Congress who may have switched their vote to 'Nay' because they took offense to Pelosi's comments. In either case, it is the same old political blame game. This brings me to the topic for tonight's post: ACCOUNTABILITY.
Throughout this financial crisis, elected officials have constantly blamed the other party for the problems we are having now. Everyone on so called "Main Street" is blaming Wall Street for the situation we find ourselves in today. Homeowners are blaming CEOs of large Wall Street institutions for the problems they are having paying their mortgages. The fact of the matter is, nobody is admitting that they screwed up and that it is time to move on and fix the errors of the past. Let's take a look at some of the things that have happened over the past few years that have helped lead us into this difficult environment.
-In the late 90s Banks were encouraged to make loans available to middle and lower class people to buy homes because it was the "American Dream." Fannie and Freddie were influenced into buying subrime and Alt-A mortgages. This was done under a democratic administration.
Accountable parties: All members of congress and the democratic administration during that time. Enough of this bipartisan nonsense. Both parties should stop pointing fingers and admit that bad decisions were made. The executives of Fannie and Freddie should also admit that they were wrong. They should have exercised the appropriate due diligence and realized that these assets were not worth the risk in the long term.
-Alan Greenspan's Fed lowered interest rates substantially after our last recession. With interest rates at 1%, people begin taking home equity loans out to purchase second and third homes. Once the real estate bubble popped, many of these lines of credit were decreased due to the declining value of the house that served as collateral for these loans. This was done under a Republican Administration.
Accountable parties: Members of the Fed who should have foreseen the problems that ridiculously easy access to credit could cause. Many might be offended by this, but the people who bought second homes also need to be held accountable. Nobody forced you to buy a house or a car that you couldn't afford. Take some responsibility for your actions and don't expect all of the blame to fall on a few Wall Street executives. I hope people will think twice now about taking out a loan to buy something that really isn't necessary and that they cannot afford.
-With interest rates low, banks lent money to pretty much everyone with a license. Understanding the risk of lending to people with bad credit, they couldn't simply offer fixed rate loans to everyone. Instead, they created products with a teaser rate that adjusts upward significantly after a few years. I imagine the pitch went something like this:
Couple With Bad Credit: "We can only afford around $500/month."
Mortgage Agent: "Well at 2% for the first 2 years, your payment will only be $200."
Couple With Bad Credit: "What happens after that?"
Mortagage Agent: "Well in years 3-5, the payment goes up to $400. After that, it will adjust to 15%, which is around $1,500/month. But don't worry about that. You will be building credit for the next few years and should be able to refinance in a few years."
Couple With Bad Credit: "We really want this house and it sounds like we will be just fine. Let's do it!"
Accountable Parties: The mortgage lenders were obviously at fault for creating and selling products that people did not fully understand. The government was also at fault for not regulating this market. And by government I mean both Democrats and Republicans, so stop pointing fingers. There were members of both parties in Congress at the time and both sides failed to act. The Couple With Bad Credit should also take some responsiblity for their actions. I understand that many were misled into taking out a mortgage. In the end, you have the final decision and should hold yourself accountable for at least part of the problem.
I could go on and on with more examples and the same recurring theme would emerge: there are multiple factors that have led us to where we are and there are many people to blame. Regardless of who is at fault, one thing is for certain. We are in the middle of a financial crisis that needs to be taken care of ASAP. Let's hope Congress can stop bickering like 8 year olds and take some action. I don't know about you, but I want the people that represent me to do what is good for the country, not what is good for the presidential election or their reelection bid that is coming up soon.
One more quick comment regarding Wall Street vs. Main Street. If you think that we should not take action, stick it to the Wall Street firms and let them suffer the consequences of their actions, I want you to do the following tomorrow:
-Look at your 401(k). It probably is getting hammered this year. Then think about the 70 year olds who are retired and have seen their nest egg get clobbered.
-Think about your family and friends who actually work in the finanical industry. The CEOs of these companies will still have a lot of money if they go out of business. But your average Joe/Plain Jane might end up jobless and might have their retirement accounts completely wiped out.
-Think about small businesses who need loans for their day-to-day operations. What happens to these businesses and their employees if the banks stop lending?
The point is, Wall Street and Main Street are totally connected. So please Congress, stop bickering about Wall Street vs. Main Street. And stop the partisan bickering as well. Let's act like adults and get some legislation passed and restore our confidence in the financial system. As we all saw today, time is of the essence.
With all the stress and nervousness in our country today, don't forget to relax a little and find time for a good laugh. The video below always puts a smile on my face, even if we lost $1.4 trillion in market value today.
http://www.youtube.com/watch?v=cwvVh0_ZelI
28 September 2008
A Glance at the Fed Bailout
To all the readers in the northeast, how bout that rain all weekend? Thanks Mother Nature for really driving home the fact that times are tough. She always has a way of doing that. I think she was also warning us about the first Presidential debate. How bad was that? I think a total of zero questions were actually answered. At one point, I went outside and looked at a patch of grass. Yes, I thought watching grass grow was more fun than watching two more politicians avoid directly answering straightforward questions. Speaking of politics, let's talk about this bailout package.
Over the past several months, we have seen many unprecedented things happen on Wall Street. Bear Stearns was on the brink of bankruptcy, so JPMorgan bought the company for next to nothing with the support of the Federal Reserve. We have seen large banks such as Indymac go out of business. As stated in the previous post, Fannie Mae and Freddie Mac were bailed out and are now controlled by the government. Lehman Brothers then began to have problems. At this point, the Fed wanted to try and drive home the point that not everyone is going to get bailed out. So what happened? Lehman filed for bankruptcy. That same weekend, Merrill Lynch was basically forced into a buyout by Bank of America. Wall Street then focused on AIG, the largest insurance company in the world. Unlike Lehman Brothers, the Fed believed that AIG was too big to fail and hence agreed to an $85 billion bailout.
(http://www.federalreserve.gov/newsevents/press/other/20080916a.htm)
On Friday, Washington Mutual was taken over by the FDIC. This happens to be the largest bank failure in American history. Thankfully JPMorgan will be taking control of the WaMu deposits, so the FDIC and taxpayer will not be on the hook for this bailout. Typically only a few of these large events happen each decade. This year, they seem to be happening on a weekly basis. We are truly living through unprecedented times. In summary, a lot of shit has been going down on Wall Street this year.
So what exactly is this $700 billion bailout that Congress will be voting on tomorrow? Nobody really knows the full details of the bailout, but I will try to explain the basics. Before this bailout was proposed, the Fed was basically dealing with large problems on a case by case basis. They helped support the merger of JPMorgan and Bear Stearns and bailed out AIG. On the other hand, they let Lehman Brothers fail. They have come to the realization that the problem is too large and the system too interconnected and complicated to deal with the issues on a case by case basis. Hence the proposal for a huge bailout.
In my previous post, I talked about the mortgages and mortgage related products that are on bank's balance sheets. These mortgages have proven to be very difficult to price and are now very illiquid. The banks are basically stuck with massive mortgage portfolios that they have had to mark down in value and that nobody wants to buy. Recall that if the banks are stuck with these products, they have less capital to lend. That means it is more difficult for individuals and businesses to get loans and that the banks make less money. The $700 billion that the Fed and Treasury are asking for is going to be used to buy these securities from the banks to free up capital for them. The idea is that banks will have more money to lend, hence helping ease the credit crunch we are in. Since the government will become a player in the secondary mortgage market, other investors who have been sitting on the sideline with lots of cash will also start to buy up some of these assets. The main goal is to bring liquidity back into the system.
As stated above, one of the problems with these mortgage portfolios is that the products are very difficult to price. Many banks have aggressively written down these securities. Let's look at a hypothetical example. Let's bring back Greed E. Bank and assume they own one of those fancy shmancy MBS that they purchased at $100. Since the purchase, lots has happened and they have been forced to value the security at $30. The security is still making just as much money as before, but the risks in the market have increased dramatically. Is the security really only worth $30 now even though it is still making the same amount of money? That is the quandry we are in. Either way, Greed E. Bank now has $70 less and other banks are hesitant to lend them money since their mortgage portfolio looks risky and their asset base has dropped significantly. This is a huge problem for the banks. So in comes the Fed. They will buy this MBS from Greed E. Bank at the price that they think is fair. I imagine part of the bailout will include using experts in the industry to help more accurately estimate the fair value of the securities. Let's say they purcase it at $40. Greed E. Bank has now successfully gotten rid of a very illiquid asset and in turn received $10 more than expected. They are happy to have this security off of their balance sheet. The government is also happy because they have purchased this security at a massive discount. If the mortgage market stabilizes, the government and taxpayer will more than likely make a profit. Other banks that hold similar MBS are also happy because they may be able to sell their securities to the government or other investor at a higher value than expected.
With all of the bank failures and issues with the holdings in many bank's portfolios, banks are very hesitant to do business with each other. Did I mention that there is a massive overnight lending market between banks? When you deposit money in a bank, they are allowed to lend out a portion of the money, but not all of it. They are required to have a specific number of reserves to cover their liabilities (your deposits). At the end of the day, some banks are short and some have excess reserves. The banks with excess reserves lend money to those who are short and make interest on this loan that typically lasts overnight. The interest rates on these loans has skyrocketed since banks are hesitant to loan money to each other, even for 1 day. If the Fed comes in and starts buying these illiquid assets from the banks, the idea is that confidence will come back into the system. Everyone knows that confidence is sexy. Banks will be more willing to lend money to each other once these illiquid assets have been sold to the Fed.
In the words of Forest Gump, that's all I have to say about that. I will update the blog as more information on the bailout comes to light this week. Until next time.
Over the past several months, we have seen many unprecedented things happen on Wall Street. Bear Stearns was on the brink of bankruptcy, so JPMorgan bought the company for next to nothing with the support of the Federal Reserve. We have seen large banks such as Indymac go out of business. As stated in the previous post, Fannie Mae and Freddie Mac were bailed out and are now controlled by the government. Lehman Brothers then began to have problems. At this point, the Fed wanted to try and drive home the point that not everyone is going to get bailed out. So what happened? Lehman filed for bankruptcy. That same weekend, Merrill Lynch was basically forced into a buyout by Bank of America. Wall Street then focused on AIG, the largest insurance company in the world. Unlike Lehman Brothers, the Fed believed that AIG was too big to fail and hence agreed to an $85 billion bailout.
(http://www.federalreserve.gov/newsevents/press/other/20080916a.htm)
On Friday, Washington Mutual was taken over by the FDIC. This happens to be the largest bank failure in American history. Thankfully JPMorgan will be taking control of the WaMu deposits, so the FDIC and taxpayer will not be on the hook for this bailout. Typically only a few of these large events happen each decade. This year, they seem to be happening on a weekly basis. We are truly living through unprecedented times. In summary, a lot of shit has been going down on Wall Street this year.
So what exactly is this $700 billion bailout that Congress will be voting on tomorrow? Nobody really knows the full details of the bailout, but I will try to explain the basics. Before this bailout was proposed, the Fed was basically dealing with large problems on a case by case basis. They helped support the merger of JPMorgan and Bear Stearns and bailed out AIG. On the other hand, they let Lehman Brothers fail. They have come to the realization that the problem is too large and the system too interconnected and complicated to deal with the issues on a case by case basis. Hence the proposal for a huge bailout.
In my previous post, I talked about the mortgages and mortgage related products that are on bank's balance sheets. These mortgages have proven to be very difficult to price and are now very illiquid. The banks are basically stuck with massive mortgage portfolios that they have had to mark down in value and that nobody wants to buy. Recall that if the banks are stuck with these products, they have less capital to lend. That means it is more difficult for individuals and businesses to get loans and that the banks make less money. The $700 billion that the Fed and Treasury are asking for is going to be used to buy these securities from the banks to free up capital for them. The idea is that banks will have more money to lend, hence helping ease the credit crunch we are in. Since the government will become a player in the secondary mortgage market, other investors who have been sitting on the sideline with lots of cash will also start to buy up some of these assets. The main goal is to bring liquidity back into the system.
As stated above, one of the problems with these mortgage portfolios is that the products are very difficult to price. Many banks have aggressively written down these securities. Let's look at a hypothetical example. Let's bring back Greed E. Bank and assume they own one of those fancy shmancy MBS that they purchased at $100. Since the purchase, lots has happened and they have been forced to value the security at $30. The security is still making just as much money as before, but the risks in the market have increased dramatically. Is the security really only worth $30 now even though it is still making the same amount of money? That is the quandry we are in. Either way, Greed E. Bank now has $70 less and other banks are hesitant to lend them money since their mortgage portfolio looks risky and their asset base has dropped significantly. This is a huge problem for the banks. So in comes the Fed. They will buy this MBS from Greed E. Bank at the price that they think is fair. I imagine part of the bailout will include using experts in the industry to help more accurately estimate the fair value of the securities. Let's say they purcase it at $40. Greed E. Bank has now successfully gotten rid of a very illiquid asset and in turn received $10 more than expected. They are happy to have this security off of their balance sheet. The government is also happy because they have purchased this security at a massive discount. If the mortgage market stabilizes, the government and taxpayer will more than likely make a profit. Other banks that hold similar MBS are also happy because they may be able to sell their securities to the government or other investor at a higher value than expected.
With all of the bank failures and issues with the holdings in many bank's portfolios, banks are very hesitant to do business with each other. Did I mention that there is a massive overnight lending market between banks? When you deposit money in a bank, they are allowed to lend out a portion of the money, but not all of it. They are required to have a specific number of reserves to cover their liabilities (your deposits). At the end of the day, some banks are short and some have excess reserves. The banks with excess reserves lend money to those who are short and make interest on this loan that typically lasts overnight. The interest rates on these loans has skyrocketed since banks are hesitant to loan money to each other, even for 1 day. If the Fed comes in and starts buying these illiquid assets from the banks, the idea is that confidence will come back into the system. Everyone knows that confidence is sexy. Banks will be more willing to lend money to each other once these illiquid assets have been sold to the Fed.
In the words of Forest Gump, that's all I have to say about that. I will update the blog as more information on the bailout comes to light this week. Until next time.
25 September 2008
How Did We Get Into This Mess? Part 1: The Complexities of the Mortgage Market
As I said in my somewhat coherent post last night, the purpose of this blog is to educate the average person on the historic times we are living through in the financial markets. I didn't pitch in any kickball games while tipping back a 40 of Coors tonight, so I will stick to the economy in this post rather than venting about childish incidents.
In order to understand the implications and importance of the Fed bailout, it is first necessary to have a basic understanding of the banking system in America. We bring money to the bank because it is a relatively safe and convenient way to store our cash. Banks need our money to finance their operations. They pay us extremely low interest rates on our deposits. They then take our deposits and lend them out to other people and businesses at higher interest rates. Banks make loans to individuals to purchase homes, cars, boats, etc. They also loan money to businesses so that the businesses can continue to operate and expand. Depending on the credit of the borrower and the type of loan, banks charge various interest rates on their loans. The riskier the loan, the higher the rate the banks charge. It's a very simple concept and a very lucrative business. Banks are essential to our economy because without their loans, individuals have no way to borrow money to finance large purchases or to grow their businesses. That is the situation we are currently experiencing. Liquidity in the credit markets has essentially dried up.
Tight credit => Less access to capital for businesses => Slower growth in the economy => Job losses for Americans
So how did we get to the point where many banks are going out of business and others are on the verge of bankruptcy? I wish I had started this blog about a year ago, because there are a lot of factors in play. Tonight I will focus on the main factor that has brought us to one of the most difficult times in the history of the financial market: the housing bubble. Hold on to your hat because this is where a seemingly simple topic of taking out a mortgage to buy a house has become extremely complex over the past several years.
Let's say Ted E. Taxpayer goes into a bank, we'll call it Greed E. Bank to take out a mortgage. Banks like mortgage lending because if Ted loses his job and can't pay the loan, the bank is still able to take control of the house and sell it. As long as the bank can sell the house at a decent price, they will not lose very much money. Ted is happy because he has a home. The bank is happy because they are paying, let's say 1%, on their deposits and Ted is paying them 6% for the next thirty years. They also collect fees on these transactions. But the bank would be happier if they had more deposits so they could lend out more money. Well it must be their lucky day because decades ago, the government created Fannie Mae and Freddie Mac. You might have read about them in the news recently. They were privately run companies until the U.S. Treasury was recently forced to bail them out.
So what do these two agencies do and how does it make the banks happier than a pig in shit? A common misconception is that Fannie and Freddie originate mortgages. They do not. Fannie and Freddie buy mortgages in the secondary market from banks like Greed E. Bank. The banks then have more money to lend out. Yippee! Fannie and Freddie will either hold the mortgages on their own books or take similar mortgages (i.e. similar interest payments, similar maturities) and package them together as mortgage backed securities (MBS). These are then sold off to banks, investment banks, private equity firms, pension funds, sovereign wealth funds and other investors. Fannie and Freddie put guarantees on these securities that all interest and principle will be paid to whoever owns the MBS. They are essentially insurance companies. They are able to guarantee this debt by only buying a specific type of mortgage that they deem as safe.
Just in case I've lost you, let's review what has happened so far since Ted went to the bank. Greed E. Bank originated a mortgage so Ted could buy a house. Freddie Mac (or Fannie Mae if that is your favorite one) then bought this mortgage from Greed E. so Greed E. could make more loans and more money. Freddie then grouped Ted's mortgage with similar mortgages, stamped their guarantee on the MBS and sold it to to other banks and investors. A seemingly simple agreement between Ted and Greed E. Bank now involves Freddie and whoever bought the MBS. So if Ted defaults, multiple parties will be affected.
In the late 90s, the governement pressured Fannie and Freddie to loosen their standards on the types of mortgages they could buy. They wanted lower and middle class people to have access to credit as well and to have the ability to become homeowners. Fannie and Freddie obliged and began to buy Alt-A and Subprime mortgages from the banks. Armed with the ability to sell subprime mortgages to Fannie and Freddie, mortgage companies and banks began to aggressively market mortgages to people with terrible credit. A lot of people who should not have been leant money in the first place were so thrilled at the thought of finally owning a home that it was easy for lenders to sell high interest mortgages. Many of these lenders are now facing civil and criminal charges for predatory lending practices. Someone please remind me to discuss this in more detail in a later post.
Greed E. and other banks and mortgage companies made a boatload of money on these mortgages. Fannie and Freddie did as well. Unfortunately, these companies and many individual real estate investors made a critical mistake. They improperly assumed that there could not be a nationwide collapse in residential real estate values. Since they were under the assumption that housing prices would always go up, they did not really worry about defaults on the mortgages. Individual home buyers were also caught in this trap. Even if Ted lost his job, he could still sell his house at the same price or a higher price than where he bought it. The ridiculousness of these assumptions has hit the front page of every newspaper over the past two years. Real estate values around the country have been dropping substantially. The housing market fell apart quicker than Brittany Spears' career.
So how exactly did the real estate bubble form? After the last recession, interest rates were at historically low levels, so millions of people bought homes or used their existing homes to finance the purchase of second and third homes. With mortgages available to practically everyone with a driver's license that could spell their name properly 3 out of 5 times, demand for homes far outpaced supply. Just like we all learned in Econ 101, this caused real estate values to sky-rocket. Then the adjustable rate mortgages began to reset at higher rates. Millions of people became stuck with mortgage payments that they could not afford. The number of foreclosures has skyrocketed. The banks would be able to handle these foreclosures if there were buyers in the market and if real estate values were stable or increasing. Neither is true. As the number of foreclosures increases, the holders of mortgages and mortgage backed securities end up suffering serious losses. A once steady cash flow has now disappeared. Some of the largest holders of these MBS are the banks that people rely on for loans to buy houses. The banks have taken serious losses on these investments, so they have less capital to use to make loans. We therefore find ourselves in the following situation:
-People are losing their homes because they cannot afford their mortgages.
-Banks and mortgage companies are losing money because they own many of these non-performing assets.
-Banks have tightened their lending standards significantly because they don't have the capital to lend out and because they don't want to get stuck with more non-performing assets on their books. They are also stuck owning houses that they either cannot sell or have to sell in auctions at ridiculously low prices.
I could write for hours more on this topic tonight, but sleep is needed. Looks like it will be a busy day again tomorrow as Congress is once again failing us by taking too long to act on important issues. I hope this post gives people a basic understanding as to how we got into this mess. For all you experts reading this blog, I do understand that there is much more to the current crisis. I will hopefully get to more of the factors in future posts. Check back late Sunday night. I should have a post describing the implications of the Fed bailout package and I hope to clear up the Main Street vs. Wall Street debate. As always, comments and questions are encouraged.
See you Sunday.
In order to understand the implications and importance of the Fed bailout, it is first necessary to have a basic understanding of the banking system in America. We bring money to the bank because it is a relatively safe and convenient way to store our cash. Banks need our money to finance their operations. They pay us extremely low interest rates on our deposits. They then take our deposits and lend them out to other people and businesses at higher interest rates. Banks make loans to individuals to purchase homes, cars, boats, etc. They also loan money to businesses so that the businesses can continue to operate and expand. Depending on the credit of the borrower and the type of loan, banks charge various interest rates on their loans. The riskier the loan, the higher the rate the banks charge. It's a very simple concept and a very lucrative business. Banks are essential to our economy because without their loans, individuals have no way to borrow money to finance large purchases or to grow their businesses. That is the situation we are currently experiencing. Liquidity in the credit markets has essentially dried up.
Tight credit => Less access to capital for businesses => Slower growth in the economy => Job losses for Americans
So how did we get to the point where many banks are going out of business and others are on the verge of bankruptcy? I wish I had started this blog about a year ago, because there are a lot of factors in play. Tonight I will focus on the main factor that has brought us to one of the most difficult times in the history of the financial market: the housing bubble. Hold on to your hat because this is where a seemingly simple topic of taking out a mortgage to buy a house has become extremely complex over the past several years.
Let's say Ted E. Taxpayer goes into a bank, we'll call it Greed E. Bank to take out a mortgage. Banks like mortgage lending because if Ted loses his job and can't pay the loan, the bank is still able to take control of the house and sell it. As long as the bank can sell the house at a decent price, they will not lose very much money. Ted is happy because he has a home. The bank is happy because they are paying, let's say 1%, on their deposits and Ted is paying them 6% for the next thirty years. They also collect fees on these transactions. But the bank would be happier if they had more deposits so they could lend out more money. Well it must be their lucky day because decades ago, the government created Fannie Mae and Freddie Mac. You might have read about them in the news recently. They were privately run companies until the U.S. Treasury was recently forced to bail them out.
So what do these two agencies do and how does it make the banks happier than a pig in shit? A common misconception is that Fannie and Freddie originate mortgages. They do not. Fannie and Freddie buy mortgages in the secondary market from banks like Greed E. Bank. The banks then have more money to lend out. Yippee! Fannie and Freddie will either hold the mortgages on their own books or take similar mortgages (i.e. similar interest payments, similar maturities) and package them together as mortgage backed securities (MBS). These are then sold off to banks, investment banks, private equity firms, pension funds, sovereign wealth funds and other investors. Fannie and Freddie put guarantees on these securities that all interest and principle will be paid to whoever owns the MBS. They are essentially insurance companies. They are able to guarantee this debt by only buying a specific type of mortgage that they deem as safe.
Just in case I've lost you, let's review what has happened so far since Ted went to the bank. Greed E. Bank originated a mortgage so Ted could buy a house. Freddie Mac (or Fannie Mae if that is your favorite one) then bought this mortgage from Greed E. so Greed E. could make more loans and more money. Freddie then grouped Ted's mortgage with similar mortgages, stamped their guarantee on the MBS and sold it to to other banks and investors. A seemingly simple agreement between Ted and Greed E. Bank now involves Freddie and whoever bought the MBS. So if Ted defaults, multiple parties will be affected.
In the late 90s, the governement pressured Fannie and Freddie to loosen their standards on the types of mortgages they could buy. They wanted lower and middle class people to have access to credit as well and to have the ability to become homeowners. Fannie and Freddie obliged and began to buy Alt-A and Subprime mortgages from the banks. Armed with the ability to sell subprime mortgages to Fannie and Freddie, mortgage companies and banks began to aggressively market mortgages to people with terrible credit. A lot of people who should not have been leant money in the first place were so thrilled at the thought of finally owning a home that it was easy for lenders to sell high interest mortgages. Many of these lenders are now facing civil and criminal charges for predatory lending practices. Someone please remind me to discuss this in more detail in a later post.
Greed E. and other banks and mortgage companies made a boatload of money on these mortgages. Fannie and Freddie did as well. Unfortunately, these companies and many individual real estate investors made a critical mistake. They improperly assumed that there could not be a nationwide collapse in residential real estate values. Since they were under the assumption that housing prices would always go up, they did not really worry about defaults on the mortgages. Individual home buyers were also caught in this trap. Even if Ted lost his job, he could still sell his house at the same price or a higher price than where he bought it. The ridiculousness of these assumptions has hit the front page of every newspaper over the past two years. Real estate values around the country have been dropping substantially. The housing market fell apart quicker than Brittany Spears' career.
So how exactly did the real estate bubble form? After the last recession, interest rates were at historically low levels, so millions of people bought homes or used their existing homes to finance the purchase of second and third homes. With mortgages available to practically everyone with a driver's license that could spell their name properly 3 out of 5 times, demand for homes far outpaced supply. Just like we all learned in Econ 101, this caused real estate values to sky-rocket. Then the adjustable rate mortgages began to reset at higher rates. Millions of people became stuck with mortgage payments that they could not afford. The number of foreclosures has skyrocketed. The banks would be able to handle these foreclosures if there were buyers in the market and if real estate values were stable or increasing. Neither is true. As the number of foreclosures increases, the holders of mortgages and mortgage backed securities end up suffering serious losses. A once steady cash flow has now disappeared. Some of the largest holders of these MBS are the banks that people rely on for loans to buy houses. The banks have taken serious losses on these investments, so they have less capital to use to make loans. We therefore find ourselves in the following situation:
-People are losing their homes because they cannot afford their mortgages.
-Banks and mortgage companies are losing money because they own many of these non-performing assets.
-Banks have tightened their lending standards significantly because they don't have the capital to lend out and because they don't want to get stuck with more non-performing assets on their books. They are also stuck owning houses that they either cannot sell or have to sell in auctions at ridiculously low prices.
I could write for hours more on this topic tonight, but sleep is needed. Looks like it will be a busy day again tomorrow as Congress is once again failing us by taking too long to act on important issues. I hope this post gives people a basic understanding as to how we got into this mess. For all you experts reading this blog, I do understand that there is much more to the current crisis. I will hopefully get to more of the factors in future posts. Check back late Sunday night. I should have a post describing the implications of the Fed bailout package and I hope to clear up the Main Street vs. Wall Street debate. As always, comments and questions are encouraged.
See you Sunday.
Welcome to the Notorious HIG
Good evening all. In the first blog of my lifetime, I would like to give everyone an idea as to why I am finally joining the blog fad. After graduating from college with degrees in mathematics, economics and spanish, I decided to join the American workforce in finance. The purpose of my blog is to help the average person comprehend what exactly is happening in the market and what the politicians are doing and/or not doing to help the average American. I am not rich nor in the position to inherit a lot of money from relatives. I worked hard to be where I am today and so did my family. I think it is important to make that point clear because I will be blogging about the economy and politics and many people have biased judgments due to their ability to inherit millions of dollars from their parents' hard work. The purpose of this blog is to help the average person understand the complexity of the capital markets. I will do my best to post accurate information and well thought out opinions, but I'm sure mistakes will be made. Please feel free to comment on anything that you feel is inaccurate.
Given what is happening in the market, I thought my first blog would describe the financial bailout by the Federal Reserve and Treasury that is currently being debated in Congress. It is 12:15 on a Wednesday night (morning if you want to get technical with me) and I have to work a full day tomorrow explaining the ramifications of a Fed bailout to hundreds of clients, so I don't really feel like getting into this matter. I will follow up with posts on this issue that will hopefully help the average taxpayer understand what Hank Paulson is proposing and how we got in this position. Tonight I would like to focus on another event (did I mention in the description of this blog that I will not only be discussing economics and finance? I will also be blogging about my opinions on politics and other matters that arise in my everyday life). Let's continue with my Wednesday:
Every Wednesday, I play in a kickball league. I just joined two weeks ago and it has been the best decision of my life since moving to Boston 2 short years ago. We get together every Wednesday and have some drinks and play the sport that we all adored as elementary school students. For me, it is a great release from the stress and complexities of the financial market. It allows me to let loose with my peers and take out my frustration on a red playground ball. Having a few beers and playing kickball has been a great escape for me during the last few weeks of market turmoil....until tonight.
Tonight, we played a team that was clearly more prepared than us. I made my typical rude and crude comments, but as always, I followed up with some indication that I am just joking and having a good time. We lost for the first time in 3 weeks tonight. We were outplayed and the opposing team deserved the win. Just like the Bad News Bears, we shake hands at the end of the game. One gentleman this evening refused to shake my hand. Granted I had a few drinks earlier in the night, but I was always in a jovial mood during the game. I had a great time with this individual's teammates, but he still refused to shake my hand.
To me, there are three ways for a guy to truly disrespect another guy. The first is to kick him in the balls. I do not know any man who would do this under any circumstances, so let's assume it never happens. The second way to disrespect your fellow dude is to steal his girlfriend/wife. Not cool. Enough said there. The third way to disrespect your fellow dude is to refuse to shake their hand after a sporting event. Even hockey players who fight until the other can't continue shake hands at the end of the game. Ultimate fighters that knock each other unconcious during a fight still hug at the end of the match. It is a sign of mutual respect and understanding.
We are playing fucking kickball. I don't mean to put the sport below Olympic Sports, but it is just a game made popular by 8 year olds that adults are finally seeing how fun it can be, with or without a 40 of Coors. I am usually very open, but not necessarily in agreement, with the opinions and beliefs of others. Either way, I still have the courtesy and respect to listen to another person's beliefs. I still do not know why this individual refused to shake my hand tonight. He is not a drinker, nor did he agree with my decision to pitch with a 40 in my hand tonight, but that does not really matter. At the end of the night, you put your differences aside and shake hands like gentleman. I do not feel like I did anything tonight to offend this young man or his teammates. In fact, I enjoyed a few beers with some of his teammates during the game and at the bar after our unfortunate loss.
In the future, I probably will not comment on these trivial issues. I would rather discuss what a CDS is and why our politicians do not understand the gravity of the situation in the financial markets today. But this trivial argument with an ignorant individual is important to me. It shows how broken our country truly is. This gentleman could not even stomach his own pride and simply give me a handshake signifying that we all played a good, fun game but the better team (his own team) won tonight. It is time for everyone to put their pride aside and make decisions that will benefit all Americans. Many who read this may think that it is a stretch to compare kickball to politics, but I respectfully disagree. Politicians are just as childish as this individual who refused to shake my hand in a game of kickball tonight. There is a reason that our Founding Fathers never mentioned political parties. They had the intelligence and insight to understand how difficult it is to run a government where only two opposing parties have a fighting chance to make it to Washington. That is not American. Let's put our differences/political views aside for once and do what is best for all of America. I hope my future posts will help clarify exactly what is going on Wall Street and in D.C. and how it affects the average person. For now, I am off to bed with the hope that our Congress can quickly pass the proposed legislation and save us all from the Great Depression #2 - more to follow tomorrow about the economy as stated previously. I also hope that I will finally be able to shake my opponent's hand next Wednesday at kickball. Let's put our differences aside, stop bashing each other and make quick and sensible decisions that will help the future generations in America.
More to come tomorrow....
Given what is happening in the market, I thought my first blog would describe the financial bailout by the Federal Reserve and Treasury that is currently being debated in Congress. It is 12:15 on a Wednesday night (morning if you want to get technical with me) and I have to work a full day tomorrow explaining the ramifications of a Fed bailout to hundreds of clients, so I don't really feel like getting into this matter. I will follow up with posts on this issue that will hopefully help the average taxpayer understand what Hank Paulson is proposing and how we got in this position. Tonight I would like to focus on another event (did I mention in the description of this blog that I will not only be discussing economics and finance? I will also be blogging about my opinions on politics and other matters that arise in my everyday life). Let's continue with my Wednesday:
Every Wednesday, I play in a kickball league. I just joined two weeks ago and it has been the best decision of my life since moving to Boston 2 short years ago. We get together every Wednesday and have some drinks and play the sport that we all adored as elementary school students. For me, it is a great release from the stress and complexities of the financial market. It allows me to let loose with my peers and take out my frustration on a red playground ball. Having a few beers and playing kickball has been a great escape for me during the last few weeks of market turmoil....until tonight.
Tonight, we played a team that was clearly more prepared than us. I made my typical rude and crude comments, but as always, I followed up with some indication that I am just joking and having a good time. We lost for the first time in 3 weeks tonight. We were outplayed and the opposing team deserved the win. Just like the Bad News Bears, we shake hands at the end of the game. One gentleman this evening refused to shake my hand. Granted I had a few drinks earlier in the night, but I was always in a jovial mood during the game. I had a great time with this individual's teammates, but he still refused to shake my hand.
To me, there are three ways for a guy to truly disrespect another guy. The first is to kick him in the balls. I do not know any man who would do this under any circumstances, so let's assume it never happens. The second way to disrespect your fellow dude is to steal his girlfriend/wife. Not cool. Enough said there. The third way to disrespect your fellow dude is to refuse to shake their hand after a sporting event. Even hockey players who fight until the other can't continue shake hands at the end of the game. Ultimate fighters that knock each other unconcious during a fight still hug at the end of the match. It is a sign of mutual respect and understanding.
We are playing fucking kickball. I don't mean to put the sport below Olympic Sports, but it is just a game made popular by 8 year olds that adults are finally seeing how fun it can be, with or without a 40 of Coors. I am usually very open, but not necessarily in agreement, with the opinions and beliefs of others. Either way, I still have the courtesy and respect to listen to another person's beliefs. I still do not know why this individual refused to shake my hand tonight. He is not a drinker, nor did he agree with my decision to pitch with a 40 in my hand tonight, but that does not really matter. At the end of the night, you put your differences aside and shake hands like gentleman. I do not feel like I did anything tonight to offend this young man or his teammates. In fact, I enjoyed a few beers with some of his teammates during the game and at the bar after our unfortunate loss.
In the future, I probably will not comment on these trivial issues. I would rather discuss what a CDS is and why our politicians do not understand the gravity of the situation in the financial markets today. But this trivial argument with an ignorant individual is important to me. It shows how broken our country truly is. This gentleman could not even stomach his own pride and simply give me a handshake signifying that we all played a good, fun game but the better team (his own team) won tonight. It is time for everyone to put their pride aside and make decisions that will benefit all Americans. Many who read this may think that it is a stretch to compare kickball to politics, but I respectfully disagree. Politicians are just as childish as this individual who refused to shake my hand in a game of kickball tonight. There is a reason that our Founding Fathers never mentioned political parties. They had the intelligence and insight to understand how difficult it is to run a government where only two opposing parties have a fighting chance to make it to Washington. That is not American. Let's put our differences/political views aside for once and do what is best for all of America. I hope my future posts will help clarify exactly what is going on Wall Street and in D.C. and how it affects the average person. For now, I am off to bed with the hope that our Congress can quickly pass the proposed legislation and save us all from the Great Depression #2 - more to follow tomorrow about the economy as stated previously. I also hope that I will finally be able to shake my opponent's hand next Wednesday at kickball. Let's put our differences aside, stop bashing each other and make quick and sensible decisions that will help the future generations in America.
More to come tomorrow....
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