Tuesday, September 30, 2008
The latest issue is said to be that mark to market accounting is the cause of this financial freeze up. The assets held by one company have to be marked to the current market price. All this means is that if you sold 10 apples at the market for 10$ because you had to get to a wedding and needed a quick sale, you set the price for everyone else also selling apples. They would have to show on their books that all the apples they had were $1 each regardless of the fact that maybe next month they apples you have stored away may be worth $2 or even $10 a piece. In a very liquid market assets that are marked to market will adjust quickly to the market price if there is a demandfor the product. The next day someone may "bid" for your apples at $5 a piece which might be a better fair market price. Problems arise if no one wants any apples at all. I you try to sell your apples and no one makes an offer to you then, in theory, your mark to market would essentially be zero. If this was just an off day at the market, but if your books were being audited the next day, the value of your all of your apples would be worth zero. You could have thousands of apples that are likely to be worth a substantial amount of money but with the accounting rules of mark to market you would be insolvent. Your shareholders would panic and your stock would likely drop off a cliff. This is what has happened at wall street because the market to sell mortgage backed securities disappeared and therefore it become impossible to put a price on the assets or mark them to market. Another wrench in the works is that these securities have nothing really to do with the actual real estate value of the collateralizing real estate itself, but they are collateralized by mortgages that have the actual real estate as its collateral. If it was one for one and each mortgage was still tied to its original piece of property the value of the underlying asset could be assessed by comparing it to houses sold in the market. Wall street begin selling and selling these mbs based on the potential cash flow from principal and interest over the course of the loan. They took a big cut of the pie for commissions and loaded quality mortgages with poor mortgages but still priced them all as if they would preform to full term. An investment was made in this paper and it could be sold or traded again and each time a commission or fee was charged. There has been billions of dollars made on mortgages from main street just for trading such instruments. Now many banks and mortgage companies are getting stung because once defaults started on these packages of loans not one was willing to pay full price. The market collapsed and this mess started. Now those with the money are waiting for Washington to ride in to the rescue and allow the bigger and better banks to swallow up the written down assets for pennies on the dollar. However, the people on main street are expected and have been expected to pay the full dollar amount of their current loan with out any term changes or reductions even though billions have been made from the mortgages and the new buyers are going to make billions more because they now have the right to collect 100 cents on the dollar for assets they purchased for a song. The home owner has just become a pawn in the game. This wall street/government allowed mess is going to make billions more for banks and wall street but it has already destroyed trillions in wealth that belonged to main street homeowners. The system was manipulated and not regulated property by the government and now the banks hold everyone hostage as they wait for everything to hit bottom dollar and then they move in usually with government assistance to quadrupole profits again. There is no excuse for what has happened to those who have worked hard and done the right things and held their financial worth in real estate. Now the big idea is to get the prices stabilized after people of in many cases lost their equity completely and the banks again have put the sleeper hold on the credit markets and they are cleaning up.
Monday, September 29, 2008
We have a failure of leadership in the congress. We elect officials to use their judgement to do what is right for the country during their stay on the hill. We are not in a democracy that allows all of us to vote on every issue. The current congressional leaders are clearly trying react to voters before they act for the good of the country. They lack the courage to stand up and say what they truly believe and risk not being re-elected. Those who voted no today on the bailout bill sited numerous phone calls saying to vote not because people don't want to bail out wall street. The election is close at hand so care is being taken to actually pay attention to voter feedback but the reality is that we elect "representatives" that are supposed to do what they think is right during their term. Our checks and balances come at election time and if those in congress act in any other way they are just being puppets. They are puppets for one side and then puppets for the other side to try and get as many votes as possible. The failure of leadership reinforces the assumption that these so called "leaders" have no integrity. Today man revealed their true character and their true purpose. The character is weak and the purpose is re election. Neither of those things have anything to do with serving the American people or doing what is right for our country.
There is chatter on the news channels that there are banks that have not participated in this crisis and that they are not affected by the credit meltdown. The reality is that there is no bank that is immune to this crisis. All banks hold mortgages of some kind and they make their profits on the interest from lending money. This is how the market works. You put money in the bank and they get to lend it out at a 10 to 1 ratio and charge 2, 3 or 4 times the rate of return that they offer to depositors. All banks will be holding more toxic assets daily if the credit market stays frozen. Home prices will decline further, foreclosures will increase and in turn all prices of real estate in the area of bank owned homes will be pulled down. You see the larger banks scrambling to scoop up banks with massive deposit bases in order to secure their own balance sheets. They don't want the mortgages from those banks because they can use the deposits to shore up the books and when the market stabilizes they will begin to lend out against all of those deposits with the 10 to 1 ratio previously mentioned. We will have a few very large banks that hold all the deposits as well as the cards. The banking industry could end up looking more like the utility business as consumers will be given one choice of where to shop. Think about your electric bill for a minute. Is there any competition in that market? Can you switch to a different power provider if you don't like their service? I don't know of any place where you are given choice for electricity and it soon could be the same regarding our banking if we don't get the credit markets functioning again.
Saturday, September 27, 2008
Neil Cavuto just reported Chuck Schummer had a bit of a hissy fit. I have to praise Cavuto for the perfect label for what just happened. It (Hisy fit) is a term usually reserved for the description of young bratty child not get their way. I think it fits because congress is showing us that they have the maturity of young children that are first and foremost concerned with their own needs ( in this case re-election). Our system has turned out to be a bunch of bratty, self serving men and women continually trying to hide behind the facade of public service. We have been taken, yes taken by the smooth sales job and the double speak of congress. They are getting paid to serve the public but each and everyone of them has a personal agenda to get re elected at any cost.
Thursday, September 25, 2008
You have to pass a test to sell securities, to be an appraiser, to sell real estate, to get a teaching degree, to be a doctor, a lawyer, a contractor, electrician or plumber. Why don't politicians have to pass a test that would evaluate their knowledge of economics, world politics, governmental processes and the constitution? Popularity has little to do with the qualification to govern. Before entering any race for congress or senate their should be an exam that must be past in order start a campaign. It would save millions if not billions of dollars spent on ridiculous hearings where congress asks the same stupid questions over and over again. This week's hearing could have been done by just having a video of Paulson and Bernake giving the same answers over and over again while all of congress had to sit there, watch and take notes. When voter turnout has dropped to 50% at times or below it is clear that main street America has lost faith in our elected officials maybe a test would help improve the quality of our public servants.
It is clear that very few people understanding the pricing of assets. This "bailout" bill gives us the perfect insight as to the level of understanding congress and the general public has regarding economics. It appears that the majority of congress and the majority of citizens are having trouble letting go of their resentment at wall street's wealthy and are allowing it to blind them to the fact that there is a high probability that the government/citizens may make money on this deal. The core of the matter is proper pricing and though you can say that these "bundles" of mortgage become less and less valuable as defaults occur there is always the hard asset (the real estate itself) that remains. The holder of these mortgages has the right to the property so in theory they can not go to zero. If the treasury negotiates a price of .50 on the dollar in order for this to be a complete waste of tax dollars, every house would have to end up being worth 1/2 the amount of the mortgage. I do not know the statistics but I would surmise that it is not highly probable that all the real estate to be acquired will be worth less than 50% of the mortgage amount. Second mortgages are erased when property is taken back by the lender and real estate would have to drop considerably more for these assets to be worth 40% of the mortgage value on main street. The congress is pandering to voters rather than educating them, which in my opinion is what is needed more frequently in our republican form of government. We elect officials to represent us. We don't vote on all issues if this was a true democracy by definition. Our officials need to educate themselves, make critical judgments, get things done while apprising constituents of the process rather than being so reactionary to citizen outcry. We have a system that allows for citizen outcry every 2, 4, 6 years by voting in better representatives. Our system will breakdown or bottleneck continuously if we have law makers reacting to who squawks the loudest. The other reality is that just because officials get angry calls about issues it is in no way a random sample of the population and may eve be completely opposite of the sentiment of the community in its entirety. We don't have a say in everything and our system is not set up to function as a true democracy but in today's age we have gotten bogged down by ridiculous pandering, especially during election years. Our current situation reveals just how uneducated our officials are regarding the financial system and it also reveals just how adept they are at pointing fingers at anyone else to try and cover up their lack of foresight or knowledge of current issues. In order to keep the system from falling apart producing a major recession or depression the government needs to act quickly. These proposal has potential to generate free market interest in these products one the government begins to put a bid under them and if they do purchase a number of these assets they probably will recoup all of the capital outlay. Congress needs to get it together and make sure they do the right thing and what is right for our country. An elected official in our system is sent to Washington to represent the best interest of the public and use their judgement in times of crisis not ask voters how high to jump when a critical issue arises. If you want different representation then you need to vote during the elections for more trusted and accountable officials.
Wednesday, September 24, 2008
Msnbc has completely lost any sense of balance in regards to its political reporting. They are completely in the tank. Chris Mathews is in love with Barack Obama and practically drools when he talks about him and he made some sickening reference that he felt a tingle running up his leg when he heard Obama speak. Hey having your opinion is fine but try to have some journalistic integrity. It is completely absurd and as if they didn't have enough left wing palavering they add the Maddow show. Hello. Hello. Didn't they get the memo that said Air America made no money and had no listeners? Thankfully David Gregory has a reputation as a journalist and is likely not willing to ruin his reputation by following the shameful precedent set by Mathews and Oberlman. Maybe the bosses at Msnbc are starting to see the light and don't want to be in the dark when it comes to ratings. If they want to have an op ed channel they have the right but please don't try and pretend it is remotely close to journalism.
Obama was definitely caught by surprise today when McCain said he was halting his campaign and heading back to Washington until the financial crisis was resolved. It was such a lame response from him and his staff that revealed their shock. They said that a president should be able to do to things at once. I have never heard a more ridiculous answer. He is still a senator remember. He needs to get himself back to Washington and do his job in time of crisis. He still is getting paid the 160,000 to be a senator and he says he is not going back when the country is facing it worst financial crisis in history. How presidential. I don't think so. It is clear that he care more about speeches and running for president than he cares about being a lawmaker or senator. He is revealing his true intentions and feelings. He never intended to be a senator and he never intended to do his job when it was crunch time if it meant it would take him away from his all important campaign. It will be a travesty if this man is elected president. He has been orchestrating every move for years in order to try and run for president. He gives speech that have little substance and he gets people enthused by spouting off about change but he is the farthest thing from change. He is a puppet and he has been grooming himself for a run for president nothing more nothing less. His legislative career has been thin at best and his give of oration has allowed him to fool nearly half of the American public so far. The left wing media, which I know is redundant, are enthralled with him blinded by his charm and rhetoric. Being president is not about being charming or being able to speak well. Those two things might help but the job is about leadership and strength and Obama show us all again today that he is lacking in both categories. He seems like a very nice man and I am sure he is rather charming but he is not the right man for the job. Someday he may be but that day is not today. McCain stood up today and too the bull by the horns and showed up where his priorities lie. He wanted to be back in Washington to help resolve this major problem. Obama wanted to campaign and debate. It was as if it was throwing a wrench in his plans to actually have to do his current job. He didn't think this one through very well and decided it would behoove him to get intopower struggle instead of just saying "hey good idea, lets get back to Washington and help out, and hit the campaign after the crisis is averted." It would have been simple and would have not left the impression of a another self absorbed politcian. McCain will score points for his courage to take action and for his offer for McCain to join him but Obama missed the opportunity to score a few points himself. McCain showed us all something today. All of us who actually want to see a true leader in the oval office. He made the call and put his country, his constituents, and all Americans ahead of a presidential campaign. Obama didn't want to be a part of the solution. McCain showed leadership and integrity. Obama did not. Who was more presidential?
Everyone can say what they want about wall street being bailed out or that we shouldn't pay for their mistakes but it is becoming more clear everyday that our economy is in trouble. There is no play book to use for this crisis and we are fortunate to have two very bright and dedicated people trying to help us through this unprecedented time but Congress seems set on proving a point and trying to make things an "us against them battle" and they are trying to cover up the fact that they blew it. Here is the latest example of the widening scope of the fianancial crisis: One of the largest Chevrolet dealers in the country, Bill Heard Chevrolet, closed the doors of all 13 of its dealerships. They have been one of the top selling, if not the top selling dealers in the country for several years. The problems started about a month ago when the could not obtain short term financing to fund their operations. As credit tightened, they were put in an impossible situation with no cash flow. Auto sales are down, lease vehicle returns were clogging inventory as people unloaded low mileage SUVs for better more efficient cars. There was no way for Heard to make a change quickly enough to unload inventory and promote smaller vehicles if they couldn't get short term credit. It is just one more sign that main street is already showing signs of breaking under this "wall street" problem. It is sad to see such a highly successful operation be shut down after years of service primarily due to the credit crunch.
Top Ten things that could help the economy 1. builders stop building 2. congress stop talking and posturing for votes 3. People everywhere- Our economy is not a cash based economy. It can't function without credit. You would not have had the ability to work and live as well if we lived solely on a cash basis. Get over it and except the fact that we can only thrive if business is growing, paying and hiring. 4. Bad credit has a different definition than credit. Raise your hand if you paid cash for you house, car and kitchen remodel. Ok let me see that is .........1 person, 2 maybe oh wait ok you were just swatting a fly right? 5. Let the Smart guys do their job. IE Ben Bernake and Hank Paulson. Stop wasting their time with your none sense and own up to the fact that you never saw this crisis coming and that you have little clue what is going on and you think the best way to get votes is to blame everyone else for your ineptitude. 6. Middle America-realize that now your life savings is in jeopardy, if we let this go on and more and more banks fail, economy tanks and we have a depression the FDIC will not be able to meet their obligations. If you have paid off your home and thought it would rely on it in times of need by selling, refinancing or using an emergency line of credit you will suffer the most. 7. Decoupling-remember last year when the rage was that the world would not be affected by the USA housing crisis and that we had decoupled from world markets? Well that wasn't exactly true just as the message is being bantered by congress that wall street doesn't effect main street isn't true either. Main street is in trouble. 8. Realize just how much is added to the economy for every one loan a bank gives out to the public. One particular housing sale may play a part in 20 or 30 people's paycheck at minimum. The normal level of transactions pumps unlimited sources of funds into the market place and we all benefit. 9. There are people who have ran small businesses based on real estate purchases and selling and or rental property. They have done nothing wrong. They have not speculated in order to make a quick buck, they have not bought property with no money down, nor have they tried to manipulate the system. They have done a great service to the economy by taking on the risks involved with rental property and provided quality affordable housing to people who choose or rent. They have paid thousands of dollars for repairs, maintenance, taxes, insurance, utilities and accounting. Many of them are now stuck in the middle of this mess. They are no longer able to raise capital to fund day to day and month to month operations. Even with substantial down payments some real estate will not cash flow enough to pay for a new heating and cooling unit or new roof especially if rental rates decline. This in turn can affect the housing market by allowing needed repairs to be delayed in turn keeping money from returning to economy from the purchase and installation of items. 10. blaming the administration solves nothing, and the truth is that this issue started back in Clinton years when the bills was signed allowing investment banks and commercial holding banks begin to trade assets and derivatives. Try to keep up with times and stop trying to fool the public into voting for you. Blaming someone for a problem this massive is insane. There is plenty of blame for everyone on both sides.
I was wondering whether any of these congress people watch these hearings before they get to have face time. Certainly sounds like I am hearing the same questions and comments over and over again. Call me crazy but they seem to have a great knack for wasting time as the economy struggles. The congress is so far removed from reality that they have no idea what the implications are when credit markets stop functioning. The interbank lending rate has risen again over night and banks are not lending money to each other, to businesses or to individuals. When banks hoard money they stop the economy from functioning.
Tuesday, September 23, 2008
It was reported yesterday that Bank of America, the buyer of Countrywide Mortgage and more recently one of the teetering investment banks, Merrill Lynch & Co, is not willing to loan to McDonald's franchisees seeking cash to upgrade their stores. This is amazing to me. I know that McDonald's has a pretty good track record for successful franchises, and franchisees likely generate great cash flow. McDonald's stock has been preforming greatly during these tough times as well so if anyone needed any further confirmation that credit was becoming a larger problem, now you have it. The banks have closed up shop to wait for brighter days ahead and this is a perfect example of how crazy it has become in the credit markets. Congress should take note.
Monday, September 22, 2008
I just saw the Barney Frank, Nancy Pelosi news conference and was not surprised to hear they are already trying to cover their back sides if whatever they sign into law does not help the economy. It is as if they have no identity. The very people we count on to take responsibility and to look out for us, the American public, are afraid to commit to anything that may just have a chance to help a lot of people survive the credit crunch. I think that I have heard it all and then they come out and say something this childish. The truth of the matter is that we have a congress full of lawyers, many who have never practiced law, lifetime politicians, a few military personal, and no economists. The committees that do deal with finance are not headed by economists or financial brain children. They are usually guided by those with most seniority that lust for the most power. Anything to do with financing in our government is power and the lobbyist spare no expense to influence those with power. I am sure there is no place on earth, except possibly in the palace of the Queen of England, where more shallow deferential platitudes are bantered about as much as Hawaiians say aloha. Our politicians have become power and attention seekers with little expertise in economics or global markets. They want all the accolades of a superstar without having to take any responsibility for their actions. It has become almost comical.
Last Friday when the fed announced their "bailout" plan it may have been a sign that we may begin to have some improvement with the market. However, the options traded for October might have told a better short term story. The options for September were expiring and trading had increased as expected but as prices of some stocks jumped up 5 and even 10 % the November in the money and close to the money options did virtually nothing. The Mosiac company had a nearly 10$ gain for the day but the November 100 and 105 calls barely moved. It appeared to be a clear sign that investors were very leery of the fed plan and still not yet ready to bet on an improving stock market for the short term. I would guess that is was just a lot of short covering and profit taking after the ban on short selling was being instated. It was time to get out, cover the shorts and wait for the market to settle before jumping back into the November and December options. I had never seen action quite like this where the next months calls moved so little while the stock price was ramped higher Monday finished the tale as the market sold off big making most investors a little woozy from the roller coaster ride. I was hoping after stomaching last weeks wicked fluctuations that a few day reprieve would give everyone a chance to take a breath but that obviously didn't happen.
One of the reasons for our current meltdown in the financial system is something called mark to market pricing. In theory it was to protect investors from crafty book keeping that would hide low value or depreciating assets from the public. When real estate became large parts of investment firm assets and had to be valued with the mark to market model it just didn't work. In a liquid market with full transparency mark to market may make sense but real estate is not liquid and it is not a monolith. There are many different ways real estate produces a return on invested cash that mark to market fails to address. If one firm folds and they have had to mark down real estate assets because they have been bundled into traded securities of which the good and bad are indistinguishable, the value of all real estate backed securities had to be priced accordingly. It is one big casserole surprise that looks very burnt on the surface and no one wants it because they don't know what is inside. Anyone holding these mortgage backed securities appears to be ready for a fall, true or not, and it becomes more and more difficult to obtain funds, investors withdraw funds and downward spiral may lead to the end.
Wednesday, September 17, 2008
The credit crisis that has overtaken the country is no longer just about sub prime mortgages. It has gone from a few defaulted loans to the beginning of a world wide financial crisis that is affecting nearly everyone. The year of lies and accounting magic allowed for the destruction of billions of dollars of capital. The market bottom may be near but then again we might be witnesses the uncovering of a very nasty can of worms that has been held in secrecy the past few years. It is hitting main street now and if the credit markets stay frozen there is a chance that real estate could become the new unwanted asset. I question whether the market can even have normal inflation related appreciation if there is no way to purchase a home without 20 or 30 percent down payment and taking out the 2003 prices may be next. There is just no way to produce price appreciation without the leverage of lower down payments.
Tuesday, September 16, 2008
I know that it is easy for most people to assume that when a CEO of a major corporation announces with conviction that everything is ok with the company or that they are going to resolve their issues in the next quarter etc are just blowing smoke but a case can be made that they may actually believe their statment. It could be called over confidence, delustional or just a strong degree of self efficacy that ususally has lead these head honchos to there position at the top in the first place. Most highly successful people have overcome great obstacles and challenges to get ahead. The personality traits of these people is often very similar in nature and once of the most common is extreme self confidence coupled with determination. The confidence can lead to hubris over time but it also can turn into a deep seeded belief that they can overcome any challenge is none too large for them to tackle. I know that people are often to quick to judge a person as arrogant or egotistical when they fail big after facing what appeared to be insurmountable odds. They may have held out until the last possible moment before they had to submit and they often will leave with the belief that if they had more time they would figure out how to turn things around. Of course this still could be seen as hubris. I am throwing out possibility that the origin of this "self-confidence" can be from blatant disregard for shareholders or it can come from the belief that the CEO can get the job done and that their is no way the can fail. Either way it can lead to some major credibility issues but for everyone one major corporate meltdown their is likely 100 battles won with this determination and confidence. They were just not front page news. This is just a different spin, something to think about while flogging your favorite CEO.
Monday, September 15, 2008
Today was a hard hitting day on Wallstreet and the market sank below the July 15, 2008 support level. It had taken two months but the so called expert bottom callers who couldn't stop yakking on on July 15 were fairly quiet today. It is a perfect example of how analysts often become so self absorbed and arrogant that they don't even care if they are wrong. They loudest of the talkers usually are following a long list of wrong calls followed by justification or manipulation to obscure their mistakes. CNBC is notorious for pumping "experts" and allowing them to continue to have forum even after they lead viewers astray and mislead the public regarding the track record of anyone who can get in front of a microphone and camera.
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