The Mortgage FUBAR Deregulation Credit Crisis, with solutions!

What is going on, and why?

·         After the biggest expansion of easy money and credit in world history, we are experiencing the greatest contraction of credit.

·         That contraction is the result of big banks and hedge funds not knowing who is holding mountains of bad loans, and if they extend credit to some bank that is in trouble, that could destroy both firms. That means that none of them are willing to lend to each other.

But what is the root problem? Is the problem that Wall Street CEO’s, Investment Bankers and Billionaire Investors running into illiquidity issues? Or is the problem people aren’t paying their mortgages, and triggering all these other problems? The loop flows like this:

1.       Home values are falling across the California, Nevada, Arizona and western US markets, and the South Floriduh, and Coastal Georgia / Carolinas region. Owner occupied homeowner can’t sell, and investors can’t sell, and the bank holding the note is holding out with the hope that the owner will keep making payments until the market turns around.

2.       20 million Americans have homes that they owe more than the home is worth. Which is OK, so long as Joe and Jane Smith don’t need to sell, or lose their jobs, or get sick, or go bankrupt?

3.       But, 3 million Americans however are behind on their mortgages, and 1 million will lose their home in the next 60 days. What is worse is many aren’t even fighting anymore. They’re just sending the bank “jingle mail”, which means they mail in the keys, and a note saying “here are the keys, the house is yours.” This is unprecedented in world history. People don’t give up their homes. It never happened before, until the Ownership Society was instituted.

4.       Then the loan servicer loses fees, the note holder loses their payments, the insurers have to pay out on mortgage insurance, the originating banks are forced to buy the loan back, and all of this is a drag on the financial system.

5.       This glut of foreclosure homes then adds to the list of homes for sale, but is now both a non performing loan, and a property that the bank has to maintain, and the foreclosure costs money.

6.       Now, for the pResident and Secretary of Treasury Henry Paulson, and Fed Chairman Helicopter Ben here is the real problem, the Wall Street Investment bankers and hedge fund managers now have to mark down the Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDO) to an accounting standard called Mark to Market. Which means the hedge funds can’t count $100 million of loans as $100 mil, if at auction these assets are selling for less. Right now, the market is running from the worst class – mainly 2nd mortgages, and car loans and credit cards, which are all trading for less than 30 cents on the dollar.

7.       Which is bad enough, their assets are worth 70% less than they were, so now these banks and funds need to raise cash to offset these depreciating CDO’s and MBS’s. But the problem is they can’t get cash from anyone, because every other bank is afraid they’ll loan money to someone who will be shutting their doors next week. They also can’t sell the trash assets at any price, because no one wants them, and because they’re leveraged at 40 to 1, they can’t sell at a loss of 70%. If you borrow 40 dollars, against every dollar you got, to buy CDO’s, and they fall in value, you need to raise money just to sell, about $28, for every 40 they had to buy CDO’s, which are now unsellable.

To simplify this:

·         Home values are falling and folks can’t pay their mortgage.

·         Folks are getting foreclosed on.

·         Local Banks are losing money and getting closed by regulators.

·         Hedge Funds / Investment Banks are losing money, and going bankrupt.

The Paulson Bush Plan is to step in and save the Hedge Funds and Investment bankers. This plan has been tried before, by Pres. Hoover, in 1930. It didn’t work then, and it won’t work now. Why? Because the problem isn’t a liquidity crisis, the problem is folks can’t pay their mortgage, and can’t sell because of falling home values. Adding liquidity won’t make the problems with the economy disappear, it’ll only transfer the losses from billionaires to the US taxpayers. Besides, the CDO market is over $1000 trillion, and Bush is looking for $700 billion. So, after the first $700 billion is gone to Wall Street, how much more will they want? Well, probably about $1000 trillion, in chunks of 1-2 trillion every couple of months.

What can we do? How about helping the folks who can't pay?

1)      Change the accounting rules back to valuing the assets to the underlying value of the collateral or actual performance standards of the asset.

2)      Instead of the US taxpayer paying cash for Wall Street’s trash, if they really need liquidity/ cash, let us buy preferred stock, at present value prices, just like any White Knight investor would demand. This way, if it works, the taxpayers make some money back

3)      Reduce the limits on leverage for investors back to the 2000 limits of 4 to 1, instead of 40 to 1.

4)      Better regulation of all banks, investment banks, hedge funds, and investments. If they’re too big to fail, they is too big to exist.

5)      Raise the Earned Income Tax Credit, more food stamps, raise unemployment payments, and increase the numbers of people who qualify.

6)      Jobs, jobs, jobs. In America. How?

·         Tariffs on imports

·         Rebuild the USA’s infrastructure; that means roads, highways, railroads, ports, bridges, telecom lines, power transmission grid, etc.

·         Clean, renewable energy; solar, wind, ethanol, biodiesel, tidal. We convert our passenger fleet over to electric, or alternatives to oil over the next 5 years, and we keep our money in this country going to Iowan corn farmers, instead of going to fund Middle Eastern terrorists and Petro Banana Republics, and you will see a dramatic change in the USA’s financial future.

So you know, just as the Paulson Bush plan was tried by Pres. Hoover, these were tried before, by FDR, and these are the measures that saved our experiment in Democracy, America.