Tuesday, February 10, 2009

Here are the highlights as I understand them...

Summary: My concern with the rumors I was hearing was that Sec. Geithner's plan was too tied to saving the banks not the banking system. The plan as I see it today is basically a supersized version of TARP 1. It should help save the incompetent financial firms that helped to create the financial crisis of 2008 (for a time). I think we'll be in the same position in the summer of 09 looking to save the banks again thanks to collapsing credit card portfolios and commercial real estate values.

Here are the big picture highlights:

* Create a joint Treasury and Federal Reserve program (cost of $250 billion to $500 billion) to encourage investors to acquire soured mortgage-related assets from banks. This is the dreaded bad bank that we heard so much about.

Banks lent money against homes that were never worth 1/3rd of what was lent. Borrowers have been crushed as they lose their jobs and the value of their homes have returned to historical norms. Not all of these loans are worthless, but it's like taking out a giant loan to buy stock in Pets.com. If the stock of pets.com falls and you can't service your loan, should the bank write off the loan or get bailed out. The government's response is to bail you and the bank out. I am of the opinion that you and the bank made a bad business decision and should both suffer the consequences. My opinion is falling on deaf ears.

* Expand to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans.

Huh??? Unfreeze the credit markets? Again? These markets are unfrozen - this myth that the markets are frozen persists. PEOPLE ARE CHOOSING NOT TO BORROW BECAUSE THEY DON'T EXPECT TO HAVE A JOB NEXT WEEK. Lowering rates, or expanding guarantees won't change any of this. The problem is no longer the supply of money, it's the demand for money. US consumers are finally pulling back on their spending and policymakers have no recipe for solving this problem short of priming the spending pump again.....

* Review the capital levels of all banks, including projections of future losses.

This is important, but no one short of a few bloggers and a couple of professors were willing to be honest about the losses facing the US last year. Do you think these same bankers that have been remarkably clueless so far are going to be able to gauge credit card losses? Commercial real estate losses? Additional mortgage defaults? No way.

* Finally, a separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages.

It sounds good on the surface, but home ownership isn't a right. It's earned through prudent personal financial management. If you reached to buy a house that you couldn't afford. Sorry. It's hard read stories about the collapse of communities like those in Florida but there is a price to pay for incompetence. However, while this plan sounds impressive it might only help 150,000 to 200,000 homeowners. Considering 20 million (and growing) US homeowners are underwater (owe more than their house is worth), this is little more than window dressing.

By the way, I'm ready to claim my portion of a bailout. Here's my modest proposal - If you have a 50% or greater equity position in your home (ie, your mortgage - if you have one - is less than 1/2 of the current market value of your home), you get a tax holiday in 2009. No Federal or State taxes will be collected from you b/c you were not part of the problem.

This would never, ever, happen, but it would be fair to give the prudent a break, because we're going to need it when China calls up in July of 09 and says they're pulling back from the US Treasury Buffet because their stuffed with US dollars.

Sorry to be so harsh, but Sec. Geithner struck out on this one. He's doing a PR tour to support the story today, maybe some of the details will change my mind.

Cheers!

1 comment:

Anonymous said...

My plan is that if you bought stock in any company (including ETF's and Mutual Funds) in the past 3 years, the Gov should give you the money you lost. It's no different that letting an individual who bought an overpriced house have their mortgage written down.

Why is someone who was too stupid to pay the correct price for a home, any more worthy of Federal help than the person who was stupid enough to buy stock in Freddie or Fannie?

Idiots who should be living in apartments or their parents basements are now responsible for how much our income taxes will eventually be, so they can stay in their new condos on the beach. You've got to be kidding me !