Deceptive Advertising

"Auction Today"? Not Exactly

I spent a good chunk of today's broker tour going through a 90 unit condo project in St. Louis Park. (If you didn't know, Realtors spend a part of each Tuesday looking at all the new properties on the market, in a ritual called "Broker Tour.")

The condo complex caught my eye because a unit in the building looked like a good fit for one of my clients.

However, once I got to the building, all I saw were very big, very conspicuous signs announcing "Auction Today." It seemed odd: the building was empty, there were no cars in the parking lot, and yet there was supposed to be an auction?

It turns out, the company's Web site is:

wwww.AuctionToday.com

Be honest -- did you notice the "www" and the ".com"? And yes, all that signage did get me to look at the condo's that are going be auctioned (bidding's an entirely different matter -- but that's the subject of another post).

It reminds me of a Mad magazine cartoon, vintage 1968, where a would-be playboy goes around trying to entice women with the line, "I named my new yacht after you." Sure enough, the last frame of the cartoon cuts away to the name plate on the boat: "After You."

Saying "No"

Who are Obama's Air Traffic Controllers?

One of the things I remember about the beginning of the Reagan administration -- yes, I'm old enough to remember very well -- was the abrupt change in tone from the Carter administration.

Suddenly, the country's leadership seemed capable of saying "no."

One of the first important constituencies to find that out were the air traffic controllers. When they went out on strike in 1981, Reagan summarily fired them. The move was unpopular, but it very likely was the turning point in the fight against wage inflation, which was then spiraling out of control. (Of course, Reagan's first "no" was to negotiating with Iran over the release of U.S. hostages.)

The other turning point was Fed Reserve Chairman Paul Volcker's decision to raise interest rates to over 14% (this was the monetary policy equivalent of "No"). Volcker made the move in the face of almost incredible political pressure, and the immediate result was the worst recession -- at least until now -- since The Great Depression.

However, within a year, inflation was vanquished, and the stage was set for two decades of unmatched prosperity (and yes, every expansion sows the seeds of its own demise).

The contrast between President Reagan then and President Obama now is striking.

So far, at least, no one seems to have been told "no." Not Detroit, not AIG creditors, and certainly not Wall Street (assuming there's a difference between it and AIG creditors).

As Reagan demonstrated, it's a lot easier to say "yes" once you've credibly said "no," then to get tough once you're pegged as being weak. The best example of the latter problem would be . . . the Carter administration.

P.S.: of course, Reagan's other big "no" was to detente with the former Soviet Union.

(Im)plausible Deniability

Wall Street Who-Dunnit: No One??

Victory has a thousand fathers, but defeat is an orphan.

--John F. Kennedy

Hurricane Katrina was an act of nature. The economy's Wall Street-triggered financial collapse is not. If and when anyone is actually held accountable for that, you can expect to hear variants (combinations?) of the following defenses.

(Im)plausible Deniability, or, "The Enron Defense"

Ken Lay, Enron Chairman, famously argued that he was out of the loop at the company he ran.

If you don't recall, Enron was a financially engineered house of cards -- complete with opaque, off-balance sheet entities -- that spectacularly imploded (sound familiar?). The resulting mess cost investors, creditors, and company employees about $100 billion -- a number that seems positively quaint by today's standards.

At trial, Lay argued that he was above it all, and didn't really understand all the complex transactions that led to the company's undoing.

Unfortunately, that stance was contradicted by multiple pieces of evidence, including the testimony of Lay's own lieutenants, incriminating email's, and Lay's conveniently-timed sale of millions in company stock (even as he was exhorting employees to buy).

Because Lay's claims of ignorance were so roundly refuted, the jury never really got to the far more legally relevant question: whether Lay should have known what was going on at his own company. After all, under corporate law, that's the board chairman's duty. And Lay certainly was paid -- munificently -- to know what was going on.

Knew . . . or Should Have

Fast forward to today.

In an instantly infamous letter run in last week's New York Times, Jake DeSantis, a senior executive at AIG Financial Products ("AIGFP"), argued -- amongst other things -- that he had nothing to do with the toxic credit instruments at the heart of the company's (and financial system's) melt-down.

If Lay's argument was that he was too high in the pecking order to have been in the loop, DeSantis' argument is that he was too low. DeSantis wanted the world to know that he refused to be a scapegoat and a fall guy. Plus, he had other (unspecified) job opportunities -- or did.

So, in a tone reminiscent of Richard Nixon's 1962 valedictory ("you won't have Nixon to kick around anymore"), DeSantis announced that he was resigning -- and donating his $750k after-tax bonus to charity.

Here is Matt Taibbi's take on DeSantis' claim of ignorance (or at least the printable part):

AIGFP only had 377 employees. Those 400-odd folks received almost $3.5 billion in compensation in the last seven years, a very large part of that money coming from the sale of credit default protection. Doing the math, that averages out to over $9 million of compensation per person. Ask yourself this question: If your company made that much money, and the boss of the unit made almost $280 million in just a few years, exactly how likely is it that you wouldn't know where that money was coming from?

Are we supposed to believe that Jake DeSantis knew nothing about Joe Cassano's CDS deals? If your boss and the top guys in your firm were all making a killing selling anything at all -- whether it was rubber kayaks, generic Levitra or credit default swaps -- you really wouldn't bother to find out what that thing they were selling was? You'd really just mind your own business, sit at your cubicle and put your faith in the guys up top to fill you in if there was something you needed to know?

--Matt Taibbi, The Smoking Chimp

Taibbi goes on to make the point that if, however inexplicably, DeSantis is actually clueless about credit default swaps . . . what expertise does he have that would justify taxpayers paying him millions to unwind them?

"I was just following orders" (or, The Eichmann Defense). If Wall Street firms were all headed by Ken Lay's, their subordinates are likely to claim that they were all Adolph Eichmann's.
Sometimes referred to as "the architect of the Holocaust" (and the subject of Hannah Arendt's chilling "The Banality of Evil"), Eichmann argued in his defense that he was merely a subordinate following Hitler's orders.

So, too, one might expect that all but the senior-most Wall Street executives will argue that they were merely implementing directives from higher-up's. To prevail, however, they will likely have to disavow thousands of incriminating email's, eyewitnesses' testimony, and their own extravagant compensation -- often in the hundreds of millions. Unlike Eichmann, who plausibly might have feared for his safety had he opted out, Wall Street's various accomplices -- er, underlings -- faced no such coercion.

Postscript: Eichmann's arguments were rejected, and he was hung.

"Everyone Did It." When you can't deny that you did something, or blame it on others, or otherwise excuse the conduct in question, then what? The predicament reminds me of one of my favorite lawyer jokes:

When a neighbor charges that the lawyer's dog bit him, the lawyer first denies it. When he's shown photos of the bite and the emergency room bill for the neighbor's stitches, the lawyer then argues that the dog attacked in self-defense. When numerous witnesses come forward to testify that the attack was unprovoked, the lawyer says . . . it's not his dog.

Unfortunately, millions in foreclosed homes, trillions in evaporated wealth, 10% unemployment, etc., are not a laughing matter.

A functioning legal system will manage to parse the foregoing defenses, lay blame, and hold somebody accountable. Recovery depends on it.

Recommended Reading

"Houston, We Have a (Political) Problem"

One of the very best pieces I've read -- out of perhaps thousands now -- analyzing the ongoing financial melt-down is "The Quiet Coup," by Simon Johnson. The article appears in the May issue of The Atlantic magazine.

Johnson, a former chief economist of The International Monetary Fund, has a "good news, (very) bad news" take on things.

The good (and surprising) news is that the financial crisis facing the U.S. isn't unique, and that similar crises have been successfully navigated by many other countries previously. In fact, precisely because of other countries' experience, there is a clear consensus about what to do (you can read the article for the details, but I'll give you a hint: it's nothing like the plan cooked up by Treasury Secretary Tim Geithner).

Un-do the Coup

The bad news is, whether or not a stricken country takes the necessary economic medicine is ultimately a political issue. In other words, does the country have the will to do what's necessary?

On that score, Johnson is decidedly pessimistic, because he's dubious that Wall Street will prescribe or take medicine that "gores its ox" -- and it is Wall Street that controls the decision-making apparatus.

The very bad news? He speculates that things may actually have to get much worse before interests hostile to Wall Street wrest back control ("un-do the coup??").

Here's hoping he's wrong . . .

Fern Hill Ascendant

The Market Bottoms . . in Fern Hill

The first hint of a bottom came around Thanksgiving, when this non-descript rambler in St. Louis Park's Fern Hill neighborhood came on the market for $189,900.

What happened next could only be described as a feeding frenzy: 17 offers in less than 72 hours, with the winning bid, $226,000, almost 20% over the asking price.

What were they fighting over? Most likely not the house -- a solid but rough, 1,800 FSF rambler -- but the .33 acre lot, itself assessed at $235,000 and located just six blocks west of Minneapolis' Cedar Lake.

Market Dynamics

What happened next was fairly predictable: the 16 losing bidders vowed to offer more aggressively next time.

So when a nearby home, 2641 Kipling, hit the market in February, the result was an even bigger frenzy ("Multiple Offers and $40k Over Asking Price"). The hold ultimately sold for more than 24% over asking price.

Two questions: 1) do you think the next Fern Hill foreclosure (assuming there is one) is going to attract more or less interest?; and 2) if the bottom of the neighborhood is being pushed up, does that spill over to more expensive, surrounding homes?

Answers: "more," and "yes."

The New General Motors

What's Good for Goldman Sachs

To love Geithner’s plan, you have to embrace his philosophy that what’s good for Wall Street is good for America.

--Margaret Carlson, "Geithner Deals Wall Street a Can’t-Lose Hand"; Bloomberg (3/26/09)

What's good for the country is good for General Motors, and what' s good for General Motors is good for the country.

--Charles Wilson, General Motors CEO (1952)

So today's General Motors is Goldman Sachs?

Unfortunately, the updated equation is wrong on two counts: 1) what's good for Goldman Sachs seems to be very bad for the rest of the country; and 2) what's good for the country . . . seems to be irrelevant to Goldman Sachs.

"Is it Spring Yet?"

Calling the Bottom -- One Market at a Time

Asking whether "the housing market has bottomed yet?" strikes me a little like asking, "is it Spring yet?"

The answer depends on where you are.

So, it's certainly Spring in the middle of the U.S. Meanwhile, at least this week in the Twin Cities, it certainly doesn't feel like Spring is at hand (all that daylight sure helps, though). And in the southern hemisphere, it is Fall that's approaching, not Spring.

Fall in Manhattan

The real estate equivalent of the southern hemisphere is Manhattan. After remaining blissfully immune from national trends since . . forever, New York City hit the wall during the first quarter of 2009; preliminary reports are that sales are down 60% for that period ("Not Just a Bad Dream; The New York Times, 3/27/09).

Locally, things are decidedly mixed.

The neighborhoods with the highest concentrations of foreclosures still appear to be sliding (although sale volume is picking up).

At the other extreme, moderately priced, closer-in neighborhoods definitely seem to be stabilizing, if not strengthening.

Like Spring in the U.S., the housing bottom is likely to arrive in the Twin Cities in a spreading wave.

"Alimony," Not Bailout

Can We Afford Wall Street?

I've got a way to make palatable the $3 trillion (or is it $4 trillion? Or $6 trillion?) injected into Wall Street (so far).

Don't think of it as a bailout, think of it as alimony. Yes, alimony.

As in, what you pay to divorce someone -- or in Wall Street's case, something -- that has become an increasingly expensive and bad match. Indeed, someone who is a parasitic drag on your daily existence and threatens your very well-being (no, I've never been through a messy divorce).

Lost in the uproar over AIG bonuses, second and third (and fourth and fifth) helpings of bailout money, etc., is the fact that modern Wall Street fails the most basic test for economic utility: cost-benefit.

Direct Costs

It's possible that, like a bad dream, "the current unpleasantness" will pass, and the Federal Reserve and Treasury will somehow be made whole on trillions in guaranties, "term facilities," equity "investments," open-ended loans -- and God knows what else taxpayers have spent on Wall Street's salvation. But I wouldn't hold my breath.

Assuming, conservatively, that Wall Street simply doesn't lose any more taxpayer money, the tab already easily exceeds $3 trillion.

Not only is that a staggering sum, it exceeds all the profits Wall Street has ever made, combined.

Warren Buffett famously observed that the airline industry, in almost a century of operation, has cumulatively operated at a net loss. The same is now true of Wall Street.

Indirect Costs

Sadly, all the money spent so far is just for clean up; it omits the long-term costs likely to result from the financial Chernobyl that modern-day Wall Street has become.

Such indirect costs are likely to include: ramped-up regulatory oversight (if you thought Sarbanes-Oxley was expensive and intrusive, just wait); billions in unemployment benefits to recession casualties; increased government transfer payments to destitute citizens whose savings and investments have suddenly been decimated, etc.

However, that's nothing compared to perhaps the biggest -- albeit incalculable -- cost of all: grievous damage to the trust and confidence that are the foundation of a capitalist economy (and fiat currency).

Benefits

On the plus side of the scale is . . . what, exactly?

Wall Street's investment bankers supposedly allocate capital -- wisely and efficiently -- to the most deserving.

Yet their recent track record in that department is abysmal: witness the billions directed to all the neophyte "dot.com's" that promptly crashed and burned, taking investors and the '90's bull market with them (notably spared: all the VIP's -- typically the banks' largest customers, and coveted future customers -- who routinely received allocations of shares at wholesale prices that they quickly flipped).

Commercial banks have hardly performed any better.

Until Glass-Steagall was dismantled a decade ago, they took in deposits, and then used that money to make profitable, socially productive loans to business and consumers.

At least that was the theory.

In practice, while many banks behaved conservatively, the biggest ones OD'd on toxic securities and are now either illiquid, insolvent -- or both. The cost to the FDIC (and ultimately, taxpayers): more hundreds of billions.

Alternatives

In today's high tech, Internet-based world, it's not at all clear what Wall Street's "value-added" is.

Google famously went public with very little help from Wall Street, using the Internet and something called a "Dutch Auction."

Was its IPO well-priced? Perhaps not: the stock quickly trebled, suggesting that it was underpriced.

However, that's one of Wall Street's dirty little secrets: it hardly matters how underwriters price an IPO, because they only set the initial price, and then only for a small percentage of a company's outstanding stock: once the stock begins trading, the market takes over.

But surely Wall Street's role in mergers and acquisitions is indispensable, right?

Actually, no. Warren Buffett, arguably one of the most successful M & A practitioners around, famously eschews Wall Street advice and deals directly with the target company's management.

So how about Wall Street's role helping to seed start-up companies?

Actually, it doesn't do that. Venture capitalists do. Coincidentally or not, their Silicon Valley headquarters is about as far away from Wall Street as you can get (in truth, the location is due to Stanford University, and the hub of entrepreneurs located nearby).

Finally, we've just had a decade-long experiment in letting fee-hungry banks (and Wall Street-created non-banks) decide who gets mortgages. The results haven't been pretty, to say the least. Of course, now that it's raining, as the saying goes, lenders predictably want their umbrellas back.

So what's a better way to decide who should qualify for a mortgage?

The Fair-Isaac Corporation, a for-profit entity, calculates a "FICO" score that already forms the foundation for most underwriting decisions. Take good FICO scores, add a relatively high down payment -- ideally 20% -- and, Voila!, you've got the makings of a credit-worthy borrower. An independent appraisal adds further protection.

Lump-Sum Payment

There's a name for something that doesn't create value, is levied involuntarily, and ultimately serves only to redistribute wealth: it's a called a "tax."

Aside from being manifestly unfair, the "Wall Street Tax" also saddles the U.S. economy with a cost that impairs its ability to compete in a "flat," hyper-competitive world marketplace.

A financial crash is a very high price to pay to learn we have a "legacy" financial system that is devouring our resources, and threatens our very way of life.

However, if the trillions we are now giving Wall Street hasten the arrival of a better, fairer, and more efficient system, the price will arguably be justified.

All that's left is to make sure that Wall Street knows it's received a lump sum payment. (Don't like "alimony"? Call it a severance payment.)

Appraiser 'Batting Averages?'

Adding Back Checks & Balances

If you haven't been paying attention, there seems to be widespread consensus that much of the "recent unpleasantness" (what some people in the South called the Civil War) has to do with too few checks and balances in the financial system.

So, one of the reasons that securitized mortgages became such a mess is that everyone involved had an incentive to simply collect their fee, and keep the "product" moving along the assembly line.

Clearly, that "assembly line" -- now very much idle -- is going to be overhauled at best, dismantled at worst (or is it the other way around?).

No matter what happens, though, we are still going to have mortgages, banks, appraisers, etc. (and hopefully, Realtors!).

In that vein, one of the ideas I've heard lately is to rate -- or at least track -- appraisers by the default rate associated with homes they evaluate.

Appraiser "Batting Average"

Ultimately, the appraiser's job is to give the bank that dispatched them a "pass/fail" verdict on the subject home: if the bank proceeds to make a loan (mortgage) on the home in question, will it get paid back? And if not, is the collateral (the home) worth enough that the bank can sell it and recoup its capital?

Obviously, there's more that goes into that determination than the home's market value at the time of purchase. For example, if the Buyer subsequently suffers a major illness or loses their job, they may default on the mortgage even though the appraiser nailed the price.

However, that's what averages are for.

Just like a major league baseball player needs to hit over .250 or so (a Hall of Famer hits over .300 lifetime), you'd expect a good appraiser to have a "success rate" over .95 (ideally, .97 or .98).

P.S.: speaking of accountability, I loved this sentiment from Caroline Baum's most recent column for Bloomberg: 'members of Congress should be compelled to wear uniforms like Nascar drivers, so we could identify their corporate sponsors.'

So, Chris Dodd, head of the Senate Banking Committee, would sport a pink Lacoste shirt with “endorsements” from Citigroup, Bear Stearn, AIG, etc. emblazoned across his chest in large, black letters (the corporate logos go on the back).

Tear-down Prototypes

Attributes of Tear-Down Neighborhoods

I've posted previously about the somewhat counter-intuitive attributes of tear-down houses ("Tear-Down Economics," "Contender . . . or Pretender?"), so I'm not going to revisit the analysis here.

However, tear-down neighborhoods -- areas with lots of tear-down activity -- also have their own attributes.

Here's what they seem to have in common.

Location. Duh, right?

Actually, there are two kinds of locations that are popular.

The first is what you'd expect: the premier, A+ lots in the premier locations -- on Lake of the Isles in Minneapolis with skyline views, beachfront property on Lake Minnetonka, etc.

However, many if not most of those locations already have existing, trophy homes sitting on them. You don't dismantle a Lamborghini to build a Ferrari (at least, not usually).

So, in practice, much of the tear-down activity actually occurs in adjacent areas where the location is only slightly less desirable -- call it "A" instead of "A+" -- but where the existing housing stock is much more modest (and therefore cheaper).

As a result, the potential upside is much greater. This is the second type of tear-down neighborhood.

Ultimately, it is the size of this gap -- between existing and new construction -- that determines whether a neighborhood has tear-down potential (the bigger the gap, the more tear-down potential).

Examples include the areas just west of Cedar Lake and south of Lake Calhoun in Minneapolis, and South Harriet Park in east Edina.

A Curb Appeal "10"

"You Know it When You See It"

"Curb appeal" is one of those real estate terms that you really can't define, but "you know it when you see it," as they say. (That unscientific formulation also happens to be the Supreme Court's definition of pornography -- really!).

At any rate . . . this brick, center hall Colonial -- located just south of Minneapolis' Lake Calhoun -- has curb appeal in spades. Note that the photo was taken at dusk, with the interior lights on, to create an especially dramatic impression.

The price was just reduced to $1.396M; Lakes Sotheby has the listing.

Thumbs Down?

Pundits Weigh in on Geithner Plan

Thanks to the FDIC’s loan guarantee, there is a big upside if the assets do well. That upside is there to lure the rich guys in. That is why the big funds were happy; that is why the stock market went up. For the high rollers, this casino could be very attractive.

. . . If the subprime securities are truly trash, most of the big banks are troubled and some are insolvent. The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones. It should not encumber the banking system we need with failed institutions. And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.

--James K. Galbraith, "The Geithner Plan Won't Work"; The Daily Beast (3/25/09)

The ink is barely dry on the latest bank bailout plan, but judging from the online commentary, the verdict is already in: thumbs down (unfortunately).

At best, the bailout -- with non-recourse loans from the FDIC as the linchpin -- is viewed as a proactive, interim step that may improve psychology. In turn, improved psychology will hopefully spur increased economic activity.

At worst -- and Galbraith's comments are representative -- Geithner's plan is seen as dangling even bigger carrots in front of dubious actors to get them to clean up a mess they made. In other words, more "heads they win, tails we (taxpayers) lose" consequences.

China: Keep Your Dollars

Is the U.S. Dollar a "Legacy Currency"?

"China Urges New Money Reserve to Replace the Dollar"
--The New York Times (3/24/09)

Legacy: of, relating to, or being a previous or outdated computer system.

Here's a tip: when someone refers to something as a "legacy [blank]," it's not a compliment (or a good omen).

So it's unnerving -- at least to me -- to see Treasury Secretary Tim Geithner refer to the toxic assets at the heart of the most recent bailout plan as "legacy loans" and "legacy securities."

Oh . . and the Chinese, holders of more than $1 trillion in U.S. currency, are increasingly nervous (as well they should be).

Just two weeks after the Russians broached the idea of launching a new, international reserve currency, the Chinese are joining the chorus.

It won't happen overnight; think of switching from U.S. dollars as analogous to supplanting English as the world's predominant language. (A brand, new synthetic currency would then be the equivalent of Esperanto).

But it's a potent signal when this country's biggest creditor essentially utters a "no confidence" vote in our currency.

That's especially so when you consider that China holds so many dollars, it can't really sell them without destabilizing the market, leaving its holdings worth even less.

George Soros on CDS

Everything Clear Now?

Going short on bonds by buying a Credit Default Swap ("CDS") contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in.

--George Soros, "One Way to Stop Bear Raids"; The Wall Street
Journal (3/24/09)

Huh??

There's plenty of commentary out there already on the Treasury's new initiative to buy the big banks' toxic assets. So, I'm not going to add mine.

However, clearly the stock market (or at least Wall Street) loved it: it exploded to the upside yesterday, with the Dow Jones rallying 500 points, or about 7%.

Whatever the merits of Treasury's plan, one thing it is not is clear. Or simple.

Of course, neither are the problems it is attempting to address (Exhibit A is Soros' op-ed piece -- and hundreds more like it. If you're befuddled, Soros, a multi-billionaire and investing legend, is basically saying that flaws in the marketplace permited a "piling-on" phenomenon that led to the fall of financial giants like Lehman Brothers, Bear Stearns, and AIG).

And still . . . it seems like brain-numbing complexity isn't just symptomatic of the problem in the financial markets, it is the problem. Which means the cure is simplicity.

Put it this way: after witnessing the financial system crash so spectacularly, you'd think the first order of business would be to impose lower speed limits.

Real Estate Happy Ending

Extreme Makeover - Minneapolis Edition

In its hey day, this 1930 Tudor near Minneapolis' Cedar Lake was a masterpiece: custom tile everywhere, lath-and-plaster construction, hand-carved crown moldings, high-end masonry, walnut and cherry wood throughout. Not to mention a grand staircase, and a surprisingly modern floor plan.

However, the owners hadn't been able to keep up the property. In fact, years of neglect had left it with major damage and a long list of deferred repairs.

Given its location and large, .33 acre lot, it could easily have been torn down and replaced with an over-sized, out-of-character McMansion. But the owners, who'd grown up in the house, had a strong emotional investment in it, and wanted to see it bought by an owner-occupant who would rehab it.

After two weeks on the market, it sold for $405,000 last August.

The new owner, a contractor and his wife, began work the next day, and have had workers on the property 12 hours a day, seven days a week ever since.

The couple (and their new baby) are just now making the finishing touches on an amazingly restored and updated home that features, where the garage used to be, a brand new sunken Living Room with over-sized windows and French doors; an opened-up, modern new Kitchen; $50,000 of new, energy-efficient windows; gloriously restored hardwood floors, and many, many other high-end improvements. As they say, "the best of old and new."

The former owners are thrilled; the new owners are thrilled; and the neighbors are thrilled (especially the one two doors down, who was also the Realtor who handled the sale: me!).

AIG Explained

Hollywood Couldn't Come Up With This Stuff

"The AIG bailout, in effect, was Goldman [Sachs] bailing out Goldman [Sachs]."

--Matt Taibbi, "The Big Takeover"; Rolling Stone (3/19/09)

"Here's the dirty little secret . . . most of the stuff that got us into trouble was perfectly legal. And that is a sign of how much we've got to change our laws."

--President Barack Obama

Taibbi's article is apparently the buzz of the blogosphere this weekend. Warning: it makes dark, corporate conspiracy movies like Michael Clayton seem like Snow White.

My advice: read it on an empty stomach. It would be a shame to waste a nice meal as you see how all the pieces fit together (at least according to Taibbi).

Quick summary: the dollars are bigger (much) than you think, the process worse and more opaque.

Short Sales vs. Foreclosures

Home Buyer Advice: 'Forget Short Sales'

Buying foreclosures isn't always easy, but it isn't as hard as buying a short sale. A foreclosed home is already owned by the bank. With the short sales only about half of them ever get to the closing. Some end up in foreclosure long before they close even though they have offers on them. With the short sales I would rather not even show the properties to buyers; in fact, in most cases I say "no."

That might seem unfair to the sellers but most of my buyers can't wait 90 days for an answer and they end up withdrawing their offer and we go house hunting again. I have represented sellers on short sales, too, and I won't do it again. There are short sale experts around and I am happy to give them the business. They have teams of people and usually have one person who does nothing but negotiate with the bank. It is a full time job.

--Teresa Boardman, "Short Sales and other lies," St. Paul Real Estate Blog

Nice summary by Ms. Boardman. The only thing I'd change is the success rate with short sales: I'd peg it at closer to one-third, vs. 50%.

I have a client who made an offer on a short sale in November . . . and is still waiting to hear back.

The only things that have happened in the interim are: 1) so much time has elapsed, the banks now need updated financial info from the Seller; and 2) the owner cancelled and re-listed -- at the same price.

Yet one more instance of one of my favorite anecdotes lately: Ben & Jerry (of ice cream fame) met in gym class, where the phy ed teacher told them the assignment was to run a mile in less than 12 minutes. The teacher warned that "if they didn't finish in less than 12 minutes the first time, they'd have to keep running it again until they did."

If you didn't sell your house last Fall, when the market was stronger, good luck getting the same price today!

High-end Double Whammy

Jumbo Loan Premium to Shrink

With the collapse last year of the private mortgage bond market on Wall Street, home buyers, builders and refinancers who relied on jumbo financing were left with few sources except at punitively high interest rates and huge down payments.

--Kenneth Harney, "A Big Boost for Buyers Seeking Jumbo Loans" (The Washington Post; 3/21/09)

Ordinary economic mortals are probably not feeling much empathy for the relatively affluent these days -- especially if they have a connection to Wall Street.

However, today's housing market has delivered an unprecedented wallop to upper bracket Buyers: at the same time their wealth has been whacked -- in some cases by more than 50% -- by falling asset prices, their loan costs are at (relatively) nosebleed levels.

While "conforming" (under $417k) mortgages dropped to as low as 4 1/2% last week, so-called jumbo loans still cost 6 1/2% or more.

It's tough to be rich, huh?

Actually, that's a huge gap, and arguably, an unfair one. More to the point, closing it offers lenders some tantalizing profits.

So, as Harney is reporting in his weekly column, a number of lenders (including Bank of America and ING) are rolling out jumbo loan products that aim to slice this premium. (The impact is less in the Twin Cities than on the coasts, because home prices here are much lower.)

$10,000 Loans to 200 Buyers

Mpls. Offers Biggest Home Buyer Carrot Yet

Starting April 2, the Minneapolis Advantage program will provide $2 million to fund 200 $10,000 deferred loans to buyers of foreclosed homes in certain Minneapolis neighborhoods. The loan is forgiven if the homeowner lives in the house at least five years. Information about the program will be available on April 2 by calling the agency or visiting its website. The Greater Metropolitan Housing Corp. administers the loans, which can be used toward a down payment or closing costs on a foreclosedhome or one that can be sold as a short sale (a lender agrees to a sale for less than what is owed on the mortgage). The program is available for houses in 26 neighborhoods throughout Minneapolis.

--"Agency Offers $2 Million in Deferred Loans" (Star Tribune, 3/20/09)

The Strib article doesn't provide the web site. Here it is:

Minneapolis Advantage Program

As a Realtor, I'm for anything that sustainably strengthens demand for housing, and specifically, foreclosures. Foreclosures are to the housing market what cancer is to an organism: a contagious disease that quickly spreads to nearby healthy "cells" and claims them, too.

However, under the category of "side effects" or "unintended consequences," two thoughts:

One. There are a lot more than 200 foreclosed properties in Minneapolis at the moment. How is Minneapolis Advantage going to decide which properties -- and which Buyers -- qualify?

I can easily imagine the online equivalent of the latest Star Wars movie release or hot concert tour, where diehards show up in sleeping bags days before tickets go on sale.

Is that really the best way to parcel out such goodies?

Two. I have clients who just closed on a foreclosed Minneapolis duplex. I'm not sure that they would have qualified -- the program has income limits that they may have exceeded -- but it's annoying to think that they just missed out on this program (and I'm just their Realtor!).

On a larger scale, you might call this phenomenon "waiting for an even BIGGER carrot."

Whether it applies to interest rates, home prices, or buyer incentives, the effect is to teach Buyers that it pays to wait.

That's probably not what policymakers are try to achieve at the moment . . .

$8,000 Tax Credit Q & A

Today's Wall Street Journal has a nice Q & A discussing eligibility requirements for the $8,000 tax credit. Hint: it's more complicated than you think.

Here's the link: "Cracking a Valuable Home Buyer Credit"

Interest Rates Stable

Banks Not Passing Along Rate Drop?

After a dramatic drop late Wednesday, 30-year mortgage rates have leveled off at 4 5/8% at the moment. Given the size of the Fed commitment -- up to $1 trillion in new cash aimed at mortgages -- you'd expect rates in the low 4's.

Why hasn't that happened (or at least, not yet)?

Here are the reasons being bandied about:

One. There are now many fewer lenders, so they aren't competing as hard for loans (you compete for business by offering the lowest rates).

Two. The lenders still out there are understaffed, and use interest rates as a spigot to increase or decrease loan (and refi) applications. When they're overwhelmed, like they are now, they raise rates (or don't pass along savings).

Three. Banks aren't passing along savings because they're wounded and need to replenish their capital (undoubtedly true, especially for the biggest banks).

The real explanation is probably a combination of all three of these factors; the exact mix likely varies by bank.

Ultimately, mortgages and prevailing interest rates sure seem a lot like gas prices and the price of a barrel of oil: increases show up at the "pump" immediately, while price drops reach consumers more slowly . . .

On the Blogs: Reaction to the AIG Reaction

If you've been out of the loop the last 48 hours or so, the big finance-related news is the political firestorm precipitated by AIG's bonuses, and the Fed's decision to create $1 trillion in new money (by buying mortgages and mortgage-backed securities).

On the blogosphere, there is a quick consensus emerging that the the public, led(?) by Congress, is missing the point (or more accurately, the forest for the trees).

In this case, the $165 million in bonuses are the trees; the $170 billion -- immediately paid out to the likes of Goldman Sachs and Merrill Lynch -- is the forest.

Michael Lewis puts it this way: 'the complexity of the issues at the heart of the crisis paralyzes the political processes’ ability to deal with them intelligently. I have no doubt that, by the time this saga ends, we will all know what happened to every penny of that $165 million in bonuses and each have our opinion of the morality of it. I doubt seriously we will ever understand the morality of the $173 billion payment that is the far more serious issue.'

While the AIG bonuses are the latest political lightning rod, the real scandal is where all the money given to AIG ended up -- and why.

P.S.: thanks to Barry Ritholtz's The Big Picture blog for the cartoon at the top.

Blog Housekeeping Notes

Discount Realtors and Mushroom Clouds

Under the category of, "everything you (maybe) wanted to know about blog 'plumbing,' but were afraid to ask," two quick items:

1. All the ads around the periphery of this blog are "served" by Google's search engine, based on key words. So, the reason this blog has links to so many discount brokers is, apparently, because they're paying for such words as "foreclosure, "realtor," "Twin Cities housing market," etc.

In fact, one discount broker whose ads regularly appear on this blog, themlsonline.com, has previously been charged with deceptive advertising practices for giving consumers the impression that it's the Multiple Listing Service, not a for-profit broker (the MLS is actually a consortium of all local brokers, and the database it maintains is co-owned).

If you need a Twin Cities Realtor, don't call them . . . call me!

2. Everyone has their own way of telling when they have veered, shall we say, a little off the deep end. Significant Other, trusted friend, even a boss.

If you blog (yes, it's now a verb), all you have to do is look at the ads that are being served.

Judging by all the mushroom clouds lately, the subject matter on this blog has gotten a bit . . . dark. Sorry for that. But to be fair, so has the news . . .

$8,000 and 4%

Housing's "Big Two" Numbers

Two numbers loom especially large in the national housing market right now: $8,000, and 4%.

The first number is the tax credit available to eligible home buyers. Coincidentally or not, that's approximately what annual payments come to on an average-priced U.S. home (now about $175,00).

To balky Buyers who've been waiting for an irresistible deal, the government is basically saying, "how about free housing for a year? Is free cheap enough??" (Again, you have to qualify, so not all Buyers will get such an attractive deal.)

The second number, 4%, is the whispered target number for 30-year mortgages.

Whether they get there or not depends.

Based solely on yesterday's announcement that the Fed will buy up to $1 trillion in mortgage-related securities, rates instantly fell about .25%, from 4 7/8% to 4 5/8%.

Whether they keep dropping depends on how quickly the Fed deploys the money, and whether all that new money (literally) isn't negated by inflationary concerns.

Observers will recall a similar rate drop last Fall, after a similar (but smaller) announced Fed stimulus. In that case, the drop turned out be short-lived when the promised money didn't materialize (or at least not fast enough for the market).

Appraisal Issues Return

More Locked Barn Doors . . .

Yet another example of "locking the barn door after the horse has escaped" is newly vigilant appraisers.

Anecdotally, I'm hearing of more sales, especially in the upper brackets, that are derailing because of appraisal issues.

In a typical deal, the appraisal occurs several steps along. Before you even get to that point, the Purchase Agreement has to be negotiated, and any Inspection issues surmounted. By then, both the Buyer and Seller (and their agents) have been in regular contact for days, sometimes weeks.

Once the Inspection Contingency has been removed, the focus turns to the Buyer's financing, which in turn hinges on a successful appraisal.

In a rising market, that's seldom an issue.

However, in a falling or flat market, appraisers take their marching orders from defensive lenders who have become much more conservative. As a result, there can be a gap between what appraisers see, and what Buyers and Sellers agree is fair market value.

What then?

Most Financing Contingencies provide that if the Buyer can't get their financing within a specified time period, the deal is automatically cancelled.

So if the Buyer wants out, they can typically get out.

If instead the Buyer and Seller are still committed to the deal, the Buyer can put up more money to cover the appraisal shortfall; the Seller can reduce the price; or both parties can try to challenge the appraisal.

Big Fed Move

Mortgage Rates Tumble

In a surprise, [The Federal Reserve] dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

Indeed, the immediate effect on the bond markets was striking, with prices rising and yields dropping sharply on the news. The yield on the 30-year Treasury bond, about 3.75 percent before the announcement, fell quickly to 3.4 percent and remained volatile. At the same time, the dollar plunged about 3 percent against other major currencies.

Edmund Andrews, "Fed to Buy $1 Trillion in Securities to Aid Economy"; The New York Times (3/18/09)

Today's big financial news was the Fed's decision to buy up to $1 trillion in bonds and mortgages. Mortgage rates reacted immediately; the sites I monitor showed a .25% drop, to 4 5/8%.

Guesstimates are that rates could fall another .25%, which would take them under 4.5%.

Longfellow Feeding Frenzy

Multiple Offer Premium > Discount?

Where: 30XX 43rd Ave South, in Minneapolis' Longfellow neighborhood (and just 5 blocks west of the Mississippi)
How much: $17,900
Tax assessed value: $143,000 (land - $44,200; building - $98,000)
On Market: 3/13/09
Off Market: 3/16/09

So what are the chances that the ultimate Buyer is actually going to pay $17,900 for this foreclosed property? Not very high.

Which is the whole point in listing it so low.

While the house is described as a mess, a lot alone in this location is likely worth at least $30k-$40k. By pricing so low, the bank (and Realtor) precipitate a feeding frenzy intended to drive the selling price above market value.

So do I recommend such a strategy to my selling clients? No, for three reasons:

One. If you put blood in the water . . . don't be surprised if you attract sharks.

More often than not, "giveaway" list prices attract, shall we say, aggressive Buyers who will resort to dubious tactics to win the inevitable bidding war. That's also why reputable Realtors avoid using language like "must sell," "make an offer," and other language designed to convey desperation (real or not).

As a listing agent, the best way to control a three-ring circus is not to create one in the first place.

Two. Not only do such circuses attract the kind of Buyer you likely don't want, they can repel the type of Buyer you do want.

In his current letter to shareholders, Warren Buffett makes a point of saying he will never participate in a bidding war to buy a company. Similarly, many disciplined, well-qualified home Buyers will simply walk away rather than get caught up in a bidding war where their pocket books can become hostage to their emotions.

Three. Feeding frenzies like this have a high "wash-out factor."

Once the excitement and frenzy subside, more than one winning bidder has been known to experience buyer's remorse and reconsider. They belatedly realize they made a hasty decision (they did) and/or are unhappy with the price they agreed to pay.

So, they (mis)use the Inspection Contingency to get out.

Or, to win the bidding war, the Buyer overstated their financial wherewithal (surprise, surprise) and can't perform.

Either way, the deal falls through, and the whole process starts over.

I've found that the best way to sell homes is fairly, openly, and in an atmosphere of (professional) trust to Buyers who have the same expectations.

Creating feeding frenzies is at odds with those values.

Jeremy Grantham on Market Timing

"Waiting for the Light"

"Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before."

--Jeremy Grantham, "Reinvesting When Terrified"; (March 2009 Newsletter)

Grantham, who manages $85 billion and is one of the most astute investors around, was actually talking about stocks, but his advice is equally applicable to the housing market.

In the same piece, he also makes two other indisputable points: 1) you'll never catch the low -- by the time it's clear that that has happened, prices will already be higher; and 2) market commentary will be most negative at the bottom. So if you listen to it, you'll either do the wrong thing, or nothing at all.

Interestingly, he rejects conventional wisdom about how to get (back) into a market that has fallen dramatically and still looks risky: 'Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones.'

Prospective home buyers will definitely relate . . .

"One Down, 999 to Go" (cont.)

Financial Res Ipsa Loquiter - Part 2

[Note: please return to this post after reading Part 1]

Even people who agree that holding Wall Street accountable is a laudable goal are likely to raise four objections. The most serious arguments -- and the rebuttals -- are:

One. "No laws were broken."

Specifically, the SEC allowed Wall Street investment banks to borrow 35:1; the Financial Accounting Standards Board ("FASB") permitted companies to keep toxic debt off their balance sheets; and even the credit rating agencies put their "seal of approval" on the securitized debt.

Rebuttal: This is nothing more than financial chutzpah (the regular kind is defined as killing your parents, then throwing yourself on the mercy of the court because you're an orphan).

When it comes to regulation, Wall Street got exactly the rules it wanted, or, in the case of credit derivatives, forbearance on the ones it didn't.

Investment banks, led by Goldman Sachs head (and future Treasury Secretary) Henry Paulson pressured the SEC to raise permissible leverage. The same crew dismantled Glass-Steagall, the Depression-era bulwark separating investment and commercial banking. FASB has long been intimidated by the companies it purports to regulate. And companies like Standard & Poor's and Moody's were co-opted by gaudy Wall Street fees much the same way Arthur Andersen was seduced by Enron.

Two. Holding Wall Street's senior executives accountable for their actions will be bad for the market and the country's morale.

Rebuttal: Not holding them accountable is bad for the markets and morale.

Three. It's logistically impractical -- and legally cost-prohibitive -- to figure out which executives did what, when, and what their motives were. In a world where Exxon is still appealing liability for the Exxon Valdes spill, Hell will freeze over before Wall Street executives head to prison en masse.

Rebuttal: That's why the burden of proof needs to be shifted to the companies. In fact, don't stop there: require the companies to identify which individuals were most responsible for their corporate conduct -- after all, they're the ones in the best position to know. Such a tack also avoids the inevitable, Eichmann-style "we were just following orders" defense.

If the companies don't finger the responsible persons . . . hold the board of directors responsible instead.

Four. Such an approach smacks of collective -- not to mention "cruel and unusual" -- punishment.

Rebuttal: Collective punishment for collective behavior is eminently appropriate.

Just like Madoff, none of these senior executives acted alone; they were part and parcel of a culture that partook of the rewards and sloughed off the risks and responsibility.

Given the economic harm wrought by their actions, it's hard to argue that any punishment, however severe, would constitute "cruel and unusual." Besides the direct economic cost -- already in the trillions -- the indirect cost to the financial system, measured in broken lives and destroyed trust, is incalculable.

In any case, there is ample precedent for imposing disproportionately harsh punishment when the public policy stakes are so high.

That's exactly what the Supreme Court has opined in numerous cases brought by members of the posse comitatus, famous for filing expletive-filled tax returns (if they file them at all) -- and drawing very long prison sentences as a result.

According to the Supreme Court, the Internal Revenue Service relies on a system of voluntary compliance. It is allowed to make examples of the few to "encourage" the majority to do their duty.

Capitalism is no different. If the worst kinds of greed and self-dealing go unchecked, why should ordinary citizens behave? Or trust such a system with their life savings?

Before taxpayers replenish the hen house that has just been so spectacularly looted -- or set about the long-term task of restoring security -- it would seem wise to apprehend the foxes who made off (sorry, couldn't resist) with the chickens.

Or, to put it in slightly less modern terms, society should take steps to assure that "as you reap, so shall you reap."

"One Down, 999 to Go"

Financial Res Ipsa Loquiter

If the stock market surged 15% in the week since Bernie Madoff finally went to prison, just imagine what it would do once the senior management at companies like AIG, Citigroup, Goldman Sachs, and Fannie Mae are held accountable for their behavior.

And why shouldn't they be?

Thanks to the legal principle of res ipsa loquiter (Latin for "the thing speaks for itself"), when a patient finds a scalpel in his back after surgery, he doesn't have to prove negligence to prevail in a malpractice suit against his surgeon(s). Rather, the surgeons have to prove that they didn't commit malpractice.

So, too, when a company requires $5 billion -- or 10X or 50x(!) that -- from the U.S. Treasury to prevent a melt-down in the U.S. (no, global) financial system . . . the burden of proof to show gross negligence should be deemed to shift -- to the company receiving the bailout. (Don't need the $5 billion? Then pay it back.)

The best way policymakers can restore confidence in the ailing financial system isn't by devising some miracle cure that will suddenly make sick banks healthy. Rather, it's by demonstrating that there are consequences -- not rewards -- for reckless, outrageous behavior.

"One Down, 999 to Go"

So here's my proposal.

For every $5 billion in taxpayer money that a company has received, hold one executive at that company personally responsible. If the number trips $100 billion, send the whole board of directors to prison. After all, under state law, which governs most corporate conduct, it is the board that is ultimately responsible for the company's actions.

Assuming that the U.S. Treasury has now spent or guaranteed about $5 trillion in bad debts, the number of executives subject to such an enforcement action would be around 1,000.

Here's what a partial breakdown (pun intended) by company would look like:

AIG: Cost to taxpayers -- $200 billion; Responsible executives -- 40
Citigroup: Cost to taxpayers -- $150 billion; Responsible executives -- 30
Bank of America: Cost to Taxpayers -- $100 billion; Responsible executives -- 20
Fannie Mae, Freddie Mac, Goldman Sachs: Cost to Taxpayers -- $75 billion; Responsible executives -- 15 apiece
Merrill Lynch: Cost to Taxpayers -- $50 billion; Responsible executives -- 10
Washington Mutual, Wachovia, Bear Stearns, Countrywide: Cost to taxpayers -- $25 to $50 billion; Responsible executives -- 5 to 10 apiece

But, you object, wouldn't such a tactic be nothing more than an extra-legal, torch-and-pitchfork mob action?

It needn't be, conducted properly. In fact, such a response might offer the country its best chance of averting such a mob action.

Today's financial melt-down has already destroyed more wealth -- about $15 trillion; erased more jobs; and caused the foreclosure of more homes, than any other financial calamity in history, including The Great Depression. And that's just in the U.S.

Far from being an economic Katrina, the melt-down was very much a man-made affair.

Follow the Money

Which men?

As they say, "follow the money."

Senior executives at the above-named firms collected billions for designing and running a "financial sausage factory" that churned out trillions in securitized debt (principally tied to mortgages). Thanks to the credit ratings agencies, the vast majority of this debt was highly rated, and therefore palatable to investors around the globe.

Incredibly, at least some of these companies figured out how to profit a second and third time from these toxic securities -- by "shorting", or betting against them, after they sold them to customers (Goldman Sachs); by buying insurance policies that paid off when the toxic debt inevitably exploded (Goldman Sachs, Merrill Lynch and a host of others); and by collecting premiums for insuring said toxic debt (AIG).

Incredibly, the Treasury apparently is now honoring these bets through "backdoor bailouts" via AIG.

If executives at these companies knew the egregious risks they were running, they're guilty of fraud. If they didn't know the risks . . . they're guilty of gross negligence. This is exactly the same Hobson's choice (minus three zeroes) that confronted Enron's putatively out-of-the-loop executives.

That's just for starters.

Depending on the company and individual executives, you'd guess that a complete list of misdeeds would include: filing false financial statements (all that off-balance sheet debt); breach of fiduciary duty to their shareholders (isn't that what a "heads I win, tails you lose" policy amounts to?); insider trading; and corporate waste.

Financial Res Ipsa Loquiter - Part 2

"All Legal Means"??

Dealing with AIG: More Ideas

One day after [the President's] economic advisers insisted that their hands had been tied by contracts requiring the payments, Mr. Obama ordered the Treasury Department to “pursue every single legal avenue to block these bonuses” and make the American taxpayers whole.

--"Obama in Effort to Undo Bonuses at AIG"; The New York Times (3/16/09)

Warren Buffett has called the ongoing financial melt-down an "economic Pearl Harbor." Government officials, to rally support for various bailouts to date, have warned of economic collapse if their measures were rejected.

It sure seems like a national (if not global) emergency, albeit the financial kind.

And doesn't the President have extraordinary powers in such crises, like suspension of habeas corpus?

"Economic Treason"

In times of war and other crises, the Constitution contemplates that the President may arrest and indefinitely hold those who pose a threat to the country.

What AIG executives have done -- and are continuing to do -- arguably constitutes such a threat, on many levels (appropriating taxpayer money, destroying public confidence in government and the markets, etc.).

If there was such a thing as "economic treason" -- and there should be -- executives at AIG and several other companies have committed it.

Firing Your Realtor - Part 2

[Note: Please go to Firing Your Realtor - Part 1 to see the beginning of this post]

Three. Poor or no feedback from prospective Buyers.

As I like to tell clients, the best feedback any home seller can receive is a full-price, non-contingent offer from a financially qualified Buyer (even better: several of them!).
However, in the meantime, a proactive Realtor will elicit and make the most of feedback from non-Buyers.

If prospects are balking because the mechanicals are old, savvy sellers may want to consider buying a home warranty (or, if the asking price warrants it, replacing an ancient furnace, water heater, etc.)

If Buyers are turned off by old paint or carpeting, cosmetic updated may be in order. If the curb appeal is a turn-off, flattering interior shots — and lots of them — can help compensate.

If you don’t know what Buyers’ objections are, however, you can’t counter them.

Even if the problems cannot be easily remedied, it is important for Sellers to know so that their asking price can be discounted appropriately.

Four. Inattention.

It is never a good sign when your Realtor takes days to respond to you (or doesn’t respond at all). Even a Realtor in the middle of multiple deals will find a way to fire off a quick email or leave a voice mail.

What if your Realtor is guilty of none of these sins?

On the contrary, what if they continue to aggressively market your home to fellow Realtors and the public, hold open houses, refresh the marketing materials, track nearby activity for trends and developments, etc.

In the words of that famous real estate observation: “the fault, dear Brutus, is not in our stars, but in ourselves.”

AIG, cont.

AIG Creditors' Hold on U.S. Treasury

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody."

--James Carville

If Carville were to update his answer today, he'd no doubt substitute "AIG creditor" for the bond market.

In a world where equity investors have been chopped in half and and Lehman Bros. creditors were fed to the (bankruptcy) lions, AIG's creditors are being made whole. By the U.S. Treasury -- in other words . . . us.

So far, the amount paid out to AIG's creditors is approaching $200 billion.

The two questions dominating the "blogosphere" at the moment are: 1) exactly why are AIG's creditors being bailed out -- at 100 cents on the dollar, no less?; and 2) who are they?

AIG Bonuses: How Big?

AIG Tries to Bury (the latest) Bad News

Anyone reading the *Sunday papers is likely to notice the blaring headlines: AIG senior executives are being paid millions in bonuses. That, notwithstanding the almost $200 billion of taxpayer money already injected into the company.

What's interesting, though, is how the news first broke online, then changed rapidly.

Around 6 p.m. tonight, both The New York Times and The Wall Street Journal web sites broke stories saying that AIG is paying out $100 million in bonuses (amazingly, largely to the executives who worked in the unit responsible for most of the company's losses).

However, by later evening, the number in the Times story had morphed into $165 million, while the Journal article backed off on the number altogether, only reporting that AIG was to pay "millions in bonuses." Then, just before midnight, the Journal reported a dramatically higher bonus amount: $450 million.

Do I hear $700 million??

What on earth is going on?

Obviously, there's some confusion about the amount.

One possibility is that the news got buried -- or at least there was an attempt to bury it -- on a late Sat. afternoon, and the media are still digesting it. Not having seen the news release, one might further guess that it was not exactly a model of clarity.

This most recent, sordid episode involving AIG is eerily reminiscent of the Sept. weekend last fall, just before the government "rescued" the company, and just after Lehman Bros. collapsed.

Anyone who was glued to the financial news that weekend, as I was, recalls the "SOS" AIG put out, accompanied by its ever-rising estimates of its total losses.

First the number was pegged at $20 billion, then $40 billion. By the end of the weekend, the loss estimate had ballooned to $80 billion -- and then the government stepped in.

Since then, of course, the number has grown to almost $200 billion . . .

*I get practically all my news online, so don't usually know what the print headlines are.

Firing Your Realtor -- Part 1

How to Know When: Four Signs

Just because a home hasn't sold doesn't mean that the Realtor is doing a bad job.

But, if your home is lingering on the market, it's imperative to know why. Here are four signs that the problem may not be your home, but your Realtor.

One. Mediocrity (or worse).

Fortunately, egregious Realtor ineptitude is usually easy to spot.

Examples include omitting or misstating key information about your home on the Multiple Listing Service ("MLS") database or marketing materials; lack of familiarity with the contracts you've been asked to sign; and thinking a "virtual tour" is something that museums offer (in residential real estate, it refers to streaming video that lets prospective Buyers see your home from multiple angles on the Internet).

Not as obvious, but just as harmful, is when your Realtor fails to showcase your home's best selling points -- in which case, other Realtors and the public are likely to miss them, too.

In today's Buyer's Market, if your home isn't shown off to maximum effect --online, inside, and from the curb -- it's likely to stay on the market longer, fetch a lower sales price . . . or both.

Two. Under performing the competition.

With more than 30,000 homes currently for sale in the Twin Cities, the market time for practically all homes is higher than 2-3 years ago.

However, that doesn't explain why the 3 Bedroom, 3 Bath Colonial down the block sold in six weeks, while yours has been on the market for four months (and counting).

If seemingly inferior homes are selling while yours sits, your Realtor should have a ready explanation.

Sometimes, a nearby home that appears less impressive on paper in fact has a remodeled kitchen, a superior floor plan, etc. Or, your home may have one or more warts that, after years living in it, you either take for granted or can't see anymore.

Next: Firing Your Realtor -- Part 2

Buyer's Market Conundrum

"I Can't Find Anything I Like"

"Water, water everywhere [but] nary a drop to drink."

--Samuel Taylor Coleridge, "The Rime of the Ancient Mariner"

One of the conundrums of a housing market supposedly flooded with inventory is Buyers who lament that they can't find anything they like.

What's going on? Is it just their imagination?

Actually, I think it's a combination of a couple things.

While Twin Cities inventory is actually coming down now, it's still at a high level.

However, it's not at a high level everywhere.

If you're looking for a foreclosure in Minneapolis' Phillips or Camden neighborhoods, you can literally pick from hundreds of houses.

However, I can think of several neighborhoods where there appears to be a shortage of homes for sale right now. To pick just one example, the inventory in Linden Hills seems surprisingly thin at the moment, especially between $500k and $800k.

Clearly, some would-be home sellers are waiting for a stronger market. So Buyers who can't find what they're looking for aren't necessarily hallucinating.

But another factor is that the homes that are on the market can be underwhelming.

One aspect of that is real, the other more psychological.

In a softening market, it's not unusual for Sellers to overprice. When that happens -- surprise! -- their homes don't sell. As time passes, the owner becomes a little less vigilant about prepping the home for showings. Instead of all the lights on, it's dark; the once spotless Kitchen now has dirty dishes in the sink; the beds aren't necessarily made. And Buyers notice.

But it's also true that Buyer scrutiny increases as a direct function of time on the market.

The reason why the first week or so on the market is so critical is because that's when interest is highest. On a first date, little imperfections like a nasal laugh or big ears (Seinfeld fans could add significantly to this list) are endearing.

Six months later, every flaw, however minor, is put under a microscope.

So, too, with homes.

Finally, in a recession, people have less money to spend (not exactly a shock).

So owners who a few years ago might have spent a few thousand dollars on dressing up their home with new paint and carpet may not be able to do that now. Or, not see the merit in doing that. Ditto for perceived "extra's" like staging.

As a result, to my subjective eye, fewer of the homes debuting on the market now seem to have the same sharpness and appeal that they did when it was a Seller's market.

Multiple Offers and $40k Over Asking Price

[Editor's Note: want to see what happend to this house? See, Fern Hill Flip]

Where: 2641 Kipling, in St. Louis Park's Fern Hill neighborhood

What: 3 BR/2 BA; 1,678 FSF

Asking Price: $165k

Sold Price: $205k

Days on Market: 3

Closed: 3/9/09

Forty thousand over asking price??

That isn't supposed to happen in a market flooded with inventory, and specifically, bank-owned foreclosures like this one. And yet, that's exactly what happened here.

I profiled this home one month ago when it went pending after less than 3 days on the market ("What's Selling? Fern Hill Foreclosure"). At the time, I speculated that it went in multiple offers, and that the ultimate selling price would be over the asking price -- perhaps well over.

Good call (if I say so myself).

One of the biggest misconceptions in today's market is that, no matter where a house is priced, it will ultimately sell for a big discount from that price.

Sellers who subscribe to that mindset invariably pad their asking price -- and then wonder why they aren't selling.

Buyers who subscribe to that mindset miss out on a lot of great deals (and waste a lot of time and energy writing unrealistically low offers).

Contender or . . . Pretender?

"They're Asking How Much??"

Where: 5500 Park Place, in Edina's South Harriet Park neighborhood
Asking Price: $549,900 (white picket fence included)
Key Stats: 3 BR/2BA; 1,500 FSF. Year built: 1947
Lot Size: 60' x 134.8'
Time on Market: 64 days

In any other Twin Cities neighborhood, this unassuming 3BR/2BA home with a white picket fence would be worth $150,000, tops. If there were any foreclosures nearby, that number could easily drop to $100,000.

But it's not (in just any neighborhood, that is).

It's just south of Minnehaha Creek, in Edina's up-and-coming South Harriet park neighborhood. The lots are nice-sized, and the location is prime -- just south of Edina's tony Country Club area. Best of all, the existing stock of housing is older and undersized.

Voila! Tear-down territory.

As someone whose clients have bought and sold several tear-down's the last few years, I've found that a good rule of thumb is to multiply the projected selling price of the would-be tear-down by 3.5. If the resulting number makes sense for new construction on the immediate block . . . the house is a bona fide tear-down candidate.

So if a house is worth $300,000, to be a tear-down, the neighborhood would have to support new construction over $1 million (I call this "tear-down leapfrog," or "the last shall be first" phenomenon, because the former tear-down often gives way to the nicest home on the block).

Contender . . or Pretender?

So is this house for real? Or more to the point, is the land underneath it worth anywhere near the asking price?

To find out, you start at the end -- namely, by determining the upper price limit of the immediate block (and to lesser extent, the surrounding neighborhood).

In this case, a brand-new, 4,000 FSF house just sold for $1.5 million a block away (in fact, it sold before hitting the market, a good omen). So clearly, the block has lots of upside.

The next step is sizing up the particular lot.

At 60' x 138', it's not gigantic, but it's still more than 30% bigger than a typical, 40' x 120' city lot. It's also comparable to other East Edina lots that now have new construction.

It's also a corner lot, which is a plus to some, and a negative to others. Net those out, and it's a wash.

More important is the fact that the lot gently slopes towards the rear. That makes it suitable for a walkout, which allows more light in the lower level and allows better access to the backyard.

So what's the verdict?

Contender. (If you want to know what it's likely to sell for, though, you'll have to call me . . .)

Proposal: Financial "Son of Sam" Law

Look Who's Cashing in on the Mortgage Mess

Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering. So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess. Stanford L. Kurland, Countrywide’s former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

--Eric Lipton, "Ex-Leaders of Countrywide Profit From Bad Loans"; The New York Times (3/3/09)

Let me see if I've got this right.

Bank executives at subprime lenders made hundreds of millions originating toxic loans that helped blow up the housing market. In turn, that helped blow up the banking system, which -- surprise! -- is now tanking the general economy.

Nothing has happened to them.

On the contrary, they are now using their toxic loan wealth and banking connections to make money a second time on toxic loans -- this time, by buying them for pennies on the dollar.

To paraphrase the government attorney who admonished Joseph McCarthy: "Have you no sense of decency sir(s), at long last? Have you left no sense of decency?"

And what kind of financial and legal system stands by and watches this happen??

Proposal: Financial "Son of Sam" Law

After serial killer David Berkowitz reportedly received lucrative offers to sell his story to publishers, New York state passed a law preventing such a travesty.

Known as the Son of Sam law, it authorizes the state to seize money earned from such a deal and use it to compensate the criminal's victims. The rationale, which hardly seems to require explanation, is that no one should financially profit from crimes that they've committed. Since then, 39 states have passed similar laws.

Such an approach seems tailor-made for today's housing and financial crisis, and the "economy killers" at the root of it.

The best thing for public confidence would be a healthy economy generating lots of well-paying jobs.

In the meantime, the next best thing would be sending the people most responsible for the financial crisis to prison -- or at least pulling them away from the trough ("A-I-G" is starting to look and smell a lot like P-I-G).

Preventing Financial Stroke

Tightening Credit Snares the Healthy, Too

Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably.

--Meredith Whitney, "Credit Cards are the Next Credit Crunch"; The Wall Street Journal (3/10/09)

Just like in a real stroke, in a financial stroke, the key to recovery is preventing damage to healthy "cells" far removed from the source of the damage.

As the financial melt-down weakens banks and tightens credit, one of the side effects is that heretofore good credit risks are finding their access to credit curtailed.

To pick just one of the multiple ways that can happen: lenders are now flagging credit files by zip codes. So if you live in a zip code where housing prices are falling especially fast, the bank issuing your credit card may dramatically raise your interest rate, or even cut you off altogether. Even if your credit is spotless.

Locking Barn Doors

Is there some logic to screening credit card customers by zip code? Sure.

For most families, home equity is one of their biggest assets (or at least, it was). If that's under siege, it's not a big leap to guess that the affected families' finances are also weakening, potentially putting creditors at risk.

But what sense does it make to give such families a downward shove?

Certainly, banks need to take defensive measures to guard against promiscuously issuing credit: one of the reasons we're in this mess is that banks exhibited far too little discretion a couple years ago (especially in hot housing markets).

Now, however, banks are predictably overshooting the other direction. Their actions take an already bad situation and make it much worse.

Ultimately, the best way to avoid stroke damage is prevention. If it's too late for that, then the next best course of action is to break the clot with blood thinner, the faster the better.

That's why getting credit flowing again is so critical to the economy's health.

Bernie Madoff & the Path to Recovery

Stock Buyers Strike . . . For Good Reason

When will the stock market finally bottom?

Here's a thought: it won't be when P/E ratio's hit some magic level, or market cap's (capitalization's) become tantalizingly low, or even when the housing market finally stops falling.

It will be when Bernie Madoff is in prison, and he and his family are stripped of their -- his clients' -- assets. (Just plain stripped would be even better.)

For now, Madoff sits, under house arrest, in his $10(?) million Manhattan penthouse while his lawyers plea bargain and argue, however implausibly, that his wife should be allowed to keep $67 million now titled in her name.

And Madoff's victims?

Three months after their money disappeared, they are selling their homes to raise cash. I personally know of four such houses on the market in the Twin Cities, and wouldn't doubt that the number nationally is in the hundreds (don't expect an accurate tally, because in most cases, you'll never know).

Who wouldn't pull their money out of such a market?

What sane person would commit fresh money?

No wonder the stock market is suffering from the granddaddy of all buyer's strikes.

And that's before the debacle that has befallen investors in financial stocks, whose primacy in today's market was even greater than tech stocks' in the late '90's -- and whose subsequent fall has been harder.

"Madoff Homes"

Investors are right not to trust a market where the top securities cop, the SEC ("Securities and Exchange Commission"), outsources its "whistle-blowing" function. Actually, it doesn't even do that: when someone credible like Harry Markopolos presented it with credible evidence of fraud . . . it did nothing.

Meanwhile, our legal system allows well-heeled defendants to make a mockery of the presumption of innocence. Even if Madoff hadn't confessed -- which he did -- there'd be no doubt as to his guilt. (If it's all a big misunderstanding, somebody had quick better tell all those people selling their homes.)

In the meantime, any rational, functioning system would: 1) promptly incarcerate Madoff; 2) trace any assets attributable to his victims, and label them as fraudulently conveyed; and 3) confiscate such assets, and put them in trust for his victims. Done. End of Story.

Instead, Madoff is clearly using his clients' money to pay for expensive legal maneuvering. Instead of Madoff selling his homes, Madoff's victims are selling theirs. Watching all this, one would be forced to conclude that, at best, the authorities are impotent; at worst, they're corrupt.

The New Testament famously says "the poor will always be with us." It doesn't say anything about scoundrels like Madoff.

Until investors are satisfied that the Madoff's of the world have been dealt with appropriately, and convincing steps have been taken to assure that there won't be any more . . . don't hold your breath waiting for a sustainable stock market rally.

Name that Crash

"The Great . . . [Something]"

As the evolving financial crisis ratchets up a notch -- or two -- so is the gravity of the names being tossed out as would-be labels.

So far, the leading candidate is probably "The Crash of 2008."

However, just in the last few days, a new slew of contenders have made their appearance -- many of which now contain the adjective "Great."

Roughly in order of popularity in the blogosphere (subjectively judged by me), they are:

1. The Great Recession

2. The Discontinuity

3. The Great Disruption

Hopefully, there won't be need for even more portentous names any time soon . . .

Enron: Just Ahead of its Time

[Note to Readers: I originally published the following post in mid-December. At that time, the cumulative federal bailout bill was about $2 trillion. Including guarantees of dubious bank assets, that number now is closer to $4 trillion -- $173 billion of which has been pumped into just one company, AIG.

Given these developments, I thought this post was even more topical now. The only other new information is the size of the '08 bonuses Wall Street exec's paid themselves (not known in December). Suffice to say, they didn't go with "the low end of the range."]

Is it Too Late to Bail Out Enron??

"Supreme Court Overturns Bush v. Gore"--Headline; The Onion (12/9/2008)

Watching what's going on in Washington and on Wall Street, the Enron guys must be turning over in their . . jail bunk beds.

Consider the following:

--The audited financial statements of AIG, Citigroup, Bear Stearns, etc. obscured or omitted billions in company liabilities.
--Enron's audited financial statements obscured or omitted billions in company liabilities.

--Senior management at AIG, Citigroup, Bear Stearns, etc. reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.
--Enron senior management reaped hundreds of millions in compensation and bonuses based on (dubious) asset values they determined.

--Senior management at AIG, Citigroup, Bear Stearns, etc. publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.
--Enron senior management publicly reassured investors, creditors, and employees that all was well, and exhorted them to buy "cheap" company stock, even as they dumped their own holdings.

Enron's leadership is in jail (or in CEO Ken Lay's case, dead). Wall Street's senior management is . . . deciding what their 2008 bonuses should be. (My advice: go with the low end of the range, guys.)

Enron wasn't corrupt -- it just had the misfortune of being ahead of its time.