"Half-Decade" Mentality

"Obama Saw Successes, Then Harder Times"

I've read (or skimmed) Barack Obama's two autobiographical books, and followed his political rise, so the above headline in today's Wall Street Journal caught my eye: was there some, heretofore hidden chapter in his life?

Nah.

The "successes" referred to Obama's first three months in office; the "harder times" the second three months.

Glad the journalist has a sense of perspective . . .

P.S.: Once upon a time, a "half-decade" referred to 5 years.

Martin Feldstein's Housing Rx

Smaller Mortgage, But Full Recourse

If you haven't been paying attention, the administration has tacitly adopted a Japan-style, "muddle through" strategy to deal with the housing (and banking) bust.

Namely, instead of forcing banks to take massive write-downs and pushing for regulatory overhaul, the government has ushered in an era of super-cheap money (at least for banks) that gooses bank profits and slowly nurses them back to health.

In fact, bank earnings are up dramatically. Even the banks thought to be sickest, like Citigroup and Bank of America, are now reporting billions in quarterly profits.

So what's the problem?

A weak economy is creating millions of additional foreclosures, which is putting renewed pressure on home prices, which in turn is undermining the banks' recovery:

Despite a slight uptick in house prices in some markets recently, the sales of foreclosed properties continue to dampen house prices and weaken banks’ balance sheets. The uncertain pace of future losses makes banks nervous about the adequacy of their capital, which discourages bank lending and economic growth.

--Martin Feldstein, "How to Save an ‘Underwater’ Mortgage"; The Wall Street Journal (8/8/09)

Feldstein's prescription?

Take the pressure off both underwater homeowners and ailing banks by striking a quid pro quo: reduce the balance of the mortgage borrowers owe, but in return, make the rest full recourse (now, mortgages are non-recourse). To make such "medicine" easier for the banks to swallow, the government would reimburse the bank for part of the write-off.

Here's how it would work (Feldstein again):

Consider someone with a home worth $200,000 and a mortgage of $280,000, i.e., a loan-to-value ratio of 140%. If the borrower and the creditor both agree, the loan could be reduced by $40,000 to $240,000 (120% of the home value.) The government would give the creditor $20,000 to offset half of the write-down. The homeowner would convert the remaining $240,000 mortgage to a bank loan with full recourse that could not be discharged in bankruptcy. The bank takes a $20,000 loss (as part of the $40,000 mortgage write-down). But it would be better off, because it has a more legally secure loan of $240,000. The homeowner owes less, but he is now personally responsible to repay the loan in full.

Makes sense to me.

However, the catch with all such "rational" solutions to the housing mess -- and there have now been several -- seems to be getting the banks to sign on.

Defending Sodom & Gomorrah

Goldman Sachs: 'Bad, But Not the Worst'

Based on the drivel I've read the last six weeks, I'm convinced that if Matt Taibbi had chosen to rail against, say, the mayor of Sodom & Gomorrah -- instead of Wall Street and its undisputed kingpin, Goldman Sachs -- the same pack of apologists would have jumped to the mayor's defense.

Who are these people? Seriously.

Consider the latest non-defense defense:

What about Taibbi's charge that Goldman engaged in "laddering," or promising shares of hot IPOs to insiders or "friends and family" who would buy more later? And "spinning," or giving company executives super-cheap shares in exchange for the promise that they would buy more?

Yes, Goldman may have been involved in something like that. It helps, however, to point out that the class-action lawsuit on laddering included 55 underwriters as defendants. Including Goldman, yes, but also Morgan Stanley, Credit Suisse, Deutsche Bank, Salomon Brothers, Robertson Stephens, and literally every bank on Wall Street. The lawsuit -- launched in 2001 --was just settled this year, and it was all of $586 million for all of the banks as well as 300 of the failed companies they took public. That was an amount those banks and companies earned before afternoon tea on tech stocks during the boom year. The whole point of the lawsuits, however, is that the banks and companies were in it together-at least 355 entities in all. To single out one bank of 355 as particularly rapacious is ridiculous. What were the other 354 doing, then?

--Heidi Moore, "Matt Taibbi is Just Plain Wrong"; The Big Money (8/6/09)

Where to start . . .

How about with, "Yes, Goldman may have been involved in something like that"??

There's really no need to continue.

Just because Goldman wasn't the ringleader, just because it didn't invent the egregious practices described, isn't really a defense. It's an indictment of the entire Wall Street culture -- one which, if you don't recall, made billions off the Internet bubble before it blew up in investors' faces and tanked the economy.

Sound familiar?

Which raises point #2: they got away with it.

Moore is certainly right about one thing: $586 million is a small amount to pay for the aforementioned misdeeds.

Hmm . . . huge profits, nominal civil fine imposed almost a decade later -- "Let's do it again!" And they did.

The only real difference I see is that the resulting conflagration grew so big that it consumed practically all of Wall Street.

Except for . . . you guessed it: Goldman Sachs.

Why? Because it effectively built itself a bomb shelter. Namely, it bet against the same toxic mortgage-backed securities that it sold its customers.

To Moore, this isn't the height of deceit, or fraud, or breach of fiduciary duty, it's . . . prudence.

In fact, we should be grateful that Goldman's bets against their own customers paid off so prodigiously because if they hadn't, U.S. taxpayers would have had to have given the firm an even bigger bailout.

Sadly, amazingly, infuratingly -- she's probably right.

So, there you have it: Goldman Sachs, looking out for the best interests of the U.S. taxpayer.

"Priced for Immediate Sale"

As Opposed to . . .?

"Priced for immediate sale" is one of those real estate cliches -- like, "not a drive-by," or, "in move-in condition" -- that has been overused to the point of meaninglessness.

Consider: are there really any homes on the market that are priced to sell in three months? Next year?

(There are, but that's the subject of another post.)