Hank Paulson is not done asking for more authority to “rescue” us from the mortgage crisis. In his first round of legislative begging, he got Congress to pass The Housing Economic Recovery Act of 2008 which gave him the right to take over Fannie and Freddie putting taxpayers on the hook for their greed and mismanagement. Most insiders figure that will cost about $300 Billion after all is said and done.

But Hank is not done!

Now after this horrific week of every company under the sun coming to Washington hoping for a bailout, it becomes clear to Hank he must do something “bigger”. He decided to hold a press conference Friday to announce he was working on a comprehensive rescue package that would alleviate the “crisis” at it’s source…in Paulson’s own words,

“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible.”

Well now some of the specifics are coming out as Hank goes to the Hill laying out his plan. Hank’s plan involves getting Congress to give the Treasury Department open ended power to buy, hold, and then sell any residential or commercial mortgage assets originated before September 17, 2008.

According the American Banker,

“As drafted, Treasury could use its power to buy far more than $700 billion worth of mortgage assets over time. The draft language only restricts Treasury to holding no more than $700 billion of mortgage related assets “at any one time.” If it sold some assets back to the private sector, even at a loss, it could continue to purchase more, observers said. That could continue to drive up the potential cost of the plan to taxpayers.

“The authority is broad and the $700 billion represents the total amount at any one time but there is not a cap on the total amount of assets that can be purchased,” said Scott Talbott, senior vice president for government relations at the Financial Services Roundtable. “It’s a revolving line of credit.”

Yikes!

Paulson wants to buy the all the “bad loans” on the books at every financial institution now…not just Fannie Mae and Freddie Mac. Congress rolled over the first time Paulson came to the Hill, but insiders don’t believe Congress, especially the Democrats, will be as cooperative this second time around.

American Banker reports,

“There are going to be some hiccups of this plan because it’s completely open ended — Wall Street runs this plan and there’s no help for homeowners,” said Howard Glaser, a mortgage consultant. “Congress will find it very troubling that the asset managers running this program will be asset managers hired by Treasury.”

This is getting ridiculous. It reminds me of Naomi Klein’s, “Shock Doctrine” theory of the current Administration to use a “crisis” either real or imagined to pass legislation which “the people” would never stand for without the crisis.

To me it seems Paulson is using the Shock Doctrine to get Congress to pass far reaching legislation which includes no help for home owners or protections for the tax payer.

I truly hope Congress doesn’t fall for it.

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Tags: fed, federal reserve, Henry Paulson, paulson, The Fed

The snowball that is the US and Global Financial Crisis continued to get larger Tuesday as American International Group (AIG), the nation’s largest insurer came close to collapse. Over the weekend, the Fed failed to provide a $40 Billion bridge loan that the company’s leadership had been pressing for, but late Monday night, the Fed stepped in. In exchange for an 80% ownership stake in the company, the government went against earlier promises and rescued AIG with an $85 Billion loan.

According to CNN:

Officials decided they had to act lest the nation’s largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries. An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won’t have to go through a tumultuous fire sale.

The failure of AIG could have caused unprecedented global ripple effects, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.

“If AIG fails and can’t make good on its obligations, forget it,” Bolton said. “It’s as big a wave as you’re going to see.” AIG has had a very tough year. Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year. Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

According to the International Herald Tribune:

The decision, announced by the Fed only two weeks after the Treasury Department took over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history. With time running out after AIG failed to get a bank loan to avoid bankruptcy, Treasury Secterary Henry Paulson Jr. and the Fed chairman, Ben Bernanke convened a meeting with House and Senate leaders on Capitol Hill at about 6:30 p.m. Tuesday to explain the rescue plan.

The decision was a remarkable turnabout by the Bush administration and Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system. But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.

Was there any other option for the government? What now? Taxpayers now own Fannie, Freddie, and AIG . . . any guesses as to what’s next?

This week’s news has been the financial equivalent of a 9.5 earthquake on the richter scale . . . unprecedented!

Tags: AIG, American Insurance Group, fed, government bailout, paulson

Alan Greenspan, the controversial former Fed Chairman, in an interview by the Wall Street Journal’s David Wessel gave us a few pearls of wisdom to ponder about the state of the housing market.

He starts out with a prediction calling for a stabilized market by summer of 2009. Greenspan admits depending on the size of the bubble certain location will see continued price declines after his deadline. But for the majority of markets, a never-ending price depreciation will end about a year from now…and I happen to agree with him on this point.

Denver, where I live, was first into the bubble (a smallish bubble at that) and will be the first out. We are already seeing signs of this as the Case-Shiller Index for Denver was up for 2 months in a row in May and June. However, Phoenix, Las Vegas and other markets like them were late to the bubble party and saw bigger price appreciation, so they won’t hit Greenspan’s target but will follow soon after.

Greenspan bases his prediction on supply versus demand statistics as well as rent versus own price corrections. He states it best by saying,

“It’s the imbalance of supply and demand which causes prices to go down, but it is ultimately the valuation of the commodity which tells you where the bottom is.”

He uses the current figure of 800,000 vacant homes and figures it will take a year to liquidate enough of those homes at lower and lower prices, that an equilibrium will be hit when investors feel the desire to hold on to the home rather than sell…put another way, when it costs more to rent than to own.

I like this dual methodology for analyzing the bottom in the housing market. Historically, home owners had to see a benefit from owning versus renting and landlords needed a premium to stay landlords. Greenspan knows a “corrected” market will return us to that state. He also informs us the number of households created in a year in the US today is 800,000…the same number as vacant homes, so the supply/demand component is covered too.

If prices could drop fast enough to make a mortgage payment less than rent for the same house…violia…the bottom is reached.

He warns against too much legislation, tax incentive, or bail out activity which could slow the speed in the drop of housing prices. Subsequently, he voiced he dissent on the GSE bailout by saying,

“They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted — with necessary taxpayer support to make them financially viable — as five or 10 individual privately held units,”

Greenspan fears a huge taxpayer bill coming due for Fannie Mae and Freddie Mac thanks to Hank Paulson’s new law…and I share his concern.

Wow…I agree with Alan Greenspan a lot here…I’d better go lay down.

Tags: Alan Greenspan, fed, federal reserve, The Fed

In a clear sign the federal government is far more concerned about the financial health of mortgage finance giants Fannie Mae and Freddie Mac than its public comments indicated as late as Friday, the U.S. government Sunday night announced what some are calling a “massive aid” package to the two shareholder owned and run companies officially cementing a government relationship that till now was only implied but never admitted to.
According to a Reuters dispatch, the plan, which will require swift approval from Congress, is designed to “head off a potential meltdown in financial markets.”

Here’s what the government is offering Fannie and Freddie:

1. Access to its emergency cash–the so-called discount window
2. A huge “temporary” increase in the line of credit available
3. The U.S. Treasury will, for the first time ever, purchase equity in both companies should it be needed
4. Investigation by the Securities and Exchange Commission to stop the spread of “false information.”

Both Fannie and Freddie are vital to the housing market–they buy mortgages from banks and other lenders and either keep them or repackage them into securities that are sold to investors.

“Welcome to the socialist state”

Strong words from some critics are already greeting the government plan. Josh Rosner, the managing director at Graham Fisher in New York told Reuters, “It’s outrageous. It’s offensive. Welcome to the socialist state. In capitalism, winners are supposed to reap rewards and losers are supposed to take losses for bad risk management. These are private companies.”

But others are deeply concerned that should Fannie and Freddie fail–though they both say they are well capitalized–the shockwaves would cause a financial meltdown world-wide.

The most troubling part of the government plan,perhaps, is the possibility the Treasury might buy equity in Fannie and Freddie. Some critics charge this could end up costing taxpayers enormous sums of money.

It will be interesting to see whether Wall Street gives the plan a thumbs up or thumbs down during Monday’s trading.

Here are 2 more articles worth reading:

• Government as the Big Lender
• Treasury Acts to Save Mortgage Giants

Tags: bailout, bank, banking, fannie, fannie mac, fed, federal reserve, freddie, freddie mae, housing bailout, lenders, mortage, paulson, subprime

It’s like one of those TV shows where after an entire season in which everything goes wrong for the star, he finally awakes to find it was all just a bad dream–everything was just fine!

Jesus. Who wants to watch a show that has an unhappy ending?

Apparently, we all have to watch it and, worse yet, live through it!

What began as a real estate debacle is now a full grown global economic crisis.

A New York Times story out of Washington says that a consensus has been reached among federal officials that , as the Times puts it, “the turmoil plaguing the housing and financial markets is likely to spill deep into 2009…”

Foreclosures? Want to See Foreclosures? You Ain’t Seen Nothin’ Yet!

No sir. Treasury Secretary Henry Paulson is now saying that even if a comprehensive housing relief bill is passed and signed into law, “many of today’s unusually high number of foreclosures are not preventable.” He estimates there will be about two and a half million more foreclosures by the time we get to the New Year.

So, what is being done?

Congress appears on the verge of passing some type of legislation aimed at giving a helping hand to homeowners in trouble, only, according to some experts, that hand only has one finger and my guess is, it is the middle one.

The nonpartisan (can there really be such a thing??) Congressional Budget Office has done some research which is, after all, what it does. And, according to Reuters, it found the pending legislation “would do little to ease the housing crisis.”

That’s just great.

Who Was Watching The Watchers?

Apparently no one was watching them. A review by the Securities and Exchange Commission has concluded that the three main credit rating agencies–Moody’s Investors, Standard & Poor’s and Fitch Ratings–failed in their primary responsibility to make sure there were no conflicts of interest in awarding high ratings to securities that were destined to tank because they were backed by—–subprime mortgages!

Putting The Dots Together

Here’s pretty much what it comes down to–if you are thinking about investing in real estate and are operating on the assumption that things could only get better in the not too distant future, then you operating with a wrong assumption and need to be fully aware that you are before shelling out any of your hard earned but inflation eroded cash.

I have said it before and will say it again: If you do NOT know what you are doing when it comes to real estate investments, or do not have someone with enormous experience guiding your hand, forget about it. Use your money to pay down credit card and other debt. Wait until the wind stops blowing and you can truly evaluate what the damage has been.

Whenever I have said this in the past there is always some real estate broker who gets all flushed and writes something to the effect that this is a golden time to invest in real estate because prices are so low.

Well, you know what….if they think this is such a great time to invest in real estate, ask them to loan you the money and see how fast they stop returning emails!

When federal officials start saying things are really worse than anyone thought, that should make the hairs on your body stand up and fall out.

By any measure, we are in for a very rough flight. And, what do you do during a rough flight? Yep. You stay seated and keep your seat belt on.

Think of this as a sort of metaphor for real estate investing now–only, instead of staying seated, what you want to do is stay solvent by keeping your money out of real estate investing UNLESS YOU KNOW WHAT YOU ARE DOING! (The bold letters are to keep real estate brokers somewhat happy so they won’t write nasty comments.)

Tags: fed, federal reserve, foreclosure, Foreclosures, housing, real estate, real estate investing, The Fed

There is a law in physics that says: For every action, there is an equal and opposite reaction. The same is true is a rate cut by the Federal Reserve. Many people get excited when the Federal Reserve cuts a key interest rate. They somehow see this as a magic bullet that is going to fix what ails the economy. They are often surprised when they don’t see an instant economic turnaround.

The idea behind a rate cut is to stimulate the economy by encouraging businesses to borrow and expand. However, people have a tendency to focus on the impact that the rate cut has in their world. They don’t see the ramifications of the Fed action to the economy as a whole. If all that was necessary to promote economic growth was to lower interest rates, why not keep them at 0%?

The Good

The good part of a rate cut is fairly obvious to most. Indeed, for many, that is all that they see. The cost of borrowing is lowered. Adjustable Rate Mortgages that are tied to short-term Treasury Bills are lowered. Home equity credit lines tied to the prime rate are lowered as well as the interest rate on many adjustable rate credit cards. One of the biggest beneficiaries is the Government itself. With trillions in debt, lower interest rates have a huge impact on the Federal Budget since so much is spent on debt service. So with all of these benefits, what could be wrong?

The Bad

Tags: Ben-Bernanke, bernanke, fed, federal reserve, rate cut, real estate investing

This week has been an extremely volatile one in the world of real estate and the economy. We’ve seen Gold at $1,000 an ounce, a collapsing dollar, oil skyrocketing, an much more. Of everything that has happened, probably the most shocking is what came out of the Fed this week . . .

According to the The Daily Telegraph, “The US Federal Reserve has taken the boldest action since the 1930s, accepting $200bn of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis.” Tim Bond, a strategist at Barclays Capital remarked, “The market was starting to question the solvency of bodies that stand at the top of the credit pile. These agencies together wrap or insure $6 trillion of mortgages. They cannot be allowed to fail because it would cause a financial disaster. The fact that this sector has blown up has caught everybody’s attention in Washington”

At Least President Bush is Confident in the Economy!

It seems like everybody but the President, who continued to dodge questions about the economy until a press conference today where he expressed his “confidence” in the US economy. I’m glad that he is confident, but he’s doing little to stem the collapse of the dollar and the looming current recession.

To make matters worse, suffering investment bank Bear Stearns today was given a bailout by J.P. Morgan Chase and the Federal Reserve Bank of New York. From the Wall Street Journal:

The intervention by J.P. Morgan and the New York Fed shows Bear “didn’t have enough money to turn the lights on this morning,” said Carl Lantz, strategist at Credit Suisse. “And in a big picture sense, this isn’t that comforting.”

This news turned a somewhat positive market (inflation report wasn’t as bad as expected) upside down once again, and at the time of publishing this post, the Dow is down 300 points and Bear Stearns is off 40%.

Talk about an economy we should be Confident in!

Tags: bear stearns, dollar, Economy, Euro, fed, federal reserve, George Bush, monetary policy, president bush