“The Kool Aid Man” by Reece Gates
The Kool-Aid Man
Guest-written by Reece Gates
Geithner’s plan to stimulate the economy stinks if you can even call it a plan, unless you call re-inventing the wheel a great idea. Geithner has high hopes and it sounds like he’s working for the banks and not the people. This is going to help the banks get their balance sheets in order without having to take responsibility for their bad investments, and then this is where the magic is supposed to happen and they will start lending money again. This is such an absurd and ridiculous attempt to cover up losses that I can’t help but wonder what is going on in that White House. I have not seen this type of cunning creativity since Bill Clinton.
If I understand this PPPIP correctly, the hedge funds first have to raise collectively 500 billion just to meet the goal of the Legacy funds target, and then they need another 100 billion to purchase all of the 1 trillion in assets. I find it very interesting that they limited the investment pool to hedge funds instead of opening this investment up to the entire country, first of all Hedge Funds were major players in the Credit Defaults, a lot of them made billions shorting the housing market. Then they got paid from AIG after we bailed AIG out. Now if I know hedge funds and they buy into Geithner’s scheme, what’s to stop them from buying CDSs all over again and insuring their positions? The FDIC is guaranteeing all of the toxic assets, which means any insurance company will sell a Credit Default on it; it’s a no-brainer because they are guaranteed. For starters there is 1 trillion in toxic assets on the market and the entire hedge fund industry only has 1.5 trillion under management. Geithner is giving the Funds 6 to 1 leverage, which is really high. Imagine getting 6 to 1 leverage on a house you want to buy. Let’s say you want to buy a $240,000 dollar home and the government says they will give you at a 6 to 1 leverage, all you have to do is come up with $40,000 and the house is yours. At those prices, why not buy 6 homes? You’ll get 6 for the price of 1. Furthermore, the bank is going to split the $40,000 50/50 so you really only have to put up $20,000. Hmmm let’s see, that would make this deal more like leverage of 10 to 1. With that kind of leverage they can easily create a bubble in Toxic assets.
Now let’s look at other serious problems, with the hedge fund industry as a whole only being worth 1.5 trillion, even with 6 to 1 leverage every hedge fund on the planet would have to invest .33 cents of every dollar they have under management- that is (1.5 trillion/ 500 billion). Now that is just to meet the equity tranche of the legacy assets target, it doesn’t even include the actual purchase of the toxic assets. Tim Geithner knows that if they did not offer the leverage, hedge funds could not afford to buy the property. Sound familiar? When people could not really afford homes, the banks gave everybody leverage.
We also have to keep in mind that this not a plan to save the economy or a plan to save the equity in your home if you have any left, this is a plan to remove bad debt from banks balance sheets. This is one part of a bigger plan: this administration believes that if they can “help” the banks get rid of its toxicity they will start lending again. But after this is all in motion, the new owners of the assets have to sell these homes into the physical market at some point and I just don’t see people tripping over each other to pay top dollar for these homes. But I wouldn’t be surprised if they prove me wrong… Since hedge funds would probably have swaps on the assets anyways they will get paid even if they dump the homes in the physical market to the highest bidder, it’s a win/win. You cannot hide the losses caused by subprime mortgages, and right now it’s like a hot potato, no one wants to take the losses. If the scenario above plays out and these 19 million homes end up being in every American’s neighborhood, it will drag the prices of all of our homes to the ground and those losses we suffer will be where the subprime losses show up. If it doesn’t show up there, it will show in inflation- but it will not go away, it’s just impossible. They are literally removing debt from the balance sheets of banks and putting it on the taxpayer’s balance sheet. We have to accept the losses someway somehow, but not the banks. What price are Americans willing to pay in hopes of a recovery? Do you realize that if we have a miraculous recovery, you and I may not be part of the surge because of these sacrifices? We will watch wealthy people around us become even wealthier while we sit around chewing on this gum the administration is feeding us and wondering why everyone else is getting richer.
We still hear the administration complaining that banks are not lending money. I understand what they mean now, I have been suspecting this anyways but I wanted to give them the benefit of the doubt: they want banks to lend to anybody that has a pulse again. The real problem here is that a lot of banks have wised up; things have gone back to the basics of loans. Remember when the 3 Cs were needed to get a loan? Cash, Credit, and Character; the theme of the 80’s. Well the 3 Cs were jacked up in a dark alley off Wall Street somewhere and have been missing for a long time because over the last 10 years you did not need anything that resembled one of the 3 Cs to get a loan. Gang Bangers were financing empty buildings in Chicago, and then taking out $100,000 in equity because the banks did not even know the buildings were not habitable. Once their balance sheets are in order, they will be able to sleep again and I seriously doubt lending will pick up, which is the exact purpose of them creating the PPPIP. Banks will not start lending until the economy’s fundamentals are solid. Not the “Virtual” stock market, it can rally all it wants. Hedge funds can bid the “Virtual” homes as high as they want, but we will know the real value when the assets come off the books and are sold in the physical markets, that is where real price discovery is far more accurate.
Houses are still un-affordable, the housing market needs to fall 40% from its high levels to meet the median income of the average American before it is in line with incomes. Banks know this, they are not going to start financing houses that are priced too high again, but who knows, they are buying Toxic Assets again.
Right now 1 in 8 home owners is 1 month or more behind on their mortgage, 1 in 4 home owners has a home worth less than the mortgage on it. Those are staggering numbers, which just goes to show the precariousness of our situation. How come we can’t just let the economy de-leverage and go back to living normal non-over consuming lifestyles?
Our Government is making laws to help “responsible” people keep their homes and then turning around and simultaneously giving court orders to evict families from their homes because they can’t pay the bank when that same family just bailed them out! Why is it that irresponsible home owners get booted out on the street but still have the responsibility of bailing out irresponsible Bankers? Homelessness did not come overnight during the great depression, it crept up slowly over time, and right now every state in the country is reporting record numbers of homelessness. How come Obama can’t order all courts to stop issuing foreclosures? If you are an American citizen and your tax dollars are going to bail out a bank that is putting you out of your home, you should be insanely pissed off right now. Then they turn around and give houses away to investors at super leveraged prices to sit on for 3 to 5 years in hopes it will rise in value and if the investors lose, we all still have to pick up the tab. The government could buy these homes with our 1 trillion; nationalize the homes to use as temporary government housing.
All they did was re-pack the houses into another Mortgage Backed Security (MBS), oh, I’m sorry, that would be a Tax Payer Backed Security (TPBS). This is not right!! And I don’t understand how this is helping “America” right now, or 3 years from now.
All markets including the housing market, are simply trying to de-leverage and return to “fair value” in terms of what they are really worth so we can all afford food, cars and houses again. Our government clearly does not want that, they want a screaming economy and they want you to go shopping!! Don’t get me wrong, I want to go shopping too, but what we saw from 2003 to 2007 was not normal consumption or production. It was hyper-consumption and over-production. As you have seen, it took a very special set of conditions to create that economic boom: they were extremely low credit requirements, fraud, and lots of leverage. Do you really want that again? Did we not learn anything here? It is very bad for our environment & global warming to consume at those levels. The measures the administration is taking now are the same tactics used to over leverage the last boom, do you think it will work without the key ingredients of the last blunder? We’re all busy pointing fingers, blaming others and trying to get to the bottom of why the economy is in shambles, I see people on TV being interviewed that bought homes they could not afford and they all say they are the victim, but let’s get real, let’s face the truth:
We all drank the “Kool Aid”
And it tasted so good until the sugar ran out…
Thanks for reading.