Rick Santelli is Right Again! This Time on the Debt Ceiling

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In case you needed any other reason to love Rick Santelli on CNBC, below is a video where he brings some common sense on federal spending and the debt ceiling.  He does it in his traditional, calm, restrained, and cool manner.  Ok, just kidding, he is on fire!!

A Moral Hazard

CNBC's Rick Santelli got it right about this "Mortgage Relief" being pushed by President Obama. While I generally stay out of particular political issues in this blog, the video clip really hits the nail on the head.

For reference, Wikipedia has a good definition of moral hazard:

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

So, some homeowners got themselves into mortgages which they probably knew they wouldn't be able to make. Now that they are sinking, in rides the US taxpayer to bail them out. As somebody who pays their mortgage on time, I resent having to bail somebody out of their uninformed mortgage mistake. You can read a great primer about the financial crisis here and here.

While I have sympathy for those who don't fully understand mortgages and mortgage documents, I don't have sympathy for mortgage brokers and those who just got big eyes for big houses. I also have only a modicum of sympathy for banks who were bullied into making bad loans by the US Justice Department via the 1977 and 1999 Community Reinvestment Act.

Although I could get on my soap box about thrift, savings, mortgages, living within your means, I won't. Rather, I wish that US citizens will seriously consider both the economic stimulus signed into law and these mortgage and mortgage relief provisions that President Obama wants passed. Finally, I tip my hat to Rick Santelli for telling it like it is.

Financial Crisis Primer, Part II

In my previous article, "Financial Crisis Primer," I gave a very brief explanation of why there is a financial crisis in the first place.

What I failed to mention, was a solution. While I would love to take credit, I didn't come up with this, and sadly I don't remember the name of the guest on CNBC who mentioned it.

What the Treasury should do, and it appears as though they will, is ask the banks what they need in terms of recapitalization. For example, Neel Kashkari (Cash-Carry, right? Love it) pictured above, calls Citi and asks how much they need to cover existing losses on mortgages, as well as capital necessary for lending. Citi responds with a number like $15 billion (twice what they got from Abu Dhabi Investment Authority). The government in turn, gets $15 billion in prefered stock, warrants, and other financial instruments of value.

I think this is a good model. It is very similar to what Warren Buffett did with Goldman Sachs. Goldman needed some quick cash and Warren put down a cool $5 billion. In exchange, (from MSNBC):

"(Buffett got)...$5 billion worth of perpetual preferred stock getting a 10% dividend and warrants to buy $5 billion of common stock with a strike price of $115 a share. He'll be able to exercise the warrants at any time over five years."

Imagine if the Treasury could spend $120 billion, $15 billion over 8 banks, and voila, much of the financial crisis is solved. The banks get fresh capital and the US taxpayer gets a profitable investment. Unfortunately for the existing shareholder, the infusion will dillute existing shares. Oh well, caveat emptor.

In the end, I think Bernake and Paulson are trying to shorten the duration of this mess by offering US taxpayer money to purchase the worst of the worst assets as well as providing plenty of cash at the Federal Reserve Discount Window.

Many argue that the government shouldn't be spreading around taxpayer dollars. While I agree in principle, the overall market for money indicates that banks are hoarding cash and investors are fleeing for quality. For the global financial system to function smoothly, capital has to get moving again, and I think that is the plan.