Stop the Meddling With the Market!!

On the front page of the 04 December print edition of "The Wall Street Journal," the headline is "U.S. Eyes Plan to Lift Home Sales." Are you kidding me?? The article states unbelievably, "The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages."

You just read what I read, Freddie and Fannie back loans whose rate is below market. Good grief!! The goal is to extend more loans and "address falling home prices." Doesn't anybody remember the housing bubble? Why does the government think it makes sense to prop up home prices instead of allowing the market to price them? Also, why allow failed institutions to back below-market mortgages? I feel like I am living in the Twilight Zone.

Let's take this a step further. This scheme is only for buying a home and not refinancing. However, later in the article, Secretary of the Treasury Paulson says "...is to reduce the cost of mortgage finance so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages." Huh? Now he wants to subsidize mortgages? Maybe the plan can include only those refinancing with bad credit, as the rest of us suckers are stuck with what we've got.

When I bought my house, I had to scrimp and save to get a suitable down payment, as well as prove employment and the ability to pay. Guess what, I have been able to pay my mortgage, on time, and without any "adjustments." So why should things change now? What should happen is that those institutions that made bad loans face the consequences.

As a taxpayer, and somebody who pays on time, I resent that some new home buyer is going to get a subsidized mortgage. I also resent the fact the lenders are going to rewarded for not applying standard risk models and setting rates. Stop this madness!! If the US government wants to restore both faith in the financial markets, as well as stability, mortgage and home prices should be set by the market, not by government interference (and my money!).

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.