Mortgage mess

Well. For those of us who lived in DC for the past few years, the mortgage mess is no secret. Easy loans, lots of money floating around, "sophisticated" hedging schemes to spread risk, low interest rates, incentive for banks/loan origininators to cheat, ARMs, speculation, etc.

Any surprise that it all came crashing down?

The funny thing now is that all these really smart financial people are "scratching their heads" trying to figure out how their complex leveraging schemes to spread risk eventually came up broke. Well, it doesn't take a PhD to figure out that people who play the market on others money will get burned at some point. And these whiz kids knew that it was the poor people who would pay the price.

We have both sides of the aisle in the Congress and our nominal Commander in Chief advocating how wonderful it is to have people own homes. Let's just not talk about how they will be bankrupt in two years when the teaser rates vanish and the bill comes due. And who owns them now? Yup, the bank. And the bank become really the nominal owner. There are other things afoot.

I don't buy this idea that "no one saw this coming". Two and a half years in DC and I saw this beast grow and begin feeding on itself. Homes that were 180K in 2000 became worth 800K in 2006. We paid 2000 bucks a month in rent (60K over our time in DC) and the place was bought for 120K in 2001. The level of speculation (flowing out of the dot com bust) was truly spectacular. Am I supposed to feel sorry for people who played the market and lost. Well maybe. But I am really not sorry for the infrastructure that fed the boom and now has to deal with the mess. Should they go under? Absolutely. Teach the market some discipline.

Banks thought that they could move their positions in real estate off the sheet just one day after mortgaging the house. Except they had to write in clauses about foreclosure rates. Oops. Now they are having to pay their due for originating bad loans and are running to every Abu Dhabi, Shanghai, and Singapore that will loan them the money to get through. Their normal cash cow, Washington, has not sprang into action to resuce them in totality. And now the sterling institutions of the banking world are whoring themselves to the highest bidder to cover their ass.

Let's get this straight. Banks made bad bets. They want DC to cover their bad positions. DC blinks. They run immediately to rich international governmental funds to get their cash infusion - and dilute their stock in the process. Are you kidding me? Merrill Lynch is sucking up petro dollars from the terrorists and the government lets them slide by? I say that is a real problem because they are leveraging the financial structure of America on bad bets that they made. And now, they are shoring up their positions with foreign governments which are no ally to America.

Let's just clarify this. The major capitalists are selling themselves to enemies to hedge themselves and, let's just ask, who will own your house when it is all done? Some emirate in the sand? This is not leverage in the traditional view - that being that these governments buy a position in publicly traded bonds. No, they own sizeable shares in the companies that were given to them for a fire sale price.

I guess that we should not be surprised. China funds almost 20% of our housing debt - albeit in bonds which are tradeable (until dumped en masse when they approach zero in value - but we will set that elephant in the room aside fornow). Why ought these financial whores (read: banks) not shell out another 20% (not in bonds, but in real shares) to our non-allies. If Germany or France were going to finance our debt - I might not be so specious. But to give shares for pennies on the dollar to totalitarian governments (and board seats to boot) - are you kidding me? The point of this is that banks originate the loans of their own free will. Those freely given loans go into default when the teaser rates vanish and the people who paid NO money down start to walk away - banks, thinking that no one would ever default (um, are you kidding me), now have their pretty little leverage package handed back to them (under the terms of the agreement they willingly entered) and they now have to put all that loan mess back on their balance sheet. So when they hold the loans and then run to foreign governments for a capital infusion (for a trade of stock) - who owns your loan? Note the volition of the banks that set this whole debacle in motion.

I just find it hard to belive that banks had no "idea" about the mess. Of course they knew - it was short term gain (originate the loan, sell it off, and get the 1.5% charge in up front cash) and don't worry about the longer term implications. Well longer term implications are here. And banks, who hate to carry loans on their own balance sheets, are stuck with bad ones when the complex leveraging schemes hand them back because the default rate is too high. Had they followed the old model, they would NEVER have loaned out this money. But once they had the green light to move the loan balances off of their sheet and onto the sheet of complex leveraging schemes - they could make the origination money and the interest (read: profit) without having to carry the debt. Too clever by half. And now, when the bill is coming due, for their willing participation in the shell game of "who owns the mortgage" - they sell your loan out (in part through their shares) to those who don't (and won't) practice core capitalistic principles at home, much less democracy.

I have been watching some old movies lately while sipping wine and the whole Japanese conquering America in the 1980s theme has come back to me. Japan went on the rampage in the 80s - they took their money and went on a shopping spree in NYC and LA. This caused major drama. But they took those loans onto their own balance sheets and when the crash came, well, Japan took a 15 year hiatus to work out their bad loans. Now fast forward 20 years. American banks have facilitated a domestic buying binge and then moved all that money into complex schemes. Doesn't work out - but do they take it on the chin? Nope. They run to DC, no dice. Then in the next breath they take their debt to foreign governments and offer shares for cover. So you now have our financial institution, after using China to buy our housing bonds rather quietly, these capitalists are overtly going to our enemies to get cash to cover their bad bets.

I'm thinking of Sharon Stone in Casino right now. The end is not pretty. But the mortgage mess is not a quick OD and the screen fades to black. It is you writing a check to Abu Dhabi via Merrill Lynch. Bad enough your $300 gas bill for winter heating goes to them. Or your $3/gallon gasoline goes to them. Now, your house is owned by them and you pay them interest. When the bill comes in Arabic, don't be surprised.

The short version is this. Capitalism works great when anyone wants to set a price in a market that is transparent. Capitalism is not so good when things get opaque. And when you hear words like "leverage" and "collatorized debt organizations" - you best think of some milky haze. The person who loses in the near term are the poor saps who over-reached or speculated ((probably both), but in the longer term we all lose. Even if we don't pay the terrorist governments directly through shares (remember - all those shares get a quarterly dividend), we sell our infrastructure to them by these sorts of shenanigans. This does not occur in one bolus, rather it gets doled out nickel and dime to the enemies via our "valiant" capitalists.

Sounds really weird. But look at this for what it is. Junkies having to pay the bookie -- and when they cannot pay bookie number one they go to another bookie (number two) to kite the loan. Let's face it, the first bookie isn't great and you need to get him out of your hair - but when you have to borrow from the second bookie to pay the first - well, there should be no surprise that our financial system is now descending to the level of ghetto economics. Crack and loans are now analogous. But the crack whore is now Merrill Lynch, B of A, Wachovia, WaMu, etc instead of Strawberry, Tanisha, Evangeline, etc.

It will all end in one of two ways. Either we, the people, foot the bill to shore up the bad boys of capitalism via tax money, or we the people are forced to pay the terrorists a monthly bill (and quarterly dividend) so that the capitalists can go on.

The sad thing is that the WSJ, of all institutions, were the rallying cry for leverage. They know better. But now the WSJ writes about the complexities of the marketplace. Shame on them - the Washington Post or the NYT doesn't know any better - but the paper that embodies true capitalism has turned a blind eye. Vote this year to own the debt through American tax money. We all hate it. But better the devil we know than the terrorist we really do not.