JP Morgan starts to tackle the problem?? Not really.

Well - I have missed alot over the past few months of being in slumberland (from the blogging perspective) - but now that winter is coming and I have done what I can do outside to my new pad (Bubba and I bought a house in the Spring) and golf is done - time to get focused on more indoor activities.

So I will start off my new blogging season with the topic du jour - who is actually going to rewrite the mortgages for those who took ARMs in the housing boom.

Interestingly - it is JP Morgan. Odd choice in my mind as they are not usually so visible in the consumer (read: middle class) sector directly. However they snapped up some troubled lenders/banks and got 25 billion from the government last week - and, SHOCK , they are now going to start rewriting the problematic loans. The revisions will take the following form: The ARMs, with the messy interest only teaser and balloon payment later, were a favorite of the speculators and those who, in many (but not all cases) ought not have bought a house in a speculative boom, will get rewritten into conventional type loans.

Bubba and I did not get on board this housing boom when in DC and Jimbo has blogged about in great detail. Maybe we could have bought a house - but the fundamentals were not right. Prudent (or stupid - you can take your pick) - Bubba and I sat out the DC boom and paid exorbitant rent. Now with the expected downfall of what EVERYONE saw as a boom - the messy mortgages have to be dealt with. The spike in foreclosures that started the entire mess, has yet to actually be addressed.

I'll say that again - the initial cause of the recession has yet to be addressed. The Feds have picked winners in the bailout (Bear Stearns, Wachovia, WaMu, AIG, Merrill Lynch) and one particularly notable loser (Lehman Bros. - could not find a buyer to take it intact and got sliced and diced). However the bigger solvent banks (Wells Fargo, B of A, JP Morgan, Goldman Sachs) that absorbed the distressed winners in the bailout - had to take on the debt of the companies that they absorbed - of course that was guaranteed by you and I via tax dollars. Also the big banks got direct loans from 2-25 billion on top of the other guarantees. Also they got a big gift from the SEC to halt short selling of stock (in a very delayed measure to prevent the market from trashing their stock prices). And they got Freddie and Fannie out of the private sector (they were both taken over directly by the Federal Government).

So we have had, since Bear Stearns was absorbed in March for $10/share which was bumped up from the original deal of $2/share) - nothing tangible done to rewrite all the messy loans. That was up until this past week (it is November now)- instead the Feds wanted to keep at least some of the banks solvent first and keep the stock market from completely shutting down.

So now that the Feds have ALSO added money into the system to allow banks to loan to each other (another gift from us to them which is added upon the costs of direct payments to banks) and now banks are loaning again to one another - then we can start to deal with individuals.

Odd how the system that made so much money off of the boom got their needs taken care of first while the consumers were put to the back of the line. NOw I agree that many consumers were trying to speculate and flip houses - but those of us who lived in white hot real estate markets also know that houses in Logan Circle cannot go from 100K to 800K in one year without some assistance to buy a house from the flow of cheap and easy dollars.

Interestingly, the onus of this appears in the economic press to have fallen on Freddie and Fannie - which is odd when you consider that many large banks say that the Feds made the banks (i.e. Freddie and Fannie) loan money cheaply and without any sort of background check. I find this twist very odd - that the blame game (while taking hundred of billions of dollars from us over the past six months) from the private companies is due to Fannie and Freddie. Now remember when you mother said - "just because someone else is doing it why should you, if they jumped off a bridge, would you do it too?" If Fannie and Freddie were being speculative - why should the private banks follow suit? After all Freddie and Fannie are backed (well, it is understood this backing to be implicit) by the Federal Government while the private companies are beholden to their shareholders.

An additional twist comes when you think about what the private banks really did - they would originate a loan (and accumulate the points and fees as real time earnings) and then slice and dice off the loan into complex deriatives priced based upon the quality of the loans. So banks get to collect up front fees, then move the loans off their balance sheet, and repeat. This is what is called leverage - that means that banks had originated far more loans than their balance sheet could handle (but collected fees for that, i.e. good revenue for Wall Street and helps their share price). So then comes the default crisis - and guess what happens? The derivatives are structured such that if a defined default rate is reached, the debt gets returned to the bank. Oops - you can see how the spiral starts.

Now the real fun begins - the banks then are returned the debt (they originated of their own free will) onto their balance sheet. PLus they are now required by accounting rules to price the property on their balance sheet at the current market price (mark to market is the catch phrase). Double oops - how do you value something that is in default and no one wants to buy it. Yup, the balance sheets start to look really really ugly because the banks are on the hook for the sold price of the house but now have a real value on their balance sheet that is much less (and in many cases unknown since the market has no idea how to handle the derivatives in real dollars).

In the old days, banks had to loan out only what they could reasonably expect to cover with their own balance sheets. But Freddie and Fannie then got a pass from the Federal Government to start loaning out money to minorities and poor folk to increase the rate of home ownership (remember that "ownership" society nonsense years back). Well Fannie and Freddie started over-leveraging but using the Feds as their backstop. The private banks then got bitter - Fannie and Freddie get to generate all this revenue in real time and the private banks are losing out on a new market segment. So the private banks decide to use complex derivatives as a method to mimic the Federal backing - but then pat themselves on the back for having a "market based solution". And they start earning lots more money from origination without the costs on their balance sheet.

Well with the default crisis at hand (and totally predicable) the heaping pile of shit loans are back where they started; the banks are now insolvent by their own volition. Do they go under? Mostly not - they just get consolidated into the stronger banks with heavy investment of taxpayer dollars. The banking system is just "too big to fail". Perhaps - but did anyone think of this 2 year ago? Did anyone actually force the banks to do the thought experiment of "what if". Nope - the loaning went up to the end, and then froze. The music had stopped and where were the chairs? So the taxpayers now get to absorb the costs of the bad behavior and for what benefit? Consumers bought what the banks offered - probably not a good idea - but the banks always say it is the responsibility of the consumer to take a loan responsibly. But how do you buy a house in DC without being somewhat irresponsible?

The banking sector made the housing boom and now they are being trashed for their excess on Wall Street - sad part is that converting the ARMs to conventional loans was not part of the medicine - until now. And ONLY with a healthy bribe from the taxpayers. Oh well, yet another fleecing of the taxpayers for the private companies' excess - not the first and not the last. But let's remember who is coming last in the bailout - the whole source of the problem. The banks used their "too big to fail" threat to get their servings from the Federal trough first - and then, and ONLY then, would they convert the exotic loans to conventional products.

The real problem is that we have had a real concentration of wealth in a few banks - the biggest surviving banks can and now will act as a cartel when things get sorted out. Cartels never work in the public interest and NEVER expect this concentration of wealth to thank the taxpayers for bailing them out when in dire straits. Nope we'll pay once now for their excess and then pay very dearly later when the survivors act in a concerted effort to corner the market.

A tax funded bailout of irresponsible companies will end up becoming the taxpayer-based noose around the consumers neck. Some relief will come via JP Morgan's lead to refinance but that is short lived and will only benefit the healthiest of the speculators. Expect in 2010 when things start to revive that the pool of companies that survived (and sucked up the competition) is shockingly small in number - the cartel will be at hand and their existance to fuck you and I will have been paid for by, you guessed it, you and I.