Archive for ‘real estate crisis’

From PBS, An Interview with David Stockman and some Shocking Remarks

By trader7757, 6 February, 2010, 4 Comments

SAUL SOLMAN: David Stockman, former Michigan congressman and Ronald Reagan’s budget chief, who’s also toiled in the private sector at Wall Street’s Solomon Brothers, private equity firm the Blackstone Group, and his own controversial private equity fund.

Charges against him for accounting fraud there were filed and later dropped, and he settled a dispute with the SEC just last week. Stockman’s now working on a book about the financial crisis called “The Triumph of Crony Capitalism,” and has come out in favor of the president’s bank reform efforts.

David Stockman, welcome.

DAVID STOCKMAN, former Reagan administration budget director: Thank you.

PAUL SOLMAN: So, you like the Obama banking proposal. Why?

DAVID STOCKMAN: I would give the administration credit for trying to move us back to something that’s a lot saner than trillion-dollar banks being propped up by the taxpayers, which is exactly where we are today.

The fact is, Wall Street is entirely involved in capital markets activity, which is fine. But that’s free market activity. They shouldn’t be involved in it if they have got deposit insurance and if they have got the Fed window behind them. That’s for deposit banks, not for gunslingers and for hedge funds and for capital market players.

PAUL SOLMAN: But you were a gunslinger, right?

DAVID STOCKMAN: Yes. But I didn’t ask for any — I didn’t ask for any deposit insurance that the taxpayer is going to back up.

Please, Wall Street banks, don’t come and ask the taxpayer of this country who’s out in Green Bay Wisconsin, can’t pay his mortgage, can barely put food on his table, to have the safety net of the Fed and the Deposit Insurance and the Treasury of the United States. It’s an outrageous ask, and they ought to be ashamed of themselves.

PAUL SOLMAN: Listening to you, I’m struck by the fact that I can imagine critics on the left saying exactly the same thing.

DAVID STOCKMAN: I’m mortified by that thought. But, at some point, you have to ask, what’s good policy? And we have gotten into this syndrome, I think, over the last 20 years, where policy of the Treasury and of the Fed has been dictated by Wall Street, that, if Wall Street threatens to have a hissy fit, or the stock market is going to go down, the Fed has basically capitulated and is creating a very unstable and dangerous financial system in our economy.

PAUL SOLMAN: The president’s first bank proposal a few weeks ago, to tax financial institutions based on their size and risk-taking, stirred Stockman to write a New York Times op-ed.

“The baleful reality is that the big banks,” he wrote, “the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome.”

We asked the CEO of Bank of New York Mellon, Robert Kelly, to respond.

ROBERT KELLY, chief executive officer, BNY Mellon: The reality is, banks provide millions of jobs in our economy. The reality also is, is that we have had a one-in-80-year event. We also have a gigantic economy, which you can’t run with a lot of really small banks.

DAVID STOCKMAN: Well, you know, those are the talking points from Wall Street, and I take strong issue. The fact is, the heart of the bailout was AIG. That was $80 billion worth of CDS that was going to go sour.

PAUL SOLMAN: CDS meaning?

DAVID STOCKMAN: Credit default swaps, OK? And we weren’t bailing out AIG. We were bailing out the banks, because the banks had bought a lot of low-caliber or subprime loans, wrapped some insurance around it from AIG, and said, presto, we have a AAA, a security on our balance sheet.

They didn’t. They had garbage on their balance sheet. And the bailout was to make sure that they didn’t suffer multi $10 billion write-downs on that AIG-supported loan.

PAUL SOLMAN: So, if you had been in the administration after Lehman Brothers, you wouldn’t have supported bailing out AIG?

DAVID STOCKMAN: No, absolutely not. It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.

It’s destroyed any basis for fiscal discipline in the United States. I was a member of Congress, and I know how they think. And they think by analogy. If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.

PAUL SOLMAN: Well, spoken like a true gunslinger, but you would have been taking an enormous risk.

DAVID STOCKMAN: It’s part of the capitalist system. You know, if an investment bank gets in trouble, it ought to fail. If a hedge fund gets in trouble, it ought to fail.

The idea that our system is so fragile that the failure of Lehman Brothers or even Goldman Sachs, which could have happened, allegedly, in the next few days, would have brought the whole system down, I think, is baloney. I think it’s an urban legend that was created by Wall Street.

PAUL SOLMAN: Almost everyone I talk to says too big to fail is a bad idea, and, yet, in Republican and Democrat administrations alike, it has been the de facto policy. Why?

DAVID STOCKMAN: I think part of the problem is that Wall Street has this tremendous army of lobbyists, who strangle in the cradle any decent idea before it can even see — see the light of day.

PAUL SOLMAN: Which sounded a lot like Stockman’s political polar opposite, Paul Krugman.

PAUL KRUGMAN, columnist, The New York Times: This is as raw an incidence of the power of money in preventing us from doing something that everybody knows we should do that I have ever seen.

PAUL SOLMAN: And now both men favor a new tax on risk-taking financial institutions, which prompted one last question for Ronald Reagan’s budget director, famous for the starve-the-beast argument, that tax cuts would force government to cut spending.

Do you still feel that way?

DAVID STOCKMAN: I think the lesson of the last 25 years is that it doesn’t work. You can keep cutting taxes until you reach the point where this year — or the year just ended, we spent $3.6 trillion, and we only collected $2.2 trillion.

So, we are now so far out of kilter that it’s irrelevant. Taxes are going to have to be raised. And the beast needs to be trimmed back. But it can’t be starved enough to even begin to cope with our fiscal problem. And this is where I think all the politicians are faking in both parties, but the Republicans especially.

The Republicans think their mission in life is to cut taxes. Sorry, game — game over. We’re now in the tax-raising business. And we’re going to be in the tax-raising business for the next decade.

PAUL SOLMAN: David Stockman, thank you very much. Thank you.

Homeowners Walking Away From Homes

By trader7757, 5 February, 2010, No Comment

From the New York Times

“New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.”

You know, I am one of those guys that figures that when you sign a contract you are bound by the terms of the contract. We all seem to make bad financial decisions from time to time, but the new “American Way” seems to be a bit mercenary in terms of compliance. It goes something like this, “if this contract goes well for me, I’m all in, but if things don’t work out so well, I’m outta here.” I will grant that a great number of homeowners now find themselves underwater on their home valuations, and this may or may not be long term situation, but walking away from a home with a mortgage default is certainly a new method of viewing consumer responsibility. The general line of thinking is let someone else, a third party, eat the loss and you walk away without responsibility. Why even have a mortgage agreement to start with?

The New York Times Reporter continues,

““Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

I can’t deny that walking away from a home where you are upside down solves the homeowners problems, but what sort of broker recommends defaulting on a home? It just defies the way we have done business in this country, contractual law, and moral responsibility. No one forced these homeowners to buy homes at skyhigh prices, they made the decision to buy of their own volition. It appears that most of these homeowners are still employed and just tired of overpaying for a home in which they misjudged the future price. Am I missing something here?

On the other hand, if a homeowner has lost his income and can not make his payments, well, that is another story. But if the homeowner is still employed and his payments are still part of the budget he calculated to pay for the house, I find it difficult to justify walking away from the home because you don’t like the mess in which you have put yourself. Prices go up and down, that is the nature of a market driven economy, and most of us have to live with the consequences of rising and falling prices. On the other hand, there seems to be a distinct group who doesn’t like the downside of the market driven economy and chooses not to participate. I’ve heard it all, I guess.

Update on TARP Money

By trader7757, 7 December, 2009, No Comment

From the NY Times: U.S. Forecasts Smaller Loss From Bailout of Banks

The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report.

The new assessment of the $700 billion bailout program, provided by two Treasury officials on Sunday ahead of a report to Congress on Monday, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. …

The officials said the government could ultimately lose $100 billion more from the bailout program in new loans to banks, aid to troubled homeowners and credit to small businesses.