The Tycoon Report on the Mortgage Bailout

December 5, 2007

A reader of AFM sent me an email with an article by Dylan Jovine, who writes The Tycoon Report. As many of you know, I’ve been pretty vocal (and lots of you have too) about this mortgage bailout plan that Washington is trying to push through. Dylan’s rather long piece compares this crisis with stock market panic of 1907. For the most part, I agree with what he says. That is, until he says this:

Half of the people I hear screaming at the top of their ignorant lungs would have you believe what the politicians are spinning to you — that this is a bailout of good old fashioned American homeowners who simply got taken by the big bad fat cats on Wall Street.

If you believe that, then I have a bridge to sell you in Brooklyn.

The other half of the people screaming at the top of their ignorant lungs would have you believe that this is a bailout of the fat cats themselves. I can’t tell you how many op-ed pieces I’ve read from writers claiming that Treasury Secretary Hank Paulson, who is the former CEO of Goldman Sachs (SYM: GS), is running the financial Trilateral Commission, and he’ll make sure the rest of his Wall Street fat cats don’t get crushed by the mess they made.

I’d like to believe that. It sure sounds good. But the truth is that this bailout isn’t about either of them. And like I said, neither is it about me.

This bailout is about saving the system itself.

First off, I don’t like being considered ignorant if I’m skeptical of this bailout. Secondly, I don’t think either one of those points addresses the concerns of me or most of the readers of AFM. I think that this bailout is strictly political. The Bush administration is trying to do something so they look like they’re “doing something.” Bush’s hands are tied on this deal. If he doesn’t do anything, the Democrats will use it as a way to show that Bush doesn’t care about struggling homeowners. If he does do something, people like me will call it political. Thirdly, this IS ABOUT ME and YOU!

I think Dylan fails to see that this bailout isn’t going to do anything but prolong the pain. Temporarily postponing interest rate resets is just that – temporary. Eventually the dust has to settle and that means some people are going to lose. Housing prices may fall significantly. However, there will be people to buy those houses if the price is right. Things will get back to normal until the next big idea comes along.

Finally, this will be my last subprime post unless a reader sends me another email. LOL! I don’t want to beat a dead horse but sometimes the topic is too important to pass up.

12 responses to The Tycoon Report on the Mortgage Bailout

  1. Check out this link. The housing mess is affecting everyone all over the world

    http://www.dnaindia.com/report.asp?newsid=1136716

    Norway’s towns are the latest victims of the credit crisis that began last summer in the American subprime mortgage market and has spread to the farthest reaches of the world, causing untold losses and sowing fears about the global economy, the New York Times reported on Sunday.

    People, are angry and scared, fearing that the losses will hurt local services like kindergartens, nursing homes and cultural institutions. With Christmas only weeks away, Narvik, a close-knit community of 18,000 has already missed a payroll for municipal workers, it added.

    News today as I sit and watch CNBC is that various attorney generals starting investigation into all wall street loans….

  2. If one can argue that the banks ARE the system, then yes, it is the system that is being bailed out.

    The truth of the matter is that were the banks obliged to mark-to-market all this junk paper, many of them would actually be insolvent.

    There is this fervent hope on the Street that things will improve and bids will go up.

    This reminds me of a gadget I saw in a Sharper Image yesterday. It uses electrical stimulation to mask back pain; the argument being if I don’t feel it, it’s not there. The fact that pain is a call for attention is deemed irrelevant.

    I have no doubt that, if bids don’t rise, then accounting changes will be instituted to mask all this underlying fragility.

    Just report it differently and it goes away.

  3. This is absolutely political and the market should be allowed to work this out on its own. How often does government ‘help’ really help?

  4. The latest thing seems to be calling for ARM rate freezes. Clinton’s for example extends 5 years.

    What’s worse? Wouldn’t freezing those rates drive up rates for prime borrowers so banks can recoup profit? Or would they go higher if they all foreclosed and banks hiked rates to keep themselves above water?

  5. First, I am a different guy than the Tycoon Report Dylan.

    Second, I agree with you JLP, but PLEASE don’t stop writing about subprime topics. You are my primary source as to what’s worth reading more about and what’s not!

  6. First, let me agree that meddling in any market has unknown consequences in the long term.

    But is it fair to blame this on Democrats??? Come on! If Bush can take a moral stand on 1) cutting taxes while increasing spending, 2) fighting three wars (one optional) on credit from China, 3) talking about privatizing social security…

    … then surely he can find the moral backbone to stand up and say this is a cut-n-dry dumb idea!

  7. Lorax,

    I’m not blaming the Democrats.

  8. I’m kind of torn on the issue. I bought a house that I believed I could afford, and I got a 30 year fixed mortgage to guarantee that wouldn’t change. I’ve nothing to fear really from a change in interest rates in that regard. A bailout has little to offer me.

    And yet, I know that a lot of what drives the economy is perception. Money is this fluid that flows around from person to person, but it is not wealth. It is only wealth to the point that it can purchase the things we desire. So having more money in the system (inflation) shouldn’t really change anything since we all would just adjust to the new amount.

    And yet, when the economy flags, the Fed lowers interest rates and new money is created. And for some inexplicable reason, this seems to help smooth things out. We generally consider this a good thing; we get recessions instead of depressions.

    Perhaps a bailout only prolongs the pain. But I might be persuaded that that’s a good thing, just like recessions are better than depressions. Perhaps it might be better to have housing be a laggard for a decade than to have people starving for 6 months. For sure there will be people who can’t afford basic necessities in either scenario.

    But I wonder just how much any of this is going to do. Interest rates were still pretty low as near back as February. My sister-in-law took an ARM last summer at a decent rate. I think she’s nuts of course, but a “friend” at the bank sold it to them. Does anyone really think that whatever bailout has been suggested is still going to be in place 5 years from now when her loan resets? I doubt it.

    No matter what happens, I expect there will be plenty of pain to go around.

  9. This cements W’s spot as Worst Ever. I thought is amnesty plan was bad. This is worse. And the scary part is he has a whole year left to come up with these plans.

    The even scarier part is that Dems would have done ever worse had they been in power. Hillary wants to freeze all ARMs and put an end to foreclosures. Might as well rename the county the USSR United States Socialist Republics.

    It is simply disgusting.

  10. Just look at what rent control has done in the cities.

    The people who took out these mortgages were cheaters – cheating the 20% down, fixed-rate rule that had been in place for decades. Because of them, home prices rose to ridiculous levels, making homes unaffordable to all but the best earners. I don’t see how this is good for the country. Now anyone who wants to buy a house will be paying till they’re 90.

    So as I sit in my small house with my above-average salary, waiting for prices to drop so I can buy a house half as nice as the one my parents could afford on my same salary, am I supposed to be happy that the government is going to let these same cheaters stay in the houses they never should have afforded in the first place, keeping prices still too high for play-by-the-rules guys like me?

  11. I agree with Jayson. The folks who are prudent with their finances are the losers in this.

    Anytime the government interferes in the free markets, unintended consequences happen. In this case, it may actually hurt the real estate market, not help it. The politicians think this will preserve home values and stabilize the market. It may help preserve home values, but it will probably slow the number of sales in homes. If these subprime borrowers lost their homes, it would drop the home values, which would bring new, deserving buyers to the table. Real estate might get more movement and actually normalize. Now the real estate market may sit and languish for longer than it would under a market driven correction.

    Also, this may harm the rental market in unintended ways. And, of course, it will hurt the investors who purchased these loans through Collateralized Debt Obligations (CDO). These investors are not just rich fat cats. Many pension funds hold these loans so it affects the retired teacher, police officer and firefighter. The State of Florida is already having trouble paying its teachers because it invested in many of these loans. The value of these loans will certainly drop further since the risk/return ratio is much worse than a Treasury bond. Plus, who wants to buy something where the government might step in and extend the “teaser freezer” another five years; thus, guaranteeing lower yields than most Treasuries or high grade corporates.

    Finally, the government is hurting the borrowers as well. Sure, it is painful to lose your house, but mistakes are life’s greatest lesson. These folks probably won’t change their behavior because the government has created a moral hazard. These folks will believe the government will bail them out if they are in financial distress. This is not how America became great.

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