Sunday, September 28, 2008

Shame On America Sunday: Four Questions To Ask When Someone Needs Money.

NOTE: If you read all the way to the end, you will see my bailout plan that will not cost the taxpayers anything and will definitely work. But
you have to sit through some rhetoric, first.

Shame On America Sunday is about contrasts -- about the comparing of two things that exist, side by side in America; the fact that those two things could exist, side-by-side, is why America, the richest greatest proudest country in the history of the world, should be ashamed of itself.

Today is no different. Well, today is a little different, because today, I'm starting with the little guy first. Usually, I begin where people's attention is always focused: The rich, the powerful, the famous, the spoiled-brat-kids/Tonight Show hosts who waste money, the selfish greedionaires.

I'm going to reverse that today.
He owns a house:

Here's Michael "J.B." Schaffner of Nocona Texas. "J.B" is a trucker hauling for a small company. Back in May, "J.B." was one of the organizers of a convoy to Washington D.C. to try to get Congress to do something about his ailing industry. "J.B." at the time was fueling his truck in small amounts, trying not to spend too much at any one time. One day, in his words, "I woke up and said a prayer," and began trying to do something to get some action about the high cost of fuel.

The trucking industry was in crisis before May, 2008; in the first quarter of 2008, nearly 1000 trucking companies went bankrupt.

Naturally, Congress went right to work, right? Of course they did: They introduced HR 6922, a bill to provide low-interest loans to companies hit hard by rising fuel costs.

They went straight to work on it, I said. They... introduced it to a committee where it sits to this day. HR 6922 is just a bill, sitting there on Capitol Hill -- it went off to committee, where it sits there and waits.

So Congress leapt right to action, and then slept right back to inaction.

Nobody, in the end, paid attention to "J.B." Did you hear about the convoy? Did you hear about HR 6922? Did Worst President Ever George Bush go on TV urging you to help the truckers?


He owns two houses and is worth $700 million.
Here's Henry Merritt Paulson, Jr. Odds are you've heard of him -- but only in the past few days. The odds are that you know that Paulson is the current Secretary of the Treasury; he's the guy that proposed the government give him $700 billion dollars with no strings attached and no oversight possible. When you propose someone give you $700 billion to do what you want with, that attracts attention.

Prior to that, Henry Merritt Paulson, Jr., attracted very little attention, which is odd because people usually pay at least some attention to the ultra-rich swank business leaders.

Paulson is ultra-rich. He was born in Palm Beach, Florida. He went to Ivy League school Dartmouth, and then Harvard Business School. He owns, at last report, two homes. (How many homes do you have? I have just the one.)

Henry Merritt Paulson, Jr., became a partner at Goldman Sachs in 1982. He had a leadership role of one sort or another at Goldman Sachs from 1982 through 2006; he ended his career at Goldman Sachs in 2006 when he came to join the Failed Bush Administration in its multiyear plan to destroy America.

Where else have you heard "Goldman Sachs" lately? You may be struggling to sort out all the financial news, so I'll help you with some recent news quotes that feature "Goldman Sachs."

From "The Economic Times." Last Sunday marked the end of an era. That was the day Goldman Sachs and Morgan Stanley, the last two of the original five big investment banks on Wall Street, became history.

From "The New York Times." The beginning of the end is felt even in the halls of the white-shoe firm Goldman Sachs, which, among its Wall Street peers, epitomized and defined a high-risk, high-return culture.

Why are you smiling, Henry Merritt
Paulson, Jr.?

There are those who say that Goldman Sachs -- whose employees earned an average of $600,000 per year in 2007 -- will survive because of major changes it has made. Don't connect those changes with Paulson, though. From that same NYTimes article:

GOLDMAN’S latest golden era can be traced to the rise of Mr. Blankfein, the Brooklyn-born trading genius who took the helm in June 2006, when Henry M. Paulson Jr., a veteran investment banker and adviser to many of the world’s biggest companies, left the bank to become the nation’s Treasury secretary.

Is it because your company helped create a
culture that led to this, while enriching you
to a ridiculous degree?

Blankfein took over because Henry Merritt Paulson, Jr., had moved to Washington, D.C., having earned $53.4 million in the previous two years as head of Goldman Sachs; with a net worth of over $700 million, Henry Merritt Paulson, Jr., could afford to take the pay cut from an average of $25 million per year to $191,300 per year -- that's what the Secretary of the Treasury is paid -- and live off of savings.

Interestingly, I did a Google search to see if Henry Merritt Paulson, Jr.'s commitment to public service included not collecting some or all of his $191,300 per year government salary -- he surely doesn't need it-- but found nothing to suggest that he returns that money back to the Treasury.

(By comparison, Wisconsin Senator Russ Feingold, whose net worth is very low, routinely refuses pay increases, and his office routinely cuts pay and returns money to the U.S. Treasury. In 2002, Feingold had negative equity in his home in Middleton, Wisconsin, and yet refused a $9000 per year pay increase, accepting only the $136,700 that was in effect when he was elected. In 2008, he listed less than $350,000 in assets and a liability that included his second mortgage.)

Henry Merritt Paulson, Jr., clearly has the ear of Washington, unlike Michael "J.B." Schaffner. When Henry Merritt Paulson, Jr., went to Congress and asked for $700 billion, Congress went into round-the-clock negotiations; John McCain briefly and hyperbolically suspended his campaign to address the problem (and duck a debate with Obama). Failed Worst President Ever George W. Bush went on TV to urge Americans to support the cause.

Why would Washington, D.C., listen to Henry Merritt Paulson, Jr., so avidly, but pay no real attention to Michael "J.B." Schaffner?

Why is the government prepared only to lend money, at low interest rates to struggling trucker firms but will hand money over to giant investment banks? The truckers did not make poor investment decisions trying to "epitomize[] a high-risk, high-return culture." They weren't creating poorly-understood financial packages that created money from nothing, like so many real-life Sherman McCoys; they were driving around the food and materials we need, and were hit hard by events beyond their own control -- the high gas prices.

I don't know, for sure, why DC listens to rich men but not truckers -- but I suspect that it's because the rich men contribute to campaigns and can give lucrative jobs to people once they leave public office -- and that makes me suspect that the "bailout" is nothing of the sort, but instead a payoff or a bribe. If a bailout was a good idea, I suspect that Congress would have bailed out the trucking companies; or at the least would have voted on the idea in the past four months.

The haste with which the richest, best, greatest nation ever is bending over backwards to help millionaires stay millionaires, when contrasted with the way the richest, best, greatest nation ever has ignored for four months the poor struggling truckers, tells me that Congress is concerned less with helping businesses or the economy and more with helping itself get re-elected or land a cushy job. If you were hoping to stay employed and keep your house, would you rather have Henry Merritt Paulson, Jr., owe you a favor, or "J.B.?" No offense, "J.B." -- you're probably a nice guy, but Congress would rather suck up to Henry Merritt Paulson, Jr., and the investment bankers.

So on that bailout: Every single time the government tells you that a business is too big to fail; ever single time the government tells you that intervention in the marketplace is necessary, every single time the government says we need to do this, why not call your congressperson and ask them which trucking companies were "too big to fail?" Why not ask them why trucking companies are allowed to go bankrupt but investment banks aren't? Why not ask them why it costs more to get your children's cereal to the store, making you pay more for your children's breakfast, while the government is subsidizing Wall Street bankers who averaged $600,000 per year?

Ask them why their plan is to use your money to help out people who earn, on average, $600,000 per year, people who gambled that money -- and why your money isn't used to help out businesses like "J.B.'s" trucking company?

I suspect Congress' plan won't work, and I suspect that Congress is instituting the plan for its own gain rather than the country's gain, because not only is Congress disingenuously insisting that the government must help businesses, insisting that about the business of millionaires while ignoring the business of common folk -- not only that, but also because Congress has not yet stopped to ask the four questions it must ask.
On the foreclosure block: People's houses.
The Fix: Whenever someone asks me for money, I ask them four questions: How much do you need? What is it for? How'd you end up here? And how can I make sure you don't come back next week?

Those four questions are not being asked. Specifically, the last two are not being asked. The banks are failing because they engaged in two basic, flawed practices, and then engaged in a third.

Not on the foreclosure block: the Goldman Sachs Building.
Banks began subprime lending as the housing market exploded, fueled by cheap money from low interest rates. "Subprime" lending means lending to people who were not good credit risks. That is, banks took more risks with their money; in roulette terms, instead of betting on "red," they bet on "Red 23." At the same time, banks began "securitizing" loans. "Securitization" is a complicated process, but it amounts to this: No one bank owns your mortgage loan. Instead, a variety of investors and banks hold pieces of your loan; they all make money based on various factors that have very little direct connection with whether or not you pay your loan.

That led to two problems: First, people defaulting on their loans -- not unexpectedly, given that they were poor credit risks in the first place. To qualify some debtors, loans began with deceptively low payments, payments that didn't even cover the accruing interest, which meant that every single day, these homeowners owed more on their loan than they did the day before.

At the same time, the housing market became saturated; how many homes do you think people can buy? After a time, a slump will always occur, as everyone who wanted to or could buy a house did, and you have to wait for another upturn.

So it began: People began defaulting, and housing prices slumped. At the same time, too, there was nobody on the other end of the mortgage who could make responsible choices. When people defaulted on their loans, there was nobody on the other end of the line who could cut a new deal, try to cut their losses, or otherwise deal responsibly with it. Mortgage servicers and lawyers were turned loose with one direction: Foreclose.

All those foreclosed houses end up on the market, an already depressed market, creating a housing glut, and further cutting into the bank's profits.

If you loaned money to someone, and they came back and said I can't pay you in full, you'd have a couple of choices: Forgive the debt. Enforce the debt. Or modify the debt. You could say "Tough, I want all my money now" and sue and try to get it all, running the risk that you get nothing and increase your expenses. Or you could say Well, pay me what you can and we'll see if things don't get better. You could say If you pay me 60% of what you owe me, we'll call it even, so that you get money today without further risk or expense.

All of those might be viable choices depending on your circumstances and the particular deal. But you would be able to make those choices and determine which is best.

Securitized loans don't have that. Lenders sell the loan and there's nobody out there, no one person, who can make or not make a deal, in almost every case.

That's a longwinded way of introducing my own bailout plan, because I had to answer those two questions that nobody is asking: How'd you end up here? And how can I make sure you don't come back next week? Those are the two most important questions.

We ended up here because of securitization of loans and bad loans. We can make sure they don't come back next week by addressing those loans.

So here is my bailout, which costs the government next to nothing; some parts of this were suggested to me by people and I liked them, so I'm taking their ideas:

1. Tell states that to get federal highway funds in 2009 and 2010, they must institute an immediate 12-month moratorium on foreclosures. This costs no government or taxpayer anything; the federal highway funds will be paid or not, regardless, and states gain or lose nothing from stopping foreclosures. No state ever bucks the federal highway money threat. By doing this, the housing market depression is stalled, and mortgages that are or would soon be in foreclosure are frozen -- giving lenders a powerful incentive to begin working on some other package. (Thanks to Bill Clinton and A Guy At Work for this suggestion.)

2. Allow any person to receive a government guarantee on their loan, in an amount up to the median value of homes in that county, by converting the loan to a nondischargeable, fixed-rate lower-interest obligation. This program would work like the guaranteed student-loan program; borrowers would agree that their loan would be a personal obligation and nondischargeable in bankruptcy, as student loans are, and in exchange for that, the government would guarantee payment to the lender, but the interest rate would be reduced to just above the current prime rate. Borrowers who owe more than the median value of homes in their area would not qualify; only primary residences would qualify. The government might take a short-term hit as they pay off banks on defaulted loans, but would be able to collect against the borrowers in the long run. Banks would lose some income by trading sky-high adjustables for lower fixed-rate mortgage -- but would avoid defaults and have a guaranteed income stream. (Thanks to A Gal At Work for this suggestion.)

3. Encourage investment in troubled banks on a long-term basis by eliminating taxes on certain investments. The government would encourage wealthy individuals -- like Warren Buffett, who just took a huge stake in Goldman Sachs, and like the Forbes 400 -- to bailout the companies using private money; this encouragement would be given by first developing a list of troubled companies that need a bailout -- including unglamorous trucking companies. The goverment would then announce that anyone who purchases stock in a company on the list would receive all dividends from that stock, if any, tax-free for 10 years, provided they held the stock for 10 years. In addition, any capital gain on the stock, if held for 10 years, would be tax-free. Any tax deductible loss after 10 years would be doubled, if the stock was held for 10 years. The government could do the same things for bonds issued by those companies: allow the companies to issue 10-year or longer bonds, bonds that are not tradeable but must be held, and make the interest earned on those bonds tax-free. (Thanks to ME for this suggestion.)

That prong, if the companies do well, costs the government nothing; it must forego EXTRA tax revenue on the income earned, but does not spend any additional money. If the companies do not do well, the government, in 10 years, will suffer some reduced tax revenues from the doubled deduction for losses.

Simple: Three Steps, and it stops the problem. The housing market can rebound; people who bought affordable homes will be protected, while people who borrowed, or lent, money foolishly will have a year to try to resolve the problem and then will be left in their own boat; and private money will solve private companies' problems, with some government encouragement.

What you can do until the Fix is in: Contact Your Congress Person! Tell them No Public Money for Private Companies! Urge them to ask those four questions and adopt my plan -- or suggest a plan of your own.

Clicking on this link will take you to a map of the US; click your state and get easy access to your congressperson and senators. I'm going to email this link to mine; you can do the same.

No comments: