November 11, 2008
Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.
This meme—government confiscation of retirement accounts— is rapidly gaining credence. On November 4, Carolina Journal Online reported that Democrats have been meeting to discuss transferring currently-voluntary private retirement accounts to eventually-mandatory government administered retirement accounts that would produce a guaranteed rate of return. Further, the now tax-advantaged plans would lose tax incentives and deductibility.
On the surface, this doesn’t look very appealing. However, there are two ways to look at this plan: 1) protection of retirement accounts to the tune of a guaranteed 3% per annum; or 2) confiscation of retirement accounts to the tune of loss of control and, effectively, loss of ownership.
As currently being discussed, the plan would entail transferring private retirement plans, such as IRAs and 401ks that are invested in stocks and bonds, into government retirement accounts (GRAs). These new accounts would be invested in newly-created government bonds yielding 3%, adjusted for inflation.
Further, the current tax-advantaged, voluntary plan would become a mandatory savings of 5% of wages with no tax deduction for either the employee or employer. These accounts would be administered by the Social Security Administration. Actually, the money would not be invested in government bonds, per se, but would earn “pension credits.” The wage earner would continue to pay into Social Security and Medicare. To make this more palatable, the transfer price might be calculated at market prices pre the recent cliff dive, assuming that it would be put into effect this year.
But wait a minute, there’s another way to look at this proposal. In her report, Ghilarducci said that “GRAs would guarantee a fixed 3% annual rate of return (vs. the volatility of returns in the capital markets, which have devastated savings this year). In place of tax breaks workers now receive for contributions and thus, effectively, a lower tax rate, workers would receive a $600 annual contribution from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants. Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that “savings incentives are unequal for rich and poor families because tax deferrals provide a much larger carrot to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”
For more information, see: US Congress Committee on Education and Labor hearing on October 7, 2008 “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions” (PDF) testimony of Economics Professor Teresa Ghilarducci on “The Impact of the Financial Crisis on Workers’ Retirement Security.”
This proposal is similar to Argentina’s recently announced plan and we don’t hear any crying down there. Rock throwing and other expressions of civil unrest, but not crying; and a stock market crash; and money escaping the country; and, what else, oh yeah, increased likelihood of sovereign default.
Buck up, Americans, this is what you can do for your country.
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November 10, 2008
A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.
An often used saying when it comes to value investing is that you don’t want to “catch a falling knife.” Many times just when we think that stocks or commodities or any asset has been knocked down so far it can’t go any lower and buy in, it falls even further than we anticipated. The mortgage market is another area where experts and analysts think they’ve found a bottom, only to find out there really was no floor at all. Some funds, however, think they can make some money in this mess, and they know where to find it. With panic still ruling the markets and hedge funds eating huge losses left and right, one has to wonder where exactly they’re going to make their money in a sea of failure.
Look at Fortress Investment Group as an example. They had thought that bonds in the sector were attractively priced, and they made a huge bet trying to call the bottom. Unfortunately they ended up riding that bet down to yet another bottom, and their numbers show it. The fund had assets of about $940 million, and it’s down 47 percent in one portfolio, 42 percent in another, and 5 percent in a third. That’s as of the end of September, and things haven’t exactly improved since then. It’s possible that their bet may eventually pay off, but I’d be feeling pretty sick right now if I had a seat on that roller coaster.
Bryan Caisse, however, an 18-year veteran of the mortgage markets, thinks he can find some profit potential where so many have failed. He’s currently planning on launching Huxley Capital Management with backing from a United Arab Emirates investor. Supposedly, he claims that other hedge funds have been reckless in their use of leverage, and failed to properly handle liquidity challenges. As he put it, “Leverage is a very, very dangerous thing in any market; it can be deadly in a market where liquidity is uncertain.” No kidding?
To find these diamonds in the rough, Caisse says he’s looking for Fannie Mae and Freddie Mac mortgage bonds. These bonds are (surprise) trading at historically low levels even with U.S. Government backing. Through the use of “conservative leverage,” whatever that means, he sees some serious value opportunities, and hopefully profit down the line.
I’m sure I’m not the only one that’s skeptical here, but I can’t argue with the guy’s experience or success. Time will tell whether his into the line of fire strategy will work, but if other similar endeavors are any indication, the odds do not favor him.
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November 8, 2008
Two news items were released on Friday that would seem to bode poorly for the state of the real economy. One of these was the report on unemployment rates, which has now shot up to approximately 6.5%. That figure happens to be the highest since 1994, which curiously represented a turning point for the American economy. While that number is not astoundingly high in itself, when we look at the factors which comprise it, 6.5% becomes slightly more alarming. 247,000 manufacturing, construction, and service-providing full-time jobs were lost. We also have to bear in mind that these are the official numbers reported by the government, which are of course configured to appear far more optimistic to the casual observer.
My opinion is that real unemployment stands at 7.5%, with the figure coming from this table from Mish’s Global Economic Trend Analysis below. but regardless of which number you believe to be truly accurate, it would be tough for anyone to disagree with the fact that the real economy continues to stumble. Last months unemployment figures were also revised upwards by 125,000 jobs, putting total job losses at about half a million in two months.
The second piece of news, far more ominous in its implication, is the staggering quarterly loss and cash burn rate reported by General Motors on Friday. GM is essentially hemorrhaging cash at this point, posting a loss of $2.5 billion, while spending $6.9 billion. It doesn’t take a genius to figure out that those figures are a bit problematic. The company has gone so far as to acknowledge that its pockets will be empty by the beginning of 2009 unless something is done to recapitalize it, hinting at an additional $25 billion, which would be coming on top of the current $25 billion loan that has yet to be disbursed. Ford’s cash burn rate is equally substantial, and Chrysler looks to be just as poorly positioned as the aforementioned.
Why is this news so dire? For many of us keeping an eye on the economy, the key to recovery has been identified as the housing market. Even though activity has been stirring in the housing market of late, the simple fact is that as people continue to lose jobs, it becomes difficult to make housing payments even in the best of times. When your house is mortgaged for more than it is worth, and your interest rates are suddenly adjusted higher, that makes the situation even worse. As this continues to happen at a national level, money will continue to simply disappear.
Now let’s bring the automakers into the discussion. Anyone who has seen Michael Moore’s “Roger & Me” can attest to the intense, immediate impoverishment that a closing auto plant can wreak on a local economy. Regardless of what you or I may think of his politics, the scenes of dilapidated houses and boarded-up shops are viscerally evocative of our deepest sympathies. A bankruptcy of the Big Three would cause a ripple effect not only in local economies, but nationwide. The downward spiral of the housing market, and therefore the economy at-large, would continue. Other automakers will fill the gaps in the market left by the Big Three, but even if that took only a year (a highly optimistic estimation), the effects would be devastating.
It’s important to consider that while we rail against large corporations, they employ, and support the lives of everyday, responsible, hard-working people, people who could foreseeably lose their homes. These are not sub-prime homeowners who were suckered into something they could not afford by the allure of the housing bubble. These are victims of mismanaged and outdated corporations. I am not a proponent of the government giving aid to corporations, but when it comes to retaining working-class jobs, our government is required to preserve the well-being of its citizens. If that means lending additional money to the Detroit, our policymakers need to attach some strings that emphasize a change in production emphasis. The same would apply if the government decided to allow the Big Three to have access to the $700 billion bailout package. Automakers should be forced to anticipate future demand for new types of efficient, green vehicles, rather than current demand for gasoline-fueled cars.
By doing so, the government would be killing two birds with one stone, and could avoid a potentially catastrophic acceleration of job-losses. These are the sorts of crises that Keynesian economics are meant to deal with, not those that involve providing corporate welfare. It certainly won’t save the housing industry, but it well prevent the bottom from falling out. We can only hope that the government is aware of the severity of the situation.
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November 8, 2008
Hat tip to Tyler. Visit his site.
More consolidation and reduction from Countrywide Wholesale. It makes perfect sense as the company has greatly reduced volume on strict underwriting guidelines from Bank of America and lesser demand. Bank of America earlier in the year outlined their strategy to all but eliminate wholesale lending from their lending plans; but whether that has changed or not, the reduction can’t be expected.
Less volume, fewer programs, overlapping resources, and tighter lending restrictions all equal less need for a massive wholesale lending channel.
From Countrywide:
Dear Valued Business Partner:
Thank you for your business and continued support of Countrywide®, America’s Wholesale Lender®. As we diligently continue our integration process with Bank of America, we remain committed to you and your business.
Just over a year ago, we initiated efforts to optimize our business model relative to the market opportunity. Earlier today, we further modified our loan fulfillment operations to align our model as follows:
- Effective immediately, six Wholesale loan fulfillment locations will be consolidated into our remaining fulfillment network. The consolidated network will be comprised of nine Wholesale Loan Centers - including those that specialize in government lending.
- Our account executives will remain in the impacted markets to sustain our commitment to serving you and our mutual borrowers.
- Dedicated fulfillment teams have been formed at our remaining fulfillment center locations to provide immediate and continuing support for our business partners and account executives in the impacted markets.
Many of our business partners will not be directly impacted by these changes. If you are affected by this move, you will receive a separate communication shortly with detailed information on your new loan fulfillment location and team members. You may also log on to cwbc.com to view a list of the impacted loan fulfillment sites along with the corresponding new fulfillment locations and contacts.
If you are currently served by one of our consolidating fulfillment locations, I assure you that measures are in place to quickly and carefully migrate in-progress loan files to your new loan fulfillment team. Your account executive and your new loan fulfillment team are standing by, ready to assist you with both existing and new loan submissions.
I am confident that this aspect of our optimization effort has been planned with the utmost care to minimize any disruption to your business. Again, thank you for choosing Countrywide, and I look forward to our continued and mutual commitment to success.
Todd A. Dal Porto
Senior Managing Director and President
Countrywide, America’s Wholesale Lender
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November 8, 2008
Hedge funds are continuing to lose big bucks, suspending redemptions and, in a number of cases, liquidating. They all cite difficult market conditions. Which markets, though? Derivatives have been under the radar lately, yet there have been many events that would force mark-to-market accounting. Recent changes in SEC rules allow banks to defer mark-to-market and keep off balance sheet certain assets. Hedge funds too?
From the Nobel Prize-winning asset managers who brought us Long Term Capital Management, Bloomberg today reports that Platinum Grove Asset Management LP has suspended investor withdrawals from its largest fund after a 29% loss in the first half of October. That’s right, 29% in 15 days. The year to date is higher.
“The decline left Platinum Grove Contingent Master fund with a 38% loss this year through Oct. 15. Funds employing a similar approach of exploiting differences in the value of related securities fell 14 percent last month and 30 percent this year to date,†according to Hedge Fund Research. “Hedge funds are reeling from the worst financial crisis since the Great Depression, losing an average of 20 percent this year. A surge of investor redemptions forced firms such as Blue Mountain Capital Management LLC and Deephaven Capital Management LLC to freeze funds to stem the tide of withdrawals.â€
Hedge funds are getting it in both directions. Investors want their money back and prime brokers are demanding higher margin requirements. Platinum is only one more of dozens of funds that have suspended withdrawals rather than sell assets at fire-sale prices, the reason given by the hedge funds themselves. Hedge funds are down 20% this year on average, as measured by the HFRX Global Index.
I thought hedge funds were supposed to make money regardless of how the market did. As Mish points out, “to collectively be down 20%, they had to have been making one-sided bullish bets on something. Where’s the hedge?†Twenty percent or more down is a lot of value lost. On the surface, there are plenty of stocks down big for the year. However, derivatives seem to be under the radar again. We know that hedge funds are big players in derivatives, which, as we also know, are worthless hard to price. Wonder how that’s going to be dealt with for year-end bonus calculations.
Anecdotal reports of 401k participants not being able to switch out of stock and bond funds—especially PIMCO— into money-market funds are increasing. Sounds like a lot of losses going into year end.
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November 7, 2008
A guest post by Jay C. Hammond, freelance journalist and researcher.
There are plenty of candidates for blame in the current mortgage meltdown. Yet the ability of the Federal Bureau of Investigation (FBI) to investigate mortgage fraud and other financial crimes is increasingly being called into question. The FBI and the Department of Justice are the agencies primarily responsible for pursuing criminal charges against lenders and financial firms.
Mortgage fraud is blamed for annual losses of between $4 and $6 billion, according to statistics published on the FBI website at www.fbi.gov/hq/mortgage_fraud.htm, By September, the FBI had already received more than 62,000 reports of suspicious activity representing losses of $1.4 billion in 2008. There were 1,569 active investigations underway as of August 2008. Compare that to only 462 in 2007 and 295 in 2003.
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November 7, 2008
A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.
No matter who wins today, the facts on the ground will not change. Currently the best-case scenarios are for a recession ending sometime late next year. Never a good sign when that’s the view from the rose-colored glasses.
Both candidates have come up with adroit verbal dodges to the question, “Which of your promises are you now not going to be able to fund?” Had either one answered honestly it would have been the end of their campaign.
Here are some possible ways the current fiscal nightmare will effect the major issues of the campaign:
- Any tax issues will have to be decided first and foremost on providing relief to individuals. The public wants its share after underwriting all these corporate bailouts.
- Lack of jobs will decrease illegal immigration. (see comments below)
- For the first time fiscal issues will be a factor in deciding whether to continue our foreign military expeditions. I expect a return of isolationism.
- Desperate companies will push the government to take over health-care costs, possibly resulting in some form of universal health insurance.
- Despite this, government will have to shrink in size. Cutting – not reigning in – benefits and services is the only option available.
Given all this it is difficult to imagine anyone — even Mike Rowe — wanting this job.
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November 7, 2008
No matter your affiliation get out and vote! It’s crucial and it feels great. I got mine in first thing this AM.
Yeah America!
I was first in line so I snapped a quick photo (w/a crummy iPhone camera) before the polls opened.
If you want to follow election results, have at it:
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November 7, 2008
A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money-mattersand his adventures in self employment.
In the midst of the widening housing crisis, there’s been quite a lot of criticism from voters aimed at the recent efforts by the government to bail out financial institutions that are being dragged down by souring mortgage securities. After all, if the heart of the crisis lies in rising foreclosures, shouldn’t more efforts be focused on helping the homeowners themselves? Shouldn’t there be more efforts relating to modifying existing mortgages so consumers can stay in their homes? Efforts on both sides of the fence from both the government and the private sector have begun to take up the call.
The Bush administration, for it’s part, is supposedly working on a new homeowner bailout plan, Details on the plan are still few and far between, but it’ll likely involve incentivizing financial firms to change loan terms in exchange for having part of the loan guaranteed by the U.S. government. I went into further details in a previous post.
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November 6, 2008
Have you seen Robert Wagner recently? Chances are you have and he’s been talking about reverse mortgages. Reverse mortgages have been touted as a solution for cash strapped seniors allowing them to keep and live in their home while still enjoying a comfortable lifestyle. Comfort has lately taken a back seat to surviving the current economic chaos.
Reverse mortgages can help seniors weather some financial disruptions. On November 1, lower origination fees and higher loan limits were introduced on Home Equity Conversion Mortgages (HECMs), the federally insured reverse mortgage program. HECMs account for most (99 percent) of the reverse mortgages being made today although only an estimated 1 percent of those eligible for the program are participating, according to the Christian Science Monitor.
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