The Financial Crisis

I have had lots of discussions among my friends regarding the mortgage meltdown.  Wired has this article which hits many of the items my friends and I have discussed.

The concept is that a Mortgage servicer (think your local bank) originates your mortgage and at some time in the year, sells your mortgage to a mortgage owner (think Fannie May).  The mortgage owner, packages a number of mortgages in creative ways in order to create a Collateralized Debt Obligation (CDO).  This CDO is treated like a bond, it has a face value and is placed on the market for investors to buy.  The price paid for it is discounted in order to quantify risk.

The the problem originates when the market is unable to accurately gauge the risk of the CDO.  When the market cannot gauge the risk, the market cannot set an accurate price for the CDO and the market collapses.  This is what happened in late September. 

The point that I like to make is that, in the information age, something like this should never happen.  You don't need elegant or simple models to predict results.  In the age where my phone company can tell me, to the minute, each call I make and to whom, the creators of each CDO ought to have sold the underlying data to each purchaser.  Armed with the knowledge of who and what is being valued in an individual CDO, the market could judge the underlying risk of each CDO.  Banks might have needed the TARP funds as a bridge measure, but the real way to solve this credit crisis is to expose the data underlying the so-called toxic assets and let the market begin to price them.

Just Read

Scratch Beginnings: Me, $25, and the search for the American Dream.

I was interested in this book from the time I initially heard about it.  I was not disappointed.  The autobiographical portions are not something that one can agree or disagree with - those just are, although I do think Adam laid it on kind of thick with the dog poop story.

Synopsis: He was given the opportunity to work odd jobs for a guy on Sundays at $10 / hour cash.  The first job he had to do was clean up a place littered with dog poop.  I just couldn't buy the whole 'this is so degrading' thing.  Sorry.

The other issue that I have trouble with is among his conclusions following the termination of his experiment.

He reprints some steps obtained from his friend, Neil Cotiaux.  Step 2 recycles the old standby, "too much is spent on defense and not enough on domestic programs."  Sorry, domestic spending is already at an all time high of 69% of the $3 trillion federal budget.

However, I do agree with his thoughts regarding the minimum wage.  These minor issues aside, I recommend this book.

What if President Obama is Cheering the Stock Market Collapse?

If the Stock Market collapses, doesn't that mean more people will request help from the Government (and by proxy the Democrats)?

Here is an interesting article at Townhall.com.

Re-default rates are 55%

Wow.  The link leads to a .pdf published by the treasury department and based on data collected during 2008.  The data presented is based on 9 banks and 5 thrifts.  Page 5 has the key information. 

In the first quarter of 2008, 72,877 loans were modified, and payment plans for an additional 136,874 were accepted.  The kicker, after just 1 quarter 37% of the loans were again in default.  (Remember these were modified between Jan - March 2008 and were in default by April - Jun 08).  The default rate for the 6 month period of time following the modification is 55.14% (Remember - the big layoffs have not occured by September 08.  Those occur after November through the present)

In my post yesterday, I commented how the administration's plan relies on those who made poor borrowing decisions and poor lending decisions.  The WSJ points out, 

Sadly for those who deferred the gratification of homeownership, the 20% down payment has now become industry standard. But at least their taxes will allow other people to stay in homes they can't afford.

Then there is:

Given that mortgage fraud skyrocketed during the housing boom, and that the Obama Administration intends to assist up to nine million troubled borrowers, we can say with certainty that the unscrupulous will be among those rescued.

Remember, Instugator's Rescue is not a bailout - the Rescue relies on those who have made good decisions in the past in order to achieve broader economic results for the rest of us.

Related articles by Zemanta:

• Obama's Homeowner Assistance Plan
• Mortgages: Loan Fraud Seen on the Rise

Bailout Plan

<Update> I have change the name it is now Instugator's Rescue Plan

In light of the current 'Stimulus' plan and the protests against it, I have dusted off the plan I proposed on 27 August 2008.  The reason I am re-posting this is because I do not understand how the new government spending proposal is supposed to directly stimulate the economy.  I use the word, 'directly' for a reason. 

Direct Stimulation

I can comprehend how a direct rebate to the American taxpayer stimulates the economy.  The taxpayer takes the money and does 1 or 2 things with it that are easy to understand.  He either (1) spends it, (2) he saves it or (3) does some combination of the two.  The direct cost to the government is the price of the paper the check is written on, postage, and the costs associated with borrowing the money. 

The consequences of the payment are profound - if the individual spends the money, he is spending it on goods and services that he personally enjoys - there is no bureaucrat in the middle making these decisions for him.  The money thus spent goes to those firms who make the things the individual enjoys - the market then works as advertised.

If the individual chooses to save the money he is still benefiting the economy.  The bank that he puts the money into now has assets that it may write loans against. 

If the individual repays debts, that still stimulates because the bank has reacquired assets and the individual can use those dollars that were previously devoted to interest in the pursuit of more consumer goods.  The benefit of this type of system is that it requires no bureaucrats in order to properly function.  All the beneficiaries of this system have to do is make good decisions in the aggregate and everyone benefits.

Issues with the current plan

The current plan, however requires bureaucrats in order to function properly.  Since so many dollars are filtering through the hands of so few bureaucrats, any mistake on the part of the administrators is magnified greatly.

The other issue I have with the current bailout plan is that it rewards bad behavior.  That is not quite accurate - it provides incentives to people to engage in bad behavior.  It doesn't just reward bad behavior, it encourages more bad behavior.  The government paying the loans of people who made bad borrowing decisions rewards 2 groups of people - those that made the bad borrowing decision and thos lendors that made poor lending decisions.  This is not the kind of twofer that we need.  Additionally, all this type of plan can achieve, at the most, is a return to status quo ante.  You cannot move forward, and you cannot improve the economy as a whole.  This is because the plan is based on 2 groups of people who have made bad decisions in the past.  Success of the Obama plan, therefore, relies on those who have been unreliable in the past.

By contrast, however, Instugator's plan relies only on those who have been reliable in the past.  All that has to happen for my plan to succeed is that those people who have been reliable continue to be so.

Here is Instugator’s bailout Rescue plan.

Principles:

1. Reward those who practice good behavior

A. Paying your mortgage on time is good behavior

2. Do Not reward those who practice bad behavior

A. Borrowing what you cannot afford is bad behavior.

B. Having an interest-only mortgage is bad behavior.

C. Having an ARM is questionable.

D. Investment Bankers who purchase CDO’s without understanding the underlying value of them are engaging in bad behavior.

E. Those who sold CDO’s without including the data necessary to understand the underlying value are engaging in bad behavior.

3. Do not let those most directly responsible for the current mess come within 100 miles of the bailout money.

A. Those whose W-2 forms show that they work for congress, Freddie, Fannie, or any investment bank in need of a bailout need not apply.

The Plan:

1. Take the $700B <or any figure currently in Vogue>

2. Find those people who-

A. Have a conventional mortgage.

B. Have always paid it on time.

C. Have never declared bankruptcy

3. Establish an agreement that the Gov’t will:

A. Pay off the mortgage of those who meet each condition in item 2.

(This allows banks to resume mortgage lending and permits those who engaged in good behavior to go bargain-hunting - thus rewarding good behavior)

B. Each person whose mortgage is paid off will agree to make monthly payments to a money-market account

(This increases short term liquidity - also allows those with good behavior to use their work ethic to the betterment of all)

C. Each person agrees to re-finance their house at the end of a 5-10 year period of time at market value to repay the Gov’t.

(This repays the bonds that the govt will have to put on the market to fund the plan)

4. The government will issue bonds to pay for this plan (up front).

5. Bonds are repaid prior to maturity by those bailed out.

(People with good behavior are people who are less risky - that is why they have good credit ratings)

6. In the event the number of bailoutees exceeds the dollars available, applicants from the acceptable pool will be chosen by lottery.

Instugator, as author of the plan, recuses himself from participating.

Wrestling

My son placed 5th in the Louisiana High School Athletic Association wrestling tournament.
The video of his last bout is here.

Thomas' 5th place finish.

The big story of the evening was the loss of the Division 2 title to Holy Cross by Archbishop Shaw.  Here is the story.

There are two lessons here.  The first is that the Shaw wrestler used an illegal move against his opponent.  Unlike the way it is portrayed in the story, the decision to award the bout to the Tuerling's wrestler was not quick or easy.  The Tuerlings wrestler was injured by the move; the injury clock (5 minutes) was started and ticked down through less than 2 minutes remaining.  At this point, the referee brought the injured wrestler to the center of the mat and awarded him the bout.

This loss hurt Shaw, but they would have ultimately still clenched the Division title, except for the second lesson.  The Shaw wrestler could not comprehend that he lost his bout to DQ.  He wigged out and put on a display of what can only be called 'unsportsman-like' conduct.  He was ejected from the tournament.  Not only did he have to leave, but his entire tournament results were erased from his team score.  Shaw went from being ahead by 4 points to being down by 16 points at the end.

The two lessons. 

1. If you perform an illegal move, you may lose the bout.  Accept it.
2. Unsportsman-like conduct can have tremendous consequences - don't engage in it.

Google Documents - Footnotes

Google Docs now does footnotes, will Instapundit now use it for his law articles?