Rusty Law

Blame Game

Congress blames the Federal Reserve the Fed blames Congress for the lending crisis.  It is going to take a lot of cooperation, though, no matter whose fault it is.  

Keith Griffin said the cat did it.  He claimed that he left the room while waiting for music to download onto his computer, and that is when the cat jumped on his keyboard.  The cat allegedly played cat and mouse to navigate to a secret underground website for child pornography.  Apparently the cat dragged in over 1,000 images.  Griffin must have an extensive music collection on his hard drive.  While Internet resources vary on words per minute a dog can type, this cat’s clicks per minute exceeded the reasonable consideration of the court.  

There may be no easy way out of our financial fiasco, but on the smaller scale, “It’s not my fault,” does not always cut it for the sympathy of the court, or for anybody else.  

Capital Problem

If the State had run the background checks they make mortgage brokers pay for when they are licensed, more than half the crooks would have been caught before they sold bad loans.  But that is not the current problem.  It may have contributed to the credit crisis, but the current problem is one of capital.  

How are you going to raise capital if you cannot do anything about it?  The answer is ‘Yes.’ 

The HAMP scuttlebutt is that it is not really working.  The Government’s Home Affordable Modification Program is not quick enough to help the people it is trying to help.  Servicers merge and their computer systems get mired in trying to interface (note that if it were a litigation matter court deadlines would still be court deadlines regardless of technical difficulties) plus you run into the problem of who owns the loan.  On top of that the government regulations are telling lenders they cannot loan money while at the same time saying lenders must loan money.  

The Florida Attorney General is campaigning to get these modifications done because a lot of people get trial modifications, then are turned down for a final modification; meanwhile the money they paid into the trial modification does not really count towards their mortgage payment.  

Lending regulations are in a huge quagmire.  The rules are four inches thick in Biblical type and changing daily.  It is a capital problem with a Capitol setting.  

The good news is that since the creation of the FDIC in 1933, risk in banks has been greatly reduced.  One hundred and twenty-four banks have closed this year, but there has not been a run on the banks.  

The other good news is that Karl Vierck is a good local resource of updated mortgage information.  Please call on him at Ancient City Mortgage for your mortgage needs.  He can be reached at (904) 669-5284 or via email at karl@ancientcitymortgage.com.  

In The Game

If linebackers did not wear helmets, they would not block with their heads.  Helmets were designed to prevent serious immediate injury like skull fracture.  A helmet was not meant for head-on collision, and a mortgage was never intended to back a security.  

Head injury is an occupational hazard for football players the way getting sued is for attorneys.  While criticism about concussions resounds from too much head in the game, criticism of mortgage-backed securities arises from not enough skin in the game.  

Banks sold risk and the risk kept being divided and resold until risk was so diluted the banks became cavalier at levels to equal the greed of investors.  Banks had very little skin in the game, which left a lot of people shirtless.  

Football is not about to go away.  Neither is mortgage lending, despite its difficulties.  Risk analysis is running high in both arenas with long-term considerations a major proponent of discussions.  Lenders are undergoing massive changes in regulation, and there is a recommendation to disallow NFL linemen to go into a three-point stance before the play to prevent players from springing head-on into the game.  

Invisible Hand

Adam Smith was not the first man who got kicked out of the Garden of Eden in Genesis.  He did, however, talk about an Invisible Hand, an economic concept that the market will correct itself.  Invisible Hand is like Mother Nature of the markets, where Darwinian principles are allowed to slap around supply and demand.  

Laissez-faire has a deep groove in the palm of Invisible Hand:  governmental non-interference in a free market.  Laissez-faire, or Let the good times roll! 

Governmental price-fixing at Valley Forge almost lost the American Revolution.  Oh sure there was sickness and the long winter, but the Commonwealth of Pennsylvania was nearly just as deadly.  The burgeoning US legislated price fixing on military commodities to reduce expenses of supplying the army.  A handful of outcomes resulted, including American farmers who could not afford to sell their crops at such low rates and supplied the British army instead.  

The recent stimulus money has done some good, for instance Ford Motor Company posted a profit, benefitting from the Cash for Clunkers program.  Thus we have had some good short term stimulus outcomes.  However, on the private side, there are people now who have the resources and can buy up and then control prices artificially.  For example Warren Buffett’s recent purchase of Burlington Northern Santa Fe railroad network, which grants Buffett pricing power over freight transportation in the western United States.  AT&T is a vintage example of a company that owned everything related to its goods and services and thereby controlled pricing on those.  

When the government gives a stimulus check, that comes from someone else.  It is a balance you have to tweak.  

Binary Opposites in Wealth Status

Levi-Strauss introduced binary opposition into literary criticism and social science—a dependency of opposites on each other for existence—up/down, fast/slow, bull/bear.  At 101, he died recently no longer feeling a part of a world he once knew, much like the sentiment of many loan officers.  A few years ago, three million homes were not going into foreclosure.  

Coin laundry and the diner are icons of American culture.  While the diner is a more hands-on business to run, a coin laundry is relatively easy money and traditionally down-turn-proof.  Even in poor economic times, people still have dirty clothes.  Home foreclosures separate people from their appliances, and/or people cannot afford to run or repair their own machines.  A quarter at a time, coin laundries amount to about a $5 billion industry in this country.  

The laundromat of today, however, is not the ideal business to come clean through this Recession.  Urban emigration is creating blight on coin laundries, along with cooperation among friends and relatives to share appliances, as well as people simply wearing clothes longer between washings.  As with businesses like Lehman Brothers, coin laundry has come under the spell of Levi-Strauss:  the opposite of rich is poor, and the earnings are all washed up.  

Musical Shares

The music has stopped.  Shareholders are not holding very much, and anyone without a seat is in a vast majority.  Wealthcare reform is in session, and consumers are putting their heads down on their debt, shrinking credit card spending, and bringing borrowing to a crocodile metabolism.  

An atlatl is a labor-saving device that allows a user to throw something much faster much farther, like a credit card that allows you to buy something you cannot immediately afford—it extends your purchasing power.  But no one is throwing credit around these days.  Consumers are instead de-leveraging themselves, reducing their amount of revolving credit at a rate of 13% annually. 

A crocodile can stay under water for two hours without coming up for air, reducing its heart rate to 2 or 3 beats per minute, and it can live for 115 years.  That is where nonrevolving consumer credit is now.  Nonrevolving consumer credit includes auto and student loans and has slowed to a 1.5% annual rate.  

While consumers have embraced more primitive forms of spending, that is not necessarily helpful in the modern world, seeking rapid economic recovery.  Consumer spending makes up about 70% of the US gross national product.  Conservative attitudes towards spending and borrowing contribute to a slower ballad of recovery, but may better support long-term growth.  

Driving Down Income

The gap is closing between the rich and the middle class, correlating with a narrowing gap between federally backed and privately funded loans.  It’s not the middle class going up, but the wealthy coming down.  

Just as the “Cash For Clunkers” program closes, Rolls Royce rolls out its economy model, the Ghost of the Phantom.  At two-thirds the flagship cost, you can have the iconic grill and the hand-crafted bull-calf interior, but downsized to a steel shell instead of aluminum, and boasting BMW electronics.  

Middle income Americans are still driving the same cars they were 30 years ago, though the more fuel efficient models.  But for those in the top 1% of wealth in 2007 (representing 23.5% of personal wealth in the US), the long-reaching ramifications of the mortgage crisis have affected their ability to inflate their income.  This year’s income is a ghost of what they once made.  

Ginnie in a Bottle

Little old Prosperity Bank of St. Augustine, Florida was mentioned Thursday in the Wall Street Journal as one of the banks loading up on Ginnie Mae bonds, while simultaneously off-loading Fannie and Freddie securities.  Ginnie has soared in popularity, doubling the amount of securities it backed from the same time last year.  Banks have TARPed their rainy days to buy up Ginnie’s securities.  She’s a shoe-in for prom queen.  

The Government National Mortgage Association, GNMA or affectionately known as “Ginnie Mae,” is in her early forties.  Unlike her cousins, Freddie and Fannie, Uncle Sam is Daddy Sam for Ginnie Mae.  The US Federal Government explicitly backed Ginnie Mae mortgages from the onset, thus making her historically safer than Fannie and Freddie.  Ginnie has always had a risk weighting of 0%, guaranteeing the investor will continue to be paid even if the borrower defaults.  

While replacing Freddie and Fannie with Ginnie securities doesn’t change a bank’s balances, it reduces the risk.  At this point, Ginnie’s backing more securities than ever, amounting to 20% of total new mortgages.  Ginnie’s released from her bottle and is being liberally poured over the credit crisis.  The question is if she will raise the cost of mortgages or hinder their availability.