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Dodd admitts to being loophole culprit
Dodd facing fresh political firestorm
Sen. Chris Dodd (D-Conn.) looks like he may be facing a fresh political firestorm.
Dodd just admitted on CNN that he inserted a loophole in the stimulus legislation that allowed million-dollar bonuses to insurance giant AIG to go forward – after previously denying any involvement in writing the controversial provision. .
“We wrote the language in the bill, the deal with bonuses, golden parachutes, excessive executive compensation that was adopted unanimously by the United States Senate in the stimulus bill,” Dodd told CNN’s Wolf Blitzer this afternoon.
“But for that language, there would have been no language to deal with this at all.”
Dodd had previously said that he played no role in writing the controversial language, and was not a part of the conference committee that inserted the language in the bill. As late as today, Dodd’s spokeswoman denied the senator’s involvement.
The AIG bonuses have caused a political firestorm, with Republicans and Democrats alike looking to lay blame for who’s responsible, and leading lawmakers looking to revoke the bonuses.
Dodd’s role in the legislation will likely come up as he faces the likelihood of a tough re-election. Former GOP congressman Rob Simmons announced he was running this week, and has already taken issue with Dodd’s stewardship as chairman of the Senate Banking Committee.
The FDIC: as Rock Solid as Social Security
by Michael Pento, Delta Global Advisors, Inc.
March 16, 2009
We all should be painfully aware by now that there is nothing held inside the Social Security and Medicare trust funds but a bunch of IOUs. Monies collected from payroll taxes are treated as general revenues and used in the “unified budget.” But how many of us are aware that the FDIC’s Deposit Insurance Fund works in a similar fashion?
On March 2nd, FDIC Chairman Sheila Bair made some remarkable statements in defense of the Insurance Corporation’s decision to raise fees and increase revenues. She said in a letter sent to the over 8,300 insured banks that, “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”
After talking with an Information Specialist at the FDIC, I learned some important facts about the agency that all taxpayers should find interesting. Exactly how quickly is the insurance fund being depleted you ask? At the start of 2008 the fund held $52.4 billion, which fell to just $34.6 billion by the end of the third quarter. And at the end of Q4 there was a mere $18.9 billion left in the coffers, so there seems to be good reason for Ms. Bair to worry. Even more troublesome is the projections for further drain on fund reserves. The FDIC itself predicts there will be an additional $65 billion in losses through the year 2013.
The most interesting part of my conversation with the FDIC came when I heard confirmation of my worst fear about where the assets held in the insurance fund are kept: the vast majority of the Deposit Fund’s assets are held in U.S. Treasuries. This is extra puzzling when you see the next quote from the Chairman, “Some have suggested that we should turn to the taxpayers for funding. But banks not taxpayers are expected to fund the system…” Now I’m really confused. She doesn’t want the taxpayer stuck with funding the FDIC, yet nearly all of the reserves are held in Treasuries?
Since the insurance which backstops all eligible bank deposits are primarily invested in Treasuries, is there much difference between the FDIC insurance fund and the Social Security and Medicare funds? No. In fact, they are essentially the same. It would be far less egregious if the fund bought Treasuries in the secondary or even primary market. But, according to a Senior Consumer Affairs specialist at the FDIC, U.S. debt purchases are transacted solely and directly with the Treasury Department and not done at auction—directly funding the expenditures of the government so Ms. Bair should understand that taxpayers are already on the hook for bailing out the insurance fund. Any drain on FDIC reserves starting from dollar number one is met by sales of Treasuries, which are a direct obligation upon the U.S. taxpayer.
That impugns the very existence of the FDIC Deposit Insurance “trust fund.” The Bair truth is: there is no fund, only the system of IOUs which backs the entitlement programs. It turns out Congress, via the Treasury, has found yet another “unused” pool of money to pour into the budget each year. Collecting more fees to feed another wealth redistribution arm of government bureaucracy won’t solve anything.
Housing starts surge 22% on apartment building
Single-family building permits rise 11% in February
By Rex Nutting, MarketWatch
Last update: 10:10 a.m. EDT March 17, 2009
WASHINGTON (MarketWatch) - Boosted by an 82% increase in construction of apartment buildings, U.S. housing starts surged 22% in February to a seasonally adjusted annual rate of 583,000, the Commerce Department estimated Tuesday.
It was the largest percentage gain in 19 years and was the first increase in eight months in the sector that was at ground zero in the global economic recession. The housing data in winter months are especially volatile because of the weather.
Building permits, which are less volatile than the starts data, rose 3% in February to a 547,000 annual rate. Permits for single-family units rose 11% to a 373,000 rate, the largest percentage gain in 18 years.
"We're inclined to write this off as a weather-related fluke for now," wrote economists for Wrightson ICAP. "If the permits series can hold onto its gains in next month's March report, though, we'll take it as a sign that new construction has finally found a floor (albeit a very low one)."
"We hold to the view that the level of housing construction is becoming so low in absolute terms that starts will bottom out in the months ahead," wrote John Ryding and Conrad DeQuadros of RDQ Economics.
Construction of new housing units had plunged 38% in the previous three months before February's unexpected jump. Economists surveyed by MarketWatch had forecast a further drop to 456,000, despite an expected surge in multifamily construction.
But despite February's gain, housing starts are down 47% from a year ago, and are down 74% from the peak in early 2006. Permits are down 44% in the past year.
Builders are trying to reduce their inventories of unsold homes as they face relentless competition from older homes thrown on the market by foreclosures or short-sales.
"With new home sales still falling and the months' supply at a record there is no reason for homebuilding to rise," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics.
The mood of home builders' has rarely been worse. The National Association of Home Builders reported Monday that its sentiment index was stuck at 9 on a scale of 1 to 100 in March.
The government cautions that its monthly housing data are volatile and subject to large sampling and other statistical errors. In most months, the government can't be sure whether starts increased or decreased. In February for instance, the standard error for starts was plus or minus 13.8%. Large revisions are common.
It can take four months for a new trend in housing starts to emerge from the data. In the past four months, housing starts have averaged 568,000 annualized, down from 614,000 in the four months ending in January.
Details
February's housing start rate of 583,000 was the highest since November. January's starts were revised higher to a 477,000 pace, a record low dating back to the 1940s.
Completions of housing units rose 2.3% to a seasonally adjusted annual rate of 785,000. Completions of single-family homes fell 8.2% to a record-low 505,000.
The number of units under construction fell 2.7% to a 762,000 annual rate. Single-family homes under construction dropped 3.4% to 370,000, the lowest in 38 years.
Starts rose 89% in the Northeast, rose 58% in the Midwest, rose 30% in the South and fell 25% in the West.
443 New Foreclosures Filed in Massachusetts in Week Ending March 13, 2009
By Jeremy Shapiro on March 13, 2009 9:17 AM 443 new foreclosures were filed in Massachusetts over this past week, ending Friday, March 13, 2009, 47 more new foreclosed properties than last week with 396 new foreclosure filings.
Broken down by county,
Barnstable County had 26 foreclosures,
Berkshire County had 5 foreclosures,
Bristol County had 28 foreclosures,
Essex County had 57 foreclosures,
Franklin County had 4 foreclosures,
Hampden County had 25 foreclosures,
Hampshire County had 10 foreclosures,
Middlesex County had 73 foreclosures,
Nantucket County had 3 foreclosures,
Norfolk County had 36 foreclosures,
Plymouth County had 64 foreclosures,
Suffolk County had 38 foreclosures,
Worcester County had 74 foreclosures.
The biggest movers from last week to this week were Hampshire County (400% increase, 2 -> 10), Norfolk County (80% increase, 20 -> 36), and Middlesex County (59% increase, 46 -> 73).
As the volume of foreclosures fluctuates from week to week, we much prefer to look at the number of new foreclosures over the past 60 days.
Over the past 60 days, the following number of foreclosures were started, by county:
Barnstable County, MA: 191 new foreclosures
Berkshire County, MA: 39 new foreclosures
Bristol County, MA: 335 new foreclosures
Dukes County, MA: 11 new foreclosures
Essex County, MA: 529 new foreclosures
Franklin County, MA: 32 new foreclosures
Hampden County, MA: 297 new foreclosures
Hampshire County, MA: 40 new foreclosures
Middlesex County, MA: 544 new foreclosures
Nantucket County, MA: 10 new foreclosures
Norfolk County, MA: 290 new foreclosures
Plymouth County, MA: 457 new foreclosures
Suffolk County, MA: 439 new foreclosures
Worcester County, MA: 588 new foreclosures
ForeclosuresMass Members have access to the latest foreclosed properties in the Members Only My Foreclosures section of the site.
That's all for this week. Stay tuned until next Friday when we bring you the latest stats on Foreclosures in Massachusetts - from your friends at ForeclosuresMass.com!
bbotcs,
OK, fine by me, for a few million I'll even be "a dipstick"
Please refrain from obvious comments....
bbotcs, TARP for Axle
"Seems to me American Axle would qualify for TARP money" probably will, either directly or funneled........
and the rung below them, and below that and below that and below that.......
opps we have now reached the folks holding the ladder at the bottom rung, "the real taxpayer", so sorry none left, please place your money in the cup for we have become dizzy and blinded by the heights from which we have come .......surely you can afford a mere pittance here and there, and here and there and there and here...............
Auditors raise concern about American Axle's future,
By MarketWatch
March 13, 2009
NEW YORK (MarketWatch) -- Auto-parts maker American Axle & Manufacturing Holdings may be unable to continue as a going concern, according to auditors Deloitte & Touche. In a letter included with the company's 10-K filing on Friday, the auditors cite "significant unfavorable consequences" that could arise from the potential inability of General Motors Corp. and Chrysler LLC to continue as going concerns themselves. According to the 10-K filing, sales to GM and Chrysler made up about 84% of American Axle's total net sales in 2008.
Finally an understandable explanation,
Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed in a ledger (thereby granting the customers loans).
Word gets around and as a result increasing numbers of customers flood into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
He sees no reason for undue concern since he has the debts of the alcoholics as collateral.
At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager of the bank, (subsequently of course fired due to his negativity), decides that the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.
However they cannot pay back the debts.
Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.
The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.
The funds required for this purpose are obtained by a tax levied on the non-drinkers.
Finally an explanation I understand ...
yielddude:
The markets know the losses will continue and the Fed will continue to feed them money. I don't know why the Fed just doesn't take them (FNM / FRE) off the open market and be done with it.
Bernanke made it quite plain that they are not going to let anymore of these large institutions fail.
Nothing surprises me anymore.
U.S. foreclosures hit record level in February
By Simon Kennedy
Last update: 6:11 a.m. EDT March 11, 2009
LONDON (MarketWatch) -- The number of completed U.S. foreclosures in February was 121,756, the highest monthly total since the crisis began, according to data from Foreclosures.com. The figure was a 67% increase from the 72,694 reported in January and was also well above the previous monthly high of 104,243 set last September. The number of pre-foreclosure filings also set a new monthly record, rising 24% to 207,703 in February from 166,860 in January.
A little OT, but they do have to do with construction
Wally Wallington can move anything.
Wally Wallington has demonstrated that he can lift a Stonehenge-sized pillar weighing 22,000 lbs and moved a barn over 300 ft. What makes this so special is that he does it using only himself, gravity, and his incredible ingenuity.
http://j-walkblog.com/index.php?/weblog/posts/moving_big_rocks
The climbing excavator
http://www.contractjournal.com/blogs/digger-blog/2009/02/liebherr_r312_climbing_stunt_p.html
Banks on the move, Bernanke no majors will fail
WASHINGTON (MarketWatch) -- Federal Reserve Board Chairman Ben Bernanke stressed Tuesday that major financial institutions would not be allowed to fail given the fragile state of financial markets and the global economy. In a speech in Washington, Bernanke repeated that until the banking system recovers, a sustainable economic recovery will "remain out of reach." "In particular, the continued viability of systemically important financial institutions is vital to this effort," Bernanke said in a speech to the Council of Foreign Relations. Bernanke also laid out his thinking on a fresh approach to the regulation of financial markets. Weaknesses in the current regulatory regime have been glaringly obvious during the financial crisis
OT: Alternative measures of labor underutilization:
Feb. 2009
U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force..3.4
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force..5.0
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)..8.1
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers..8.5
U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers..9.3
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers..14.8 (Seasonally adjusted)
.........16.0 (Not seasonally adjusted)
NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. For more information, see "BLS introduces new range of alternative unemployment measures," in the October 1995 issue of the Monthly Labor Review. Updated population controls are introduced annually with the release of January data.
http://www.bls.gov/news.release/empsit.t12.htm
bbotcs:
I picked some STEM up AH on friday, just hope I can keep my fingers..
Warren Buffett says economy fell off a cliff:
Monday March 9, 8:24 am ET
By Josh Funk, AP Business Writer
Buffett says economy fell off a cliff in the past 6 months as consumers changed their habits
OMAHA, Nebraska (AP) -- Billionaire Warren Buffett said the economy has "fallen off a cliff" over the past six months and consumers have changed their habits in remarkable ways.
Buffett said Monday during a live appearance on CNBC that current economic turmoil has basically followed the worst-case scenario he envisioned.
"It's fallen off a cliff," Buffett said. "Not only has the economy slowed down a lot, but people have really changed their habits like I haven't seen."
Buffett said the changes are reflected in the results of Berkshire Hathaway Inc.'s subsidiaries. He said Berkshire's jewelry companies have suffered, but more people have been willing to switch to the Geico insurance company to save money on car insurance.
He predicted that unemployment will likely climb a lot higher before the recession is done, but he also reiterated his optimistic long-term view: "Everything will be all right. We do have the greatest economic machine that's ever been created."
Fear and confusion have been driving consumer and investor behavior in recent months, Buffett said.
The nation's leaders need to clear up the confusion before anyone will become more confident, and he said all 535 members of Congress should stop the partisan bickering about solutions.
Buffett said he believes patriotic Republicans and Democrats will realize the nation is engaged in an economic war.
"What is required is a commander in chief that's looked at like a commander in chief in a time of war," Buffett said.
A little over a week ago, Buffett released his annual letter to shareholders describing the worst of his 44 years at the helm of Berkshire. The Omaha, Nebraska-based company reported sharply lower profit because of its largely unrealized $7.5 billion investment and derivative losses.
Overall, Berkshire's 2008 profit of $4.99 billion, or $3,224 per Class A share, was down 62 percent from $13.21 billion, or $8,548 per share, in 2007.
Berkshire's fourth-quarter numbers were even worse. Buffett's company reported net income of $117 million, or $76 per share, down 96 percent from $2.95 billion, or $1,904 per share, a year earlier.
Buffett said he doesn't regret writing an editorial last fall encouraging people to buy U.S. stocks, but he joked that in hindsight he wishes he'd waited a few months to publish the piece. Since that editorial appeared on Oct. 17, the Dow Jones industrial average has fallen from 8,852.22 to close at 6,626.94 on Friday.
Buffett stands by his overall advice that over time owning stocks will be better than so-called safe investments.
"Overall, equities are going to do far better than U.S. government bonds at these prices," he said.
Buffett said he doesn't regret investing $8 billion of Berkshire's money in investment bank Goldman Sachs Group Inc. and conglomerate General Electric Co. last fall. Both companies gave Berkshire preferred shares paying 10 percent interest that Buffett said he doesn't think he could get now.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
http://biz.yahoo.com/ap/090309/na_us_buffett_economy.html?.v=4
Financial Stability website:
http://financialstability.gov/
Tell Congress to Block the Trader Tax
Sign the Petition :
48,635 Letters and Emails Sent So Far
http://www.rallycongress.com/no2tradertax/1536/tell-congres-to-block-trader-tax/%20
On Friday, February 13, your colleague, U.S. Congressman Peter DeFazio, introduced H.R. 1068: “Let Wall Street Pay for Wall Street's Bailout Act of 2009”, which aims to impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stock, options, and futures.” Without a doubt, many Americans are appalled at the reckless behavior of large Wall Street companies, and the notion of making those who are responsible for putting the global financial system in jeopardy help repay taxpayers for bailing them out is certainly justifiable.
Unfortunately, I feel that this proposal is the wrong way to do that, as this tax applies to all investors, the vast majority of whom have done no wrong. Effectively, this tax will punish anyone who wants to save their money, whether it be by investing in stocks or options directly, putting their hard earned money in any mutual fund, or by simply placing a portion of their paycheck in a 401K. There’s no doubt that banks and mutual funds will pass along this added cost to their customers, giving this proposed tax a much further reach than was initially imagined.
Moreover, the unintended consequences associated with H.R. 1068 are also hard to ignore.
First, many hard-working Americans make their livings by running small businesses that trade stocks, options and other financial instruments. Many of whom will be put out of business due to the fact that their margins are often quite thin. In addition, those who work for or with these individuals will also lose their jobs.
Second, a transfer tax such as this will lower capital gains dollar for dollar, making the notion that anyone who invests their money will be on the hook for the excesses of Wall Street all that more poignant.
Finally, such a tax will undoubtedly affect the number of shares traded on an absolute basis, thus reducing liquidity – a necessary ingredient in the effective pricing of assets. It’s the complete lack of liquidity, for example, which made collateralized mortgage obligations effectively worthless.
The body of the bill suggests that such a tax would have a negligible impact on the average investor. I beg to differ. For example, a $10,000 trade (or approximately 100 shares of stock in Apple, Inc.) would increase the cost of a round trip transaction by $50. 100 shares is generally considered to be a minimum size for a trade, which would devastate any small business executing even a handful of similar trades each day.
As you can see, while this bill may sound good on the surface, the effects, if it is passed, will reach anyone who wants to invest their money and will ruin many small business people who are not at fault for this distressing situation all Americans are struggling through.
I urge you to vote NO on H.R. 1068
Some one new something was coming,
http://stockcharts.com/h-sc/ui?s=DNA&p=D&yr=0&mn=3&dy=0&id=p01881597773
thanks Vino,
1500 @ 1.86
OK, I did find this,
and below the link from which it came........
"The administration is also developing a program to provide partial payments to holders of second mortgages, known as second liens, to encourage them to extinguish that debt. Treasury officials did not release price tags for either of those efforts."
By Renae Merle and Dina ElBoghdady
Updated: Thursday, March 05, 2009
page 3 bottom paragraph......
http://mobile.washingtonpost.com/detail.jsp?key=357701&rc=to&p=3
lentinman,
First let me say that the headline,
"Second Liens Forgiven: Are You Kidding Me?" came with the article, and "is" misleading as written.
http://www.cnbc.com/id/29513414
I agree that the way the article presents it you are correct with regards to the $250, does not even make sense. Why would a second lien holder that is owed money just forgive it?
In the detailed program description section vi it says,
that the program will include "additional incentives" to extinguish second liens, but does not say what the incentives are.
and
Servicers will be eligible for "compensation" for extinguishing second liens "to be specified by the Treasury, depending in part on combined loan to value"
and
that the servicer will "also" recieve an extra $250 for handling the second lien.
I may be reading to much into it, but I see the above as three different items, it appears to me that not "all the details" are included, I have been looking for the "specified schedule to be provided by the treasury", but as of now to no avail.
The "Making Home Affordable" updated detailed program description says,
section vi
While eligible loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program, in order to reduce the indebtedness
of the borrower and improve the loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid second liens (according to a schedule to be specified by The Treasury, depending on part on combined loan to value) servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.
http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf
Second Liens Forgiven: Are You Kidding Me?
Wednesday, 4 Mar 2009
Posted By: Diana Olick
Amid the dozens of pages of details of the Obama mortgage modification plan, one new element will likely not make it into the headlines because it’s something of an afterthought.
It has to do with second liens, that is piggy back loans or home equity lines of credit.
Deep deep in the pages of the plan, is paragraph vi. Second Liens: While eligibly loan modifications will not require any participation by second lien holders, the program will include additional incentives to extinguish second liens on loans modified under the program in order to reduce the overall indebtedness of the borrower and improve loan performance. Servicers will be eligible to receive compensation when they contact second lien holders and extinguish valid junior liens. Servicers will be reimbursed for the release according to the specified schedule, and will also receive an extra $250 for obtaining a release of a valid second lien.
So in an effort to help borrowers stay current on their newly modified loan, which is at a nice new 31% debt to income ratio, the government is also going to pay cash money to get servicers to totally wipe out second liens. When I heard this I thought there might have been something funky in my morning muffin.
It’s not that I don’t get the reasoning. Sure, do all you can to help people pay their mortgage, like get rid of other debt. By why stop there? What about car loans? Student loans?? The second liens, in general, were used by borrowers to either buy more home than they could really afford or to use their homes as ATM machines. Yes, some people use home equity lines of credit to pay college tuition.
But I can’t tell you how many homeowners I’ve interviewed (and just take a look at David Faber’s documentary House of Cards to see more) who took out home equity lines to put in a pool or buy a fancy car or put an addition on the house that includes a fancy new kitchen with a Viking six-burner. And I’m supposed to pay for all that?
It’s one thing to suck up the bitter pill in order to save the greater housing market and keep families in their homes, but using taxpayer dollars to give homeowners a free ride on second liens is preposterous. The Obama administration talks a good long line about helping “responsible borrowers.” Second liens can certainly be responsible, but there’s a much much much greyer area in these loans when it comes to actual “need”, and many many people used them irresponsibly.
In fact, if Americans hadn’t taken quite so much money out of their homes during the housing boom, we wouldn’t be in quite the underwater mess we’re in right now.
go here to bottom of page 5 and top of 6 to find second liens vi refered to in the article......
http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf
lentinman
So does that make it 12000...
DOW to 4000?,
4000 dow possible even though the Dow appears oversold and could rally back to around 7,400, investors should consider limiting their exposure to equities, according to Stockmarket Cycles' Peter Eliades.
http://www.marketwatch.com/video/asset/dow-could-hit-4000/1973951D-B6AB-41F1-B91D-06032C304AFB
GM, auditor express doubts over survival,
March 5, 2009
LONDON (MarketWatch) -- General Motors and its auditor, Deloitte & Touche, on Thursday expressed doubts over the automaker's ability to survive, which in part will depend on car sales rising next year.
General Motors said in a filing to the Securities and Exchange Commission that bankruptcy was a possibility if its Viability Plan, as submitted to the U.S. Congress, didn't succeed.
The automaker is seeking up to $30 billion in loans from the U.S. government, and loans from foreign governments including Canada, Germany, the U.K., Sweden and Thailand for up to $6 billion more.
Vehicle sales, which have dropped 40% in the U.S. from their peak, need to recover next year under the plan submitted to Congress.
GM's survival also depends on its ability to obtain liquidity and financing to establish an appropriate level of debt, cut costs and have consumers convinced of its viability -- as well as partly-owned GMAC's ability to obtain funding from both wholesale and retail financing.
Deloitte & Touche made a similar analysis: "The Corporation's recurring losses from operations, stockholders' deficit and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern."
The markets share those fears as well: GM shares have dropped 90% over the last 12 months.
http://www.marketwatch.com/news/story/GM-auditor-express-doubts-over/story.aspx?guid=%7B63A40A45%2D656E%2D4E3F%2D930F%2D16A42183ACA4%7D#comments
Paul Harvey 1963, on the transfer of wealth,
Paul Harvey from 1963, during the broadcast Harvey mentions Castro and how he led the revolution to take Cuba from the rich, and the outcome was.....everyone than became poor.
the comments start at 3:20 minutes
The Most Important Messages From the 4Q GDP Report
some very interesting charts with the article,
http://www.financialsense.com/Market/wrapup.htm
The bullish case
Commentary:
At least one index remains above its Nov. 20 low
By Mark Hulbert, MarketWatch
Feb. 27, 2009
ANNANDALE, Va. (MarketWatch) -- I rise, your honor, in defense of the bull market that began last Nov. 20.
I know, I know -- the stock market in recent days supposedly reached new bear market lows, with the Dow Jones Industrial Average last Friday breaking below its Nov. 20 low, followed in turn by the S&P 500 index on Monday. So, by definition, the bear market would seem to be alive and well.
And I furthermore acknowledge that the sentiment data don't tell a particularly bullish story either, as I reported a little more than a week ago.
Still, the evidence never points universally in just one direction, and right now is no exception. So it's worth analyzing the bullish case to see just how strong it is.
Let's start with the notion that fresh and new bear market lows have been seen in the past week. This is not entirely true, believe it or not.
Not only is there one index that did not break below its Nov. 20 low, it just happens to be the most comprehensive of all stock market averages. I am referring to the Dow Jones Wilshire 5000 index which represents the combined market capitalizations of virtually all publicly traded stocks in the United States.
And at least according to this broadest of all stock market indexes, the low of the bear market that began 18 months ago occurred last Nov. 20. As of Thursday night, the total-return version of this index was 2.8% above that closing low of three months ago.
That's not a huge margin of safety, to be sure, especially given the stock market's extraordinary recent volatility. But, until and unless the Dow Jones Wilshire 5000 index breaks below its Nov. 20 low, it remains at least plausible to argue that the bear market ended then.
How can it be that the Dow Jones Wilshire 5000 has consistently remained ahead of its Nov. 20 level even while the Dow and the S&P 500 have dropped below it? The answer is that the smallest-cap issues have performed markedly better over the past three months than the largest-cap stocks.
In fact, small-cap relative strength has been impressive. Consider the Dow Jones Wilshire 4500 index, which represents the Dow Jones Wilshire 5000 index but for the 500 stocks in the S&P 500. As of Thursday night, this narrower index was 8.5% ahead of where it stood at Nov. 20's close, in contrast to the S&P 500, which was just 0.39 (or less than one-tenth of one percent) ahead of its close on that day.
Small-cap relative strength is in itself bullish, by the way. When the market begins to turn, the smallest-cap issues are typically among the first to respond to the good news that is just beginning to appear on the horizon -- far more responsive than the more sluggish large caps, for example.
As a result of this tendency, in fact, Gerald Appel and Marvin Appel, editors of the Systems & Forecasts newsletter, developed some years ago a market timing model based on whether NASDAQ stocks or NYSE-listed issues were leading or following. Needless to say, this model currently is bullish.
Technicians often consider divergences to signal potential market turning points, and the divergence between the small-cap and large-cap sectors could be carrying that significance now. Under this scenario, it might be that, even while the less-widely-followed Dow Jones Wilshire 5000 index continues to remain above its Nov. 20 lows, the new bear market lows from the widely-followed Dow and S&P 500 indexes lead investors to throw in the towel -- thereby catalyzing the capitulation for which contrarians have been waiting over the past several months.
That hasn't happened yet. But if it did, contrarians would add their support for the notion that a bear market bottom is at hand.
To be sure, this scenario would be negated if and when the Dow Jones Wilshire 5000 breaks its Nov. 20 low.
But I've seen very few analysts even mentioning the divergence between this index and the Dow and the S&P 500, or its potentially bullish significance. Given my contrary nature, I therefore believe it should at least be pointed out.
Buffett: Sees economy in 'shambles' in '09
By David B. Wilkerson
Last update: 8:22 a.m. EST Feb. 28, 2009
CHICAGO (MarketWatch) -- Berkshire Hathaway Chairman Warren Buffett told shareholders Saturday that 2008 was the company's worst year on record, as the per share book value of both the Class A and Class B stock fell 9.6%. In his annual letter, Buffett said neither he nor Charlie Munger, his partner in running Berkshire, can predict winning and losing years in advance, and that no one else can. "We're certain, for example, that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall." Commenting on the federal government's actions to resolve the economic crisis, Buffett said: "Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects."
Letter to shareholders
http://www.berkshirehathaway.com/letters/2008ltr.pdf
If You Don't Like the Numbers, Then Change Them
by John Mauldin
February 27, 2009
Let's be clear. I like Jeremy Siegel. He is a very nice and very smart gentleman. But in his op-ed piece, I think he was talking his book, if you can pardon the pun.
I have been writing for a long time about the rather dismal forecasting ability of the analysts who predict the earnings for the S&P 500. Each month it gets uglier. But just for fun, let's review a few charts. This first chart shows analysts' estimates for 2008. The last number is with 94% of the 500 companies reporting. Earnings forecast have been knocked down by over 70% since the end of 2007. That is a monumental miss.
Now let's look at forecasts for 2009.
Based on 2008 as-reported earnings, the S&P 500, which closed at 735 today, has a trailing P/E of 52. The forward P/E, based on 2009 projected earnings, is 22.7. But the trailing 12-month P/E for the end of the second quarter, based on the last half of 2008 and projections for 2009, is a nosebleed 51.2. (The combination of actual and projected earnings is $14.36 per share.) Mind you, that is after a rather healthy drop in the price of the index!
In his op-ed, Jeremy says that looking at the earnings for the entire index can be misleading. "What this dismal news actually reflects is the bizarre way in which the S&P (and most other index providers) calculate "aggregate" earnings and P/E ratios for their indexes. Unlike their calculations of returns, S&P adds together, dollar for dollar, the large losses of a few firms without any regard to the market weight of the firm in the S&P 500. If they instead weight each firm's earnings by its relative market weight, identical to how they calculate returns on the S&P 500, the earnings picture becomes far brighter."
He uses the illustration of Exxon and Jones Apparel Group, the largest and smallest, respectively, two stocks in the index. Exxon has a weighting 1,381 times that of JAG. If by some chance one made $10 billion and the other lost $10 billion, the effect on aggregate earnings would add up to zero. But if you counted earnings relative to size, you would get a much different picture.
There are 80 companies which had a combined (so far) loss of $240 billion in 2008, which takes about $27 per share of the total earnings, although these companies only account for 6.4% of the index. If you figured earnings by market capitalization, you would get earnings at $71.10, says Jeremy. At today's close, that makes the P/E closer to 10! And that does sound better than my analysis above. He concludes:
"No one can deny that the recent economic downturn has badly hurt corporate earnings. But let's not fool ourselves into thinking that this is an expensive market. When computed accurately, P/E ratios show that this market is much cheaper than is currently being reported by the S&P. Those who venture into today's stock market are indeed buying good values."
So which is it? A P/E of 10? Or 20? Or 50?!?!? Who is fooling whom?
First, let me state unequivocally that there are stocks in the S&P 500 that are good values. If you buy them today you will be rewarded in the medium and long run. Don't ask me which ones, because I don't do stocks -- I have enough on my plate looking at investment managers and the economy. But there are value managers who will do well from this point. The fact that they have been hammered by 50% or more in the past year is another story for another letter. (But nearly all of them made the case that "today" was a good time to buy their fund and did so every day for the last year.)
I think there are some problems with Jeremy's methodology. Do you weight CITI, for instance, at their market cap at the beginning of the quarter, or at the end? AIG? B of A? That could make a huge difference. And what about when the financials were contributing so much to earnings just a few years ago?
Financial stocks were 22% of the index at their highs, and an even greater share of the earnings. They are now down to 10%, and Mary Ann Bartels of Bank of America thinks they will slip to 7%. Using Jeremy's methodology, one would overweight their earnings in the go-go years and then all but ignore their losses this last year as they slipped 78% (and still falling).
Buy and Hope
Stocks that lose money fall in price. That is no mystery. And if you are an index investor, you want to know what the index is going to do, not what just some of the stocks are going to do. If the market cap of Citibank drops by 90%, it is going to affect the index. In Jeremy's system, the positive earnings of Citibank in 2006 would be weighted 10 times more than the losses in 2008. That does not help you assess overall index value going forward.
Further, if you wanted to weight earnings by capitalization and use that number for comparison, you would need 100 years of such analysis to come up with an average trend P/E. Comparing Jeremy's cap-weighted index to aggregate data is simply apples and cumquats. It could be hugely misleading.
Quick aside: AIG has now lost over 99% of its value. It is down to $0.42, yet next week will report a loss of $60 billion, which I admit will skew the data even more. It makes it tough to get a real sense of it all. But even if you ignore last quarter, we are still at high valuations going forward, and as we saw from the previous charts, those earnings estimates are a moving target. They are likely to fall further.
Who might want to use such a different weighting methodology? Someone who was committed to buy and hold, has seen their portfolio trashed, and wants to hold on to some hope that their stock is going to come back. Such statistics are a kind of feel-good narcotic for the buy and hope crowd.
For the last 18 months there has been a parade of analysts, mutual fund managers, brokers, and their kin, telling you that stocks are a reasonable value "today." And they trot out "data" (with lots of charts) which supports their position and then ask you to invest "now."
"The stock market turns up six months before the end of the recession. This recession is already almost the longest, so now is the time to buy." The bullish cheerleaders said that six months ago, they say it today, and they will say it in six months. One day they will be right. Care to make a bet?
Now let's reread the last paragraph I quoted from Peter's Financial Times article.
"... There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realized."
We are in an economic period unlike any other we have faced. I think we are likely to have a long, slow recovery after the recession ends some time (hopefully early) next year. However, to suggest that corporate earnings are going to show the same type of resilience in 2010-2012 that they have after every other recession since WWII is ignoring the macroeconomic picture surrounding the potential for earnings growth. "Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical."
We are in a synchronized global recession. Yes, we will recover, but the causes are not those of the typical business-cycle recession. We are seeing massive debt deflation, deleveraging on a scale never witnessed, a financial industry that has to be rebuilt, and a housing industry that is reeling all over the world. We created a lot of excess in a number of industries. We decimated the savings of a generation that was hoping to retire soon, and now will have to work longer and save more.
This is not a typical recession. And for any analyst, writer, or pundit to trot out past historical data to demonstrate that the stock market is going to rebound at such and such a time and at such and such a pace simply ignores the fact that the future is unlikely to look like the past for at least the next 2-3 years. We are in a brand-new world, macro-economically speaking.
And let me also suggest that when we do get the problems worked out, and we will, the recovery that ensues may be breathtaking in its scope, as the technological changes that will be coming down the pike in the next 5-10 years are simply going to dwarf what we have seen in the past 30. Ray Kurzweil predicts that we will see twice as much change in the next 20 years as we saw all of last century. Think about the implications of that.
Just as we cannot let past performance and wishful thinking blind us to the reality that we confront today, we must not let 3-4 years of a slow Muddle Through world after this recession ends blind us to future opportunity. Projecting the current trends into the long future is nearly always a mistake. And the longer the trend goes, the more complacent (or negative) we get. But trends change. Remember that.
Just because a stock is down by 50% does not mean it cannot go down further. Think back to all the people who said Citi was a screaming buy at $20 or ... (pick a stock!). I want to see earnings start to settle down and maybe even rise. Given the nature of what could be the negative environment for earnings in the second quarter, there could be one more leg to this bear market. Though I must admit that I am surprised we haven't seen some type of tradable rally. I thought the money coming back into the market from hedge fund redemptions might have been a boost, but evidently it has not been. Caution is the word today.
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John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
The S&P Gets Its Earnings Wrong
Stocks are cheaper than they look.
By JEREMY J. SIEGEL
Standard & Poor's recently shocked investors with an announcement that reported earnings for its S&P 500 Index for the fourth quarter of 2008 are forecast to be negative for the first time since such data were calculated in 1936. S&P further reports that for all of 2008, earnings are expected to be less than $40 per share, indicating that the market now has a price/earnings ratio over 20, well above its historical average of 15.What this dismal news actually reflects is the bizarre way in which S&P (and most other index providers) calculate "aggregate" earnings and P/E ratios for their indexes. Unlike their calculation of returns, S&P adds together, dollar for dollar, the large losses of a few firms to the profits of healthy firms without any regard to the market weight of the firm in the S&P 500. If they instead weight each firm's earnings by its relative market weight, identical to how they calculate returns on the S&P 500, the earnings picture becomes far brighter.
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A simple example can illustrate S&P's error.
Suppose on a given day the only price changes in the S&P 500 are that the largest stock, Exxon-Mobil, rose 10% in price and the smallest stock, Jones Apparel Group, fell 10%. Would S&P report that the S&P 500 was unchanged that day? Of course not. Exxon-Mobil has a market weight of over 5% in the S&P 500, while the weight of Jones Apparel is less than .04%, so that the return on Exxon-Mobil is weighted 1,381 times the return on Jones Apparel. In fact, a 10% rise in Exxon-Mobil's price would boost the S&P 500 by 4.64 index points, while the same fall in Jones Apparel would have no impact since the change is far less than the one-hundredth of one point to which the index is routinely rounded.
Yet when S&P calculates earnings, these market weights are ignored. If, for example, Exxon-Mobil earned $10 billion while Jones Apparel lost $10 billion, S&P would simply add these earnings together to compute the aggregate earnings of its index, ignoring the vast discrepancy in the relative weights on these firms. Although the average investor holds 1,381 times as much stock in Exxon-Mobil as in Jones Apparel, S&P would say that that portfolio has no earnings and hence an "infinite" P/E ratio. These incorrect calculations are producing an extraordinarily low reported level of earnings, high P/E ratios, and the reported fourth-quarter "loss."
As the fourth-quarter earnings season draws to a close, there are an estimated 80 companies in the S&P 500 with 2008 losses totaling about $240 billion. Under S&P's methodology, these firms are subtracting more than $27 per share from index earnings although they represent only 6.4% of weight in the index. S&P's unweighted methodology produces a dismal estimate of $39.73 for aggregate earnings last year.
If one applies market weights to each firm's earnings using the same procedure that S&P employs to compute returns, the results yield a more accurate view of the current profit picture. Market weights produce a reported earnings estimate of $71.10 for 2008 -- nearly 80% higher than the unweighted procedure. The reason for this stark difference is that the firms with huge losses generally have extremely low market values and hence have a much smaller impact on the total earnings in the index.
Similarly, operating earnings (essentially, earnings before write-offs), of the S&P 500 are boosted to $81.94 per share when earnings are weighted by market value, yielding a P/E ratio of about 9.4 for the market, instead of S&P's $61.80, which yields a P/E ratio of 12.5 when firm profits are simply added. Even the negative earnings for the fourth quarter disappear when market weights are accounted for, as fourth-quarter GAAP earnings on the S&P 500 Index total $7.44 per share and operating earnings reach $14.40.
No one can deny that the recent economic downturn has badly hurt corporate earnings. But let's not fool ourselves into thinking that this is an expensive market. When computed accurately, P/E ratios show that this market is much cheaper than is currently being reported by the S&P.
Those who venture into today's stock market are indeed buying good values.
Mr. Siegel is professor of finance at the University of Pennsylvania's Wharton School.
Jang-A-Lang, Wouldn't that depend on how much life one had left?
"this could mean we are at the buy of a life time".
Signs of life
Commentary: The economy's worst may be past
By Irwin Kellner, MarketWatch
Feb. 24, 2009
PORT WASHINGTON, N.Y.
Although you wouldn't know it from the behavior of the stock market, the economic outlook is turning just a bit less gloomy.Prosperity may not be just around the corner, but statistical evidence is mounting to suggest that the worst of this recession may soon be past. And before you inundate me with email alleging that I am out of touch with the real world, let me say right at the top that I am not for one moment saying that the economy has stopped sliding. I am only suggesting that it appears to be contracting at a slower pace.
Clearly, this has nothing whatsoever to do with the stimulus package that the president signed into law last week. As a matter of fact, if the recession does end within the next few months, it will probably be in spite of this package, rather than because of it. If you want a policy to credit, it's monetary policy. The combination of liquidity that the Federal Reserve has pumped into the economy, along with its special lending programs and capital injections into the banks, is largely responsible. But you want more than assertions;
you want proof.
And here it is:
The Conference Board's index of leading economic indicators has risen for two months in a row.
Producer prices have increased for two straight months.
Consumer prices rose in January -- the first monthly gain in six months.
The Baltic Dry Index, which measures the cost of shipping key raw materials like copper, steel and iron, has more than doubled from its recent lows.
Existing-home sales rose in December, and participants in our weekly survey think that another rise took place in January.
Pending home sales went up in December.
Builders' confidence inched up this month.
Thanks to lower interest rates, applications for both new mortgages and refinancings of existing mortgages are rising.
Real hourly earnings rose 4.5% in December following a 3.3% increase in November.
An index of consumer expectations rose in January.
Retail sales shot up by 1% in January -- the first monthly rise since June.
The decline in consumer credit moderated in the latest month.
New orders for consumer and nonmilitary capital goods went up in January.
The ISM index of manufacturing went up last month.
The ISM index of services rose last month for the second month in a row.
The money supply is soaring, a sign that there's plenty of liquidity in the economy.
The 3-month London interbank offered rate, a measure of banks' willingness to lend to each other, has dropped to 1.2% from close to 5% a number of weeks ago.
Other measures of the state of the financial markets, like the TED spread and the 2-year swap spread are down, as well.
Prices of credit default swaps for banks have fallen from their peaks.
The corporate-bond markets are thawing out, too; some $127 billion in dollar-denominated debt was issued in January, the most for any month since last May.
Some securities on banks' books are starting to recover in value.
All this said, the economy is still a long way from a pink-cheeked state of health. But remember, you've got to crawl before you can walk. And it looks like the economy is about to do just that. Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.
Penny Lane,
I understand the frustration, but......
"How much time has each of us spent dd'ing all the wacky (changing) share structures?"
"What's with all the gimmicks all these degenerate clowns have added?"
If a company is being run by wacky clowns, why would anyone want to be invested in it?
"Why not just have, say, 3 share-structures of 1M, 10M, or 100M, no more splits of any kind, and if the company abuses it share base into needing more than 100M, TOUGH!"
If we're going to have that kind of regulation, why not have regulations that say certain investors should not invest in certain company's because they can not afford it, or it does not fit their style? Apparently many investors agree with the wacky clowns as they continue to stay invested with the company.
I have had several company's over the years have share splits, liked the company, didn't like the split,but the management had morphed into wacky clowns, so I sold and moved on.
Again I understand the frustration, but I also fear to much regulation.
Satyam gets new orders; auditor resigns
http://www.marketwatch.com/news/story/Satyam-gets-new-orders-auditor/story.aspx?guid=%7B0D5C17DD%2D98BD%2D441C%2D819C%2D7BD987626FFA%7D
The good, bad, ugly on the mortgage plan
Comment by Mike Larson, Real Estate Analyst with Weiss Research
The good, the bad, and the ugly on the mortgage plan - Feb 20, 2009
The mortgage plan has been made public. The questions going forward are simple: Will this latest plan work? And what are its biggest flaws?
Let's start with the "good":
First, mortgage lenders and investors appear to be taking the "first hit" on whatever modification would get a borrower's payment down to a 38% DTI ratio. Then the government shares the cost for the next seven percentage points. I like this "loss share" component.
Second, the program is targeted at borrowers who may not already be delinquent on their loans, in addition to those who have already fallen behind. This eliminates the "My lender won't talk to me until I miss three payments" problem.
Third, borrowers are going to get up to $5,000 in principal reduction payments from the government, spread out over a period of five years. The idea is to help incentivize borrowers who are upside down to stay put during the period they are upside down, but paying at the reduced rate.
And now, the "bad":
First, the plan only applies to owner occupied homes with loans under the conforming loan limit. Some 40% of existing homes sold during the peak of the bubble -- 2005 -- were purchased as second homes or investment properties, according to the National Association of Realtors. Jumbo loan borrowers would also be excluded from the plan. These exclusions are understandable from a political standpoint. After all, officials don't want to be seen bailing out speculators or the rich. But they will also limit the plan's impact.
Second, the provision that would allow Fannie Mae and Freddie Mac to refinance borrowers into new loans with LTVs of up to 105% is somewhat troubling. Waiting and hoping for a home price rebound -- and refusing to just go ahead and foreclose on loans where borrowers have fallen behind and are upside down -- has proven to be a losing strategy. It's akin to kicking the can down the road, and it has resulted in billions and billions of dollars in industry losses.
Now, rather than cut their losses short, Fannie and Freddie will be allowed to refinance these outstanding mortgages into new lower-rate loans that feature LTVs of 80% to 105%. That means a portion of the new loans will effectively be unsecured. This exposes Fannie and Freddie to potentially larger losses down the road if home prices don't rebound and/or if borrowers just end up defaulting anyway. That, in turn, could result in some additional risk being priced into the GSEs' cost of funds.
So what's the problem? Taxpayers could ultimately get soaked if home prices don't rise in the coming few years. Those losses would come on top of any possible losses stemming from the recent surge in FHA loan volume. FHA, unlike most private lenders these days, will still extend mortgage loans at LTVs as high as 97%. That's a significant risk in an environment of falling home prices and rising unemployment.
Third, the plan still doesn't attack the principal reduction issue head on. Lenders and servicers may voluntarily apply any government aid toward principal reductions. But it appears term extensions and rate reductions will be the main technique used to reduce payments to the 38% and 31% thresholds. The Obama administration is hoping that the threat of bankruptcy cramdowns will inspire lenders to act. But that remains to be seen.
Fourth, in many hard-hit markets -- the ones where foreclosure rates are the highest, including Florida and California -- home price declines have been extremely severe. Even a $5,000 principal reduction incentive payment likely won't be enough to incentive those borrowers to stick around should hardship strike. And the more generous 105% LTV standard on Fannie and Freddie refinances won't make much difference.
Consider the following example from my own backyard, Palm Beach County, FL:
Let's say you bought a median priced home in the West Palm Beach market in December 2005, around the peak of the market. It would have cost you $408,200 at the time, according to Florida Association of Realtors figures. Let's be generous and assume you put 10% down, rather than finance with some 80/20 scheme. You would have had to cough up $40,820 and finance $367,380 -- leaving you with a mortgage with an initial LTV of 90%. Thirty-year fixed rates were around 6.3% at the time, so your payment (principal and interest only) would have been $2,273.98.
As of December 2008, just three years later, the median price of a West Palm Beach home is $246,000 (again, going from FAR data). That means your home would have lost $162,200 in value, or 39.7%. During that same three-year period, you would have only paid your mortgage principal down to $353,738.60 (about $13,600, or 3.7% of the original balance).
You would have $54,461.40 in equity, or a 13.3% equity position, assuming the original home did not lose or gain any value in the interim. Stated another way, your LTV would have declined to just under 87%, and the new Fannie/Freddie 105% LTV break would give you some relief.
But as I said earlier, prices haven't stayed the same. They've plunged almost 40%. That means you now have a mortgage with an LTV ratio of 143.8% (!) As you can see, even a more generous 105% LTV limit doesn't help you refi in a market like this one. And a $5,000 subsidy over five years doesn't do much to offset a $162,000 decline in value, much less incentivize you to stay put. This is why principal cramdowns/reductions are all but inevitable in hard hit markets -- Florida, California, and so on.
And now let's talk about the "ugly" part of this plan, the possibility that it will incentivize bad behavior (moral hazard) and more importantly, that it might actually DELAY a rebound in the housing market ...
As part of this program, the government could end up subsidizing mortgage borrowers, lenders, and servicers to the tune of more than $10,000. How is that fair to borrowers who played by the rules ... who didn't buy too much house ... and continue to pay their loans on time? Why are they left out in the cold? That's what many Americans are going to be asking, and what many politicians are going to be hearing from callers.
Moreover, market forces ARE working. Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. In markets where prices have fallen the most, home sales are currently rising smartly. Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing, even if it makes us all feel good for doing "something."
http://news.google.com/news?btcid=cbf8e3dbb310f95f
The good, bad, ugly on the mortgage plan
Comment by Mike Larson, Real Estate Analyst with Weiss Research
The good, the bad, and the ugly on the mortgage plan - Feb 20, 2009
The mortgage plan has been made public. The questions going forward are simple: Will this latest plan work? And what are its biggest flaws?
Let's start with the "good":
First, mortgage lenders and investors appear to be taking the "first hit" on whatever modification would get a borrower's payment down to a 38% DTI ratio. Then the government shares the cost for the next seven percentage points. I like this "loss share" component.
Second, the program is targeted at borrowers who may not already be delinquent on their loans, in addition to those who have already fallen behind. This eliminates the "My lender won't talk to me until I miss three payments" problem.
Third, borrowers are going to get up to $5,000 in principal reduction payments from the government, spread out over a period of five years. The idea is to help incentivize borrowers who are upside down to stay put during the period they are upside down, but paying at the reduced rate.
And now, the "bad":
First, the plan only applies to owner occupied homes with loans under the conforming loan limit. Some 40% of existing homes sold during the peak of the bubble -- 2005 -- were purchased as second homes or investment properties, according to the National Association of Realtors. Jumbo loan borrowers would also be excluded from the plan. These exclusions are understandable from a political standpoint. After all, officials don't want to be seen bailing out speculators or the rich. But they will also limit the plan's impact.
Second, the provision that would allow Fannie Mae and Freddie Mac to refinance borrowers into new loans with LTVs of up to 105% is somewhat troubling. Waiting and hoping for a home price rebound -- and refusing to just go ahead and foreclose on loans where borrowers have fallen behind and are upside down -- has proven to be a losing strategy. It's akin to kicking the can down the road, and it has resulted in billions and billions of dollars in industry losses.
Now, rather than cut their losses short, Fannie and Freddie will be allowed to refinance these outstanding mortgages into new lower-rate loans that feature LTVs of 80% to 105%. That means a portion of the new loans will effectively be unsecured. This exposes Fannie and Freddie to potentially larger losses down the road if home prices don't rebound and/or if borrowers just end up defaulting anyway. That, in turn, could result in some additional risk being priced into the GSEs' cost of funds.
So what's the problem? Taxpayers could ultimately get soaked if home prices don't rise in the coming few years. Those losses would come on top of any possible losses stemming from the recent surge in FHA loan volume. FHA, unlike most private lenders these days, will still extend mortgage loans at LTVs as high as 97%. That's a significant risk in an environment of falling home prices and rising unemployment.
Third, the plan still doesn't attack the principal reduction issue head on. Lenders and servicers may voluntarily apply any government aid toward principal reductions. But it appears term extensions and rate reductions will be the main technique used to reduce payments to the 38% and 31% thresholds. The Obama administration is hoping that the threat of bankruptcy cramdowns will inspire lenders to act. But that remains to be seen.
Fourth, in many hard-hit markets -- the ones where foreclosure rates are the highest, including Florida and California -- home price declines have been extremely severe. Even a $5,000 principal reduction incentive payment likely won't be enough to incentive those borrowers to stick around should hardship strike. And the more generous 105% LTV standard on Fannie and Freddie refinances won't make much difference.
Consider the following example from my own backyard, Palm Beach County, FL:
Let's say you bought a median priced home in the West Palm Beach market in December 2005, around the peak of the market. It would have cost you $408,200 at the time, according to Florida Association of Realtors figures. Let's be generous and assume you put 10% down, rather than finance with some 80/20 scheme. You would have had to cough up $40,820 and finance $367,380 -- leaving you with a mortgage with an initial LTV of 90%. Thirty-year fixed rates were around 6.3% at the time, so your payment (principal and interest only) would have been $2,273.98.
As of December 2008, just three years later, the median price of a West Palm Beach home is $246,000 (again, going from FAR data). That means your home would have lost $162,200 in value, or 39.7%. During that same three-year period, you would have only paid your mortgage principal down to $353,738.60 (about $13,600, or 3.7% of the original balance).
You would have $54,461.40 in equity, or a 13.3% equity position, assuming the original home did not lose or gain any value in the interim. Stated another way, your LTV would have declined to just under 87%, and the new Fannie/Freddie 105% LTV break would give you some relief.
But as I said earlier, prices haven't stayed the same. They've plunged almost 40%. That means you now have a mortgage with an LTV ratio of 143.8% (!) As you can see, even a more generous 105% LTV limit doesn't help you refi in a market like this one. And a $5,000 subsidy over five years doesn't do much to offset a $162,000 decline in value, much less incentivize you to stay put. This is why principal cramdowns/reductions are all but inevitable in hard hit markets -- Florida, California, and so on.
And now let's talk about the "ugly" part of this plan, the possibility that it will incentivize bad behavior (moral hazard) and more importantly, that it might actually DELAY a rebound in the housing market ...
As part of this program, the government could end up subsidizing mortgage borrowers, lenders, and servicers to the tune of more than $10,000. How is that fair to borrowers who played by the rules ... who didn't buy too much house ... and continue to pay their loans on time? Why are they left out in the cold? That's what many Americans are going to be asking, and what many politicians are going to be hearing from callers.
Moreover, market forces ARE working. Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. In markets where prices have fallen the most, home sales are currently rising smartly. Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing, even if it makes us all feel good for doing "something."
http://news.google.com/news?btcid=cbf8e3dbb310f95f
lentinman,
I agree with you completely,
BUT, I do expect to see "principle reduction" before all is said and done.
FWIW, Frontlines "Inside the Meltdown"
(shown last night) can be seen on the net,
http://www.pbs.org/wgbh/pages/frontline/meltdown/interviews/
Tuesday Feb.17, Inside the Meltdown,
on PBS, Frontline.......
this is a trailer
http://www.pbs.org/wgbh/pages/frontline/meltdown/
On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. “There was literally a pause in that room where the oxygen left,” says Sen. Christopher Dodd (D-Conn.).
FRONTLINE producer Michael Kirk goes behind closed doors in Washington and on Wall Street to investigate how the economy went so bad so fast and why emergency actions by Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson failed to prevent the worst economic crisis in a generation on Inside the Meltdown, airing Tuesday, Feb. 17, 2009, at 9 P.M. ET on PBS (check local listings).
As the housing bubble burst and trillions of dollars’ worth of toxic mortgages began to go bad in 2007, fear spread through the massive firms that form the heart of Wall Street. By the spring of 2008, burdened by billions of dollars of bad mortgages, the investment bank Bear Stearns was the subject of rumors that it would soon fail.
“Rumors are such that they can just plain put you out of business,” Bear Stearns’ former CEO Alan “Ace” Greenberg tells FRONTLINE.
The company’s stock had dropped from $171 to $57 a share, and it was hours from declaring bankruptcy. Ben Bernanke acted. “It was clear that this had to be contained. There was no doubt in his mind,” says Bernanke’s colleague economist Mark Gertler.
Bernanke, a former economics professor from Princeton, specialized in studying the Great Depression. “He more than anybody else appreciated what would happen if it got out of control,” Gertler explains.
To stabilize the markets, Bernanke engineered a shotgun marriage between Bear Sterns and the commercial bank JPMorgan, with a promise that the federal government would use $30 billion to cover Bear Stearns’ questionable assets tied to toxic mortgages. It was an unprecedented effort to stop the contagion of fear that seemed to be threatening the rest of Wall Street.
While publicly supportive of the deal, Secretary Paulson, a former Wall Street executive with Goldman Sachs, was uncomfortable with government interference in the markets. That summer, he issued a warning to his former colleagues not to expect future government bailouts, saying he was concerned about a legal concept known as moral hazard.
Within months, however, Paulson would witness the virtual collapse of the giant mortgage companies Fannie Mae and Freddie Mac and preside over their takeover by the federal government.
The episode sent shockwaves through the economy as confidence in Wall Street began to evaporate. Within days, in September 2008, another investment bank, Lehman Brothers, was on the brink of collapse. Once again, there were calls for Bernanke and Paulson to bail out the Wall Street giant. But Paulson was under intense political pressure from conservative Republicans in Washington to invoke moral hazard and let the company fail.
“You had a conservative secretary of the Treasury and conservative administration. There was right-wing criticism over Bear Stearns,” says Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
Paulson pushed Lehman’s CEO Dick Fuld to find a buyer for his ailing company. But no company would buy Lehman unless the government offered a deal similar to the one Bear Stearns had received. Paulson refused, and Lehman Brothers declared bankruptcy.
FRONTLINE then chronicles the disaster that followed. Within 24 hours, the stock market crashed, and credit markets around the world froze. “We’re no longer talking about mortgages,” says economist Gertler. “We’re talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading.”
“I think that the secretary of the Treasury could not fully comprehend what that linkage was and the extent to which this would materialize into problems,” says former Lehman board member Henry Kaufman.
Paulson was thunderstruck. “This is the utter nightmare of an economic policy-maker,” Nobel Prize-winning economist Paul Krugman tells FRONTLINE. “You may have just made the decision that destroyed the world. Absolutely terrifying moment.”
In response, Paulson and Bernanke would propose—and Congress would eventually pass—a $700 billion bailout plan. FRONTLINE goes inside the deliberations surrounding the passage of the legislation and examines its unsuccessful implementation.
“Many Americans still don’t understand what has happened to the economy,” FRONTLINE producer/director Michael Kirk says. “How did it all go so bad so quickly? Who is responsible? How effective has the response from Washington and Wall Street been? Those are the questions at the heart of Inside the Meltdown.”