Sunday, October 19, 2008

Taking a Look at "Building Flawed American Dreams"

The New York Times, a never ending source of liberal bias and blind ideology, once again brings us a piece of reporting on the financial bugaboos currently impeding the extending of credit and erasing trillions of dollars of wealth built on ephemeral paper.

The piece is titled, as the title to this post alludes to, The Reckoning Building Flawed American Dreams.

The main subject matter of the NYT piece, is Henry G. Cisneros, former head of the Department of Housing and Development under “it depends on what the definition of is is,” President Clinton.

Here’s Mr. Cisneros’ on his “passion,” expanding homeownership.

While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.”

They were lured by “unscrupulous participants — bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.”

Note those darn “bad actors,” and other “unscrupulous participants,” seem to be to blame, rather than the briefest acknowledgement that “people came to homeownerships who should not have been homeowners.” And would that brief acknowledgement have anything to do with this?

Perhaps the most overly generous subprime underwriting guideline was what is known as the debt to income ratio.  The debt to income ratio is simply the percentage of your monthly gross income that you are spending on your house payment and other monthly long term debts.  For conforming prime loans, meaning “A” paper loans which are underwritten to FannieMae (FNMA) and FreddieMac (FHLMC) guidelines, borrowers are typically limited to spending thirty-eight percent (38%) of their monthly gross income on their house payment plus their long term debts (long term debts are any credit cards or lines of credit with outstanding balances, and any installment loans with over ten (10) months of payments still outstanding).  Bear in mind that his 38% debt to income ratio was set by FNMA/FHLMC for solid, good credit borrowers.

In the subprime lending industry, weak, poor credit borrowers were allowed to spend up to fifty-five percent (55%) of their monthly gross income on their house payment plus monthly long term debts.  Subprime lenders were allowing the highest risk borrowers to carry debt loads which even the most creditworthy prime borrowers were not allowed, and which are not, realistically, financially advisable for any individual.

Which I mentioned here. The alleged “hijackers” were simply selling, as fast and as furious as they could, the foolish generosity of underwriting guidelines which were untenable from the start.

The very next paragraph following the one quoted above also neglects to acknowledge the foolishness of allowing individuals to pledge fifty-five percent (55%) of their gross income to their housing expense.

The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats.

But this individual, quoted in the NYT piece understands the foolishness, now.

Victor Ramirez and Lorraine Pulido-Ramirez bought a house in Lago Vista in 2002. “This was our first home. I had nothing to compare it to,” Mr. Ramirez says. “I was a student making $17,000 a year, my wife was between jobs. In retrospect, how in hell did we qualify?”

The remainder of the NYT piece delves into Cisneros’ foray into the private sector where he formed companies to develop homes, his association with KB Homes, and with the company which is the poster boy for wanton lending, Countrywide Financial, through its subprime lending arm Countrywide Full Spectrum Lending, which provides us with this bit of equivocation.

Still, Countrywide expanded subprime lending aggressively while Mr. Cisneros served on its board. In September 2004, according to documents provided by a former employee, lending audits in six of Countrywide’s largest regions showed about one in eight loans was “severely unsatisfactory” because of shoddy underwriting.

HUD required such audits and lenders were expected to address problems. Mr. Cisneros was a member of the Countrywide committee that oversaw compliance with legal and regulatory requirements. But he says he did not recall seeing or receiving the reports.

Nor, he says, was there ever a board vote about the wisdom of subprime lending.

“The irresistible temptation to engage in subprime was Countrywide’s fatal error,” he says. “I fault myself for not having seen it and, since it was not something I could change, having left.”

I guess it’s difficult for recall and wisdom to be exercised when the temptation of dollars overflowing from profitable enterprises built on foolish principles are piling up.

Posted by John Venlet on 10/19 at 08:18 AM
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Saturday, October 18, 2008

Let 'Em Fail

The Wall Street Journal has an interesting interview with Anna Schwartz, co-author with Milton Friedman, in 1963, of The Monetary History of the United States. I have not read this tome, but, I’ll be heading to my local used book dealer shortly to see if he has it piegonholed in his shop.

From the interview, which reads more like an article.

...In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. “They should not be recapitalizing firms that should be shut down.”

Rather, “firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years."

I think Anna Schwartz is correct, “firms that made wrong decisions should fail.” Unfortunately, the principles Ms. Schwartz hopes would be established are lacking both at the firms that should fail, and at the state level.

The rest of the interview is worth reading.

The WSJ piece is titled Bernanke Is Fighting the Last War

Posted by John Venlet on 10/18 at 03:06 PM
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Obviously, A Hand Out is in Order

Tesla Motors, makers of the Tesla Roadster, a sweet electric performance car in my opinion, states that they have hit a “financial wall.” Disheartening, isn’t it?  That damn “financial wall” seems to be in every Tom, Dick and Harry’s way, currently.

Here’s a company, building a “green” machine, with an alleged one (1) year waiting list (for the Tesla Roadster), and they, like Ford, GM, and Chrysler are supplicating the state for a “loan."

Citing the tough economy, the Silicon Valley company said it will have to scale back the development of a $60,000, all-electric sedan until its U.S. Energy Department loan guarantee becomes effective.

But never fear taxpayers and state hand out proponents, Tesla Chairman Elon Musk states that Tesla Motors is “not far from being cash flow positive,” and that he “will do whatever is needed to ensure that Tesla has more than sufficient captial to get there.” There, I presume, being the state of cash flow positive.

"We are not far from being cash flow positive,” Musk wrote, “but even if that threshold ends up being further than expected, I will do whatever is needed to ensure that Tesla has more than sufficient capital to get there."

Obviously, Mr. Musk, you must admit that you are “doing whatever is needed,” since you are attempting to pick the pockets of Americans, through supplication to the state for assistance, well other than privately bringing a product to market which sells without the state stepping in.

Segway anyone?

All-electric carmaker hits a financial wall

Posted by John Venlet on 10/18 at 01:20 PM
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Barack Obama - "Spreading the Wealth Around" - An Analogy

Barack Obama desires to spread the wealth around.  Let’s examine this premise, as an analogy, at the collegiate level.

Two college students attending any college or university.  One student is, well, studious.  Hitting the books, attending all classes, generally busting his butt to excel, and his grade point average (GPA) reflects this.  He’s a 4.0 GPA student.  The second student is less studious, enjoying the party atmosphere and being out from under the thumb of his parental units while attending college.  This second student is not stupid, but is not applying himself to the curriculum at the collegiate level and his grade point reflects this.  He’s a 2.0 GPA student.

Under the socialist ideals of Barack Obama, and his desire to spread the wealth around, the 4.0 student should give up one (1) point of his GPA to be applied to the 2.0 GPA student’s GPA, for equality and all you know.  Thus we end up with two 3.0 GPA students because the wealth has been spread around.

It’s a simple analogy, but accurate.

Posted by John Venlet on 10/18 at 10:49 AM
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Community Reinvestment Act - To Blame or Not to Blame

Once again, this morning, The New York Times is championing the Community Reinvestment Act (CRA) in a op-ed piece co-written by Michael S. Barr and Gene Sperling.  This is not the first time the NYT has done this.  Thomas Friedman, just the other day in a piece titled Misplaced Blame, which I noted in a post titled A Rather Stupid Question, also questioned the cupability of the Community Reinvestment Act in the current financial straits money movers find themselves in.

But let’s look at a couple of points made in today’s piece from the NYT which is titled Poor Homeowners, Good Loans. Here’s the very first sentence.

FOR those who championed a hands-off approach to the supervision of finance, the economic meltdown should have prompted reflection on the value of common-sense regulation.

It was not common sense regulation which was lacking as subprime loan portfolios grew, and more and more diverse financial products were spun off and sold in the secondary market based on these subprime loans, but common sense underwriting was lacking, on each and every individual loan which was originated to the “poor homeowners.”

The fourth paragraph of the piece states this.

It is not tenable to suggest that the Community Reinvestment Act, which was enacted more than 30 years ago, suddenly caused an explosion in bad subprime loans from 2002 to 2007.

I’ll repeat what I wrote in response to Thomas Friedman’s question in regards to this premise noted by Barr and Sperling.

Do the NYT editorialists understand that one or two, a dozen, or even one thousand mortgages originated under coercion of the CRA would have no noticable effect on financial markets, but that cumulatively, over the past three decades, as more and more marginal mortgages were originated because of requirements of the CRA, the CRA’s culpability is not without blame?

To further bolster their argument to the non-cupability of the CRA, Barr and Sperling offer this argument.

Instead, the bad subprime loans were predominantly made by financial firms not covered by the act. According to recent Fed data, 75 percent of higher-priced loans during the peak years of the subprime boom were made by independent mortgage firms and bank affiliates that were not covered by the act.

I will concede to Barr and Sperling that “bad subprime loans were predominately made by financial firms not covered by the act.” But, that concession does not concede to their argument.  It does not concede to their argument because those financial firms not covered by the act were not booking these loans to their loan portfolios, they were selling them off as soon as the loan closed to mortgage lending entities which were covered by the act.

Though the CRA is not the primary cause of the financial straits currently affecting markets, it is far from blameless.

Posted by John Venlet on 10/18 at 08:38 AM
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Friday, October 17, 2008

Obama, Well, I Just Don't Know

Wendy McElroy links to a African Press International (API) story that is just starting to percolate under the headline Shocking development: Mrs Obama decides enough is enough: “My husband was born in Hawaii and adopted by his step father, does that make him unpatriotic; she asks”, on a direct telephone to API.

Did you catch the importance of that headline?

Anyway, Slate has a bit posted on this story in The Fray, also.

Check it out, and let’s see what else comes up, barring any lawsuits and claims of being racist for noting the story.

UPDATE: A YOUTUBE video which is pertinent to the above story.

UPDATE II: Well, I still just don’t know about the API story, and neither does Wendy McElroy, but Wendy’s most recent post regarding this story notes that one Julian Sanchez is offering odds on the story, and another of her readers has done some research backwards in regards to API.

UPDATE III: It seems that this whole Michele Obama story put out by the API is a hoax, though the API story does not concede this.  Thanks to Wendy McElroy for the update.

Posted by John Venlet on 10/17 at 09:58 AM
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Tell Me Again Why You Vote

Listen to the following and rationally consider why, you as an individual, may go to the polls and cast a vote.  Also consider the myriads of irrational individuals going to the polls and casting their vote.

Don’t vote.

Posted by John Venlet on 10/17 at 08:15 AM
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Economic News Worth a Drink

While investors flee traditional markets such as stocks and commodities on growing recession fears, trade in rare bottles of whisky is flourishing.

Roughly 11 months after the launch of a Dutch online trade platform for exclusive single malt whiskies, mostly from Scotland, the World Whisky Index has seen an average return of 26.2 percent, compared to a more than 40 percent decline in the MSCI World stock index.

I prefer bourbon.

Stocks sink but there’s whisky galore

Posted by John Venlet on 10/17 at 07:12 AM
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Universal Consequences of Something for Nothing

Hawaii is dropping the only state universal child health care program in the country just seven months after it launched...
"People who were already able to afford health care began to stop paying for it so they could get it for free,” said Dr. Kenny Fink, the administrator for Med-QUEST at the Department of Human Services. “I don’t believe that was the intent of the program."

So, tell me again why individuals clamor for universal health care from the state.  So they can get something, for nothing, at the expense of everyone.

Hawaii ending universal child health care

Posted by John Venlet on 10/17 at 06:58 AM
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Subprime Assembly Line Injustice

Today, word comes to us out of California that U.S. Attorney Thomas O’Brien is promising “dramatic results” in ongoing fraud investigations into the now defunct and discredited subprime lending industry.  Wow, must be impressive stuff.

I’ve said it before and I’ll say it again,

While the FBI may find a few prosecutable mortgage lending fraud cases, what will mostly be brought to light by their investigations will be the foolishness of the underwriting guidelines utilized by the subprime lending industry, and the unethical, but not illegal, methods which were utilized to suck subprime borrowers in.

But let’s take a look at what else is emanating from the mouth of O’Brien.

The government is pursuing a “surgical approach” in its investigations and hopes to streamline its prosecutions by seeking indictments with only three or four counts, instead of spending several years seeking additional charges.

“We offer them three or four counts,” O’Brien said. “We would get the same sentence and we plead them out and we move on to another crook."

This so called “surgical approach” and the statement “we offer them three or four counts,” and then “move on to another crook,” reminds me more of The Case of Comrade Tulayev than an actual case of justice being served.

Government may file subprime charges soon

Posted by John Venlet on 10/17 at 06:16 AM
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Thursday, October 16, 2008

Just Say No to Electrical Usage

The State of Pennsylvania has passed a law mandating electrical utilities cut electricity usage.

Pennsylvania has begun a major effort to cut electricity use, requiring the state’s 11 utilities to not only stop power usage from rising, but to cut it starting in 2011.

Legislation that Gov. Ed Rendell signed Wednesday requires the utilities to cut annual electricity usage by at least 1 percent by May 31, 2011, based on usage estimates made by state regulators, who can take into account a major anomaly, such as an unusually hot summer or a substantial surge in demand from a new user, such as a factory.

Now, I can appreciate utilizing less electricity.  Not for the environment, though it would benefit.  Not to reduce the use of fossil fuels, though less would be utilized if consumption of electricity is reduced.  I, personally, reduce my electricity consumption to save money, while at the same time reducing the amount of illgotten revenue the state drains from my pocket.

State laws mandating a reduction of electrical usage simply interfere with sound business practices and restrict the freedoms of electric consumers.  The next logical legislative step for the State of Pennsylvania will be to pass a law mandating the cutting off of electrical power to consumers on a scheduled basis, just as was done in the Soviet Union, and is done in various countries even today.

Pennsylvania law tries to cut electricity usage

Posted by John Venlet on 10/16 at 08:25 AM
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Wednesday, October 15, 2008

The Plumber Knows Socialism When Obama Speaks It

Quite recently, Barack Obama was asked a question concerning the “American Dream” by Joe Wurzelbacher, a plumber.  In partial response to Mr. Wurzelbacher’s question, Obama clearly and unequivocally stated that his policies would incorporate “spreading the wealth around.”

Obama’s reply garnered alot of attention, and Mr. Wurzelbacher also garnered some media attention, but being a mere plumber, Mr. Wurzelbacher will soon be forgotten by Obama and the media.

Fortunately, a more indepth view of Mr. Wurzelbacher, who I think fits the much maligned profile of the “Joe sixpack,” an honest working man, was recently interviewed by Pam Meister for the organization Family Security Matters.  The title to the interview piece is Exclusive: Obama – ‘Spread the Wealth Around’ Reveals Socialist Plan for America Interview with Joe Wurzelbacher

Go read the interview.

Via PrestoPundit.

Posted by John Venlet on 10/15 at 04:13 PM
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A Rather Stupid Question

In most instances, I would state that there are no stupid questions.  Question everything, I say.  But for the editorial board of The New York Times I must make an exception and state that the editorialists are asking a rather stupid question.

The rather stupid question they ask emanates from an opinion piece, commenting on the Community Reinvestment Act’s role in the current financial debacle, titled Misplaced Blame. To wit,

...First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years?...

Do the NYT editorialists understand that one or two, a dozen, or even one thousand mortgages originated under coercion of the CRA would have no noticable effect on financial markets, but that cumulatively, over the past three decades, as more and more marginal mortgages were originated because of requirements of the CRA, the CRA’s culpability is not without blame?

Posted by John Venlet on 10/15 at 07:41 AM
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They're Just Now Figuring This Out?

Thomas Friedman has a piece in The New York Times this morning titled Why How Matters.

In the third paragraph of Friedman’s piece he states the following,

Our financial bubble, like all bubbles, has many complex strands feeding into it — called derivatives and credit-default swaps — but at heart, it is really very simple. We got away from the basics — from the fundamentals of prudent lending and borrowing, where the lender and borrower maintain some kind of personal responsibility for, and personal interest in, whether the person receiving the money can actually pay it back...

I guess because Thomas Friedman has now pronounced this from the pages of The New York Times, much too late I might add, sound lending criteria may once again be adhered too.

I myself knew that the lack of sound lending criteria was the impetous for the collapse of many aspects of the financial system some time ago, and stated so in a post titled Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending - Self Inflicted, where I stated the following,

The stage was set for the collapse of the subprime lending industry with the origination of the individual subprime loan underwritten to foolish; one could say incompetent; underwriting guidelines.  As more and more of these structurally deficient loans piled up in lenders’ servicing portfolios, to be mined again and again for any remaining equity subprime borrowers may have retained in their homes, the swiftness of the final collapse lacks any astonishment.  The subprime lending business model was fundamentally flawed and myopic.

I guess some individuals are just slow learners.

Posted by John Venlet on 10/15 at 07:07 AM
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Self Professed Libertarians Should Not Vote

Any individual who votes is sanctioning the state and the violence wielded by said state.  Many self professed Libertarians, who decry the state, vote, so their cries against the state are like the little boy crying wolf in the forest when none is present.

With the above in mind, I point you to two (2) pamphlets published in the same place.  The one pamphlet, written by Samuel Edward Konkin III, is titled Our Enemy, The Party, and said pamphlet is the reason for this post.

The second pamphlet at this link, which in actuality precedes the above mentioned, is titled Our Enemy, The State and is also worth your time.  This pamphlet was written by Albert J. Nock.

Update: I note that I neglected to credit the link to Konkin’s and Nock’s pamphlets.  My apologies.  The link to their pamphlets should be credited to Wendy McElroy.

Posted by John Venlet on 10/15 at 06:44 AM
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