Originally published September 30, 2008
I had pancakes for lunch yesterday. I made them myself. They were delicious. Pancakes, while satisfying and pleasing to the palate, are oft considered a poor mans means of nourishment. In various difficult economic times in our nations history meat has been considered a luxury item. Not every man could literally bring home the bacon. Ingredients such as flour, eggs, milk and butter however, were easier to come by, easier to pay for. Hence pancakes, the hearty, filling, get ready for a long day of work food of the poor man. I am a poor man. I eat pancakes.
It was while doing so that I came to turn on CNN, normally a mistake, but this time on purpose. I was curious to see how the financial markets would react to the proposed 700 Billion Dollar “Bailout” package the House of Representatives had been promising for days. All weekend Nancy Pelosi, John Boehner and the rest had hijacked every microphone and camera west of Mars to pat us all on the head and tell us everything would be okay.
They had worked hard, and together. They were Bi-Partisan. They had prepared a bill that would set everything right. They even came into work on the weekend in order to get the job done. Good job – you wanna cookie?
To say the least, it was a surprise to learn that the bill had failed, 205 votes for and 223 against. Funny, we didn’t get votes. We’re common folks; we leave the voting to the fancy people in Washington D.C. With their expensive suits and big words and in-depth knowledge of financial systems and such, they are clearly more qualified. We’re only qualified to pay for it, well some of us are. It seems this 119 page life raft could not float. Everyone said it would, but it didn’t. As we now know, the bill sank and took the stock market with it.
The Dow Jones Industrial average fell 777 points, the single greatest one day decline in the history of the market. I remember my 6th grade teacher telling our class once that in the early 80’s the number 777 was slang for cocaine. That seemed as likely a reason as any for the day’s events.
The Dow Jones Industrial average is an index of 30 stocks. All 30 fell yesterday. The S & P 500 is an index of, you guessed it, 500 stocks. 499 of those stocks fell yesterday. The lone stock gaining ground – Campbell’s Soup. I have been told I have a way with metaphors. Not even I could say it more simply than that. The whole world was down except for chicken noodle soup.
The Wilshire Index is a group of 5,000 stocks. In total yesterday those 5,000 stocks lost a collective 1.2 Trillion Dollars in market value. I’ll repeat that. 1.2 Trillion Dollars, in one day, gone. Perhaps I need write the number in its numerical form to further demonstrate my point. $1,200,000,000,000 in market value disappeared yesterday. I believe Fuck is the word you are looking for.
140 Democrats voted Yea, joined by 65 Republicans, while 95 donkeys and 133 elephants said Nay. Jerry Weller, Republican of Illinois had the lone non vote. Maybe he had a doctor’s appointment, maybe he got caught in traffic, maybe there was something really good on TV. Who knows, he isn’t saying and I’m not caring. All that matters is he failed to perform the one task he was assigned, to show up and vote.
As quickly as news of the bills failure and subsequent market correction spread, members of both parties in the House of Representatives began lining up to tell us why. First to the microphone (as usual) was House Speaker Nancy Pelosi, who claimed that Republican leadership had failed to deliver the member votes promised during negotiations. House Minority Leader John Boehner (properly pronounced Bo-Ner) had a different rational, Nancy Pelosi was mean to them so at least a dozen Republicans changed their vote at the last minute.
Pelosi opened the discussion of the bill with what many have called “an inflammatory partisan speech.” She talked about failed White House policy being the cause of the current state of affairs. She criticized Congressional Republicans for protecting big companies over little people. She finished by doing her best Eddie Haskell impression and giving President George W. Bush the business. She gave it to him hard, deep and fast.
Perhaps moments before a critical vote on a closely contested controversial spending bill is not the time to defame ones opposition. I’ll concede that point. Nancy, you were not very nice to the Republicans, please go sit in the corner and count to 100 while you think about what you did. The funny part is every damn word she said was true, but no matter. It seems her speech upset several Republican members to the point where they decided to take their ball and go home.
As previously stated, according to Republican Leadership speeches moments after the vote, at least a dozen members changed their vote out of protest to Pelosi’s speech. To clarify, 12 or more members of Congress had planned to vote for the bill. They were going to vote for it. A Republican President initiated the discussion that lead to the bill. Leadership of the party told them it was a good bill. These men and women agreed and pledged to vote Yea. But, then Nancy made fun of them and they instead voted Nay. Had these 12 voted Yea as initially planned, the bill would have passed 217 – 211.
I’m used to Congress acting like children, I think we all are, but at the risk of straining my ability to use hyperbole – if you want to act like a 5 year old, stay on the playground with Jerry Weller while the grown ups are talking.
I have my opinions on the bill itself. While I have not read the entire proposal I feel I have the general gist of it. The federal government was proposing to buy distressed assets from various troubled financial institutions, both filling these private entities with cash and collecting for the fed assets that most economists feel are currently available below their actual value. Banks and lenders could use this capital to remain solvent, continue loaning money to other businesses and private citizens, and ultimately keep the water running and the lights on.
The federal government would hold these assets until their market values increased, then sell them off. The idea is as simple and old as time itself. I have no money, but I have stuff I’m willing to sell to you cheap. You have money (so it seems) and are willing to buy low in order to later sell high. Everyone goes home in a limo.
There is strong sentiment that while the business side of it makes sense, the fact remains that this proposal is in essence rewarding bad business who have made bad decisions by giving them money to make more bad decisions. This is the true point of order, and the only way in which to prevent recurrence – how do we as a society regulate the market to allow it to grow, yet prevent it from growing fictitiously? Common sense is a good jumping off point.
This current economic crisis has been credited (no pun intended) to being a direct result of the sub-prime mortgage industry. Those dirty bastards acted unethically, giving loans to people who couldn’t afford to pay them back, giving loans that featured back end adjustable rates that would skyrocket, and in a nutshell giving big bags of money to people with no job, income or assets. All of these things happened, many times. It’s the sub-prime meltdown, sub-prime evil, sub-prime, sub-prime, sub-prime! Let us consider for a moment some actual facts and real numbers.
Less than 5% of all mortgages currently outstanding in the United States qualify as being of the sub-prime variety. Of those, less than 10% are currently in default. By the rules of math, henceforth ½ of one percent of current outstanding mortgages in the United States are sub-prime mortgages in default. 1/200th of the total number of mortgages in this country are sub-prime loans in default. For every 200 mortgages outstanding, on the average 1 is a sub-prime loan in default. This doesn’t seem, at least on the surface, to be enough to cripple the world’s financial system. But then there’s the catch.
When these sub-prime loans were written, the value of the loan was immediately placed on profit and loss statements as an asset. The loan had not been re-paid. In many cases the lender knew it was unlikely it would ever be repaid. However, the lender was able, by law, to count these sinking ships as assets. What do big corporations do with assets? They borrow against them tooth and nail.
On February 26th of this year American Equity Mortgage, a small to medium sized lender primarily in the south and Midwest, failed. Bankrupt. Doors locked, lights off, belly up done. According to published reports American Equity specialized in what we now call sub-prime loans. They were pioneers of NINJA loans, or no income/no job/no assets loans. If you had a decent credit score and wanted to buy a house you filled out some paperwork and they handed you a big bag of money. If you had a job, this was a bonus, for which you were eligible to borrow up to 20% more than the home you were purchasing was worth.
I am not an economist, although I played one at a party once. It remains clear to me however that this is not the best practice of insuring money you loan out will be re-paid. It seems the management of American Equity agreed. They sold approx 50% of loans they financed to other lenders for a small upfront fee, getting the loans off the books and insuring payment for services rendered while leaving another company to maintain and collect on the loan. In most cases the original home buyer did not know their loan had been sold until paperwork showed up saying make your checks out to someone else now. The remaining 50% of loans given were kept on the books, listed as assets, and borrowed against – up to 40 times each. It seems when the credit market opens its arms to let everyone in, some people come in many, many times.
So in essence, AEM would list a $200,000 loan as an asset, and borrow against it as many as 40 times, using the loan as the collateral asset in every case. So in essence that $200,000 loan brought in $8,000,000 in credit. Credit is fun. You can buy stuff without actually having the money. Sadly, at some point along the curve the people who loan you the money want it back. This apparently for AEM was either a problem not worth solving or a big enough loop hole to drive a train of deception through. Wanna hear the funny part? When that original $200,000 loan went into default, AEM was allowed to list the $8,000,000 in credit against it as a sub-prime loss. This is the bulk of red ink on many lenders books these days who once specialized in ye olde sub-prime. How did this happen? The unregulated free market let it happen.
The Free market can be a beautiful animal. It can be the basis for robust economic growth, true supply and demand and a gateway to wealth and prosperity. The unregulated free market is like that girl in the bar who flirts with you while you buy her 11 rum and cokes only to pass out on her bar stool and be collected by her friends at last call, leaving you angry and broke.
As a suggestion to the members of the House of Representatives who will come back to work on Thursday (they took two days off after Mondays debacle), perhaps a little common sense regulation might be in order at this juncture, I would even say it was prudent. Of course there is the more pressing issue of trying to correct a decade of bad legislation in one fell swoop, but when the fire has been extinguished it might be an idea to ensure the new financial house is built according to some basic safety standards. But I’ll leave that to the fancy people in Washington D.C. With their expensive suits and big words and in-depth knowledge of financial systems and such, they are clearly more qualified. We’re only qualified to pay for it, well some of us are.
I’ll just sit here and eat my pancakes and Campbell’s Soup.