The Wells Fargo Stress Test: A Tin Foil Hat Production

Today the Fed releases the results of the banking industry “stress test.”  You remember this test right?  The Fed created a scenario of economic failure well beyond what is already the worst economic downturn in seventy years.  They then evaluate the banks’ ability to withstand this Armageddon against the Fed’s own made-up base line.  (Let’s not cloud the issue with the idea that the economy is already turning around.)  They then tell the banks which failed the made-up test to take some very not made up actions: increase assets.  How?  Well, that’s the easy part: you can raise private funds (a very tough hill to climb in this credit market), you can accept more TARP funds (that many of them didn’t want in the first place) along with the business stifling, government mandates that go with them, or… you can simply convert the government’s preferred stock into common stock (thus increasing the government’s control of the bank – sometimes to a majority stake).

Interesting results: Bank of America needs roughly 35 billion dollars (despite the $45 billion dollars already given them by the Fed in exchange for preferred stock).  Isn’t this the same bank that took over Countrywide at the Fed’s behest and backing?  It seems that by following the Fed’s request, Bank of America is now more likely to be owned by the Fed.  But let’s leave that bit of conundrum alone.  Let’s take a look at Wells Fargo – by far the strongest of the major banks.  Let me ask you: which was the only major bank to have their results leaked way back on Monday?  Wells Fargo.  Which was the first major bank to ask to return the TARP funds they were forced to accept?  Wells Fargo.  Which is the only major bank not on life support?  Wells Fargo.  When the Fed tested the various banks’ liabilities, which is the only major bank with a portfolio that does not contain 100% financing, option arms and teaser rates?  Wells Fargo.

I don’t know what the Fed’s intent was because I’m not in the group creating the long term plans of this administration.  But it looks an awful lot like a hostile takeover to me.  So, as I don my tin foil hat I’m left to ponder the words of the Fed when they FORCED Wells Fargo and others to accept TARP funds in the first place: “We don’t have any interest in owning financial institutions.”

In the immortal words of Charles Laughton in Witness for the Prosecution, I ask (tin foil hat smartly askew): “Were you lying then, are you lying now or are you not, in fact, a chronic and habitual liar!

Filed under: "TIN FOIL HAT" Productions , Fed, Wells Fargo

You’re Gonna Need a Shovel

When I was young, my father taught me a very simple story:

A man walks by a big room and sees that it’s chest high in manure.  “Quick,” he says “someone get me a shovel.  There must be one helluva horse in here somewhere!”

Now the message was always clear: don’t be afraid of hard work and look upon every situation with an optimistic eye. Lately though, reading the paper has been a lot like running into that room; only I’ve begun to realize there’s no horse in there. Just a whole lot of shovelin’.

The latest pile can be found in a column by Dean Calbreath, a well-respected staff writer for the Business section of our local paper: The San Diego Union Tribune. You can read the full story here: Government Spending is Tool to Revive the Economy, although the title itself is about as subtle as a sledge hammer to the head. (I wonder if he was being ironic with the word “tool”?) In the column itself, Mr. Calbreath expects politicians debating the “stimulus package” will take heart in a new study by UCSD economist Valerie Ramey which concluded that for every $1 the government spends, it generates $1.40 in economic growth. Uh… yes, you read that right. The government is generating 40% growth on its spending programs. Wow! We really can spend our way out of a problem.  I mean Mister, at 40% growth we’ll be out of this recession in a quarter or two if the government will just get it through their thick heads to spend enough. (When I read utter nonsense like this I am reminded, as I so often am, of the wit and wisdom of Homer Simpson. Upon realizing he and a few other characters were literally trapped at the bottom of a hole they themselves had dug, Homer hit upon an elegant solution:  “We’ll dig our way out!” As the screen fades we can here Chief Wiggum say, “No, dig up, stupid…”)

“Raising spending stimulates the economy,” Ramey said.  “On average, government spending raises gross domestic product and raises employment, although it sometimes leads to a small decrease in consumer spending, as consumers find themselves in competition with the government.”  You think?!  So let me get this straight: the “magic” money that the government has (we’ll come back to that in a second), stimulates the economy but stops small businesses and individuals from investing in themselves.  Well, what’s a little shift in the welfare state if it means an increase in the GDP!  Hey, I’ve got an idea; let’s triple the amount of money the government spends, move the majority of our citizens onto welfare and really bounce the GDP up to record heights.

I suppose it should come as no surprise that later in the article, Mr Calbreath describes an “economy laid low by the mortgage crisis.”  The mortgage crisis?  Is this economic shorthand?  Was there not enough space in this 1100 word column to mention immoral investment banks, criminal ratings agencies, the CRA (ground zero of the housing problem), government regulators asleep at the wheel or rampant, undisclosed use of exotic creations like Default Swaps & CDOs?  The mortgage crisis?  Mr. Calbreath, your readers deserve more respect than that.

The UCSD study is not the only peg on which Mr. Calbreath hangs his hat:

A massive hole in demand is emerging as consumers, businesses and state and local governments are forced to cut back,” said Nigel Gault, chief US economist at IHT Global Insight, an economic analysis firm in Massachusetts.  “The federal government is the only entity that can fill that gap, either by spending itself or by providing the financing for spending in the rest of the economy.

… either by spending itself… Ah yes, we come back to the financial gain we reap when the government reaches deep down into its pockets and spends some of its hard-earned money to stimulate the economy.  What’s that you say?  The government doesn’t have a job?  The government doesn’t earn money, hard or otherwise?  The government doesn’t even have pockets?  Well, I guess you’re right.  But WE have pockets.  When these pinhead economists tell you that government spending is going to accomplish something, remember what they mean: the government’s going to confiscate money from you (or in the alternative print it and confiscate it from your unborn children) and spend it on things you very likely wouldn’t have.  This is a zero sum game.  When the government raises the GDP or employment by spending money – YOUR MONEY – you are, by default, unable to spend it yourself.  So we have to ask ourselves: “Did anything really happen?”

To answer that question, I propose a quick thought experiment.  Imagine yourself on your way to the grocery store with your allotted budget for groceries and I stop you on the street and take that money.  Let’s say I repeat this up and down the streets.  Now let’s say I take all that money and I go to the grocery store (although to be accurate we would have to make it a grocery store far away and poorly run, a store which I – in my infinite wisdom and obvious superiority to all those from whom I took grocery money – have deemed worthy of the business) and I spend all that money.  Now tell me, did that store enjoy a boost in its gross profits?  Certainly it did, no question.  Now tell me this: did grocery stores as a whole enjoy a boost to their  gross profits?  No.  All those stores that all those people would have shopped at suffered a loss; worse yet, it wasn’t even a dollar for dollar trade.  Remember, I took all of your money and spent it at an inefficient, poorly run store.  Not only was there no real gain in over-all grocery store gross profits, there was a net loss!  (Unless you’re an economist, in which case you might discover a 40% return on the spending I did.)

Eventually, way down at paragraph 27 (of 28), we see a little piece of logic leak out.  Ms. Ramey, our UCSD economist, states,

In the long run, for instance, we should take a look at reducing the payroll tax – which, after all, taxes people for something you want them to do: work.  Economic theory tells us that if we reduce that tax, we can stimulate the number of jobs created.

Well that just makes too much sense.  If we lower payroll taxes we can stimulate the number of jobs created.  Ms. Ramey, why aren’t we following that piece of logical advice?  Because, she explains, people might just save the extra money they make.  Or pay off debt with it.  It would not have “an immediate effect on the economy.”  Not like, say… infrastructure spending would.  Uh huh.  I think I get it now.  Taking my money and spending it inefficiently increases the economic viability of our economy.  Building bridges and freeways two or three years from now, that will have an immediate affect on the recession in our economy.  But reducing my payroll taxes, which I would feel as increased purchasing power within one pay period, that will not help the economy.

Here’s your shovel back.  There’s no horse in here.  Just a whole lot of BS.

Filed under: POLITICAL & ECONOMIC FOLLY , Fed, press, recession

Learning to Appreciate the Arts

Not everyone appreciates the entertainment value of watching the body politic.  But I do.  I stand hands on hips, amazed by the intricate movements each player contributes to their tap dance around the truth.  I listen to their spin, enthralled by the rhythm and stunned by their ability to stand upon the dais and look us in the eyes.  For all its pleasures though, most dedicated fans recognize the elements of tragedy that underlie every production.  There may be action and there will most certainly be humor; but the end is always the same: hubris and self-importance combine to bring about tragedy.  In the audience we may see it coming, but our recognition is too late to avert the inevitable.

Residents of California have been blessed with a double header as of late; two shows for the price of one.  True aficionados of this delicate art form will not only revel in the production value both shows offer, but the clever juxtaposition between them – the contrasting views of power they represent.

On the main stage we find the Federal Players and their prime-time rendition of The King and I.  The legislative branch of democracy writes a blank check and hands it to King Henry (Paulson) and his trusty side-kick President Bush.  They spend it on assorted items, many never contemplated when the check was written.  The legislature must be commended, however, for its heartfelt portrayal of the country bumpkins who did not see any of this coming.  In the final act, a chagrined upper house – the Senate – reasserts itself.  They choose not to spend money they don’t have on an industry that does not deserve it.  (This decision aligns with the wishes of the audience, but we assume the relationship to be coincidental more than causal.)  At the last moment: a twist!  We see the King spending the money anyway!  He usurps the Legislature’s constitutional and historical role as the means of appropriation.  It is a dramatic twist, shocking in its brazen contempt for law.  As the curtain comes down the audience is too dazzled by it all to recognize the depth of the tragedy they have just witnessed.

On the secondary stages we find the State Players.  If you travel to the “Will Never Be Ready for Prime Time” tent you find the players particular to California, a state which all art patrons know to be the source of every decent slapstick comedy in the past thirty years.  Tonight’s presentation finds a Legislature stymied by the people’s will.  A proposition that allows tax hikes only upon a two-thirds vote of the house and senate prevents them from a continuous bacchanal of taxing and spending.  Like Nero, they fiddle while California burns.  There is a comic element in the beginning as the populace, forced to tighten their belts and deal with tremendous cuts to their budget, watches a government – unwilling to employ a budget - throw temper tantrums over their denied access to the public’s ever thinning wallets. But the comedy turns dark when the legislature realizes they can redefine taxes as fees.  For instance: define all gasoline tax as a fee and remove the fee.  Now they can raise income tax, sales tax plus a multitude of other taxes and offset it all by the elimination of the gasoline tax.  Thus they have a revenue-neutral tax bill which, in their humble opinion, does not fall under the two-thirds law enacted to prevent them from doing that which they have done.  The tragedy: the gasoline fee was immediately reinstated… and raised.  All of this was done with a straight and earnest face.  Afterall, for the play to succeed the audience must believe.

Great entertainment indeed.  A federal King usurping the power of the legislature and a state legislature usurping the power of the people – that’s quite a bit of power being transferred.  As an ardent fan of the tragic form I am enthralled by the drama of it all, but as a member of the audience I wonder how much power is left to us and suddenly saddened by the tragedy of it all.

Filed under: POLITICAL & ECONOMIC FOLLY , California, Fed, government

The Mortgage Dance? EZ: Just Follow the Bouncing Ball

And the beat goes on…  but sometimes it helps to have that little bouncing ball show us exactly what lyric we are singing this week.  All together now:

Today the Fed suprised no one by opening the discount window to ailing siblings: Fannie Mae and Freddie Mac.  Together they hold more than half of all mortgages in the US and the guarantee that they would not fail has been implied for some time.  The Fed also intimated there would be no other bail outs in the foreseeable future.  Who is walking the thin line?  WaMu, Wachovia, Downey, Indy Mac (oops, they were written out of the chorus last week).  Now it looks as if the Fed has reworked a few more lines and their song to the Wall Street firms goes a little something like this: if you can not fix your problem with the ability to borrow at 2.25%, your problem is not fixable.

This does not bode well for our short list.  Downey is more of a regional and will likely go down under its own weight of Losses and Lawsuits (the real ”L” words).  Previous posts have fixed WaMu as the consensus “next big one” to fall.  Wachovia, in my opinion, is more of a question mark.  Straight-laced, tea-loving bank goes to a frat party where “everyone who is anyone” is drinking and the peer pressure just becomes too much.  This is a hangover for which they are ill prepared.

What does this mean for real estate and the mortgages that drive its cycles?  Here’s one thought: if you are a specialist in homes that do not play the Fannie/Freddie tune, you may want to create some more income streams and fast.  Any regional that has not already eviscerated it’s “improvisational jazz” lending will find themselves looking at a Wall Street that no longer believes anyone is above failing.  If recent history has taught us anything it is this: the big firms currently involved in lending are either asleep at the wheel or lying outright.  We watched Counrywide lie about their financials right up until the end.  We watched WaMu take hits twice their predictions.  Even Wachovia, a stalwart bank, was “surprised” by losses more than double what they had predicted for Wall Street.  Not sure why anyone believes anything these firms say now.

I believe this all goes back to a problem that is not discussed in the media (whether for lack of a sound bite or just ignorance is anyone’s guess) and never given the light of day by these firms themselves: the accounting debacle tied to neg-ams.  Want to know who is going down next or where “surprise” losses will most likely come into play?  Look to the firms that made a killin’ putting clients into neg-ams.  (And before some of you start commenting on how neg-ams are just a tool and can be a good loan to boot – you know who you are – let me say “I know.”  Loaded guns are just a tool too.  Cars are just a tool.  I am in favor of both.  But if I stand at the door handing out keys and guns to everyone as they leave the party… let’s just say the onus of responsibility comes back to me.)

I guess it is not so difficult to follow the bouncing ball afterall.  I think I’ll go to bed tonight and dream about how attractive Fannie & Freddie have become lately.  They just may be the only two left on the dance floor.

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , Countrywide, Downey, Fannie/Freddie, Fed, IndyMac, Wachovia, WaMu

How Do You Move Buyers AND Sellers Off the Fence?

The key to marketing is not so much the how as it is the how often.  The problem though is content: what are you bringing of value each time you touch your client?  We currently have a tremendous opportunity.  The recent rate drops by the Fed have been severe and there are a number of possible outcomes.  I have discussed them before and Option 3 was more fully explored by Dan Green.  But they can be a great source for marketing material that raises your perceived expertise.  More importantly, this information can be used to move buyers AND sellers off the fence.  How is that possible?  Follow the bouncing ball of fiduciary obligation:

Outcome 1: The cost of money drops enough to bring buyers back to the table.  This leads to a window of relative parity in supply and demand.  BENEFIT: both buyer and seller benefit by acting now. 

Outcome 2: People view the rate drop as confirmation that economic problems are worse than originally imagined and pull back.  This decreases demand over time and housing prices continue to fall.  BENEFIT: seller benefits by acting now.

Outcome 3: Rate drop could be too much, setting off an inflationary cycle that the Fed has dreaded for some time.  Affordability drops over time due to the higher cost of money.  BENEFIT: buyer benefits by acting now.

As you can see, each option lends itself to someone acting immediately and here is the key point: we do not have a crystal ball.  The market is going to move (it always does) and it is going to benefit one group over another.  We might hope it moves in a specific way.  We might even expect it to move in a specific way.  But we do not know.  It is this acknowledgement that gives us the edge in helping both our buyers and our sellers act now.

An agent’s fiduciary obligation is to look out for their client’s best interest.  It should go without saying that all options be explained.  But when discussing a clients’ home, their best interest is usually aligned with their safest one and that means minimizing risk is more important than maximizing reward.  Now look at the following two conversations:

Conversation with seller: “Mr. and Mrs. Seller, after reviewing these outcomes, I believe we should focus on #2 and act now.  If we are wrong, the downside is you sold for less than you might have had we waited.  But if we are right and do not act, you may not sell your house at all.  By comparison, the latter is far worse to your financial position.”

Conversation with buyer: “Mr. and Mrs. Buyer, after reviewing these outcomes, I believe we should focus on #3 and act now.  If we are wrong, the downside is you paid a little more for your dream home than you might have had we waited.  But if we are right and do not act, you may never get into your home.  By comparison, the latter is far worse to your financial position.”

Now the clients are impressed with your expertise (which leads to referrals); of much greater importance, however, you looked out for the best interests of both your buyers and your sellers.  Icing on the cake: you are moving twice as many clients off the fence and into action.

Filed under: LIFE THAT POPs, REALTORS , Fed, inflation, REALTORS, recession, Success

Read about the Fed in the Shower

The Fed went ahead and lowered the overnight rate another half point today.  Hard to imagine this being a good move in the long run.  I commented last week about the possible inflationary pressures of this decision and I was going to comment again today regarding their decision.  But there is no need when you can read Dan Green over at Mortgage Reports summarize this so succinctly.  Once you visualize The Fool in the Shower, it is all very clear.

 After you read this one start talking to your clients.  The more info you as Realtors can bring to the table the more expertise you are seen to have and the more referrals you will gather.  Buyers sitting on the sidelines need to take a good long look at what rates are going to do if (when) Dan is right.

Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS , Fed, inflation, recession

The Good, The Bad and The Fed

The Fed has done it again.  Known for over reacting to economic stimuli, the Fed announced today a surprise, 3/4% cut to the overnight rate as well as the discount rate.  Cause for celebration, right?  Maybe not.  Here are three of the possible ways that this plays out:

The Good: people take advantage of cheap money and reinvest in their business, which slowly begins to bring the recessionary ship around.  Of course, in this era of historically low unemployment and historically high energy prices, that could lead to the inflation monster the Fed has been (correctly) tracking for some time. 

The Bad: this move is seen as confirmation that there really is a problem and that it is severe, thus causing businesses and homeowners alike to pull in and tighten up.  In the short time since this was announced I have spoken with about a dozen people and the recurring theme seems to be: “Wow, I knew things were bad but I did not know they were this bad.”  Does that sound like the voice of salvation?

The Ugly: Imagine the Fed as a hired gunslinger being paid to protect our town (the economy).  They carry a six-shooter armed with the ability to lower the cost of money and they rarely have access to a reload.  By shooting this many bullets at once they risk being defenseless when a real bad man shows up.  By “real” bad man I mean the upcoming Neg-Am debacle, which is going to make the sub-prime crisis look like the small ripple it really was.  Tough to defend a town with no bullets and if the Fed Funds get below 2%, they are basically throwing their empty gun at the bad guy.  It may look good in the movies… it may even feel good… but you are a goner just the same.

Filed under: BUYERS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , Fed, inflation, recession