I don’t know about you, but I get this strange feeling that our government is deliberately covering up the biggest con of all time.
Let’s do the math. I am going to use round numbers here, so please don’t quibble with me about minutia.
U.S. Home equity is about $10 trillion. American homeowners have about $10 trillion in mortgages. Total home value is about $20 trillion.
Somehow, Wall Street found a way to sell $50 trillion to $60 trillion in securities (no one knows exactly how much was truly sold, but this is a general consensus), all based upon $10 trillion of U.S. equity.
Where did the money come from to buy all this stuff, you wonder? Most of it was borrowed. Where did the underlying value come from to justify the purchase of these securities? It was manufactured on paper. The value was never there; it was a ghost.
This should have been an easy problem to fix. Six months after the fall of Countrywide, one of our nation’s best teams of economists (University of Chicago) issued a white paper predicting that the total loss would be about $500 billion. This should have been the case―certainly not the $10 trillion to $20 trillion that has been lost to date.
Let me explain. Let’s say that a nightmare scenario occurred to cause 10% of all mortgages to default. 10% of $10 trillion is $1 trillion. The market could have absorbed this. Congress could have written a check. Even with no intervention, investors may have lost a few hundred billion. End of story.
Even as the Obama administration commits to stabilizing home values and subsidizing mortgages to make thing right, the world is going into economic free-fall.
What has happened is something so far removed from this that it can only be the result of massive ignorance, deceit or outright fraud. Subsidizing defaulted mortgages should have fixed the problem. This is the underlying asset (collateral) of the CDO (collateralized debt obligations) market. But this has done nothing. Nothing. When these securities were sold to investors, insurance companies, banks, etc., they were assigned bloated, inconceivably high values that could never be achieved.
In all my reading, I have not seen this mentioned as the cause. So, either I am stupid, the world is ignorant, or there is a massive cover-up underway. (I vote for the ignorant world).
The only way that fixing the underlying asset would not have corrected this problem would be that the values attributed to the securities sold were wildly overpriced. Wall Street took $20 trillion in securities. They broke them up into small pieces. Then they sold the pieces at a markup. If the SEC does the forensic accounting (provided these records have not been destroyed) I believe they will find that Wall Street took in more than $50 trillion on $20 trillion of value.
Using this math, $30 trillion in borrowed money has no collateral. And that, Martha, is why we are in this mess.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
Tuesday, February 24, 2009
Wednesday, February 11, 2009
I've Made Mistakes Too
I make a living by giving financial advice and selling books. Over my career, there have been times when I have done pretty well. There are other times when I have made some really stupid decisions, usually when I’ve sold any of my companies.
I have made some really poor personal decisions as well. I did make one great choice, though. That was marrying my wife. This lucky choice makes up for all the bad ones, proving that we don’t have to be right all the time, just more often than we’re wrong. Still, without Deb, I would probably be a lost soul.
When I make comments and recommendations, do not make the mistake of thinking that I am not flawed. I am flawed. We all are flawed. That is not to say that we can’t improve. I try to improve, every day. Sometimes I win. Other days are not so good.
Throughout my life I have tried to do what is right, particularly when it comes to others. I have not always succeeded. None of us do, not all the time. But I have tried to walk a good moral line. I have actually walked away from small fortunes, because doing so was the right thing to do.
When you read my words, I hope that they will make you think. Maybe, if I am lucky, you might join some cause that is important to me. The cause of freedom. The cause of family. The cause of morality. The cause of goodness over evil. The cause of fairness over trampling greed.
Life is not black and white. Everything we do has shades of gray. Choices have consequences, some good, some less good. Self-service often stands in the way of service to others. Service to others can stand in the way of self gain. Somewhere in the middle we find our own playing field.
In our own game of life, we’re like the one kid with the ball. We can share it with our friends, or we can play alone. Sometimes, the more we share, the more we enrich others and the more we have. But sometimes, the more we share, the less we have. Good guys do not always win. Sometimes life just sucks.
What I try to do is help others see the difference, and find ways to improve their lives without trampling on the opportunity and freedom of others. There are times when I read my words and wonder what gives me the right to stand on my little soap box and shout what I think, or what makes me some moral arbiter with wisdom others should hear. I’m not some great shining example of morality or achievement. I am just a man with things to say, perhaps something worthwhile, someone whose words might be heard above the din and sink in, somehow spreading light on the dark secrets of this crazy world that spins around us.
I felt that it was important for me to fess up to my own imperfections and frailties. It is so easy to sit behind this keyboard and sound like I (we) know it all. That we’ve got some magic answer that no one else can see.
The simple fact is, I don’t. None of us do. All we can do is our best. I do try to do my best, every day. I hope that you do too. Because if we all do our best, despite our flaws and mistakes, this world will be a far better place.
Tuesday, February 10, 2009
Geithner Plan Not Even Close
Today, Timothy Geithner’s proposed plan to restore order to our nation’s financial markets fell so far short of solving the problem that it completely missed the target. This plan is like using a popgun to take down a bull elephant, or steering through a tsunami in a boat made of cork with no rudder. It won’t happen. This plan does too little to restore capital to a completely bankrupt banking system, and it lacks the punch needed to get loans flowing to qualified consumers and businesses as soon as we need it (today).
$1 trillion just won’t do it, folks, not if we want a healthy world economy. The world was so leveraged on mortgages (30-50 times equity), that underfunding the bailout could still be disastrous. Geithner: Wake Up!
What we need is to reset bank capital, and set compensation plans in motion that will not allow executives to (metaphorically) rape the taxpayer. I know that this is a powerful and distasteful analogy, but truth is truth.
In 1992, Congress limited the corporate tax deduction on salaries in excess of $1 million. I threw up big warning flags then, and I am doing it still. By limiting the corporate deduction, companies are forced to compensate executives in other, tax-favored manners, usually in stock options. This caused (and still causes) executives to cook company earnings and make short-term decisions to affect short-term stock prices rather than long-term viability and solvency. Hence, all the leverage.
Executives are like entertainers and sports figures. There is a big market for top talent and they will get paid. By trying to “end corporate greed,” the 1992 Congress put corporate greed on steroids.
Here is what we need to do. We need to start fresh. We need to tear down this old fixer upper and build something new, something that will survive.
First, we need to restore banking capital to healthy levels. We should create an independent bank to purchase bad debt from financial institutions, particularly from the banks. Additional capital should be in the form of convertible debt at low interest rates. (I hate the thought of bank nationalization, but the taxpayers should get repaid somehow). Some will argue that this is inflationary. Restoring lost capital is far less inflationary than creating new capital. When compared to the alternative of fifty million people out of work, and an economy less than fifty percent of what it was, I will pay an extra one or two percent per year for goods for a while.
Second, the new bank should work out all the loan terms with the mortgages they have bought. This includes blanket agreements with creditors and affordable terms with homeowners with the ability to repay. Homes that cannot be refinanced should be sold in an orderly manner, not liquidated through rock bottom auctions. If this means renting properties until home prices stabilize, and this proves to be the most profitable solution, get it done. Remember, this is the taxpayer’s money and it is precious.
Third, changes must be made to compensation structures. We should restore the corporate tax deduction for salaries in excess of $1 million. This will encourage more long-term thinking. If we need to cap salaries, we should do it at levels comparable to other high-paying professions like athletes and performers. Business executives produce at least as much as entertainment figures (which athletes and performers are). If we want to cap salaries to a lower level, then cap the salaries of actors, musicians and athletes, too. Set a price cap on movie tickets, CD and download sales and baseball games. Do not try to cap executive salaries at abnormally low figures, because then all you will get is mediocrity. We don’t want mediocrity now, we need brilliance. We want these men and women making big money, provided they do so for their shareholders (and the taxpayers) over time. This is part of what made our country great.
Fourth, if an executive earns money from stock options, it should be paid into a trust. Payments to the executive can then be made from this trust, provided the company returns a certain return on equity over time. For example, let’s use a term of ten years. If an executive earns $20 million from stock options, the entire amount will be placed in trust. Each year, $2 million will be paid, provided the company remains profitable (within some reasonable parameters). This will significantly reduce the short-term thinking and outright fraud that has been perpetrated on shareholders and taxpayers.
Fifth, stop dictating that Fannie Mae (and other quasi-government organizations) conduct social policy and call it business as usual. These companies were forced to lend enormous sums of money in areas where traditional bankers feared to tread. Estimates are as high as 50% of loans. If the government wants to create social policy (which every government does), then do it with a separate organization. Fund it in a manner that is transparent to the taxpayer, not in a way that bankrupts the world.
There is no hiding from this problem. This entire mess has screwed the country for the next fifty years, perhaps forever. The economics of government, trade and tax policy have changed so dramatically that economists are going to have to rewrite all the texts. This will become one great experiment, where fortunes will be made and lost, where good people’s lives will be destroyed, and other nations (namely China) will become superpowers long before their time.
There is no sense in trying to restore things to the way they were. This will never happen. Never ever. All we can do is make the best of this situation. This will require drastic, dramatic and immediate action that is beyond anything we have ever seen. Our government must take bold steps, decisive steps and do it fast. Otherwise, we are going to be living in a world where today looks like the good old days.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
$1 trillion just won’t do it, folks, not if we want a healthy world economy. The world was so leveraged on mortgages (30-50 times equity), that underfunding the bailout could still be disastrous. Geithner: Wake Up!
What we need is to reset bank capital, and set compensation plans in motion that will not allow executives to (metaphorically) rape the taxpayer. I know that this is a powerful and distasteful analogy, but truth is truth.
In 1992, Congress limited the corporate tax deduction on salaries in excess of $1 million. I threw up big warning flags then, and I am doing it still. By limiting the corporate deduction, companies are forced to compensate executives in other, tax-favored manners, usually in stock options. This caused (and still causes) executives to cook company earnings and make short-term decisions to affect short-term stock prices rather than long-term viability and solvency. Hence, all the leverage.
Executives are like entertainers and sports figures. There is a big market for top talent and they will get paid. By trying to “end corporate greed,” the 1992 Congress put corporate greed on steroids.
Here is what we need to do. We need to start fresh. We need to tear down this old fixer upper and build something new, something that will survive.
First, we need to restore banking capital to healthy levels. We should create an independent bank to purchase bad debt from financial institutions, particularly from the banks. Additional capital should be in the form of convertible debt at low interest rates. (I hate the thought of bank nationalization, but the taxpayers should get repaid somehow). Some will argue that this is inflationary. Restoring lost capital is far less inflationary than creating new capital. When compared to the alternative of fifty million people out of work, and an economy less than fifty percent of what it was, I will pay an extra one or two percent per year for goods for a while.
Second, the new bank should work out all the loan terms with the mortgages they have bought. This includes blanket agreements with creditors and affordable terms with homeowners with the ability to repay. Homes that cannot be refinanced should be sold in an orderly manner, not liquidated through rock bottom auctions. If this means renting properties until home prices stabilize, and this proves to be the most profitable solution, get it done. Remember, this is the taxpayer’s money and it is precious.
Third, changes must be made to compensation structures. We should restore the corporate tax deduction for salaries in excess of $1 million. This will encourage more long-term thinking. If we need to cap salaries, we should do it at levels comparable to other high-paying professions like athletes and performers. Business executives produce at least as much as entertainment figures (which athletes and performers are). If we want to cap salaries to a lower level, then cap the salaries of actors, musicians and athletes, too. Set a price cap on movie tickets, CD and download sales and baseball games. Do not try to cap executive salaries at abnormally low figures, because then all you will get is mediocrity. We don’t want mediocrity now, we need brilliance. We want these men and women making big money, provided they do so for their shareholders (and the taxpayers) over time. This is part of what made our country great.
Fourth, if an executive earns money from stock options, it should be paid into a trust. Payments to the executive can then be made from this trust, provided the company returns a certain return on equity over time. For example, let’s use a term of ten years. If an executive earns $20 million from stock options, the entire amount will be placed in trust. Each year, $2 million will be paid, provided the company remains profitable (within some reasonable parameters). This will significantly reduce the short-term thinking and outright fraud that has been perpetrated on shareholders and taxpayers.
Fifth, stop dictating that Fannie Mae (and other quasi-government organizations) conduct social policy and call it business as usual. These companies were forced to lend enormous sums of money in areas where traditional bankers feared to tread. Estimates are as high as 50% of loans. If the government wants to create social policy (which every government does), then do it with a separate organization. Fund it in a manner that is transparent to the taxpayer, not in a way that bankrupts the world.
There is no hiding from this problem. This entire mess has screwed the country for the next fifty years, perhaps forever. The economics of government, trade and tax policy have changed so dramatically that economists are going to have to rewrite all the texts. This will become one great experiment, where fortunes will be made and lost, where good people’s lives will be destroyed, and other nations (namely China) will become superpowers long before their time.
There is no sense in trying to restore things to the way they were. This will never happen. Never ever. All we can do is make the best of this situation. This will require drastic, dramatic and immediate action that is beyond anything we have ever seen. Our government must take bold steps, decisive steps and do it fast. Otherwise, we are going to be living in a world where today looks like the good old days.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
Has Cheating Become the American Way?
Yesterday, Alex Rodriguez admitted to taking performance enhancing drugs. It seems like every new member of the Obama administration has broken the law. The Bush administration convoluted the truth to commit us to war. The Clinton administration was run like a mafia whorehouse. A Congressman can run a prostitution ring from his Washington home and remain in an influential position of power. Wall Street can defraud the public of trillions of dollars and we just look the other way. Even an Olympic superstar can break our hearts.
What has happened to America? Have we become a nation of cheaters? Everywhere I look, I see people breaking the law with impunity and a clear conscience. “Everybody else is doing it…” we here from the cheaters. As if that makes it okay.
We are acting like teenagers, warping the truth into something we want it to be. Illegal aliens are needed in our society. Pedophiles must be understood, not punished. Drugs should be decriminalized because (name your reason).
I know that some laws are just stupid. Like that 55 MPH speed zone that should be 65 MPH, or having to stop for three full seconds at that stop sign when there is no one around. But things have grown out of whack.
The human genome wires us to conform, to follow leaders and to lead. Most of us have all three traits, mixed into some order of priority. The instinct to follow, this “flocking” behavior, makes us want to be like everyone else. We don’t want to be weird or wear the wrong clothes. There are those of us who buck the big trends, like wearing a nose ring, but this usually puts us into a smaller sub-group, not a solo experience.
As our media bombards us with examples of (previously) aberrant behavior, many in our society have found new groups that make them feel “normal.” We see pro athletes who use steroids or HGH, so kids think it is the way to succeed. We see pop stars doing drugs, so kids think it is cool. We see our national leaders cheat on taxes and their spouses, so we think it is fine for the little guy. We’ve even seen sex become not sex.
When I grew up, we left our house unlocked. Keys were left in the car, sometimes overnight. Young kids played away from home unsupervised. Sure, homes were robbed, cars were stolen, and children abducted. But it wasn’t “normal.” Criminals didn’t see a constant barrage of like-minded criminals being talked about, or even celebrated.
This free flow of information has allowed everyone to break into smaller and smaller sub-groups. It has allowed previously “aberrant” behavior to be considered “normal,” and to become accepted.
Along the way, our morals have begun to bend, our laws have grown more lax, and our society has begun to break at its seams. If this continues for much longer, our society will grow closer and closer to anarchy, were crime goes unpunished, where crime becomes more and more normalized, and deviant behavior becomes the norm. The rights of the few will outweigh the rights of the many, because we all belong to some group of the few.
If we want to stop this gradual slide into the acceptance of cheating, immorality and the systematic trampling of individual rights (in the name of individual rights) we are going to have to begin holding our leaders and role models to higher standards of behavior. Our politicians will have to become good people, not good manipulators of the system. Our athletes will have to realize that the huge money they earn comes at a price. That price is responsibility, not to themselves, but to the children who follow their lead. Wall Street will have to stop rewarding the carnivores and promote the farmers.
If we don’t, I am afraid that the America we used to know, and even the society we know today, will seem like the days of innocence, something to look back on with nostalgia, and not something to emulate. God bless America, and please help us save her.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
What has happened to America? Have we become a nation of cheaters? Everywhere I look, I see people breaking the law with impunity and a clear conscience. “Everybody else is doing it…” we here from the cheaters. As if that makes it okay.
We are acting like teenagers, warping the truth into something we want it to be. Illegal aliens are needed in our society. Pedophiles must be understood, not punished. Drugs should be decriminalized because (name your reason).
I know that some laws are just stupid. Like that 55 MPH speed zone that should be 65 MPH, or having to stop for three full seconds at that stop sign when there is no one around. But things have grown out of whack.
The human genome wires us to conform, to follow leaders and to lead. Most of us have all three traits, mixed into some order of priority. The instinct to follow, this “flocking” behavior, makes us want to be like everyone else. We don’t want to be weird or wear the wrong clothes. There are those of us who buck the big trends, like wearing a nose ring, but this usually puts us into a smaller sub-group, not a solo experience.
As our media bombards us with examples of (previously) aberrant behavior, many in our society have found new groups that make them feel “normal.” We see pro athletes who use steroids or HGH, so kids think it is the way to succeed. We see pop stars doing drugs, so kids think it is cool. We see our national leaders cheat on taxes and their spouses, so we think it is fine for the little guy. We’ve even seen sex become not sex.
When I grew up, we left our house unlocked. Keys were left in the car, sometimes overnight. Young kids played away from home unsupervised. Sure, homes were robbed, cars were stolen, and children abducted. But it wasn’t “normal.” Criminals didn’t see a constant barrage of like-minded criminals being talked about, or even celebrated.
This free flow of information has allowed everyone to break into smaller and smaller sub-groups. It has allowed previously “aberrant” behavior to be considered “normal,” and to become accepted.
Along the way, our morals have begun to bend, our laws have grown more lax, and our society has begun to break at its seams. If this continues for much longer, our society will grow closer and closer to anarchy, were crime goes unpunished, where crime becomes more and more normalized, and deviant behavior becomes the norm. The rights of the few will outweigh the rights of the many, because we all belong to some group of the few.
If we want to stop this gradual slide into the acceptance of cheating, immorality and the systematic trampling of individual rights (in the name of individual rights) we are going to have to begin holding our leaders and role models to higher standards of behavior. Our politicians will have to become good people, not good manipulators of the system. Our athletes will have to realize that the huge money they earn comes at a price. That price is responsibility, not to themselves, but to the children who follow their lead. Wall Street will have to stop rewarding the carnivores and promote the farmers.
If we don’t, I am afraid that the America we used to know, and even the society we know today, will seem like the days of innocence, something to look back on with nostalgia, and not something to emulate. God bless America, and please help us save her.
http://www.lumbert.com/
http://www.jaylumbert.com/
http://www.shaksperbooks.com/
Thursday, February 5, 2009
U.S. To Be Sold
Like some sprawling conglomerate that can no longer meet its obligations, the United States is about to get broken up and sold to the highest bidder. So, we need to stop teaching Spanish in schools and switch to Chinese.
In less than two decades our nation has leveraged itself into bankruptcy. There is no actual capital in our banking system—none, except for local banks who stuck to their knitting, and did things the old fashioned way, with common sense.
Until now, financial institutions have been able to borrow money from the Fed at will. They have been allowed to give artificially high values to loans and assets they hold. If they were forced to fess up, and declare the true value of these assets, banks would have to call in all their good loans. That would shutter the nation faster than an alien invasion.
As our nation’s debt swells toward fifteen trillion (yes, Martha, trillions) our country is printing money as fast as the computer keys will move. Until now, we have been able to do this with low interest rates, as the world hunkers down and seeks safety in their investments. When all else is in the crapper, buy American. Unfortunately, this bunker mentality will not last for long. And when fear subsides, interest rates will spike. This will slow down business, as it becomes more expensive for companies to borrow. The Fed will be faced with the choice, to print money from thin air (with no one buying it) or pay higher and higher prices to lenders.
Just so we understand what we are talking about, let me do the math. The debt service on fifteen billion dollars (at 5%) is $750,000,000,000 per year. Seven hundred fifty billion per year. That is a lot of annual deficit.
Now, some of you may try to argue that our national debt is half that amount. You might say we shouldn’t include the five trillion we are guaranteeing for Fannie and Freddie. We shouldn’t include the trillions we are injecting into the nation’s banking system, or the amount for the coming national bank, the trillions more that we will have to spend to fix the damn system.
We aren’t in Kansas anymore, people! Wake up. This is real.
Our Congress is going to be faced with a no-win proposition. Borrow more and more money, even as we increase spending on entitlements, or print it and suffer with the inflation.
Look for a movement to sell our nation to the highest bidders, China and the Middle East. That’s right, Dorothy, look for the solution to be selling us out. Look for a movement to nationalize our nation's retirement system, because thieves go where the money is.
Imagine a national bank that holds a few trillion dollars in mortgage assets. Taxpayers are complaining about higher and higher taxes, a crumbling economy, etc. So, we go to China and say, “You know that $1.7 trillion you have in U.S. debt, that little piece of paper that says we’ll pay you a hundred billion a year in interest? How about we just swap? Our nation’s houses for your paper.
Now, it won’t happen that way, not our in the open. It will happen in subtle ways, a little at a time, until the sale is over. Even now, China is warning us not to protect our workers against cheap Chinese goods. They have us by the balls and they know they can bring us to our knees.
I will continue this discussion in later blogs, because it is something we have to understand before it is too late to save ourselves.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
In less than two decades our nation has leveraged itself into bankruptcy. There is no actual capital in our banking system—none, except for local banks who stuck to their knitting, and did things the old fashioned way, with common sense.
Until now, financial institutions have been able to borrow money from the Fed at will. They have been allowed to give artificially high values to loans and assets they hold. If they were forced to fess up, and declare the true value of these assets, banks would have to call in all their good loans. That would shutter the nation faster than an alien invasion.
As our nation’s debt swells toward fifteen trillion (yes, Martha, trillions) our country is printing money as fast as the computer keys will move. Until now, we have been able to do this with low interest rates, as the world hunkers down and seeks safety in their investments. When all else is in the crapper, buy American. Unfortunately, this bunker mentality will not last for long. And when fear subsides, interest rates will spike. This will slow down business, as it becomes more expensive for companies to borrow. The Fed will be faced with the choice, to print money from thin air (with no one buying it) or pay higher and higher prices to lenders.
Just so we understand what we are talking about, let me do the math. The debt service on fifteen billion dollars (at 5%) is $750,000,000,000 per year. Seven hundred fifty billion per year. That is a lot of annual deficit.
Now, some of you may try to argue that our national debt is half that amount. You might say we shouldn’t include the five trillion we are guaranteeing for Fannie and Freddie. We shouldn’t include the trillions we are injecting into the nation’s banking system, or the amount for the coming national bank, the trillions more that we will have to spend to fix the damn system.
We aren’t in Kansas anymore, people! Wake up. This is real.
Our Congress is going to be faced with a no-win proposition. Borrow more and more money, even as we increase spending on entitlements, or print it and suffer with the inflation.
Look for a movement to sell our nation to the highest bidders, China and the Middle East. That’s right, Dorothy, look for the solution to be selling us out. Look for a movement to nationalize our nation's retirement system, because thieves go where the money is.
Imagine a national bank that holds a few trillion dollars in mortgage assets. Taxpayers are complaining about higher and higher taxes, a crumbling economy, etc. So, we go to China and say, “You know that $1.7 trillion you have in U.S. debt, that little piece of paper that says we’ll pay you a hundred billion a year in interest? How about we just swap? Our nation’s houses for your paper.
Now, it won’t happen that way, not our in the open. It will happen in subtle ways, a little at a time, until the sale is over. Even now, China is warning us not to protect our workers against cheap Chinese goods. They have us by the balls and they know they can bring us to our knees.
I will continue this discussion in later blogs, because it is something we have to understand before it is too late to save ourselves.
www.lumbert.com
www.jaylumbert.com
www.shaksperbooks.com
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