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TARP2 and Millions of New Visas

On August 31, 2010, in Economy, Housing, by Tim

Hedge fund manager and author Andy Kessler recounts the recent history of the U.S. failing to rid itself of toxic assets and proposes some solutions to today’s economic and financial market ills in this Wall Street Journal op-ed($) today.

• QE toxic. The Fed’s quantitative easing has been focused on buying Treasurys as well as packages of high-quality mortgage assets. It’s time to go back to the original TARP and start buying toxic assets directly from banks, no matter the price. If they become insolvent, set up the Treasury to inject capital a la TARP2 and allow the Federal Deposit Insurance Corporation (FDIC) to implement a quick-turnaround, prepackaged bank resolution and receivership. Clean those balance sheets up for good, else we relapse into financial crises again and again.

• Import buyers. Someone has to step up and buy those 1.5 million extra homes in inventory. I would wager there is a backlog of high-paying jobs for educated foreigners well beyond what H1-B visas allow to trickle in. In the name of financial stability, create a million visas for qualified immigrants, say, those with a masters or Ph.D., and watch home prices start to rise.
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There are so many price distortions that markets, let alone business leaders, are confused as to what is real. So they sit on their hands. The only way out is to let prices go to where they need to go to clear the overhang. This is especially true of housing and the housing assets clogging up bank balance sheets. Next time banks are under fire (and I hope we are not heading toward a next time), buy them out, fire management and restart the franchise with a clean bill of health. We are starting to see what the alternative is.

That sure sounds like a better plan than the one that we’ve been working to over the last couple years. As an addendum to that last item, it sure would be nice to get the banks out of the business of selling houses because they seem to be much more content to sit on them at their “mark to fantasy” prices than sell them, a development that, left unchecked, could result in another lost decade following the one that we just started.

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Beware the Banks’ New Credit Cards

On August 30, 2010, in Banks, Consumerism, by Tim

More evidence that banks and other institutions are already finding ways to skirt recently enacted regulations designed to protect consumers and will, someday, probably make an even bigger mess than the one the nation is still in the process of cleaning up comes in this WSJ report about purveyors of credit cards becoming quite creative recently.

Amid all the junk mail pouring into your house in recent months, you might have noticed a solicitation or two for a “professional card,” otherwise known as a small-business or corporate credit card.

If so, watch out. While Capital One Financial Corp.’s World MasterCard, Citigroup Inc.’s Citibank CitiBusiness/ AAdvantage Mastercard and the others might look like typical plastic, they are anything but.

Professional cards aren’t covered under the Credit Card Accountability and Responsibility and Disclosure Act of 2009, or Card Act for short. Among other things, the law prohibits issuers from controversial billing practices such as hair-trigger interest rate increases, shortened payment cycles and inactivity fees—but it doesn’t apply to professional cards.

Until recently professional cards largely had been reserved for small-business owners or corporate executives. But since the Card Act was passed in March 2009, companies have been inundating ordinary consumers with applications. In the first quarter of 2010, issuers mailed out 47 million professional offers, a 256% increase from the same period last year, according to research firm Synovate.

I’ve noticed these coming in the mail lately, but, like every other credit card solicitation, they quickly end up in the circular file. There has been only one exception though. We recently took American Express up on their gold card offer in return for getting a free Bose SoundDock Music System after we make $100 in purchases. The annual fee goes from free to $175 after a year, so, you know we won’t end up being long time gold card holders.

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INSIDE JOB

On August 25, 2010, in Banks, Economy, Our Culture, by Tim

Here’s what looks to be one of the better films about the financial crisis – INSIDE JOB – from Academy Award nominated filmmaker Charles Ferguson, narrated by Matt Damon.

Favorite line: “These people are risk takers, they’re impulsive. You see a lot of cocaine use, prostitution” and don’t miss another smackdown of Hubris Incarnate with a Fatter Wallet (Frederic Mishkin) at about the 1:35 mark.

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Charting U.S. Personal Bankruptcy Filings

On August 23, 2010, in Banks, Debt, Our Culture, by Tim

The Economist reports on the rising rate of personal bankruptcy filings since sweeping new laws were enacted back in 2005, right around the time the housing bubble was fully inflated.

One could argue that this is yet another case of U.S. government policy “pulling demand forward”, that is, demand on the part of U.S. consumers to more easily wiggle out of debts that they owe. At The Economist they note, “The data suggest that an older trend is reasserting itself. This could be more bad news for America—or it could just mean that creative destruction is alive and well.” Bet on the former, not the latter.

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Reverse Mortgages to Self Regulate Too

On August 17, 2010, in Banks, by Tim

While not knowing many of the details behind the recent surge in reverse mortgages (I recall a year or two ago it was looked upon as about the only bright spot in consumer lending for the big banks) you’d have to think that with rising health care costs, the lack of savings, and poor investment returns on what savings they might have, seniors are helping to boost banks’ bottom lines by taking out more and more of these loans and paying more and more fees. Reuters reports on guidance that was offered yesterday on these products.

The Federal Reserve and other top regulators said on Monday reverse mortgages pose “compliance and reputation risks” for lenders, and offered guidance to financial firms on how to avoid such pitfalls.

The Fed said reverse mortgages, which enable borrowers to get a monthly income stream by surrendering a portion of the equity in their homes, are likely to become increasingly popular given an expected rise in the elderly population.

The guidance puts no limits on fees that can be charged for reverse mortgages.

“Reverse mortgages present substantial risks both to institutions and to consumers, and, as with any type of loan that is secured by a consumer’s home, it is crucial that consumers understand the terms of the product and the nature of their obligations,” the regulators said in a statement.

“Lenders must institute controls to protect consumers and to minimize the compliance and reputation risks for the institutions themselves,” they said.

Oh Geez. That sounds a lot like the “guidance” they were dispensing for home equity loans back around 2005. Seniors would be well advised to read the fine print closely before grabbing that money because it sounds like the banks will get at least their fair share.

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How a Ponzi Scheme Works and More!

On August 16, 2010, in Banks, by Tim

For some reason, the closing credits to The Other Guys contains a number of animations on the subject of the ongoing financial crisis, beginning with how a Ponzi scheme works.

Half way through is my favorite – a time lapse depiction using elevators to show how the ratio of CEO salaries to employee salaries has changed over the last hundred years.

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