It seems the government’s long-term strategy for an economic recovery is sweeping our major problems under the rug and only allowing the public to easily see a small amount at a time.
This is something the government does often, whether to avoid more panic or to avoid tampering with a bull market.
It was almost comical to see the Bush administration and the Fed trying to subtly talk down the market from late 2005 through mid-2007, based on the issues on the horizon. They knew that the bigger the market was, the harder it would fall. Those guys were facing the same issues that came to a head in 2008. Now, they are trying to do the opposite (talking UP the economy) based on the same major issues.
Basically, they were trying to tell you (without spooking you) that things weren’t as good as the market reflected. And now they are telling you things aren’t as bad as the market reflected. They prefer you to think things are closer to the middle.
The truth is, if the world tried to digest all of the nightmare situations out there at once, it would make the September 2008 sell-off look like a walk in the park.
But, hey, I won’t try to “fight the trend” by betting against it. I will play the bull market or bear market if it’s present regardless of whether it makes sense. I know I can risk minimal amounts with the same upside by playing options instead of the actual underlying security.
The Government Sees You When You’re Sleeping …
This year, as has been the case in many years past, on (or near) Dec. 24, there were all sorts of characters sneaking around on their tip-toes when you were sleeping. And they gave gifts to people (not necessarily for being good) and I’m not talking about Santa Claus and his elves.
I’m talking about political maneuvering and hiding from taxpayers — by Congress, the Treasury Department, the Fed, etc. — that we must pay close attention to if we’re going to see through the B.S.
And when we consider the sneaky fashion in which these moves are made (i.e., voting or modifying bills when most are away for the holidays, or making highly questionable moves when most people aren’t watching the news), we should ask, “Why?”
We’ve seen plenty of quiet and sneaky maneuvering in the past, and one of the most talked about instances was the manor in which the Federal Reserve Act of 1913 (that gave the Federal Reserve responsibility for setting monetary policy) was pushed through.
Sneaking Bailouts by Taxpayers
Nearly a century later, this year on Christmas Eve, the Treasury Department said it removed the $400 billion financial cap on the money it will provide to keep Freddie and Fannie afloat.
So, it’s another bailout — or a pre-emptive bailout.
This may or may not be the right thing to do, but that’s beside the point. The way in which this was done was insulting to our intelligence.
So now we have to ask two questions:
1. Why would they do that to begin with?
2. Why would they be so sneaky and quiet about it?
Why would they do this, right now, when Treasury officials just told us the two firms wouldn’t even need half of that $400 billion? In fact, they said losses are not expected to exceed the government’s estimate of $170 billion over 10 years. So, why the need to eliminate the $400 billion cap, quietly, now?
I’ll tell you why. Because if there is a problem on the near-term horizon, Congress isn’t going to want to have to face this issue during the 2010 mid-term election year with all constituents watching.
The Treasury claims it wants to eliminate uncertainty about the government’s commitments. But I think we are quite certain by now how committed the government has been.
Why did Treasury feel it had to sidestep the need for an OK from Congress, which is having a hard time stomaching the idea of (explaining the need for) more bailouts?
What you just witnessed, with the lift of the $400 billion cap, is potentially another bailout.
New World Out of Order
In 2009, the government became much more creative about how they go about bailouts without raising too many taxpayer eyebrows. For example, my colleague, Ron Ianieri, said:
“Very quietly, the government amended [Financial Accounting Standards Board Statement No.] 157 — allowing the banks to go back to mark-to-model (instead of mark-to-market) and to artificially strengthen the banks’ balance sheets, making the banks look healthy again.”
In a nutshell, they are not forcing the banks to mark their crappy mortgage-backed assets to market. Instead, they are letting the banks estimate what they think they can sell those assets for in the future, and claiming that’s the current value of the asset.
You mean, you don’t remember that amendment going into effect on April 2, 2009? You may not recall it because they have a way of keeping these things quiet. (Funny how they avoided doing that on April Fool’s Day). And now, look at the “profits” we’ve been seeing!
Think about this for a second. What if you wanted to go to one of these banks and tell them you want a loan backed by your $1 million Citigroup (C) stock holding — only you are basing that $1 million valuation on the assumption that Citigroup is trading at $40 because you think you will be able to sell the stock at $40 down the road? (To put this into perspective, the stock is currently trading for less than $3.50 — a far cry from $40 per share!)
Basically, amending FASB 157 was another HUGE bailout. Perhaps this was, at the time, the only thing they could have done. Heck, perhaps it was the “right” thing to do. But it’s important that you know the problem still exists and we will have to face it at some point.
What can we expect from Q4 2009 or Q1 to Q4 in 2010? Has the housing market really stabilized? What numbers are real anymore, and what numbers are inflated?
Don’t worry: The profits really might be real, assuming the housing market is in recovery mode. Um, yeah, about that …
The Recovery is in Need of Rescue
Let’s think about this one for a second. Just a couple of weeks ago, the focus was on President Obama’s mortgage-relief plan (Making Home Affordable Program) having weak results that could threaten the housing market’s recovery.
Only 23% of the 3.3 million troubled home loans in the United States (760,000) have been modified (signed up for trial loan modifications where the lender agrees to cut the interest rate to make the loan more affordable) for a limited time period.
The goal is for those temporary modifications to become permanent. But only about 31,000 of those trial loans had been made permanent. How scary is that?
This means that fewer than 1% of the troubled loans in the country have been permanently modified!
The housing market decline may appear to be slowing and, in fact, we may even be looking at a slight recovery! That is … assuming “shadow inventory” doesn’t exist. (With all these assumptions of problems not really existing, we are going to have to learn how to fill up on imaginary food soon.)
You may remember us talking about “shadow inventory” (housing units that don’t make it to the public market for one reason or another) artificially lowering the supply of houses on the market — a situation that will lead to the clogging of the system in 2010.
Shadow inventory comes in the form of Real Estate Owned (REO) properties. REOs are bank-owned properties not on the market yet and foreclosures in process. As the delinquency rate rises, this leads to more foreclosures in 2010.
And there are plenty of homeowners who are over the 90-days-late period where the lender hasn’t begun the foreclosure process yet.
There are more forms of shadow inventory, but you get the point. If only 23% of the troubled loans in the United States have even begun to be addressed, and only 1% of them have had permanent modifications (and we aren’t even discussing here the fact that a percentage of those people will still default on their loans), then we are in for a world of economic pain.
Lenders or Borrowers: Who Would You Put Your Money On?
According to Bloomberg, the number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55% to 1.7 million at the end of September, up from 1.1 million a year earlier.
About 14% of homeowners with a mortgage are either behind or in foreclosure. If 760,000 loans have been temporarily modified, then why do only 4%-5% of those trial modifications became permanent modifications?
In case you missed this a few weeks ago: Lenders blame the 4%-5% success rate on the borrowers, saying they don’t return the necessary paperwork to complete the process!
Who do you believe? Do you think 95% of the borrowers are that irresponsible that they wouldn’t complete the proper paperwork? Do you think the problem is that there are many people who don’t want to reduce their bills badly enough to provide the right paperwork, or do you think the banks are pushing the inevitable as far ahead as they can?
The Treasury Department said it will step up pressure on the industry to improve. This tells us that it believes the borrowers and not the lenders. (Besides, how would the Treasury put pressure on the borrowers to be more organized about their documents?)
All that is needed is proof of income (something that anyone who wants a mortgage payment to be cut down by 20%-80% should be motivated to put together), and for the homeowner to have at least three on-time payments under the trial program. You’re telling me 95% of the borrowers couldn’t do that?
Banks Burying Their Heads in the Sand
Banks want to avoid having to realize lending losses. And, by the way, it would probably be bad for the assets on the books if everyone realizes that the housing recovery is just a little further out in the future than investors are expecting, based on the numbers we’ve been working off of.
Why realize lending losses and investment losses when you can just pretend it isn’t happening?
Google this and find lots of “whack-a-mole” stories from borrowers who report that they have submitted all of the required documents and made several months of full payments to the banks, on time, but have yet to receive an answer from their bank — only to have the bank say “you didn’t send us the necessary documents.”
The point is, as the government becomes more and more sneaky and clever about industry bailouts, we have to become better and better at spotting them … better at asking why the bailouts are happening … asking what the government sees that we don’t … and, more importantly, questioning why they are being so sneaky about it.
The issues we know about and see are probably only a small fraction of what’s really going on behind the scenes. But the ones we do know about are enough to send shivers down your spine.
