30 September, 2008

The sky is not falling. Yet.

Not-so-random observations on our nation's financial troubles.

0. Brandon at Siris has a commentary on the recent (failed) bill that I liked. This is not the same as saying that I agree with it, mind. I'm straddling the fence on the issue, which is all the easier now that it's failed.

1. Immediately after a weblog on the Washington Post announced that the SEC has dropped the mark-to-market rule, a number of left-wingers began proclaiming hysterically that the sky is falling—not in so many words, perhaps, but it's hard to see what they mean when nearly all the arguments I read amounted to nothing more that "Enron was using mark-to-market!!!"

Hold on, guys. Enron was voluntarily using mark-to-market to project false profits; from Wikipedia:

Under Skilling, Enron adopted mark to market accounting, in which anticipated future profits from any deal were tabulated as if real today.
What the SEC announced today is the opposite of what happened with Enron. Since November 2007, banks have been compelled to use mark-to-market, with the effect that (the argument goes) they are currently projecting false losses.

I repeat: banks were compelled to start using Enron-style accounting in November of last year. Mitigating this rule—not eliminating it—is not part of some Bush administration scheme to dismantle long-standing consumer protections from nefarious bankers. It is an attempt to undo the damage done by recent, questionable regulation.

The SEC has told banks they do not have to use mark-to-market. The comparison is so badly invalid that I can't even consider it specious.

Other comments are more reasonable. I liked this one (and I'll bet it's true):
More like Mark-to-What-Number-Do-I-Need-to-Have-to-Make-My-$$$Bonus
Another commenter actually knew what he was talking about (funny how rarely that happens these days) writing,
This plan was put into place last year and caused homeowners and banks many problems. Here's how it went: One house in your neighborhood on Main Street Bank's books foreclosed. They were forced to then write down YOUR home value to match. Get it? [This is due to bundling, which I described here.] So now YOU look like an upside-down risk as well as the one guy who got foreclosed on--even though you are paying your mortgage and will continue to. [Actually YOU don't look bad at all; the bank does, because it paid more for this security than mark-to-market says it's now worth.] By doing this AND looking at values over say, a two or three year period and averaging it all out, the banks don't show good paper as bad paper anymore and have a more realistic "paper" loan-to-value for your home. Now multiply exponentially and you can see the positive affects in liquidity for the banks. [exponentially???] Do your homework and understand the process before you start screaming.
My only beef with the comment is the remark, Do your homework… He's commenting on a weblog, not an academic journal. Worse, it's a weblog hosted by the Washington Post. What makes him think anyone commenting there would have done their homework?

A different point of view that also suggested a passing acquaintance of the facts:
Ma and Pa take out a $100 mortgage. The bank sells their mortgage at a discount. The price is one hundred dollars principle, plus it'll earn another $250 in interest over its fifteen years. So that's $350-- but we discount for inflation and the risk of default. Maybe its worth $200. Now Ma & Pa's discounted mortgage is bundled [HA! there's that word again] with a thousand others, into a mortgage-backed security. [Is it really a thousand?] Complex math determines how much these mortgages might--probably--maybe--bring in over five, ten, and fifteen years, and hence determine the market price of the security. [Calling it math is insulting. Complex accounting is more like it.] Math [argh] so complex that in the breeze from the flap of a disappointed realtor's coat tail in California the computation collapses. If Ma and Pa default? All the interest is gone. Gone. Remember interest was by far the larger part of the money involved. And the cost of foreclosure eats into whatever equity is left, assuming you can sell their house at all after a year on the market in a development full of foreclosed houses. The security holder never gets title to their house. He might (might!) get a claim to what little money might be leftover after everybody else has grabbed their share, if that is, the security is liquidated. Buying a mortgage backed security is not buying a mortgage--its the difference between buying donuts, and buying the box the donuts come in.
I don't think this last statement is correct at all, and I also think the general presentation is too simplistic about what happens once the realtor's coattails flap. I addressed that in the previous entry, so I won't rehash that here.

2. Another series of ridiculous left-wing comments on the same website argue with a straight face that the entire bailout is a scheme cooked up by conservative Republicans. I gave up reading at that point. The actual facts are that a majority of Democrats, primarily of the Barney Frank variety, voted for the bailout. These are not conservatives.

Many conservative Democrats (including my Representative) and a majority of (primarily conservative) Republicans voted against it. Many conservative Republicans did vote for it, but did so only with the understanding that it was a bitter, but necessary, pill to avoid a worse catastrophe.

I don't see at all how the bill is therefore a vast right-wing conspiracy, but I'm a firm believer in education, and the comments box is open.

3. I don't own any bank deposits; I belong to three credit unions. Unlike banks, credit unions were exempted from the Community Reinvestment Act.

Now we come to the right-wing hysterics. According to virtually all right-wing authors I've read lately, the Community Reinvesment Act amounts to a vast left-wing conspiracy to (a) force otherwise healthy banks like Wachovia to issue subprime mortgages to people without sufficient credit, and (b) enrich left-wing organizations. There is probably some truth to the assertion, but there are two problems with the argument. (a) Aren't a lot of the failing mortgages of the jumbo variety? That is, loans to upper middle-class types who want to buy a house bigger than what they can afford? Isn't this why the government directed Fannie Mae and Freddie Mac to buy more of these types of mortgages back in February? Why did everyone act surprised when the FM's subsequently failed? (b) According to Wikipedia credit unions were exempted from CRA because, unlike banks,
[C]redit unions, by their nature and mission of "people helping people," already meet the financial needs of a broad spectrum of people that fall within their fields of membership, and play an active role in community development and growth. …2006 Home Mortgage Disclosure Act data shows that U.S. credit unions approved 69% of low- and moderate-income borrowers' mortgage applications that they received, versus a 47% low/mod-income borrower approval rate for other U.S. mortgage lenders, and also that U.S. credit unions approved 62% of minority members' mortgage applications, versus a 51% minority approval rate for other U.S. mortgage lenders. The 2006 Home Mortgage Disclosure Act data also shows that 25.2% of all U.S. credit union mortgage originations were mortgages for low- or moderate-income borrowers, versus a 20.6% low- or moderate-income borrower mortgage origination percentage for other U.S. mortgage lenders.
This could help explain why my credit unions claim that they will have no problems refinancing my mortgage. Since my mortgage was issued by a credit union, maybe isn't part of a bundle after all.

4. The remarks that "$700 billion of wealth disappeared" (last week) or "More than $1 trillion disappeared" (yesterday) are silly. I might find the claim credible if today's evening headlines read "More than half a trillion dollars appear" but apparently money never "appears", it only "disappears".

5. As bad as it may seem, things could be worse. The Russian stock market has had to close at least three times in the last three weeks in order to avoid catastrophe. Today was the third time that I know. Many Russians are blaming the United States and/or the West, claiming a vast conspiracy wishes to impoverish them. Of course, Putin's nationalization of companies into which Western companies poured enormous sums of capital, and further remarks threatening to take away even what they have left, could have nothing to do with Western investors' having second thoughts regarding investing in Russia.

Still, it's a sign of progress: thirty years ago there was no stock market in Russia. Even if there had been, we should take an example from Soviet grocery stores. The stock prices would have remained stable, yes. However, you would never have found any available stock for sale.

1 comment:

Brandon said...

I'm not sure I agree with my post, either, at least the economic part. :) It's certainly the way things seem to me at the moment, but there are so very many things I don't know on the subject, and things change so quickly, that I really couldn't vouch for how stable that view will be.