I Just Don’t Know

Ever have a circular argument with somebody? You know, the sort of thing where you are trying to solve 3 problems, and each solution solves 2 but makes the 3rd worse. Then you come up with another solution that solves the 3rd but makes 1 and 2 worse. That’s how I feel about this whole mortgage mess. I understand how we got here. I understand who is involved. But I for the life of me can’t figure out how to fix this thing. Consider the following:

Effect on…	Underwater Homeowners	Stable Homeowners	Banks/Mortgage Securities Holders	Non-Homeowners
Plan A:  Do Nothing	Lose their home, bankruptcy, bad credit, years to recover	Home values drop significantly as foreclosures and shorts sales enter marketplace	Left with properties worth a fraction of original loan value.  Mortgage bonds worthless; banks going to need more assistance.	Probably harmed by bank problems, but big winner if they have good credit and want to buy a home.
Plan B:  Rework distressed mortgages via lower interest rates/longer maturity	Some homes may be saved.  Risky behavior by some may be rewarded.  Likely to see some foreclosures due to sour job market	Home values propped up some, which may be the only reward for spending within their means.  Good behavior not rewarded.	Better than the do-nothing plan, but still holding properties or securities with lower values.	Screwed if looking for a home because the government is artificially inflating property prices from a foreclosure bottom.
Plan C:  Purchase distressed mortgage securities from banks	Probably same as A:  Lose their home, bankruptcy, bad credit, years to recover	Home values drop significantly as foreclosures and shorts sales enter marketplace	Best plan for these guys, as they can unload toxic assets from balance sheets.	Probably same as A minus the bank problems.

Those are the only three options I’ve heard. It’s kinda sad really. Nobody’s a winner, but there are many losers. And then there’s the question about what to do about the banks. This is the 3rd straight decade they have screwed our economy in the name of big bucks. In the 80s, it was the Savings & Loan Crisis. Seeking bigger returns, banks took incredible risks, knowing that FDIC insured all their deposits. In the 90s, it was derivatives. The moral of that story is that credit ratings can be bought and banks will do anything for the right fee. (Side note: If you want an inside look at how the large investment banks used to operate before this crisis, I highly recommend Frank Partnoy’s F.I.A.S.C.O. This book will show you how banks simply hire and pay really smart people to screw the less smart while making a ton of money. I don’t’ have a problem with this, per se, but it’s important to realize it happens.)

And then there’s the mortgage crisis of the 2008/2009. Mortgages were thought to be guaranteed by the Feds, money was cheap, and everybody was making money on mortgages. The way to make money was more, more, more. Don’t worry if the people have the income to pay this back – that’s so tomorrow, and if they don’t, the Feds will back us. It was thought that we can’t lose, and if we do, enough of us would lose so that the Federal government would bail out the banks. And they have, and continue too.

Again, I don’t know the answers here. I only know one thing. There is not-so-recent phenomenon in business called “Too Big to Fail.” Chrysler’s bailout in early 1980s might have been the first, but since then, we’ve seen Long Term Capital (a hedge fund), General Motors, and a litany of banks all receive government arranged and/or backed loans or cash because they are too big to fail. Too many people would lose their jobs. Too big a drag on our markets. This is a horrible president to set for our industries.

Consider this scenario: You are CEO of XYX Corp, a large company that employs over 100,000 workers and has hundreds of feeder companies that rely on your business. Your CFO comes to you with two growth strategies. The first one is wild, real outside the box stuff, and pretty risky. If you pull it off, you can grow revenue by over 50%. You’ll be hailed a business genius, complete with book deals, CNBC interviews, and a speaking tour. Bonus and equity deal will make you a multi-millionaire. You’ll be set for life. But if it fails…the whole company could be risk.

The second plan is boring, and focuses on sustainable revenue growth of 7-9%. It’s not risky, sort of funds itself, and really wouldn’t do much but make the shareholders nod appreciatively. But let’s face it, nobody’s gonna buy the book from the guy that grew revenue 7%, just like nobody’s gonna buy the golf book from the guys who always shoots 86.

Which do you pick? Well, under our current regime, I’m picking the first one. To hell with risk; if the plan bombs, then I’ll just go to Capitol Hill, hat in hand, and talk about how the government better bail us out or hundreds of thousands of jobs are gone. Whole communities will board up. Sure, I’ll probably have to resign, but my severance will keep a roof over my head. Probably a really nice roof. And, in a few years somebody will hire me, and the cycle will begin anew.

Tags: economic commentary, economy, mortgage crisis, mortgages, US economy