Thursday, December 31, 2009

War or Crime? We need a 3rd way

With the latest on the underwear bomber's upcoming indictment in Michigan and the upcoming trial of Sheik Mohamed in NYC, along with the furor over closing Guantanamo Bay, the raging debate is whether we should be treating these actions as acts of war or crimes.

I've struggled with it. If this is treated as a crime, all sorts of problems arise. How can we give the underwear bomber guy his Miranda rights; and then having the right to remain silent try to get him to talk about who else was, and still is ,involved in trying to kill us. Not your usual question to a criminal suspect. If we ever catch the masterminds, what kind of admissible evidence will have to convict them in a US court with full rights and procedures. Of course, if one of our drones simply kills them that doesn't appear to cause any legal problems. So we can kill these guys, but otherwise we need to treat them as criminals with full Constitution rights. See the problem here.

Why can't we treat them as prisoners of war and have the Geneva Convention govern? No need for a trial , we can interrogate within the rules of war; treat them humanely until the war ends. Well, how will we know when the war is over? We might not let them go for decades; but then who's problem is that. Also should they even be afforded the dignity of being soldiers of a sovereign government? Don't they have to be in uniform or get hung as spies?( I remember that from something). As to those who actually commit crimes against civilians and other non combatants , I assume there are procedures under the Geneva Convention for that. Maybe someone can enlighten me.

I could go on about both sides of the debate for a long time , but what I'm really advocating is the development of a 3rd alternative. These are more than just crimes ,but is this a conventional war as contemplated by the Geneva Convention? We need our greatest legal( politicians need not apply)minds to come up with something that both protects us and reaffirms the rule of law for situations like terrorism.

As always comments are welcome.


Wednesday, December 30, 2009

Stocks and Taxes

According to CNN, 50% of US taxpayers own stocks traded on Wall St-- so, to a not insignificant degree, Wall St actually benefits Main St.

Think of all those 401(k)s, mutual funds , union and other employee pension funds, 521 college plans,insurance policies and annuities, and other retirement and investment vehicles. Some of the biggest players on Wall St are employee benefits funds-- like Teachers, Calpers, Nysters and so on.

Therefore lots of ordinary people benefit from Wall St and I think they are the same people who pay all the taxes.

Why? Because (also according to CNN) 47% of Americans pay no federal income taxes; leaving just 53% who do. In case you are wondering, none of those who pay nothing are the rich, thanks to AMT. By the way, that's why it's so difficult to cut taxes for the 47%; however we still do cut taxes for some of them by actually paying some people who pay no federal income tax. I understand why, but it's just a fact most people don't know.

So when you talk about federal taxpayers bailing out Wall St what does that really mean? Are we, in large part, bailing out ourselves? And just who are those "taxpayers " anyway.

Also what kind of country are we if our "shared responsibility" as citizens at the federal level is participated in by only 53% of our citizens.


Monday, December 28, 2009

Why not rent foreclosed homes

Why don't mortgage lenders just rent out the foreclosed properties to the former owners? Rather than throwing people out of their homes, boarding them up and letting them just sit there as a blight on the neighborhood, why not let the former owner stay and pay rent? The amount of rent would be based on their income and general ability to pay. Maybe even give them right to buy the home back before the property is sold to someone else once the market returns. It would give the lenders some revenue, keep the house open and free from vandalism, reduce neighborhood blight, preserve area property values, help the former owner who may have lost his job etc., and provide great PR to lenders ( God knows they could use it).

What is the downside? There must be an answer , so let me hear it.

After foreclosure the lenders are already legally responsible for the property and are managing those foreclosed properties, to some degree. Why not collect some revenue and do some good at the same time?

I'd like to know why not.


Sunday, December 27, 2009

Wall St, Main St - Job Loss and the "Bailout"

Bankers riding high while Main St jobless and the taxpayer is paying the bill?

When complaining that Wall St has recovered while Main St is jobless , try telling that to the thousands of bankers who lost their jobs with the demise of Lehman Brothers, Bear Stearns, Merrili Lynch, Wachovia,Washington Mutual, Country Wide, not to mention all the banker's jobs that were slashed at BofA, Citibank, Wells Fargo, Morgan Stanley, even JP Morgan and many , many others due the the financial crisis.

As to the fat cat owners of the banks, try telling Citibank stockholders, whose stock was at $50 a little more than a year ago and is now around $3 , that they have recovered while Main St suffers. Similar drops in most other bank stocks have also occurred.

You say the bailout took away "moral hazard", try telling that to the CEOs of AIG, Merrill Lynch, Lehman , Bear Stearns,Wachovia, Fannie Mae, Freddie Mac, GM and Bank of America and many others who are now out of jobs.

While I've defended Banks against demonization during this panic/ crisis, clearly they got themselves in trouble big time ( see my previous post); however here is an except from an article which you'll probably never hear about, except perhaps in passing, about what TARP has cost us taxpayers.

"Out of the $700 billion originally allotted, only $245 billion was invested in banks. With B of A now fully repaid and Citi and Wells on its heels, every major bank will likely repay TARP in just over one year. Several smaller banks failed, taking their TARP investments with them, but profits from other banks more than offset their losses. The Treasury now expects it'll reap an aggregate $19 billion profit on its investments in banks."

All the losses from TARP will be from non banks like AIG, GM and Chrysler. However, I'm sure it won't stop the demonization of the "banks" who were " given $700 billion of the taxpayers money ." With a couple of more "bank bailouts" like that maybe we can invest our way out of the deficit.


Thursday, December 24, 2009

Skin in the game

I have been following the financial crisis , I call it a panic, and I am frustrated with the hyperbole and demagoguery of the media and the politicians. The whole situation reminds of the old cliche that " I've made up mind, so don't confuse me with the facts".

The following is an examples of "conventional wisdom" that never made sense to me.

If the Banks made all those bad loans just to sell them to an unsuspecting public through securitization and therefore "had no skin in the game", why did the Banks suffers all of those billions of dollars of losses?

I know the answer to the question, but it's not that those Banks didn't have skin in the game . In fact it was the reverse. The real Banks for the most part didn't make subprime loans ( not really their thing). The "banks" who made most of the subprime loans where unregulated finance companies, or loosely regulated thrifts, that usually had words like "golden" in their names and acted more like Amway salesmen than banks. Wall St thought that, through the "magic" of securitization, risk would be reduced by spreading it widely, so no one suffered too badly if things went wrong. In fact rather than spreading and thus reducing risk, it actually spread the contagion once the panic began. In current youtube parlance , it went viral. Logic and reason went out the window and panic and stupidity walked in the door. No one wanted to buy those "toxic" assets, no matter how few "toxic" loans were in the pool of loans which were collateral for the securities, which were now almost worthless, notwithstanding the actual relatively low number of mortgage defaults at the time.

There were many perpetrators of this debacle, none of whom had malicious intentions. The spark that set things in motion ( there would probably have been another spark since the US economy was clearly way overleveraged and something had to precipitate a correction) was "subprime" lending. The problem began with complaints that banks were not lending enough to people who had less than stellar credit. This lead unfortunately to the the advent of subprime lending, meaning lending to people with substandard credit at higher rates to cover the higher risk. The Government didn't discourage this and later actually encouraged it. Subprime lenders weren't your usual banks, at least not the big Wall St investment banks or even the major commercial banks. Eventually these companies were making loans to anyone with a pulse, as long as they could sell them to Wall St. In turn, Wall St. was buying them as long as they could get the rating they needed from the Rating Agencies so they could sell them to investors. Investors were buying as long as they had the desired rating. I get dizzy just explaining all that.

Why? Of course, Wall St was encouraging this because they were making lots of money selling the securities ,and the faux banks, who were making the loans, were making lots of money selling the loans to Wall St for sale to public investors, who were buying the securities without doing their own due diligence, but rather relying on the ratings of the Rating Agencies, who were getting paid by the issuers of the securities( read Wall St again). What a country!

However another big culprit ( politically correct people don't like to talk about this) were the local communities who didn't have access to traditional credit ( as it turns out for good reason). They wanted more loans to fulfill the American dream of home ownership.

The Government, the only one who could and should have put a stop to it--Didn't-- for a variety of reasons. As Barney Frank famously said "Let's roll the dice" or was that Julius Caesar? Let's just say the Government lacked courage--what a shock.

But let's now answer the question of why the Banks lost so much money thus creating the collapse of the real economy. Guess what the Banks did? They bought lots of those securities that turned out to be so toxic and therefore dramatically less valuable than what they paid for them. Why you ask? They were highly rated and therefore safe. If it looks like a dog chasing his tail , I see the analogy.

So you see it's not that the Banks ( read real the Banks we love to hate on the news every day) didn't have enough "skin in the game", it turned out that they had too much.

More examples and other thoughts will follow with future posts.