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“The RETURN of President ‘Doofus’…”
By Sherman Ragland | October 24, 2008
According to the website UrbanDictionary.com, the word DOOFUS means: “Someone who hasn’t got a clue!
… As a Realinvestor(tm) chances are that you too have been watching closely the rapid rise in mortgage rates for US mortgages over the past several weeks, and have asked yourself the question, “HEY WHAT GIVES?”
If you are like me you are probably wondering what happened to the CENTRAL PROMISE of the “PAULSON PLAN”??!
You Know, when Secretary of the Treasury Hank Paulson orchestrated a secret closed door session with the leadership of CONGRESS along with Fed Chairman Benanke and SEC Chairman Cox, and shared with the senior elected officials of our country that the MELTDOWN in the Mortgage markets was now FULLY IMPACTING credit in other areas, and that if CONGRESS DID NOT FORK OVER $700 Billion within 72 hours, the entire US Economy would grind to a screeching halt.
… and what was the $700 Billion suppose to do?
As EXPLAINED by Secretary Paulson in a brief 3-page memo, known as the “PAULSON PLAN”, the $700 Billion was SPECIFICALLY Being approved by Congress to be used to ACQUIRE the Toxic, Sub-prime Mortgages held by banks and other financial insitutions for “pennies on the dollar”. Then the Treasury Department would work with the recipients of the mortgage money (home owners) to restructure these loans, which would then be sold for something “north of Pennies on the Dollar” thus assuring the following:
#1 – Toxic Mortgages that were (and still are) the cause of the Credit Crises would be removed from the system;
#2 – Banks and Lending Institutions would have the opportunity to OFF LOAD these toxic mortgages for some level of profit, since most had already written the value of these mortgages down to zero;
#3 – Home owners in trouble would finally be getting some relief because the Government would have the power to negotiate more favorable terms;
#4 – Sophisticated investment groups, such as Carlyle Group and Blackstone Group, had already announced that they would stand ready to buy these “recast” mortgage pools in a way that would guarantee that the Federal Government would earn a profit on this exchange, thus assuring the American Taxpayer that even though $700 Billion was a “BIG NUMBER” the amount of money earned would be somewhere above the taxpayer commitment and therefore in the end, the TRUE COST to the Government would be ZERO…
…. again, a very simple plan. So simple, that Paulson ACTUALLY Did deliver his written plan to the Leadership of Congress within 72 Hours of that Secret Meeting in a 3-page memo.
And for a Brief Shining Moment it Really looked like George “W” Bush had finally seen the light and had gotten it together on what needed to be done. With a simple 3-page initiative “W” was ready to finally BE the “COMMANDER AND CHIEF” of the Economy and with a BOLD PLAN that he successfully pushed through with his Treasury Secretary Henry ‘Hank’ Paulson, and his Federal Reserve Chairman, “W” was goint to get the TOXIC MORTGAGES Out of the System, restore order to the credit markets, fix the housing problem and head off a recession (or worse). Bold Steps – Presidential – Visionary…
…So here we are exactly 4 weeks after the President signed the $700 Billion Bail Out Bill (Actually it was increased to $850 Billion to provide for an additional $150 Billion in “sweetners” to get members of the House Congressional Republican Caucus to come along and pass the thing) the question is now being asked:
“HOW MANY TOXIC MORTGAGES HAS THE GOVERNMENT ACQUIRED SO FAR??”
The answer: NONE!
So, you may be thinking, “Come on Sherman, that’s a little harsh! Everyone knows the Government needs more than 30 days to get up and running, particularly when it comes to spending $700 Billion”.
That might be true EXCEPT for one thing… The Government has been spending down the $700 Billion. As of last week the Treasury Department has “invested” $197 Billion and is about to allocate (SPEND) another $200 Billion. In buying BAD (TOXIC) Mortgages, as was outlined in the Original “PAULSON PLAN”…? NO!
It seems that there really was NO PAULSON PLAN… it was just an “IDEA”.
Once Congress RUSHED to allocate the Money, and the President RUSHED to sign the legislation, the Secretary of the Treasury came up with a Better Plan, Excuse me a “BETTER IDEA”.
Take the money and simply GIVE IT TO THE BANKS, in exchange for some watered down thing that supposidly functions like stock. In other words, Nationalize US BANKS by having the Federal Government own shares in the banks in exchange for a Government CHECK.
And EXACTLY HOW MUCH OF THE GOVERNMENT’S MONEY HAS GONE INTO ORIGINATING NEW MORTGAGE LOANS FOR PEOPLE IN TROUBLE, as was originally promised in the original “PAULSON [PLAN] IDEA”?
NONE!
Which is exactly why Mortgage Rates in the US have seen a sharp spike UPWARD since President Bush Signed the $700 Billion Bailout Bill, which was suppose to help “restore stability to the mortgage markets”.
Please see the following chart that outlines what the President (through his Treasury Secretary) has done since announcing the need for a $700 Billion bail out program to get the Toxic Mortgages out of the Financial System:
This chart shows the rapid changes in US Home Mortgages during this period of time when the Federal Government took over Fannie Mae and Freddie Mac, Proposed a $700 Billion Bail Out Bill (supposidly to buy up toxic mortgages), The President’s Signarture on the Bill, and the President then Changing His Mind and deciding to make direct investments in US Banks, instead of using the Money for what Congress Approved.
Bottom Line: Institutional Investors, who were standing by to get back in the mortgage market, have now pulled out of the mortgage market, because the US Treasury is not going to take the Toxic loans out of the system. More so, they have also decided that it is MUCH better to now own the shares of Stock of US Banks, since the Federal Government is giving away money, RATHER Than to invest in the Mortgages Originated from These Banks, and as a result, Mortgage loans Hit a 3 month high yesterday, and are probably headed even higher. NOT GOOD NEWS for anyone in the homebuilding or related industries, because it means the cost of 30 year mortgages just got more expensive – way more expensive.
Which brings me back to where I started today’s blog:
According to the website UrbanDictionary.com, the word DOOFUS means: “Someone who hasn’t got a clue!
Therefore, I think it fair game that when it comes to the economy, we can all agree that “W” really doesn’t have a clue!, and here is why…
There is a very famous finance professor at the Wharton School of the University of Pennsylvania (one of many) whose name is Peter Linneman. And Dr. Linneman broke it down very simply a few years ago at a conference I attended in Philadelphia for the supporters of the Wharton Real Estate Center, when discussing the trade relationship between the US and China.
He said: “… the relationship between the US and China is actually very symbiotic and very simple: We go to Walmart and buy lots of stuff made in China, the money goes to China and creates a trade deficit for the US and a trade surplus for China, if the story ended there it would be very bad, but it doesn’t. China sends a great deal of this money back to us by buying US home mortgages, and as long as they continue to do so, American’s can have an abundance of mortgage money at cheap rates which helps them to get more home equity loans when they need them, so they can go back to Walmart to buy more stuff…”
It sounds very simplistic, and yet it is very accurate. While it is true that somewhere around 35% of all US (adult) residents own a piece of the stock market, either through direct investment or through mutual funds, over 60% of all Americans own a home. And it is through their home ownership that they create “wealth”, or at least believe their wealth originates.
We do know that “W” did get in and did graduate from the Harvard Business School (HBS) and no one can fault him, or the Dean of Admissions (at either Harvard, who let him in, or Wharton who didn’t), but it is now becoming very clear that while at HBS, “W” never actually attended any classes on Economics, because if he had, he would know that: “You Screw Around with the US Housing Market at Your Own Peril”. Housing is the backbone of the creation of Wealth in America for the vast majority of Americans – not the stock market. As Realinvestors(tm) we know that there are special and significant tax breaks for home ownership that do not exist for stock ownership. That even with the changes in the underwriting of mortgages, that you can still get a home loan (or at least in normal times) for 80% of the purchase price of the home, where as it would be impossible to get an 80% loan to buy stocks or mutual funds. And as many of us are discovering the hard way, a “drop in housing values” can mean a paper loss by as much as 20-25%, but a DROP in the STOCK Market, can mean very real losses in excess of 50%, in some cases just in one week!
Somehwere along the way “W” either never got the lesson (or more likely was absent from the discussion) when his ECON professor told the HBS students: “If ever get to be President of the United States, Remember just one thing: ‘Don’t Screw Around with Housing’ – You Mess Up Housing, You Mess Up The Economy.”
So here we are now after allocating $700 Billion to implement a plan, that never really existed in the first place, and we discover that “W” HAS NO PLAN TO FIX THE HOUSING MARKET… and the longer the US Housing market flounders, the worse the US ECONOMY is going to get.
The HUGE Drops in the Dow Industrial Average (Stock Market) are telling us all that a really bad recession is coming (at least for those people who live outside of Washington, DC. Every time the US Economy goes into recession, the Greater Washington, DC economy GROWS – Gee Imagine that).
So, while we know that “W” went to Harvard, there is clear evidence that he did not learn a blasted thing when it comes to money, housing and the economy, or to be more specific, the impact that each has on the other.
In otherwords, when it comes to Economics and the importance of a vibrant and stable US Housing Market, “W DOES NOT HAVE A CLUE…”
and according to the dictionary: DOOFUS MEANS: “Not having a clue!”
What is MOST disturbing about this Recent Spike in Mortgage Rates, and the Corresponsing Acknowledgement that there really NEVER WAS a PAULSON PLAN, is the fact that “W” and “Hank” Knew this was Coming!
For Well Over a Year Now ANYONE WHO DOES HAVE A CLUE has paid attention and watched in horror as the US Housing Market has come to a screeching halt, and we ALL know why: No Mortgage Money, No Sales…
The fact that it Took “W” and Hank Over a year to Come up with a Solution (ANY SOLUTION) to the credit and housing crises, was an Incredibly Dissapointing thing, at least to most people who do pay attention.
The fact that After Getting the US Congress to FORK OVER $700 Billion in the same manner thart Bush Got Congress To approve a Declaration of War (for Iraq) and then Discovering that THERE REALLY IS NO PLAN (As in: Hey Guys the Day After we Get Approval we do ‘X, Y then Z’) is Just Plain DISGUSTING.
So, the Moral of This Story: “HE WHO SITS IN THE WHITE HOUSE AND WHO THEY SELECT TO BE THEIR TREASURY SECRETARY, MATTERS… At least that is as it relates to the Economy.”
So for those who say, “Why Does Sherman Really Care About This, And Why Does He Not Get Back to Talking About Real Estate Investing…?” We only get one chance every four years to protect our interests. If you really are a REALINVESTOR, you will make the time to listen to what the politicians are saying about their plans for the economy. THEN YOU WILL GET OFF YOUR BUTT AND GET OUT THERE AND WORK TO GET THE ONE WHO HAS THE BEST PLAN FOR YOU ELECTED. The alternative is to sit around in being miserable for four, or eight more years.
It is true that as Realinvestors(tm) we can make money in any market, but why intentionally put another “BONE HEAD” in the COMMANDER AND CHIEF’s CHAIR By Design. If we knew then what we know now, many folks would have worked hard (or harder) to keep us all out of the situation we face now. And even if it is still good for you, how long do you really want to live in a country where you are rich, and everyone else is suffering – they call these types of places: “THIRD WORLD NATIONS”.
As real estate investors, our ability to get rich (or at least richer) is highly dependent upon OTHER PEOPLE who have GOOD JOBS and who choose to GET UP AT O’Dark Thirty EVERY MORNING to Go To THEIR JOBS to PAY OUR RENTS.
No Jobs = No Rents.
For those of us who want to make “Quick Cash” selling houses, we need buyers to buy houses…. and those buyers need loans. Not Sub-prime or “Alt-A”, but just good, reasonable loans. The kind you get when the mortgage market is functioning “normally”. The mortgage market has not functioned “normally” since just before August 10th of 2007. The $700 Billion EMERGENCY BAILOUT BILL was suppose to fix this. Would it have really worked – we’ll never know, because President “DOES NOT HAVE A CLUE” changed his mind, and did something else with the money.
or, so far is doing something else with the money.
This insanity has to end, and thank goodness it will, in about another 2-3 months.
But where we go from here for another 4, or 8 years is squarely in your hands, and contrary to what some folks say, “IT MATTERS.”
p/s – for Christmas, someone please send a copy of http://www.AfterTheMeltdown.com to 1600 Pennsylvania Ave, NW Washington, DC 20001 Att: “W” and maybe, just maybe he may leave office in January of 2009, with a clue.
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Tags: benanke, chairman cox, congress, doofus, fed chairman, george bush, hank paulson, meltdown, mortgage markets, mortgage money, mortgage rates, rapid rise, secretary of the treasury, sherman ragland, sub prime mortgages, W
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