Some of the mortgage loan modification “fix” programs are pretty crappy, trying to turn underwater homeowners into indentured slaves:

Home owners! Accepting this ’solution’ means you:

• acknowledge the full debt regardless of the value of the home;
• waive all rights to fraudulent or predatory lending claims in the future;
• turn your loan into a full recourse loan that could follow you for life even if you choose foreclosure down the road;
• remain underwater, full-leveraged, renter for the rest of your life (in most cases);
• will save no money at 38% housing debt-to-income ratio plus all other debts;
• may not discharge any of this mortgage debt through any bankruptcy even after foreclosure;

If widely accepted by home owners, this will ruin the American consumer and make housing a dead asset class for decades. If you are in a serious negative equity position when signing these forms, as most are, remember that you will:

• never be able to sell your home
• never be able to buy a new home
• never be able to rent your home due to owner occupant provisions
• be responsible for the full loan amount even if the value of your home keeps dropping for the next 10-years.

The 38% debt-to-income ratio on top of all of your other debt means you will save no money and live hand to mouth to keep this underwater roof over your head.

The alternative to the never-ending mortgage loan would be to cram down the mortgage principals to an amount that could actually be paid back. The blog post linked to had a couple great comments about why cram downs would be just in this case. Not only were many home buyers duped into these loans by criminals, but cram downs exist on virtually every type of loan except for primary residence loans:

Currently, in bankruptcy, every other type of property which is used as collateral for a loan, other than a primary residence, was subject to a “cram- down.” The only reason I can figure that primary residences were recently excluded from cram-down was so that average Americans could be taken advantage of by creditors. (This proves once again that our Congress is owned by the finance industry.)

If you don’t like cram-downs for primary residences because contracts are sacred, then why are cram-downs allowed for every other type of property. You name it, private jets, vacation homes, luxury yachts, machine tools, ect. are all CURRENTLY subject to the cram-down. Its absurd that only home mortgage contracts are sacred. Simply put, screwing the little guy is what the cram-down exception on primary residences is all about. There is simply no reason to allow primary residences to be treated differently than every other type of property.

and

Well, a contract is as good as your legal team. Chapter 11 is pretty cool with contracts: Shred it. Thought you had a deal, a labor agreement, a pension — well you did. Management gets a bonus as they enter the market again, cleansed of all their sins. The government encouraged commercial banks to hold preferred in F and F, and what happens?

And as far as “mark of a free society”, maybe you’ll be able to appreciate your situation . I’m one of those conservatives that figures all societies are feudal — despite disguises. Notice the King has opened the grain stores for the chosen.

Your pension can suffer from cram down, and nearly every type of asset qualifies for them - except primary residence. The bankers can get a multi-trillion dollar bailout for engaging in massive fraud, but you are a pile of crap if you don’t pay all your debts. At least your tax dollars are hard at work, working against you to prop up our Ponzi scheme banking system. Further proof that the American dream of owning your own home is one with a high price tag attached.

The leveraged trades against the S&P 500 represent a small amount of volume compared to the EFT volume short financials or real estate (like SRS)..thus the trades against more liquid indexes do a better job of tracking their goal (of providing a leveraged mirror of what happened in the marketplace). In the smaller markets the derivative leveraged trades create a lot of marketplace volume that can overshadow the market and dislocate capital.

If someone buys that short-sided ETF from a market maker, the market maker does not really have “the other side” to mitigate his risk, thus he either waits for someone to unwind a pre-existing position or he goes out and shorts the underlier. This puts pressure on the underlier, which creates more interest in being short. This, magnified by the leverage, magnifies the volatility, which magnifies the negative convexity, which eats into returns. Thus the “savvy trader” who thinks he or she is doing a “smart trade” is contributing to his or her own underperformance while still having the right idea — the wrong execution of the right concept.

Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be. And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.

…

There’s a side current here which is rarely looked at but which is also quite fascinating. That’s the working class literature of the nineteenth century. They didn’t read Adam Smith and Wilhelm von Humboldt, but they’re saying the same things. Read journals put out by the people called the “factory girls of Lowell,” young women in the factories, mechanics, and other working people who were running their own newspapers. It’s the same kind of critique. There was a real battle fought by working people in England and the U.S. to defend themselves against what they called the degradation and oppression and violence of the industrial capitalist system, which was not only dehumanizing them but was even radically reducing their intellectual level. So, you go back to the mid-nineteenth century and these so-called “factory girls,” young girls working in the Lowell [Massachusetts] mills, were reading serious contemporary literature. They recognized that the point of the system was to turn them into tools who would be manipulated, degraded, kicked around, and so on. And they fought against it bitterly for a long period. That’s the history of the rise of capitalism.

Comment on the $3.3 billion in TARP money given to Amex

Another theory not heavily subscibed to (but growing now that it is more obvious) is that large corporations are actually Antimarket, meaning they don’t fit the idealized free market that is stated as the moral driver of our economy….they actually are in the business of restricting competition and teaming with governent to command the economy at the expense of the consumer. Autos, Big Pharma, the Weapons industry…

A Highly Evolved Propensity for Deceit

Deceitful behavior has a long and storied history in the evolution of social life, and the more sophisticated the animal, it seems, the more commonplace the con games, the more cunning their contours.

Don’t Regulate the Free Markets!

Here’s one of the simple truisms that gets lost in the political (i.e., bumper sticker) discussions.

Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives!

What bullshit.

One of the best ways to win a debate is to control the language used. This was one of the elements George Orwell was discussing in 1984, and why the language in the novel was degraded to phrases like “double plus good.” All nuance was dismissed. He who controls the language controls the political economy is what Orwell was saying. In modern times, its done not with boot-jacks and guns, but with catchphrases and clever marketing. Its not as heavy handed, its just more insidious.

We are already bailing out mortgage (Fannie Mae & Freddie Mac), insurance (AIG), the banks, autos, and now the cancer is spreading…where government funds are being asked for by hedge funds and commercial real estate developers.

From the Financial Times:

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

From the WSJ

With a record amount of commercial real-estate debt coming due, some of the country’s biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

Look for more violent swings in SRS. I wonder how far along talks are, and how this news will influence the market.

Nassim Taleb, author of The Black Swan, remains uncertain and hopes the situation is not getting worse:

But the extent of the bailout requests is absurd. Even the catfish industry is asking for $50 million, as reported by the (now bankrupt) LA Times:

“The catfish industry is on the verge of collapse,” said Marty Fuller of the Catfish Farmers of America, citing high feed prices and an increase of imports. About 6,000 jobs are at stake, mostly in economically depressed areas in states such as Arkansas, Mississippi, Alabama and Louisiana. Officials are talking about seeking $50 million in aid as a stimulus.

As Barry Ritholtz said, “Capitalism without failure is like religion without sin.” How many industries can the US government bailout before the dollar collapses? Looking at all the bailouts makes me want to go on vacation, rather than earning a lot of money so it can be confiscated by taxes and handed to crooks.

I can’t wait to read Bailout Nation! Great timing on the book, though I imagine there will be a need for an update in another year or two.

I am new to investing (outside of investing in websites we own and operate) but some stuff that happens in the market simply does not make much sense to me. We have deflation rates that have not yet been seen since the Great Depression.

via the NYT

Real Estate Deflation

While the real estate market is already down about 25% from its peak, experts like Robert Shiller believe it still has a ways to go.

• On a historical basis, US residential real estate prices are still way above normal averages (if you compare rent price to sale price or sales price to median home income - lots of research in this PDF)
• the future of commercial real estate is looking grim, with consumers cutting back on spending
• and there is going to be a ton of Alt A and ARM mortgages resetting in the next couple years

Shouldn’t Real Estate Deflate?

So if we are seeing rising unemployment, a contraction of credit, and are in for massive deflation, then an asset class that is still well above its historical prices (like residential and commercial real estate) should be easy to trade against, but for some reason (maybe the US government backstopping incompetent companies - and fears of more of the same?) that trade has been a failure in the current market. ProShares UltraShort Real Estate (SRS) is a leveraged fund that “seeks daily investment results that correspond to twice the inverse daily performance of the Dow Jones U.S. Real Estate Index,” but it reached fresh 52 week lows only 2 days ago, traded up yesterday, and then gave back most of those gains today.

There can be a small decay rate associated with such leveraged funds that can cause them to lose out on some growth, but it should not be so much that real estate backed assets are seemingly increasing in value.

Commercial real estate firm Simon Property Group (SPG) has a price to earnings ratio over 30 (50% higher than Google’s!!!) while ShopperTrak reports foot traffic in malls is down 17.9% year on year.

Refinancing Rising, but Few New Home Purchases

People have not been buying many new homes, but mortgage refinance is up sharply on lower interest rates.

How Much Inflation Can the Fed Create Before US Bond Yields Rise?

Longterm treasury bond yields are exceptionally low, killing trades against it - like TBT. The US Dollar has been sliding hard against the Euro recently, and the is planning on using inflation to help stimulate the economy. How far can they push this string?

Chicken or the Egg?

With the US recycling money (and attempting to inflate the crap out of it) to prop up an overpriced asset and stimulate the economy, either real estate or treasuries will eventually get killed…though I am not smart enough to know which bubble has further downside in the short run, and was recently on the wrong side of a trade/bet against the fed.

Are those trade so obvious that there is no opportunity left? How long can the market deny fundamentals? How steep is the market decline when it does happen?

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

So the lenders offer you a credit line that gives you a false sense of security, and pull the rug out from underneath you when you need to rely on that offer. Then they don’t even let you know until you have reached your new lower limit or a month has passed.

Pricing risk behaviorally further increases the risks to the poorest of the poor. Lets say a person gets laid off or has a bad earning month and shop at Aldi (a discount grocery store). Based on risk assessments associated with shopping habits, acting responsible and living more frugally may increase the chances of a consumer getting their credit line pulled and going bankrupt.

Snce the consumer bankruptcy law was rewritten by MBNA in 2005, consumers can’t get bailed out the way the bankers just did. If the consumer dies then so does the economy. But nobody cares about the consumer, and the consumers won’t realize it until they are a day late and a dollar short.

The Wall Street Journal reports that the taxpayer funded corporate candy banking bailout is getting requests from all corners of the markets, with handout requests coming from insurance agencies, car manufacturers, and other industries:

The U.S. Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government’s $700 billion program has become a potential piggybank for a range of troubled industries. The availability of government cash is drawing requests from all corners, with insurance firms, auto makers, state governments and transit agencies lobbying for a piece of Treasury’s pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large.

Barry Ritholtz once said that “Capitalism without failure is like religion without sin.” And even before this government handout is done the toxic effects are already kicking in, with investors worrying that banks that did not get a handout are set up to fail:

The Treasury Department has decided to let banks individually announce that the government will invest in each firm, scrapping an earlier plan to release the names of multiple banks receiving federal money all at once. The decision came after concerns that banks left off any group list would appear too weak for government assistance, spooking investors and depositors and potentially making troubled banks’ situations more dire.

With enough handouts appearance becomes reality. Spread that across dozens of industries and people will make a lot of false assumptions, killing many good businesses in favor of larger and sloppier competitors.

He also mentions that the biggest thing that needs changed is an internal problem rather than an external one, which is good news, as it is much easier to change how we act than force change onto others…though how could you win wide coverage in this country by preaching the virtues of thrift and moderation?

“About 15 percent of U.S. households have negative equity. Who supplied the leverage into the system? It’s called the Federal Reserve Board,” Faber said.

“If I’m the drug dealer I’m not responsible that everybody takes drugs, but I facilitate it, especially if I give it out free of charge, I can enlarge the market share, and that’s what the Fed has done.”

President Bush went on national TV to try to sway the population that the proposed Wall Street bailout is a good plan, but is it? Chris Martenson describes it as act of financial terrorism, and The Greatest Looting Operation in History.

The bailout proposal, as originally presented (on Sat. 9/20/08), was shocking.

First, there was the sneaky language that the $700 billion figure was the most that could be spent at any one time, meaning that there was no limit on the spending at all. Second, the right of review by any court of law or other administrative body was to be stripped away, a distinctly unconstitutional and anti-American provision if ever there was one. Third, the Treasury Secretary was to be embodied with complete unitary power in selecting who was to be empowered with an open-ended taxpayer checkbook.

No review, no limits, no questions.

Marc Faber, expecting more shadiness from the US government, predicted that if this emergency measure/theft did not work well enough that…

“The next emergency measure will be that Americans are not allowed to buy foreign currency and transfer money overseas, and the next measure will be not permitting Americans to buy gold and so on and so forth…. It creates even more uncertainty in the market place when you continually change the rules,” Faber said.

It wouldn’t be the first time United States citizens had their gold confiscated. In 1933 Franklin D. Roosevelt issued executive order 6102, requiring all US citizens to hand all gold coins, gold bullion, and gold certificates over to the Federal Reserve. Shortly after confiscating all gold the price of gold from the treasury was raised from $20.67 to $35 an ounce, devaluing the US dollar by 41%.