Bail out: Savior or Killer?

The Chinese have a proverb: “May you live in interesting times.” And we are living through interesting times indeed.

Whatever the political posturing regarding the current rescue plan, some believe a plan needs to be passed. We are told credit markets are frozen and banks are going to go bust every day. If this is happening it is not totally because of "toxic" mortgages. It has a lot to do with FASB 157, also known as "mark to market".

Each day lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.

Why is this so bad? Because as lenders mark down their assets, the amount that they have loaned previously becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue.

And a quick look at the holdings of these loans show that 95% are problem free. Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages are relatively safe. But this requires a bit of understanding. You see, when a pool of mortgage loans is put together, it isn't just A paper or B paper etc….it's everything. It’s got some A paper, B paper, C paper…and even what looks like toilet paper. An "A" investor buys the whole pool but because they are an "A" investor their safety is greater because they can avoid the first 20% (an example) of defaults. So they own the whole pool but are sheltered from the first batch of defaults, and for this they get the lowest rate of return. As you can figure from here the more risk investors want to take, the higher the return. So the investments are relatively safe, but the accounting rules currently place undue pressure on the banking institutions.

Now add to all this, the opportunistic “shorting” done on the financial stocks, much of it illegal because those shorts did not legitimately borrow shares (called naked shorting), and you exacerbate this whole problem. Thank goodness for the recent temporary ban on shorting in the financial sector. As for the plan, the government is the only one who can step in to do this. Is it the right thing to do only time will tell.

This is not easy to understand for the general public. In fact, most politicians don't get this either. That's why it is a difficult bill for them to vote on.

If this is done we are being told that it will take some time but the markets will stabilize. As for the real estate and mortgage industries, it will take a bit of time but we will make it through this. Rates will remain attractive and the influx of credit availability will help the housing market gradually improve.

Will this ultimately be the medicine needed to improve the situation overall or will it kill us? Only time will tell.

Bail Out, Rescue, or Screw the Tax Payer

The Politicians couldn’t sell us on the bail out.

The news media couldn’t sell us on the bail out.

Wall Street couldn’t sell us on the bail out.

So they changed the name and they think that will sell us on the bail out.

I have believed for most of my career that the words we use make a difference. But in the last six years I have changed my belief. I do not think a minor change in verbiage makes the sale. I hope we the people are not foolish enough to ok the bail out because the geniuses in Washington now call it a rescue.

In 1991 when I begin my new home sales career we called a home we built on speculation a spec home. One day a high priced sales consultant tells the owner of the company that ‘spec’ was a bad word. So we changed it to 'market home'. They thought by changing what we called the home we would be changing how a prospect felt about that home and that someone would buy it because we called it a market home and not a spec home. I am embarrassed to say that I believed this ridicules thought. Calling it a market home does not change the home, it does not change the home site, and it does not change the price. It does not change the salability of the home. It is folly.

That was the start of a major revolution in home building. You had to watch what you called everything. Is it a home or a house, a community or neighborhood, a lot or a yard, I no longer believe it matters?

It sounds good for a high priced sales trainer to come in and tell us that one of the problems we have is the words we use. It is easy to train on, it is easy to change, and it is completely ineffective.

What you need to do is sell. That right listen to the prospect, get to know them, get to understand them, and then you will help them make the best decision for them. And guess what you will sell a whole bunch of product in the process, you will make a bunch of friend, and they will refer you like crazy.

And don’t fall for our politicians changing what they call the bail out. Rescue may sound better but the results are the same. We the tax payers get screwed. If they wanted to be honest they would call it ‘screw the tax payer’!