Mortgage Meltdown: Getting out of the Mess


“Fund Frozen, Florida Towns Feel the Pinch”

That’s the title of an article in today’s NY Times, excerpted below. What everyone needs to realize is that early and reliable calculations of damage from the credit crisis caused by the mortgage meltdown are now over $45 trillion (yes with a “T”) just domestically in the United States. Each time people take another look they “adjust” the figure. 

First on everyone’s list is “Don’t cause a panic.” I’m all for not making the situation worse through panic. But those in charge of this information are missing the point: people need to know the real scope of this mess and American ingenuity must be restarted to work our way out of it. Otherwise it will just continue to spiral down and take everyone with it. It IS possible to stop the bleeding, to level off, and to recover. 

It will take a level of commitment from people who know how to make this work as well as public officials and voters and citizens of every class to join together and make it happen. In a divided, highly politicized country, I must concede the prospects are dim. 

As near as I can tell, there is no person, company, government, agency or charity whose life, investments, home value, neighborhood, city, county or state is not going to be negatively effected by this. 

You might be sitting on a home fully paid for. 

But home values in your neighborhood are going down and will continue down, 

houses will be rented to people you would rather not see there who don’t have a stake in the appearance or ambience of the neighborhood, 

crime will increase, and money for police and fire services will decrease

and you might be forced to move to safer ground only to discover that your equity is down so far that your options are limited and that you can’t afford to move to safer ground. 

City and state services will be decreased or eliminated. 

Homelessness, already on the rise from returning Iraq vets will increase substantially. You might wake up and find a family of five sleeping on your lawn with a canvas over their heads. 

That pension you are receiving or think you will receive may have been wiped out by an indiscreet manager’s reliance on the rating agencies that pegged an AAA rating on nearly worthless CDO securities. 

Your individual investments in municipal bonds might crash with defaults because tax revenues are suddenly declining without notice or planning by public officials. 

Those corporate bonds that carried good ratings might in part be derivative securities that are also backed by liabilities instead of assets. 

 Those money market funds are losing value every day even though it looks the same to you. In a year they might buy as little as half of what they would buy today.

Those corporate rising earnings statements might look good, justifying high P/E ratios, but the real income is overstated even in absolute dollars and the effect of a devaluing dollar is going to take the company south along with its stock. P/E ratios might also substantially decrease. If you look at the value of the dollar 8 years ago and the value of the dollar now, you can see that even the market indexes are already overstated by a factor of 2, and the real inflation has not even begun. 

The plain simple truth is that we must bail everyone out and the only way we can do that, because there literally is not enough money in the world to do it, is to stop the process of enforcement of the debts in the usual way, continue the flow of payments, albeit lower than expected, keep the homes occupied and cared for, and give a return to the holders of CDO’s even if it is lower than expected, and get the cooperation of the geniuses who created the mess — they are the only logical channel to make it right without trying to come up with trillions of dollars that we don’t have, can’t get, and where even the attempt would destroy the financial fabric of the US economy and the rest of the world that trades with dollars, with the US consumers and US producers. Yes, I would go to Goldman Sachs, who saw this coming, to Lehman which got stung but not quite so badly, to Bear Stearns, Merrill Lynch etc. Plan the work and then work the plan. Use the resources you have even if you hate the players. 

The Fed and the SEC needs to make it easier to create currency through banks, brokerage and government agencies acceptable in cities, states and regions as well as other countries that are based not on the U.S. dollar but on something that is more real to holders of currency. We might be able to convert those proprietary or local fiat currencies back to US dollars if we are successful. If we are not successful, a lot of people will be protected from the crash of the dollar. It is time we came up with this plan anyway inasmuch as we have completed ignored the need for access to temporary proprietary currency in disaster recovery situations. 

The list goes on and on. This is very serious and you need to take action, regardless of your situation. But there is something we can all do to save this situation, if we can put aside the massive fraud, lying and deception it took to make this happen. We can save the loans, save the CDO’s, and save the financial institutions from write-downs that undermine confidence in our financial system. We can make reasonable assumptions, spread the risk out amongst all the players so that no one class is taking the full brunt, nor does any one class get away scott free. Come on, folks, let’s do something!

From NY Times, 01/01/08: By KIRK SEMPLE and MARY WILLIAMS WALSH

PORT ST. LUCIE, Fla. — On Nov. 28, Marcia L. Dedert, finance director of this rapidly growing city, called the administrators of Florida’s state-run investment pool to ask whether it was still safe to park her city’s money there. She was hearing talk of urgent withdrawals by others worried about the pool’s investments in debt related to subprime mortgages.

After the pool’s manager told her the money would be all right, Ms. Dedert recalled, she deposited $135 million in bond proceeds. But less than 24 hours later, the administrators froze the pool and blocked withdrawals to halt a full-blown run.

Now the city cannot touch the money. And rest of the $371 million it has in the pool is also off-limits unless the city pays a 2 percent penalty.

Port St. Lucie is among hundreds of local governments in Florida that were drawn to the pool by its air of reliability and the promise of higher returns than banks offered. They now find themselves grappling with the consequences of having their money frozen.

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2 Responses

  1. [...] it’s easy to forget with all of the recent bad news. Looking at Citibank and Merrill Lynch (among others) many people have shaken their heads and asked “Why were they so risky? Didn’t they [...]

  2. [...] it’s easy to forget with all of the recent bad news. Looking at Citibank and Merrill Lynch (among others) many people have shaken their heads and asked “Why were they so risky? Didn’t they [...]

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