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Less than a month ago George W. Bush, outlining his position against a government-sponsored bail out of the housing and mortgage markets, proclaimed “It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford.”  It was a strong stance that earned plaudits from those who chose not to gamble in the housing market, and economists who were concerned that government intervention would only prolong the well-detailed over-valuation of American real estate.  But was it a ruse?  It appears so.  For a bail out by any other name is surely still a bail out.  And what we have seen over the last 3 weeks since Mr. Bush’s aphorism against the greed and irresponsibility that fueled this speculative bubble can only be surmised as a bail out indeed.

There has been little fanfare, and zero talk of a “comprehensive package” which is often the hallmark of a government-scripted rescue; but Congress cannot be accused of being insouciant when it comes to housing, there in bits and pieces can a bail out scheme be seen forming, as clearly as a figure in an artfully-crafted mosaic.

A quick scan of the items that have arisen since Mr. Bush’s proclamation shows this unheralded patchwork assistance program being swiftly and quietly ushered in to law.

The launch of FHASecure - a program of seemingly little consequence that, even by the government’s estimates, may only help a quarter-million of those 14 some-odd million home owners who hold subprime adjustable rate mortgages.  FHASecure allows homeowners who have missed a mortgage payment (or many, many more) to refinance their home in to an FHA-insured home loan at a low, fixed rate with no teaser rates or complicated amortization and rate change features.

While 250,000 may benefit from this program, it is hamstrung by the fact that the largest contingent of homeowners staring down the barrel of foreclosure live in states, such as California, Nevada and Florida, where FHA loan limits (which are currently 80% of conforming loan limits - the maximum amount being $362,760) are unable to help a large percentage of those at risk.  With FHASecure in place the government has drastically loosened traditional FHA underwriting guidelines (guidelines which dodged the euphoric distortion of the last half-decade) for people who made poor financing decisions in recent years.

The increase of federal loan limits.  FHASecure is limited because loan sizes in high foreclosure states are many times the current allowable maximum loan size for FHA-insured loans.  Further, loans that can be bought by Fannie Mae and Freddie Mac (the government sponsored entities, GSEs) are also capped at $417,000 (for most states).  In a move that is clearly designed to help improve the effectiveness and reach of FHASecure (and yet to be announced related programs) politicians at every level are calling for loan limit increases.  No less than the “Terminator” himself sent an appeal to increase conforming loan limits to Congressional leaders articulating his views on the “irrelevance” of government loan limits to the California housing market.

The Govenator is not the only one pushing; Senator Schumer is not only pushing to allow Fannie and Freddie to buy more mortgages, but to also increase their loan limit caps (and FHA as well).  His legislation hit the floor a scant 11 days after President Bush’s missive.

The forgiveness of debt relief incurred in short sale home transactions.  Currently, homeowners who sell their homes at a loss that cannot be covered by cash out of their assets is covered by the lender in the process of a short sale.  This debt forgiveness is no favor from the lender however; as homeowners receive a 1099 reporting the forgiven amount lost in the short sale to report as income on their year-end taxes.  Talk about a double-whammy; not only do homeowners lose their house (if it was ever theirs to begin with via 100% interest only financing) but also are rewarded for trying to extract themselves from potential foreclosure with a nice, healthy hit to their yearly income.  This may be about to change as the House Ways and Means Committee just passed H.R. 3648 Mortgage Forgiveness Debt Relief Act of 2007 - unanimously.  This act keeps the debt forgiven for mortgage-related losses from appearing as income at tax time.  A welcome development for those people currently decorating their front yard with ‘For Sale’ signs in a desperate attempt to extricate themselves from a less-than-desirable situation.

More on the way.  We have legislation in the works to allow bankruptcy courts to rework mortgage debt for personal bankruptcy cases, $1 billion in subprime mortgage assistance pledged by presidential-hopeful Hillary Clinton, dollars allocated for debt and financing counseling, and many more polemical and effervescent ideas - some will surely stick and fall under the unspoken rubric of a federal bail out of home owners.

Mr. Bush, your posturing was a nice, if thinly veiled try.  It seems to be a running theme of this administration to use a strong aphorism to gloss over the actual facts of the matter.  Your strong words offered a glimmer of hope to the responsible and reasonable amongst you and your colleagues constituencies, but the actions of Congress clearly show that politicians are racing ahead to bail out homeowners and speculators alike.  The goal is clear: come to the aid of gamblers who left all their money on the come line and crapped out.

Whether you ever utter the words bail out or not, the government is in full rescue mode; under the sleepy watch of American press and the public eye.  When the new legislation is assembled piece by quiet piece, a large safety-net will have been crafted by.  Crafted in total disregard of the near 70% of voters who favor no subprime mortgage bail out, the government is piecing together another ill-begotten subsidy.

We should not be surprised though.  The American government has always come to the rescue of those who fall out of the market’s favor. Farmers of cotton receive subsidies north of 80% for each bale of cotton sold; no less than the automotive, savings & loan and airline industries have been completely bailed out in the last three decades; dictators and suppressors of freedom receive billions in US government hand outs to help further American interests.  If the proletarian homeowner can’t get in line for a hand out with those regulars, what good is their government to them?  The US government continues to play with state-sponsored socialism in situations where it benefits them the most; and this year its all about looking good for elections. Joe America is going to be looking at the world (and ballot) through the lens of the bay-window of their McMansion ; and whomever helped keep him there the longest is going to get his vote.  It’s time that we call a horse a horse; the government has stepped in and the dole-line is beginning to wind down the block.  Whether 70% disagree or not,
the gears of this bail out are grinding quickly and roughly.  A common theme in America gets a new-century refrain: those that gamble win. Why not take one more roll of the die when you’ve got the greatest enabler of all time in your back pocket - Uncle Sam?

What do you think?

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Filed under: Management, Competitive strategy, Mutual funds, Goldman Sachs Group (GS)

In this week’s Barron’s [a paid service], the main feature is on the “50 Best Hedge Funds.” Despite the turmoil over the past couple months — which even Goldman Sachs (NYSE: GS) has not been immune — there are some standout performers.

However, it’s not easy to get information on hedge funds, even though it represents nearly $1.7 trillion in assets worldwide. So, Barron’s wants to provide some much-needed transparency.

To weed things out, Barron’s has based its criteria on a three-year performance span, as well as a minimum of $250 million in assets.

The winner? It’s RAB Special Situations. In fact, it has posted a stunning 47.69% average annual return for the past three years.

Basically, the fund targets commodities, as well as deep value stock investing. What’s more, the fund has been willing to invest in privately-held operations, which can certainly generate huge returns if there is an IPO or acquisition.

Who said hedge funds are bad thing?

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: Products and services, Consumer experience, Apple Inc (AAPL), Wal-Mart (WMT), Amazon.com (AMZN), Best Buy (BBY), Media World

It seems that whenever you talk to someone about the music industry, the discussion eventually comes to the steep decline that has occurred in the past few years as the growth of digital downloads has affected the sales of CDs. Whenever I think about that decline, it’s hard to see it simply because I still purchase a large quantity of CDs and only a handful of downloads per month. Still though, when I do download an album it always (and I mean always) comes from Apple Inc.’s (NASDAQ: AAPL) iTunes Store, primarily because I own an iPod.

While that may sound like a complaint, it really isn’t because I have always found the iTunes Store very usable and the iPod very convenient, but the reality is that not everyone shares that opinion. For some users, the question of accessibility has become a major issue, and iTunes dominance in the market affects how accessible they view the market. This is not without warrant of course — no matter the success of Apple with the iPod and iTunes; it is still a dominating product in a shrinking field. This view does not even take in the account of CD users.

With the beta launch this week of Amazon.com’s (NASDAQ: AMZN) MP3 store, Apple finally has a competitor that will be able to challenge iTunes with sales and prices, not to mention that the DRM-free (Digital Rights Technology) downloads will be playable on the iPod, among other portable devices. Amazon’s DRM-free tracks are not limited to music from EMI Group PLC and numerous independent labels, either. Certainly both of these differences will aid the new Amazon “iTunes” store, but the very fact that it remains an online store adding an MP3 section means that it should fare well against a store dedicated strictly to media digital downloads.

Continue reading Accessibility in the music industry: Apple (AAPL) vs. Amazon (AMZN)

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Filed under: Consumer experience, Employees, Countrywide Financial (CFC)

If Countrywide Financial Corp. (NYSE: CFC) can’t borrow everything it needs to get back on its feet, perhaps people opening savings accounts at the mortgage bank will do the trick. According to The Wall Street Journal, Countrywide is pulling in deposits of $50 million a day. The paper writes the “company is counting on deposit growth to provide funding for its mortgage lending.”

Because of the success of getting deposits from individuals, Countrywide will increase the number of branches where people can open savings accounts.

There is no doubting the troubles that the company has been through. It is in the process of cutting 12,000 jobs.

And, that’s what does not make sense about the pace of new deposits. One would think that people would avoid putting money will a bank that has been in so much trouble and whose woes have been on the front page of every newspaper.

Either there is a sucker born every minute, or Countrywide is giving away very nice toasters for every new deposit.

Douglas A. McIntyre is a partner at 24/7 Wall St.

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Filed under: Options

Agrium (NYSE: AGU) volatility is flat as AGU at record high on strong fertilizer demand. AGU, an agricultural retailer and fertilizer producer, closed at $54.38. AGU over all option implied volatility of 39 is near its 26-week average of 38 according to Track Data, suggesting nondirectional risk.

Terra Industries (NYSE: TRA) volatility is flat; TRA is near record on demand for nitrogen. TRA, an international producer of nitrogen products for industry and agriculture, closed at $31.26. TRA is expected to report EPS on 10/25. TRA over all option implied volatility of 52 is near its 26-week average of 50 according to Track Data, suggesting nondirectional risk.

Option update provided by Stock Specialist Paul Foster of theflyonthewall.com.

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Filed under: International markets, Other issues, Competitive strategy

Alternative investment asset manager Fortress Investment Group’s (NYSE: FIG) decision to shutter its subprime mortgage division, Nationstar Mortgage, generated only a mild reaction from traders and analysts alike. Nationstar, a leading U.S. subprime lender, has sustained substantial losses due to rising defaults and foreclosures.

Nationstar said any approved mortgage applications in its pipeline would be honored. Nationstar will also continue to service the $10 billion in subprime loans in its portfolio.

Wall Street took Fortress’s subprime decision in stride: Wall Street appreciates all the candor and data it can get regarding the status of subprime loans and operations, and Fortress’s announcement will help analysts compose a more-complete report on Fortress, one reason the Street did not punish FIG’s shares this week. On Friday, FIG’s shares closed down 26 cents to $21.32.

Moreover, Wall Street’s clamor for “the more data, the better” regarding the subprime sector is not without justification. Late payments and defaults on subprime mortgages are already four times the historical U.S. average, and many analysts expect that percentage to rise in the quarters ahead: about $350 billion in subprime home loans will shift to higher interest rates, with initial rate increases boosting costs by 30% or more, according to research by Credit Suisse (NYSE: CS).

Nationstar, formerly Centex Home Equity, was bought in 2006 by Fortress, a manager of private-equity and hedge funds, for about $554 million. It had been owned by Dallas-based Centex (NYSE: CTX), the fourth-biggest U.S. homebuilder.

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Filed under: Competitive strategy, Getting started, Comfort Zone Investing

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he’ll offer advice to investors who are just getting started.

I recently had lunch with a very smart businessman. He was sharing some of his investing thoughts when he said, “I hate to pay taxes on capital gains. But I can’t tell you how many times I’ve waited for my stock to reach long term capital gains status, and before it does, it tanks and all my profits are gone.” I suggested he was letting the tail wag the dog.

Taxes are awful. They hurt every time you write the check. But they’re as much a part of investing as dividends or stock splits or losses. They’re a fact of life, you know, like death. There’s no way around them in the stock market as there is in the commercial real estate market where you can do a 1041 exchange and postpone taxes. When you sell a stock for a profit, you have to pay taxes on the gain. If you hold it less than a year, you’ll pay at your income tax rate. If you hold a stock longer than a year and have a gain, you’ll pay 24% on the gain. The only relief is if you have losses in other stocks you sell or have sold to deduct from those gains.

Continue reading Comfort Zone Investing: Capital gains are the dog, taxes are the tail

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Filed under: Major movement, China, NovaStar Financial (NFI), Housing

No one would be particularly surprised that Chinese stocks traded on U.S. exchanges did well in the third quarter. The Shanghai Composite has doubled so far this year, and many stocks like Baidu (NASDAQ: BIDU), the China search engine, have made stunning gains.

In the third quarter, China Eastern Airlines (NYSE: CEA) moved up 112%. China Finance Online (NASDAQ: JRJC) ran up 282%. It is hard to imagine that the Chinese market can keep up this momentum, but analysts say that every quarter.

No one would find it odd that home builders and mortgage lenders were among the big losers in the quarter. Beazer Homes (NYSE: BZH) fell 66% to $8.25. Fremont General (NYSE: FMT), which has a subprime lending operation, fell 63.4% to $3.90. Mortgage lender Novastar Financial (NYSE: NFI) was down 68% to $8.87.

As retail sales fell, specialty store operations took a pounding. Gottschalks (NYSE: GOT) fell 63.5% to $4.34. And, Sharper Image (NASDAQ: SHRP) dropped 63.7% to $4.13.

The toughest part of the quarter is the realization the retail, housing, and mortgage shares could actually go lower during the October to December period.

Douglas A. McIntyre is a partner at 24/7 Wall St.

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Filed under: Management, Newspapers

Michael C. Jensen, a business professor, consultant, and speaker, was one of the early advocates of the larger-than-life compensation packages that have now become the standard fare of boardrooms everywhere.

But now he’s revising his thinking in his upcoming book C.E.O Pay and What to Do About It. Now Jensen wants boards to be tougher in negotiating pay packages with executives. But according to The New York Times, not everyone is buying it:

“Imposing the constraints that Michael Jensen has in mind,” said Margaret Blair, a professor at Vanderbilt Law School and a specialist in corporate governance, “runs contrary to the culture that has emerged in boardrooms over the last 20 years. Mr. Jensen himself is partly responsible for that culture.”

Mr. Jensen complains that too many executives are being paid for breathing, rather than for performance. Furthermore even an incompetent and, in many cases, unethical executive can’t be fired without a big severance package.

His proposals make a lot of sense, even if they seem unlikely to ever take hold. I eagerly await his book, as I think bad corporate governance is one of the most serious threats to American business today.

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Filed under: Law, Internet, Scandals, Personal finance

Liz Pullman Weston writes that “Some of the credit card industry’s most egregious practices are finally getting the regulatory and congressional scrutiny they so richly deserve. Consumers this month have the opportunity to weigh in on Federal Reserve reforms and on legislation that could make credit cards a lot more fair.”

Everyone knows about the egregious practices Weston is referring to: universal default, “fixed” rates that are about as fixed as the levees were in New Orleans, and just generally insane terms that very few people can understand.

While there is debate about specific changes that should be made, there is one universal principle that should be applied to the financial services industry, and it’s the same principle that is used in the medical field: Informed consent. The financial services industry should adopt the following as its motto for disclosure — perhaps the Fed can give them a nudge:

All consumers should be given enough information to make a decision about whether a certain financial decision is right for them. This information should be presented in a way that is easy to understand, and no information that could influence the consumer’s decision should be withheld.

To me, that just about covers every single egregious practice in the banking/lending industry. If a person were told at the point of sale that that stick of a gum he is putting on his debit card could cost $15.69, not $.59, would he still buy it? Since most people wouldn’t, this information should be made available.

The financial services industry needs to be held accountable for its deceptive practices — and the payday lenders need to stop being used as scapegoats. They’re the least of our worries.

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