What does getting punched at the gym, being forced to modify a large number of loans, and screwing over the American people have in common?  It is all just another day at a comfortable and secure mahogany desk job for Wall Street and our politicians. While a large number of Americans fret over a full blown […]
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■The Moulin Rouge Housing Bubble: 3 Fascinating Stories. Who Moved my Compensation Package? Free Spouse and Granite Countertop with Home Purchase. You Mean You Still Had Those Horrible Loans?
■Housing Bailout Bill Failure: Examining the Boondoggle Legislation and Populist Uprising against Wall Street. 5 Reason the Bill failed and 5 Easy to Implement Solutions that can be Used Today.
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■Washington Mutual Failure and Collapse: WaMu Largest Savings and Loan Failure in U.S. History. The Rise and Fall of Washington Mutual.

What does getting punched at the gym, being forced to modify a large number of loans, and screwing over the American people have in common?  It is all just another day at a comfortable and secure mahogany desk job for Wall Street and our politicians.

While a large number of Americans fret over a full blown economic collapse, the crony capitalist are doing everything to maintain their stranglehold on the casino which is otherwise known as the global financial system.  This weekend a survey by the Wall Street Journal found that 6 out of 10 Americans felt another Depression was possible.  That is a Depression with a capital “D”, not recession as in the mythical Great Depression which apparently most of Wall Street has forgotten since they fail to examine any historical context.

Some try to argue that there is little in common with our current system as the circumstances that plagued the 1930s.  Actually there are many things in common:

(1)  The Florida Real Estate Boom and Bust during the 1920s captivated a large part of the country.

(2)  The roaring 20s saw a decade of decadence and keeping up with the Joneses.  Think of all the people driving around in leased luxury foreign cars and taking second mortgages out to upgrade the kitchen with the latest granite countertop.

(3)  A laissez faire free market President in Calvin Coolidge who pretty much allowed the stock market to do anything with little oversight during the 1920s.

(4)  A Wall Street who gambled on risky investments and leveraged the world to make a quick profit.  Margin accounts then.  Credit Default Swaps and Mortgage Backed Securities today.

(5)  Too much debt.  Mortgages and foreclosures where a big issue back then as well.  In 1933 the Home Owners’ Loan Corporation (HOLC) was created to give folks longer term mortgages to keep them in their homes.  The program helped about a million people and put them in longer (20 to 25 years) fully amortized loans and the program was essentially spent out by 1935.  When the program ended in 1951, 18 full years later it had turned a slight profit.

(6)  An election driven by an unpopular President in Hoover presiding over an economic collapse ushering a massive uprising against the current administration.  The economy was the number one issue as well in 1932.

Aside from these comparisons, you should take the time to read some of the Great Depression articles I have put together, usually from people in their own words of how things played out during that time.  You’ll be surprised how similar things are because human nature with greed rarely changes.  We can talk about moneychangers in Rome to Wall Street today, the core modus operandi rarely changes.

Before I move on to the 3 fascinating stories, let us look at a chart comparing a 7 year window during the peak in September of 1929 through September of 1936 and overlay our current peak reached in October of 2007.  First, the important thing to note about this chart is that they are both on a 7 year scale but the percent change will not be reflected exactly on this graph, only the market patterns and timeframe:

 *Click to enlarge

There is an eerie similarity here.  The “Great Crash” of 1929 started when the peak was reached in September of 1929.  If we are to look at the DOW one year later in September of 1930 we would see the following:

September 1929 - September 1930:            -36% decline

October 2007 - October 2008:                      -31% decline

This is absolutely crucial in understanding the velocity of the current decline.  First, housing is actually declining faster than it did during the Great Depression.  Stocks are only trailing slightly as you can see from the chart above.  In addition, you need to remember that with the removal of A.I.G. recently from the DOW and the addition of Kraft Foods, the DOW isn’t really reflecting the overall pain.  Since the DOW is composed of 30 selected companies, this one move does skew the data.  The DOW also includes companies such as Bank of America, JP Morgan Chase, Home Depot, and General Motors who all have been hit hard during the current economic collapse.  The S & P 500 which may be a better indicator of the health of the market is actually down even more from the peak reached last year.  The S & P 500 is currently down 35%.

When we examined the $810 billion bailout bill that was recently passed, all the bill does is create a dumping zone for toxic mortgages with little effort given to shoring up the fundamentals of the economy which at the nucleus is the middle class and sustainable employment.  If you feel left out in the cold it is because the mainstream media, current politicians, and Wall Street care little about you.

With that said, let us move on to 3 stories that may be getting lost in all this market craziness.

Story #1 - Lehman CEO Richard Fuld Golden Parachute Includes a Punch

As the former Lehman CEO Richard Fuld was testifying to Congress on Monday, CNBC reported that Richard was punched in the face during a workout at the Lehman Brothers gym.  The reason for the Ultimate Fighting Championship like move was the firm’s bankruptcy.  From the reports being issued we get the following:

“From two very senior sources - one incredibly senior source - that he went to the gym after … Lehman was announced as going under. He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched this, I’d have done the same too.”

Even though Congress may be waxing and waning poetically without doing a damn thing, some other folks have other ideas of what would constitute a matter of “equity” in these cases.  I find it fascinating that when a desperate and poor person robs a bank and gets away with say $50,000 [if that much if the dye doesn’t explode and ruin the money] they have the book thrown at them.  Here, we have people stealing much more than that amount and costing the jobs of thousands of people and leaving many others in financial ruin, yet their punishment is simply a public verbal spanking.  Is that really justice?  I now keep hearing people [mostly those who have much to gain from bailouts and covering their tracks] that we shouldn’t be pointing fingers.  Of course we should!  Let us go back to the bank robber again.  Does the bank robber have the ability to say:

Bank robber:  “Hey there officer!  Sorry about robbing this bank.  I just lost my job and got pretty desperate.  If it wasn’t for my job loss, I wouldn’t have done this.”
Police officer:  “Put your hands behind your back before I zap you.”

Bank robber:  “Hey buddy.  This is not a time to point fingers.  Let us sit back and examine the overall picture.  We should blame my company for driving me to do this.  It is their fault.  What you say we have a drink and chat about this?”

Police officer:  [handcuffs on] “Get in the car and you have the right to remain silent…”

I am fascinated by history since it can serve as a guide for a better tomorrow.  From 1900 to 1920, I remember an author saying, there was very little crime on Wall Street since everything was practically legal.  Without any laws or regulations what they did was completely fair game.  And who made these laws?  Their corporate lawyers or what we now call lobbyist.  He who writes the laws makes the rules.  Given that logic, the $810 billion bailout bill has Wall Street written all over it.

Story #2 - BofA Faces the Ghost of Countrywide Past

When it was announced last year that Bank of America was going to get involved with Countrywide Financial, the uber toxic mortgage sausage maker I think most people really were wondering if it was worth putting the BofA brand on the line for this move.  Something had to give.  The initial bet was the market would recover and the bottom wasn’t too far away.  When all was said in done, BofA would be the largest mortgage player in the market.  Well as it turns out, things are much worse than once expected as Murphy’s Law would have it.

First in after hours, Bank of America announced a third quarter earnings result of $1.18 billion.  This is horrific given the company has assets of $1.7 trillion.  What compounded the problem even further is a settlement that would require Bank of America to modify many of the toxic trash Countrywide was peddling for years.  Those $500 billion in Pay Option ARMs and other NINJA loans that were the bread and butter of the California market are some of the loans in question.  Recent estimates put the cost being at $8.6 billion for the multiple state loan modification program.

Now think about this for one second.  Your company just made $1.18 billion in the third quarter, an annualized rate of $4.72 billion and you have a settlement with an estimated price tag of $8.6 billion.  You essentially have mortgaged two years of earnings for the horrid decision of buying Countrywide Financial!  Not a good move and the market is giving Bank of America a high five for this move:

So the market has wiped out about 50% of the market cap of Bank of America in one year.  So over $120 billion has evaporated into thin air and of course, bad moves have a lot to do with it.

Story #3 - Got Equity?  Lobbyist Saw AIG and want Nothing of it

Okay, for this next story I’m going to have to ask you to put on your white collar crime thinking cap on.  I think the problem with most Americans is that you do not have the greed gene that many Wall Street folks have.  In fact, many have bought into the concept that if you work hard and do the right thing, you most likely will have a middle class life.  In a nutshell, isn’t that the American Dream?  If you work hard and live prudently you can rest assured that you will have a fighting chance at some stability in your life.  This current irresponsible corrupt bank robbery [yes, pointing fingers] is putting that dream on the line.  This is a battle to keep what is left of the dream from being annihilated altogether.  The public had it right:

(a)  The public had it right that the $810 billion bailout was nothing more than a Wall Street bailout.  The purpose was to stop the bleeding.  Well guess what?  The bill had a shelf life of 2 freaking hours before the market went lower on Friday.  On Monday, we had an 800 point intraday loss, the biggest ever before the market ended down “only” by 360+ points.

(b)  The public is also perceiving that we are near a depression.  6 out of 10 feel this.  Of course the pundits won’t admit this but refer to item (a) above and look at the market action to see how accurate they are.  Amazingly, it would seem that the majority of Americans are diametrically opposed to what Wall Street, politicians, and the mainstream media are pushing.

So with that said, why didn’t we actually make a bailout plan were we took major equity stakes in many of these firms similar to AIG?  First we have a bunch of hardcore trickle down no tax politicians that still somehow believe we are living in a free market.  They are nothing more than crony capitalist that love social welfare checks so long as they are sent to a Lehman Brothers mailbox or other toxic firm.  Lobbyist saw what happened with AIG and wanted nothing from it.  Why?  The government is now involved and any upside [if there is any] will be shared with the public.  Remember, you need to think like a greedy criminal here, why would you want to share any of these profits even though you are asking for a fat handout from taxpayers?  You don’t.  Hence the bill has a tiny drop of this and a whole lot of free exchanges for toxic mortgages with little oversight.

The lobbyist write these bills.  Therefore it isn’t a “crime” since our representatives choose to consciously not define what is occurring as a crime.  If we redefined bank robbery as “stealing from a bank only with a gun” you would have many trying to rob a bank with a knife.  Bottom-line it is still a robbery.  So these lobbyist in cahoots with politicians have drafted a bill that has legalized corporate high level bank robbery.  Who is really running this country?

Today we also get the announcement that the Fed is going to purchase commercial paper to ease the credit crunch.  What isn’t the Fed doing?  Everything being done is to help fellow cronies.  In fact, at this point why not do a work creating initiative like in green energy?  I was watching a talking head last night with some tool bag politician that was totally behind the $810 billion bailout but when someone mentioned the government creating jobs he stated, “no way!  No taxes and keep the government out.”  I nearly fell over laughing.  This guy had some serious cognitive dissonance.  It is like the extremely religious person having to reconcile his hidden habit of [gambling, drugs, sex, etc] from his public persona.  Basically what we are witnessing is a massive amount of people who simply do not live congruent lives.  Sort of like spending more than you make.  Having a Lexus when you can only afford a used Civic.  Everyone wants the finest Rhone wine but probably needs to chill with a Bud Light.  I’m sure many of you saw Jim Cramer yesterday telling people to take a good portion of their money out of the stock market:

*Click to Watch Clip:  Today Show:  October 6, 2008

What was he singing in March of this year?

*Click to Watch Excellent Call:  March 11, 2008

Or let us see his 10 predictions for 2008 from his article in the New Yorker from December of 2007:

1.  Prediction:  Goldman Sachs to finish year at $300 a share.  Reality:  Currently trading at $115.  STRIKE ONE

2.  Prediction:  $125 barrel oil and $5 a gallon gas.    Reality:  $90 a barrel and nowhere near $5 a gallon.  STRIKE TWO

3.  Prediction:  Fed helping Citi directly.  Reality:  Citi is down 45% since that prediction was made.  FOUL BALL

4.  Prediction:  “Throw in Verizon’s growing cell-phone business and growth accelerates dramatically, making VZ the best-performing stock in the Dow Jones averages.”  Reality:  Verizon is now down 32% since the year started. In addition, Comcast who he states will hit a low is actually only down 3% for the year. FOUL BALL

5.  Prediction:  Cerebrus bailout.  Fails bid on Chrysler.  Reality:  Cerebrus still kicking and in fact, still looking to buy Chrysler.  BALL

6.  Prediction:  Google to become in top 3 U.S. market cap companies.  Reality:  Google currently has the 26^th biggest market cap at $110 billion.  STRIKE THREE!  YOUR OUT

7.  Prediction:  “European companies, eyeing the weak dollar, snap up New York real estate, and offer to buy Merrill Lynch and JPMorgan. John Thain and Jamie Dimon, the companies’ respective CEOs, agree to the bids.”  Reality:  Decoupling delusion here!  Europe having their own serious problems.  Merrill goes to BofA and JPMorgan isn’t selling to anyone…yet.  STRIKE ONE

8.  Prediction:  Apple goes to $300.  Reality:  Apple currently selling at $92.  STRIKE TWO

9.  Prediction:  New York Times drops to $10 before being helped out pushing stock back to $20.  Reality:  New York Times at $12 and not sold.  SINGLE

10.  Prediction:  “An Army of the Foreclosed marches on the White House, then launches a siege at the Federal Reserve, before camping out in front of the Washington Monument. The army demands relief from eviction. Bernanke, recognizing that he did nothing to regulate the mortgage mess in 2006 and then did not cut rates fast enough in ‘07, resigns. The siege ends, the new guy slashes rates, and the market takes off.”  Reality:  Bwahahaha!  Bernanke is still there doing random pointless initiatives to help his cronies while a large portion of the population is fixated on irrelevant events.  Rates are still at record lows and in fact, the Fed and the U.S. Treasury have gone beyond these limited items and the market is clearly not taking off.  STRIKE THREE AGAIN!

Cognitive dissonance?  Oh yes indeed.  If this guy is a “financial guru” I must be Nostradamus.

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Economic Punch Drunk Love: 3 Fascinating Financial Stories Captivating the Market: CEO Being Punched, Bank of America Past Comes Back, and the Politics of the Bailout Plan.

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Related Posts:
■Real Homes of Genius: Ed McMahon Decides to Lower Price on Beverly Hills Home by $1,900,000 This Week.
■The Moulin Rouge Housing Bubble: 3 Fascinating Stories. Who Moved my Compensation Package? Free Spouse and Granite Countertop with Home Purchase. You Mean You Still Had Those Horrible Loans?
■Housing Bailout Bill Failure: Examining the Boondoggle Legislation and Populist Uprising against Wall Street. 5 Reason the Bill failed and 5 Easy to Implement Solutions that can be Used Today.
■Dear America, If This Bailout Fails, you will Fail. 2008 Financial Fear Mongering Tour.
■Washington Mutual Failure and Collapse: WaMu Largest Savings and Loan Failure in U.S. History. The Rise and Fall of Washington Mutual.

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Filed under: Newsletters, Stocks to Buy

This post is part of a series in which TheStockAdvisors.com asked financial experts to name their top stock pick if McCain or if Obama wins the election.

“If Barack Obama wins the presidency, one under-the-radar play would be embryonic stem cell research; Geron (NASDAQ: GERN) is the current leader in embryonic stem cell research among publicly traded companies,” explains trading and investing expert Bill Martin in his BullMarket.com.

“Embryonic stem cell research in the U.S. is not restricted in any way, as is often popularly believed in this hotly contested debate. The real issue at hand is federal funding, and whether federal taxpayer dollars should be used to help fund the research.

“Currently, federal funding is only available to firms that won’t create embryos for use in scientific research or clone them for any reason, and that are working with stem cell lines derived from embryos destroyed before August 9th, 2001.

“In addition, the stem cell lines must have been obtained from ‘left over’ embryos created solely for in-vitro fertilization purposes from consenting donors without any financial incentive.

“According to a September 2003 NIH report, the only publicly traded company of the more than a dozen institutions listed with stem cell lines that qualified for federal funding was Geron, which has been a pioneer in the field since 1999.

“Embryonic stem cell research is among three areas of concentration for the biotech firm, and it has a large number of related stem cell patents. Some of its major areas of focus include spinal cord injuries, heart disease, and diabetes.

“If Obama takes office, there is a pretty good chance that he and the Democrat controlled Congress will offer government funding for embryonic stem cell research. If this happens, expect Geron to head higher.”

Steven Halpern’s TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation’s leading financial newsletter advisors.

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Watch this powerful video on “trash outs” the job of cleaning out foreclosed properties for re-sale. It’s a the sad reality of what’s going on on the ground.

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I chuckled when I saw this. Jack Daniels ad prominently featured on the day the DOW dropped 800 points and fell below 10,000 for the first time in 4 years. (Click the image for the full size.)

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Filed under: After the bell, Ford Motor (F), Market matters, Bank of America (BAC), Morgan Stanley (MS), Financial Crisis

This market just won’t quit and we even went through yesterday’s lows on the DJIA to levels not seen since 2003. The world has determined that all of the efforts by the federal government aren’t going to stop the bleeding enough or in time. The coordinated moves from the G8 nations aren’t happening fast enough. This is called bear market selling. Cheap stocks get cheaper. Fundamentals don’t matter. Technicals don’t matter. Bernanke saying rates will be cut didn’t matter. Sorry if it sounds depressing, but that is the climate.

Below are today’s unofficial closing bell levels:
DJIA 9,450.29 (-505.21; -5.07%)
NASDAQ 1,754.88 (-108.08; -5.80%)
S&P500 996.39 (-60.50; -5.72%)
10YR T-Note 3.506% (+0.08%)
52-Week Lows

Bank of America (NYSE: BAC) was down as it had trouble selling its $10 billion stock offering and as talk of counterparty demands over its Merrill Lynch ties have increased. Shares were down 23% at $24.77 in the final minutes before the close.

Morgan Stanley (NYSE: MS) was the subject of rumors again today with today’s rumors being that the Mitsubishi UFJ investment was not going to close. Both sides did refute this, but the damage was done. Shares were down 23% at $18.00 in the final minutes before the close.

Ford Motor Co. (NYSE: F) saw a massive hit on ongoing share sales and on fears that it cannot borrow for short-term operations. Shares were down 19% at $2.98 in the final minutes before the close.

Advanced Micro Devices (NYSE: AMD) was one of the few real winners today after it announced it was selling its fab-operations to Abu Dhabi in an effort to streamline operations and cut costs. Shares were up almost 11% at $4.68 in the final trading minutes.

First Solar Inc. (NASDAQ: FSLR) is a reminder of how dangerous some high-flyers can be. It was downgraded by Goldman Sachs from “Buy” to “Sell” over lower average selling prices and over fears of a supply glut. Shares were down over 19% at $128.28 in the minutes before the close.

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Filed under: Marketing and advertising, Best Buy (BBY)

Best Buy, Inc. (NYSE: BBY) is ditching the warehouse-blue store format that it’s grown famous for. Well, not really — but in some newer stores in Denver, that cheery blue is being supplemented by earth tones and skylights as the largest consumer electronics chain in the U.S. sets its sights on the female demographic. That’s right — the anti-gadget crowd who rolls both eyes when guys start salivating over that 50-inch flat screen television.

Women do have a huge (indirect) impact on consumer electronics sales, although the merchandising most retailers push definitely fits the male buying persona. So, instead of the gray, techie feel where those large flat-panel displays generally reside, Best Buy will be placing some (if not all) of those televisions into staged rooms that look like a set from a typical home. What a better way to visualize that new purchase than by seeing how it looks in the real world, right? Ever sold a home and staged it to sell? Same thing.

Best Buy even asked 40 local female customers to work with its employees to help them form ideas. In other words, merchandise your products in a way that makes them comfortable to be around and use, not as cold hard hunks of steel, plastic and chrome. Serving the needs of women shoppers better is a perfect way to grow sales in this economic state (if that’s even doable) — Best Buy certainly has the right idea here. There’s nothing better than involving your customers in decisions that affect how they purchase, right?

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Filed under: Industry, MasterCard Inc’A’ (MA), QUALCOMM Inc (QCOM), Juniper Networks (JNPR), Technology, NASDAQ

Minyanville contributor Sean Udall dares to share the kind of keen insight and actionable information you won’t find in any prospectus. For more original thought, visit www.minyanville.com.

• I’ve taken a leg in the Ultra QQQ ProShares (AMEX: QLD). The market has popped 2% off lows, the question is will it pop the full 7%?

• I’m seeing a few positive divergences and the percentage of stocks below the 50 day moving average is well below the 2002 levels. I haven’t looked at the percentage of stocks below the 200 day, but I’m sure the reading should be equally distressed.
• I know people are pricing in earnings per share Armageddon in tech land — so the question is, what happens to many of these stocks if it’s really just sort of “punk” and not a total cataclysmic drop in revenue guidance.

Continue reading Tech sector at a glance

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Instead of the House of Representatives sending in a nice sealed envelope a candy gram to Hank Paulson of $700 billion, they instead decided to listen to the people and did a reverse bailout wiping out $1.2 trillion in stock market wealth.  Go figure.  The House of Representatives actually listened to the massive uprising against […]
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Instead of the House of Representatives sending in a nice sealed envelope a candy gram to Hank Paulson of $700 billion, they instead decided to listen to the people and did a reverse bailout wiping out $1.2 trillion in stock market wealth.  Go figure.  The House of Representatives actually listened to the massive uprising against this poorly devised bill.  You wouldn’t know this from the mainstream media since they of course know much more about the markets than us regular citizens and had already started creating Photoshop templates of “bailout success!” to run for the entire day next to their tickers.  In addition, we have a large group of politicians (not economist or those with understanding of the markets) telling us that if we don’t sign off, there would be hell to pay.  Guess what?  That price tag was $1.2 trillion today.

I was jumping back and forth through various cable news and financial shows and you would think that they went out to the “investment pundit” talking head swap meet to gather the guests for the night.  The message was simple:

“How can they allow this to happen!”

“People won’t have access to their credit on Main Street!  We must help me, I mean them!”

“These are big problems and we need to get this bill passed now!”

You get the point.  To test this theory I went on “Main Street” to my local bank and guess what?  Incredibly, they still have the ability to make loans.  What a shocker.  They don’t however have the power to make option ARM, interest only, or other toxic mortgages but how is this bad?  I wanted to compile a list of Representatives from California who voted for and against this plan:

Incredibly, the vote for California was extraordinarily close:

Total Ayes:  29

Total Noes:  24

If you have a chance, please take a moment to contact your Representative and let them know how you think:  House of Representatives CA

If you are wondering about the quality of some the Aye votes, you can look no further than that of Laura Richardson.  Who better to vote for this plan than a Congresswoman who bought a home in Sacramento with a no money down subprime mortgage from now defunct Washington Mutual?  Not only was this her method of helping the housing market, she stopped making payments on the home until a real estate broker picked up the home via a foreclosure.

Maybe she had an incentive to get this bill passed?  Okay, maybe she lost one home by mistake.  But what about going in arrears 3 freaking times on another home in Long Beach and another in San Pedro!  The home in Long Beach is now caught up according to the Press Telegram but she is still behind on the San Pedro home.

Oh, and she also took a loan from a local strip club owner.  Thanks for that aye vote Laura!  Hope you enjoy your taxpayer funded $169,300 a year salary for voting.

Aside from that there were some shockers on the noes.  Again, if you can please take the time to offer your support to those who stood up against the mainstream media, opportunistic politicians, and Wall Street.  The mainstream media wants to scare you into thinking that come tomorrow, you will have zero access to credit.  Are you kidding me?  If that is the case, I’ll go on Virgin Lending and get a loan.  If we can make loans to third world countries for seed money, you think we aren’t going to get something here?

And of course I ran a quick tally for New York and out of 29 Representatives only 4 voted no.  How shocking that 84% of New York Representatives wanted this Wall Street welfare check to go through.

The bill ultimately was setup as a failure from day one.  Paulson handing out a 3 page nasty gram was absolutely pathetic.  It essentially amounted to an ultimatum with Czar like powers.  The Congress from day one should have rejected the bail out and started from scratch.  Instead, they went along with a fundamentally bad idea for political fear and as it turned out after nearly 2 weeks, the foundation was so shoddy that they will need to go back to the drawing board.

This bill was a pathetic attempt at smuggling money to Wall Street from Main Street although it was under the guise as help for the common person.  Even with all the new modifications in the 110 page updated bill there were so many loopholes, that it was only a matter of days before Wall Street gamed the system.  “Some CEO compensation” or the lack of clarity in how assets would be priced were main sticking points.

Some of you may be thinking that many of us simply want to punish Wall Street at the expense of everyone else.  Here’s the thing, Wall Street should be punished yet the notion that if Wall Street fails then we all fail is patently disingenuous.  In fact, the House of Representatives on both sides rose up today to vote this thing down:

From watching the mainstream media, you would think that what the House did was a crime.  They simply held their own and represented their constituents.  A large group of Democrats and Republicans saw something wrong with this bill.  I’ll give you 5 major failures with the initial bill and later in the article offer 5 new sticking points in any bail out.

5 Reasons This Bailout Failed

(1)  Mainstream Media:  The mainstream media ran by journalist, some that are amazing and some that just want to sell ad space for one reason or another ran with the pro-bailout propaganda since day one.  In fact, many were already on the bandwagon with the 3 page proposal from Paulson!  How in the hell can you support a $700 billion bailout with 3 pages only?  The media being hurt by the down economy thrives on ad revenues.  Who pays these revenues?  Companies.  Which companies?  Companies on or that trade on Wall Street.  They know which side their toast is buttered on.

(2)  Wall Street:  Wall Street flat out miscalculated the anger on Main Street.  They wanted to scare mom and pop investors that should they not vote, their 401(k) was going to see a big hit.  Guess what?  Many don’t even have a 401(k).  The next fear factor was losing home equity.  Guess what?  Many people, approximately 30% own their home outright.  They don’t have plans on selling and never did.  They didn’t play in the Wall Street casino.  Many in their 20s and 30s are simply trying to advance in their careers and have had very little time to build a major retirement holding in their 401(k).  It is worth repeating the break down of median income households and their 401(k):

401(k) Median Amount

20 year olds

(Salary Range)$40,000 - $60,000 =    401(k) Median Amount $16,393

30 year olds

$40,000 - $60,000 =   $38,693

40 year olds

$40,000 - $60,000 = $78,834

50 year olds

$40,000 - $60,000 = $99,932

60 year olds

$40,000 - $60,000 = $97,588

As I discussed in a previous article:

“57 million households own stocks directly or through mutual funds.  Given that there are 105,480,101 or so households, that means 54% of people will be impacted by a decline in stock values directly in their portfolio.  What this also means is that 46% of Americans do not own any stocks.”

They assumed fear was enough to get this thing going and have the public rally behind the cry.  Well as it turns out, half of Americans don’t own stocks and the other groups are split into different camps.  For example, a younger working couple is more worried about their future job security than losing say 20% of their account value which is probably only $16,000 to $50,000.  So the loss ranges from $3,200 to $10,000.  One visit to the doctor for a minor injury will cost you this.

(3)  Current Administration:  Paulson carrying the flag of the current administration did not have enough political capital to get this going even if the bill was drafted correctly from day one.  It would need buy-in and not a fear mongering ultimatum drafted on 3 pages.  Even if you look at the votes, it is the current administration’s party that revolted in large numbers against this bill.  The majority of the noes came from House Republicans including folks like Dr. Ron Paul.

You also had a large number of Democrats including Dennis Kucinich who voted no on the bill.  Ironically, it was the polar opposite sides of both parties that came together against this poorly constructed bill.  How ironic that the most liberal and the most conservative members where saying nearly the same thing.  The left was arguing that this bill amounted to a blank check to Wall Street with no protection for the American tax payer.  The right was arguing that this goes completely in the face of free market capitalism and amounts to corporate socialism.  Strange bedfellows indeed today.  Kudos for those members that stood on conviction from both sides of the isle.

(4)  Condescending to Public:  It would help if Paulson explained why he needed $700 billion!  I mean talk about delusion.  The public is furious because they perceived what the mainstream media and certain politicians could not.  That this bill was a sham which it is.  Paulson and some Congressional members never leveled with the American public.  All they kept saying was “if you don’t vote for this, ahhhh man, you don’t even want to know.”  Great way to get people to vote.  And then they argue about the one reason many Americans view as the root cause of this mess.  More credit!  Many prudent Americans feel that credit itself was the problem and now they want these folks to use their money to dole out to credit addicted companies?  No way.  The mainstream media also felt that if it repeated the same message over and over the public would kowtow and it would be a done deal.

Even on Sunday night they were talking about things as if the bill had already passed.  This is the same media who was asleep at the wheel during the housing bubble.  In fact, they glamorized it with housing bubble porn with flip this house shows and remodeling gone wild shows.

(5)  Populist Uprising:  People are fed up.  People are sick and tired of being treated as a consumerist hamster.  There is such a large disconnect from the realities of Main Street from those on Wall Street and the lives of those in the mainstream media.  They simply do not understand the silent anger many Americans feel.  These Americans despise the fact that we are having to answer to foreign banks because our local representatives cannot manage their Wall Street masters.  Many of these Americans fall under the Benjamin Franklin rules of frugality:

“1. A man may, if he knows not how to save as he gets, keep his nose all his life to the grindstone, and die not worth a groat at last.

2. Beware of little expenses; a small leak will sink a great ship.

3. Buy what thou hast no need of, and before long thou shalt sell thy necessaries.

4. A fat kitchen makes a lean will.

5. Many estates are spent in the getting, Since women for tea forsook spinning and knitting, And men for punch forsook hewing and splitting.

6. Think of saving as well as of getting: the Indies have not made Spain rich, because her outgoes are greater than her incomes.

7. Women and wine, game and deceit, Make the wealth small, and the wants great.

8. What maintains one vice, would bring up two children.

9. Who dainties love, shall beggars prove.

10. Fools make Feasts, and wise men eat them.”

1776 where art thou?  Many Americans are yearning for a return to a time when our economic prowess was based on our ability to spend and invest wisely.  Not what we have now which is Wall Street turned into a casino for the connected and wealthy.  The ability for information to travel so fast and people to be informed is fantastic.  The fact that many of you contacted your Representatives shows that we are in a new era of politics.  It was only a matter of time before the politicians listened to the will of the people.  This was one of those rare moments.

They’ll try again to jam something down the throat of the public but hopefully they scratch this bill and start from scratch.  Maybe, they’ll even explain to us why they needed $700 billion.  Let us first look at the current price tag:

We’ve already put at risk nearly $1 trillion in taxpayer money.  We want to put $700 billion more at risk?  How well did that last $1 trillion go?  The irony is one of the more thought-out plans, the Housing and Economic Recovery Act of 2008 will be utilized only to a minimum extent.  In fact, we will use some of the points in this bill for our new proposal.  Many of the members will be forced to action so a bailout is going to happen.  Let us ensure that they include these plans at a minimum.

5 Step Proposed Plan - New Requests

(1)  Mortgage Cram-Downs:  It is fascinating that no one is talking about this in the current bill.  One of the first things that got thrown to the wayside is cram downs.  Mortgage cram downs are the quickest thing that can be done right now to help homeowners in trouble.  How so?  Let us say in bankruptcy a judge looks at a borrower who has a $100,000 valued home with a $90,000 1^st home mortgage and $25,000 in total unsecured debt.  The judge can cram down the unsecured debt to $10,000 thus matching the total assets of the borrower ($100,000 home) to the total debt ($90,000 1^st mortgage + $10,000 unsecured debt).  Why was this removed?  Credit card companies and 2^nd note mortgage holders would get wiped out with this legislation.  They will not volunteer for this since there is nothing in it for them.  Clearly they would rather unload the debt to you instead of realizing the loss from their imprudent lending.

(2)  Mark to Market Similar to Housing and Economic Recovery Act of 2008:  It is amazing that the new legislation actually wanted to halt the mark to market accounting rules.  What this did is gives an out for institutions to once again hide the sausage until they unload it onto the public.  What needs to be done is what was proposed in the Housing and Economic Recovery Act of 2008.  Lenders that want to participate can do so by doing the following:

*Take a current appraisal of home

*90% offer from government of current appraisal

*One-time 5% fee to build up loss fund

*Homeowners participate in equity sharing with government tiered over 5 years

So how would this work?  Say one of those craptastic WaMu loans made at the peak for $600,000 is now in trouble.  The current home value is $400,000.  Should JP Morgan wish to unload this loan, they would get $340,000 and the borrower now has a reduced loan.  The borrower now has to share any equity gains with the government for the next X years.  This of course will mitigate some of the moral hazard problem.  Everyone wins.  JP Morgan has already estimated that they will write down $31 billion in loans from the WaMu garbage can so at least they get something here.  Borrowers get to stay in their home and the government at least has a way to recoup some losses later.

(3)  Zero CEO Compensation on Institutions that Participate:  This one is simple.  CEOs shouldn’t get one penny for participating in the bailout.  If they have managed to run their company into the ground and are asking for taxpayer assistance, we get to set the terms.  They are lucky.  In fact, we should give them an incentive that should they cooperative for the next few years they won’t be prosecuted to the fullest extent of the law when we have our 1930s perp walk sessions which will happen.  CEO compensation?  Are you freaking kidding me.  How was this even in the bill?

(4)  Massive Enforcement and Regulatory Oversight:  Agencies like the former OFHEO and the SEC have been so stripped down and starved over the past decades that they simply had no power over a multi-trillion dollar market.  First, we need to resurrect a similar law such as the Glass Steagall Act that was repealed by the Gramm-Leach-Biley Act in 1999.  You can almost pinpoint the moment the stupid toxic CDO and CDS markets exploded:

*Source:  Sudden Debt 

For nearly an entire decade, this market went unregulated.  Now that things are blowing up they don’t want to tell us where they will use the $700 billion and with utmost arrogance want to keep this market in the dark.  They created their own nightmare.  The reason for market transparency is that at any given time, you should be able to unload your assets and there will be a market to sell into.  Those people that wanted deregulation got exactly that in a black and chaotic hole.  Now they want to impose rules on the jungle of debt.  With such a hidden world and no transparency, no one really knows what some of these assets are worth in the real world.  Given the stunning amount of this out there, don’t you think the public has an obligation to have leaders explain what is going on before they start dumping their money into the abyss?

(5)  Liquidation of Lenders:  Finally, there are some pathetic lending institutions out there.  They need to fail and the quicker the better.  We are already seeing some of this.  The big are eating the weak.  JP Morgan Chase eats up WaMu.  Wachovia gets swallowed up by Citi.  You get the point.  The reason this needs to accelerate is once the market stabilizes, these institutions will once again inject liquidity.  Yet this will be a slow process.  Otherwise, more crap will hit the market.  How so?

Well in the midst of all this insanity Wachovia was bought out by Citi in what is another government bailout.  They won’t call it this but it is absolutely a bailout.  First, Citi bought out Wachovia with the full knowledge that they will only absorb $42 billion in losses from the Wachovia mortgage portfolio.  The problem?  Wachovia with their smart buy move of uber toxic mortgage all-star Golden West has approximately a portfolio of $120 billion in pay option mortgages mostly here in California.  Who will assume losses above and beyond the $42 billion?  The FDIC.  How much does the FDIC currently have?  About $43 billion.

Please continue contacting your Representatives since this battle is not over.  If they try anything new at least there are some good ideas that can be implemented:

Write your Representative

Write your Senator

Any idea is better than, “you can trust me with $700 billion.  I’m from Goldman Sachs and we’re here to help.”

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Housing Bailout Bill Failure: Examining the Boondoggle Legislation and Populist Uprising against Wall Street. 5 Reason the Bill failed and 5 Easy to Implement Solutions that can be Used Today.

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