I'm Proud of My Fellow Americans

As of this writing, I'm proud to be an “average” American and I am proud of my fellow, average Americans. They did not buy into the “crisis.”

For the most part, I keep my political opinions to myself and like a true capitalist, I study the situation and try to profit from events. In this case, I can't do that.

The majority of Americans are against a bailout and so am I. Regardless of what happens this weekend, the majority of Americans are right. This bailout is bad policy, bad for Americans, and I'm proud to be among those Americans.

Here is the history. About 10 years ago, the Clinton Administration, as part of their legacy, made it easier for low-income demographics to buy a home. As can be expected in a Capitalist country, the less stringent lending standards were exploited. What ensued was a lending and housing boom and run up in home prices.

After making the dubious loans, the underwriters packaged the loans in Collateralized Mortgage Backed Securities (CMBS) and investors bought the CMBS because they were backed by what they assumed was good Real Estate—for a while, the mortgages were getting paid. At this point, the mortgage industry created an asset base supported by inflated appraisals and sold to people with weak credit.

Wall Street than guaranteed the CMBS base with Collateralized Debt Obligations (CDOs), which was ingenious. They were able to generate an income stream with no money down based solely on their ability insure the CMBS holders against the risk of their investments going bad. They actively disregarded the simple fact that they did not have the assets to cover their obligations if/when the CMBS instruments went bad. Hence, the predictable results: the bank failures; Government bailouts; emergency mergers; and asset purchases. These same Wall Street players further exacerbated the situation by trading these instruments amongst themselves.

In short, Wall Street built a whole industry based on real estate sold to people that could not afford the debt they took on to buy the real estate. The only asset of value in the entire chain was the base real estate that in most cases was overvalued to begin with.

As the the teaser periods ended, rates on the mortgage instruments increased, and many home owners started to default on their debt, driving down the value of the housing market. This led to paying homeowners who had mortgages greater than the value of their homes; and resulted in the execution of clauses that increased mortgage payments. Another round of defaulting homeowners accelerated the devaluation of the housing market.

These defaults, in turn, destroyed the value of the CMBS market. When CMBS holders went to the CDO holders to collect on their insurance, the CDO holders couldn't make good on their guarantees. What's important to note here is that the CDOs were only as valuable as the financial strength of the guarantor, which we now know was not strong enough to cover the obligations. In other words, they had no value! It was ether!!

If an investor can generate a return without putting money down, then the return is infinite. That's what Wall Street was doing with the CDOs. This led to the credit crunch. Banks will not lend money to each other because they all know that the banking and investment industry are carrying Billions of dollars of assets on their books that are worthless! Now that the ponzi scheme is coming apart, Wall Street wants to value the worthless assets at $700B, sell them to the American Taxpayer, and get their last return on the assets.

As of right now, the American public is not buying it.

You have to hand it to Wall Street—they made money from worthless assets. When they couldn't make money from these assets any more, they went to the Bush Administration to sell the assets to the American public.

In the process, Wall Street told the American public that if the bail out doesn't work, the American people face financial Armageddon. In the ultimate act of Economic Immorality, the President of the United States got on National television and told us if we don't have a bail out, we'll lose a million jobs.

Bullchips!!

Yes, we have a credit crisis, but I submit the storm is about over. At this point, Wall Street is making a final money grab—a $700B money grab!

Fannie Mae, Freddie Mac, and AIG were bailed out by the Government. IndymacBank, Lehman Brothers, and WaMu failed. Morgan Stanley and Goldman Sachs sought protection as federally regulated banks. JP Morgan Chase gobbled up Bear Stearns and WaMu. Bank of America absorbed Countrywide and Merill Lynch. And Citibank and Wells Fargo are strong enough to weather the storm.

As of this writing, Wachovia is negotiating their merger into a stronger bank. The players have consolidated and with every round of consolidation the assets get further written down (or depreciated). There is cash on sideline; when the winners are clear, the cash will capitalize the winners. In the meantime, Americans need to live within their means—credit is scarce. But this is not financial Armageddon.

I don't buy it, and I'm proud of my fellow Americans that don't buy it.

If Congress and the President want to pass legislation to free up the credit markets, then go straight to the hard assets. Set up an RTC-like organization, clean out the bad inventory, and restore confidence in the market at the core asset level.

Don't value the worthless assets at $700B and sell them to the American Public.

I'm not buying it and neither should the American Taxpayer!

For more information contact Chris at christofer.pacheco@gmail.com .