When “It’s Just Them” becomes “Just Like Me”

I saw a photograph today – a man holding a banner that read “[expletive] jump!” – beneath the hallowed halls of a Wall Street tower. It was sent as a joke, but the message was clear: a huge segment of Americans thinks the government is seeking to bail out “them.” “Them” is bad folk, who for reasons of greed and power, created an artificial market that eventually and justifiably collapsed. “They” deserve to be punished, even go to jail, and if our pensions suffer a bit for while, it’s got to be worth it.

And that’s the problem with the government’s plan. The order of the fix just looks bad. The theory is to shore up the institutions, revive the fundamental borrowing power that is the life blood of American commerce and homeownership, and the new stronger structures will then resuscitate the poor homeowners whose property values have been driven down, who cannot get loans for simple business needs or to buy or sell a home.

The problem is one of perception. Because the plan does not start with the homeowners, placing some kind of moratorium on foreclosures, the “bailout” is not viewed as one that helps the common man, the small business or the homeowner… even if that will be one major result of the current proposed legislation. The fact that small businesses pay their employees from receivable financing, that jobs depend on borrowing power just to exist, that real estate has no value if no one can buy it and the fact that growth-directed investments – the kind that create jobs – cannot operate in a vacuum without lending ability, well, the legislation on the table pumps money into the institutions, so the fact that Main Street benefits just as much as Wall Street seems totally lost.

As I’ve said before, if homes lose more value, then the mortgages that the government is buying in a bailout have to be worth less too. Foreclosures kill home values, so we better start there. The message is better too; it doesn’t look like greedy pigs are getting a second helping. The “institutions” – the “them” – have to come second. The punishments for failed management and misleading the public into this mess need to be clear to the electorate. And right now, we need some major remedial economic legislation, if for no other reason, to begin to rebuild the economic trust that vaporized in the last few weeks… a trust that must exist if we are to have a viable economy.

I’m Peter Dekom, and I approve this message.

Leader Hosin’ - When “Incumbent” Should Mean “In Trouble”

When Congress prefers to find blame and rely on failed doctrinaire policies that have been proven incredibly wrong (with political ads that only focus on divisiveness), when the bastions of this nation (like the SEC) knowingly allow an absurd debt-to-equity ratio reign supreme in financial institutions, when our legislators let the special interests they are supposed to regulate draft the statutes and regulations, when our most senior “leaders” have secret meetings with those they are supposed to control (and do not tell us what they agreed to), when the cost of running for office requires candidates to sell their souls to special interests just to get elected, when our Representatives are busy trying to figure out what they need to do to stay elected rather than what is necessary for this country to make it across the line, and when the proposed “fix” goes directly to institutions that “should” benefit homeowners and small business but leaves the foreclosure mess without a much-need moratorium… what is clearly missing is LEADERSHIP.

We clearly need more regulation. Sorry, deregulation, underscored by a vast array of loopholes and exceptions (from farm subsidies to unregulated hedge funds, from oil depletion allowances to disproportionate taxes on working for a living versus investing your wealth), does not work.

But most importantly, we need leaders to do what is right, not what they think they need to do to avoid turning off one or more of their constituency groups. If they stop the hemorrhaging, that they did not do precisely what their electorate thinks they want… will be more than enough. It is what leadership is all about. Do what’s right for the country, not what’s necessary to get reelected even if the country will suffer by not taking the correct path. Succumbing to expediency is not leadership.

At this point, with the markets up from the massive crash, the world wants “something.” The psychology of the markets does not expect THE solution – just that there is a significant piece of legislation that offers a few solutions. We will not get perfection, and the preliminary compromises at the House were clearly in the right direction, but it is time to bring it home. We don’t need Republicans and Democrats fixing blame and clinging to their old world and failed “theories;” we need responsible legislators. We need both sides of the aisle to “get real.” We need LEADERSHIP. NOW! NOW! NOW! Or maybe we need to look at the incumbents who are voting against a solution… and remember.

I'm Peter Dekom, and I approve this message.

Instant Gratification? Not this Time

The bailout is necessary, and I’ve said that before. But the bailout does not mean that the good times will be “here again,” at least not in the immediate future. The difference is between a possible 1929-style depression (no bailout) and an uncomfortably long (15-24 months I suspect) recession (with a bailout). To have growth, we need value. That means retraining and education, fixing broken infrastructure, and encouraging job growth.

We've got lots that needs to be done, in both the public and private sectors, but a slow economy and tough money with sluggish leading indicators (even with a bailout) make achieving those goals that much more difficult. And with the rest of the world pointing their fingers at greedy Wall Street and the government that refused to regulate them until it was too late, the international capital markets are not likely going to help much.

We have energy and health care issues that can create massive new jobs, roads, highways, bridges, dams and levees that need to be repaired and expanded. Whatever the long term result, most of the bailout will be recaptured if the government makes the right moves, but we now have to focus on getting this nation into a place where it can grow, build jobs and sustain hope. Climate change, with the irony of drought and battering hurricanes, only makes that job more difficult. But we can, and we must.

The next President will be faced with the issue of priorities, as questions from the debate so clearly indicate. Choices must be made, spending cuts must be implemented, but we need tax dollars and capital investment to move from bailout to success. This is a multi-step process, and it will take both cash and patience. It will also take courage.

I'm Peter Dekom, and I approve this message.

Pain, Not so Exquisite Pain

So I have a big mouth, some have observed, and I am complaining all the time. I’ve been told I better start talking solutions to America ’s current economic crisis, so here goes, short, down and dirty:

1. Put a moratorium on foreclosures.

2. Get the government to take over the mortgages contained in the derivative market (pay a flat rate to the institutions based either on a formula or a set fraction like 60% of face value), lower the rates for those homeowners who can pay and stop the flood of foreclosures - foreclosures are driving down the net worth of real estate and this country. Give the originating banks a quarter of one percent to administer, but require them to.

3. Make sure that those who caused the problem don't get golden parachutes or high compensation. Sue or prosecute those who have already. Don't bail out those who lied on their income statements or knowingly supplied incorrect statistics.

4. Give the taxpayers equity and/or upside in everything they support.

5. While imposing severe restrictions on how much equity or cash one (person or company) needs to have versus how much they can borrow, supply liquidity to the marketplace so that homes can still be bought and sold and lend properly to fuel viable business growth. Deal flow in the housing and corporate growth market will restore some stability and create a price for residential real estate – no loans = no sales = further depreciating values. Define debt widely and equity narrowly. Fixing the debt-to-equity ratios is mission critical.

6. Focus on job creation.

7. Create bi-partisan oversight over all major bailout packages. Do not vest that authority in one man without oversight or accountability.

Not acting risks the collapse of the stock market (lots of pensions are built here), the massive failure of many more banks and financial institutions, the further drastic collapse of home values, vastly higher unemployment (and lots of hidden under-employment) and the collapse of the dollar (everything we import, from oil to steel, will explode in price).

If I can do it, so can Washington . Life is suffering. Buddha.

Next!

I’m Peter Dekom, and I approve this message.

Short Cuts and Shredded Wheat

I’m a practicing lawyer, and by all accounts, I am in one of the shadiest and most despised professions on earth… until this week, when Wall Street hedge fund managers and investment bankers shoved me and my disliked brethren into a relative breath of fresh air. What’s going on here? What’s the bigger picture?

When it comes right down to it, our country seems to be divided into those who work to make this a better country for us all, and those who work this country to make a better living for a relative few. It’s not about what’s right or makes sense – it’s about finding the loophole that will make a few folks rich, about creating the loopholes to benefit the special interests that really are running this country.

Think about it. Do oil companies swimming in cash really need the tax breaks that give them huge benefits? We call that the “oil depletion allowance” that lets big oil avoid big taxes. Did we really need to leave a huge gaping hole in our regulatory schema to let hedge funds tell savings and loans, banks and real estate brokers that they had the “numbers-defying secret” to blend high risk mortgages from unqualified borrowers destroy their lives by purchasing overvalued real estate without any hope of paying the monthly nut?

Lie on those income statements! Take on mortgages with interest rates sure to skyrocket. Those fund managers actually told everyone that if you blend enough bad mortgages into one huge pile, sell units in that pile (derivatives), they can’t all be bad! The blended power of the masses would correct for the default of the expected few. They couldn’t possibly default in numbers that could tank the economy! But they did. These folks’ actions represent one of the greatest massive ethical lapses in American history.

We trust people to do the right thing, even when everyone knows “this cannot last.” Leave them alone; the market will make it right. Well, folks do not seem to do the right thing… and if enough people do the clearly wrong thing, it becomes accepted practice. Would factories really stop belching smoke into the air because it’s bad for the environment… even their competitors could make cheaper products because they didn’t have to pay for pollution controls? Special interests hire lobbyists and create massive fund-raising moments for aspiring politicians. What chance does an ordinary taxpayer have?

Why does it take a total meltdown for our voices to be heard? Where were our Congressmen and women, our President and cabinet, before this obvious problem occurred? Where were the regulations that should have prevented this debacle? Why did our Congress and the executive branch accept the words of the oil industry, the finance industry and ignore what simple addition, subtraction, division and multiplication could have told an average tenth grader presented with the same numbers? Why is there a problem that needs such a massive fix in the first place? And why do I feel like a bowl of shredded wheat without the comfort of milk, cream or even a spoonful of sugar?!

I’m Peter Dekom, and I approve this message.

Now What? Shoot the Wolf at Our Door?

We know why we sit in the financial basement, and we know that there is more debt with less equity that even the most astute economic analysts could have ever envisioned. But the Treasury Secretary, Henry Paulson, seems to think that if someone gave him a blank check, he’s the prescient guy to know what to do with $700 billion of taxpayer guarantees – yes, the same man who gave us assurances just a few weeks ago that the worst was over – without any court or administrative review. Crazy!

Yes, we have to act now, but remember the fallout when everyone panicked after the 9/11 attacks and we got a solution to every terrorist issue we faced with a very patriotic name – a travesty called the “Patriot Act,” a statute that was passed with almost no one in Congress having read this law. We need a bailout… the world is watching, and the economy cannot be jump-started without a lot of help.

But we cannot let one man act without accountability; there needs to be oversight that does not favor one political party over another. And we cannot waste any of that money rewarding corporate officers who pull the cord on their golden parachutes, even if they pull that cord before the bailout passes. American taxpayers need to own something for their efforts, stand to recoup and perhaps benefit from the investment in the companies and mortgages that receive that governmental help. Finally, we need to make sure that the ratio of equity to debt in future financing is carefully limited… back door debt and over-borrowing must be treated as the ridiculous structures they really are. This has to apply equally to companies in the mergers and acquisitions and business growth space as it does to people buying homes.

We need the government to take over defaulting mortgages as fast as they can, so that we do not further tank the cornerstone of our economic recovery – viable and sustainable home ownership. It is cheaper for us to allow people to pay what they can (lower the interest rates) and keep their homes rather than letting the market further destroy home values by allowing more defaults. The government has to insure that there is enough money in the system (“liquidity”) to create the ability for people to continue to buy and sell homes. No money…. no sales… no demand… the prices will continue to fall. This is not a drill… we have one good shot at fixing this or we will face a whole lot more than a recession.

I’m Peter Dekom, and I approve this message.

America: Addicted to Debt

It’s un-American not to be in debt over your eyeballs! We, as individual consumers, borrow more than we earn! For four years in a row, an event that has not occurred since the Great Depression. That alone is an alarming fact. People believed that real estate could only rise. Everyone seemed to borrow more than was prudent, even beyond the sub-prime market. As the January 23, 2008 New York Times noted: “Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn't go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.”

We all follow the lead of our government that borrowed 100% of the cost of the Iraq War. The United States currently owes $9.5+ trillion of “national debt” (the aggregation of unpaid deficit-borrowings), which in turn generates a massive $350-$400 billion dollars in annual interest payments, mostly to other countries that have politely funded our deficits. Put another way, the national debt currently grows by $1 million a minute or $1.4 billion a day!

We Americans have another form of debt; we call it a “trade deficit” – it runs about $60-$70 billion a month – what happens when you import much more than you export. The November 30, 2006 Business Week predicted that “[f]or the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government.” That happened this year. Even with the slowdown from the recession/depression (whatever you want to call this total meltdown). With massive amounts of our national debt in foreign hands, with global competition accelerating at the expense of U.S. workers and with oil reserves predominantly in antagonistic foreign hands, the future of our economy is decreasingly within our own control. We live based upon the “kindness” of strangers.

So enter Wall Street. Not only did they encourage all the above consumer borrowing, they repacked the debt and sold “derivatives” (including aggregations of risky mortgage loans), making fees creating, buying and selling these “derivatives,” but they fell so much in love with debt, that investment bankers (who make the big bucks when companies are bought and sold – mergers and acquisitions) decided that you really didn't need a whole lot of equity to buy huge companies either – you could use stock and, gotta love ‘em, debt. Lots of it, not a whole lot different from people buying houses without much of a down-payment.

They even figured out how to make even more money by creating layers of debt – the top guys (senior debt) got paid 100% with interest before the next level (mezzanine debt) gets paid off with its higher rate of interest (being in second position is always riskier than being on top). The shareholders (the equity) sit at the bottom, hoping their management made the right decision.

The investment bankers figured out how to get still higher fees by structuring and supplying the high interest mezzanine debt. And giant hedge funds were created, some within these very investment banks, to raise all that capital needed to fuel the mortgage demand, the mezzanine debt demand and all of the other “needs.” A little equity, not a whole lot of government interference (the government even made interest rates so cheap, why not borrow?!), the debt just got higher and higher.

As long as the marketplace was going up, who cared about the debt load? You got a new house or a nice new company or a nice new investment. The housing market woke up in 2007; the financial markets awoke slightly after Bear Stearns went down, but went back to sleep only to awaken to one of the greatest market crashes in American history in the last few days. Lehman Bros. was gone. AIG, an insurance company alive only by government intervention. There was blood in the streets and no short term “fixin’s” gonna right a ship that has run so far aground.

Bottom-line: The laissez-faire lending markets do not work. The derivative markets are a disaster. Without government oversight, required limits on how much real equity you need to borrow and how you will pay it back, we will watch the markets react over time, minus a whole lot of companies and homeowners, until the next debacle. What kind of America will we be then? Competitive? Vibrant? Hopeful? Or a worse version of what the unregulated economy gave us this week?

I'm Peter Dekom and I approve this message.

Government-Speak Meets “Miles per Gallon”

There’s English, and then there’s “government English.” Congress wanted much more in the way of mandating that car manufacturers build more fuel efficient cars than did the current administration. They passed a bill in November of 2007 providing a newest of measurable fleet mileage mandates (moving from the current fleet average for new cars of 27.5 MPG for cars/22 MPG for light trucks to 35 MPG for both cars and light trucks and SUVs by 2020) to be imposed on manufacturers. The fact that this is a long time line for a relatively modest improvement does not augur well for the priority we have placed on these issues, but wait, there’s more.

You should know how fleet mileage is measured. Miles per gallon… per gallon of what? The government looks at gasoline consumption, not fuel efficiency – across the designated manufactures’ vehicle output. So “flex-fuel” vehicles, capable of running partially on non-gasoline biofuel alternatives, even when there are almost no filling stations equipped to provide cars with products like bio-diesel, give an artificial boost to fleet averages! We really need to stop playing games and get down to business; failure to act sufficiently won’t result in an inconvenience; it will create a radical decline in the quality of our lives.

And then there is the Brazilian “energy independence” story – how are large nation with lots of cars made it work simply with ethanol-based fuel generated from sugar cane. Aside from the fact that the number of cars per person are a whole lot fewer in Brazil than in the U.S. or that sugar cane produces six times more ethanol than a comparable amount of corn (which also sucks huge amounts of water from aquifers that are running out of that precious substance), Brazil also has massive off-shore oil reserves making it one of the richest countries in the Americas! That’s another part of government English… spinning ain’t sinning!

I’m Peter Dekom and I approve this message.

Taxes, We All Hate ‘Em

If you like paying taxes, chances are pretty good you’re laundering money! So the notion of one political party assessing higher taxes and another championing lower taxes is kind of a red herring. The real question has to be: does what you have left after paying your taxes buy you more or less than you used to be able to buy?

Sounds simple, doesn’t it? But whoever asks such an obvious question? You should! After all, if the government can pay for its excesses without raising taxes, that should be a good thing, right? Not if what happens has a worse impact on your lifestyle than paying a bit more in taxes!!! If a country has to borrow, pay lots of interest - particularly to foreign governments - instead of fixing highways or funding more schools, if the value of your dollar falls in relationship with most of the rest of the world so you have to pay more money for internationally-valued stuff (like oil, clothes, electronics, food), then maybe that sneaky government is making you pay a hidden tax, while all the time they are taking credit for not raising the rates. Let’s call them on it!

It gets more interesting when you think of those interest payments as the debt of a wild and crazy youth – nothing in it for the adult who emerged – instead of investments in our future. After all, when you owe a lot of money, who cares as long as you are making a pile and your investments are soaring?!

But when those who generate the value are under-skilled, when the educational system doesn’t train them for the future, when our infrastructure slows the movement of trucks and cars, sucking up wasted gasoline and delaying commerce… well, you get it. To be “all that we can be,” we need to repair our infrastructure, modernize it and make sure our citizens are competitive, generating real earning power.

So next time a politician tells you how they haven’t raised taxes or even cut them to the bone, ask yourself: “Did they create a hidden tax for me? Does my dollar really buy what it used to be?” Don’t let them hide behind the form… look behind them to find the substance!

I’m Peter Dekom and I approve this message.