Underwater World Revisited

OK, so the Treasury is not buying out bad mortgages from troubled banks; it’s not what the bailout bill said, but it’s just fine with me. Focus on the homeowner, the consumer and the employee… and Mr. Treasury Secretary, if those “financial institutions” you are buying into do not flow money down to the people that need them… Oh, I forgot, you’re gone in about two months. But in case we all forget how long two months can be… it’s been almost two months since the stock market melted on September 15! State legislatures are debating solutions to a federal economic problem, and private companies are creating their own bailout “plans,” because no one believes our government is on the right path. And the market is voting on your plan, Henry… it keeps falling!

Yes we need to create new jobs by opening up infrastructure repair and development immediately, we must act to un-freeze local credit and fund payrolls, incentivize employers who create new jobs (recreate the markets)… and yes, General Motors and Ford cannot die forcing literally hundreds of thousands of workers (at the plants, vendors’ facilities, etc.) into the ranks of the unemployed… but we also need a simultaneous and equally prioritized solution directed at America’s “savings account” – the measure of hope and the American dream – the housing market. Now! Not in three or six months, when the number of homes with negative equity (where the remaining mortgage is greater than the value of the house) could rise to one third more of the total!

Whether Americans were right or wrong to treat their homes as savings accounts is a question that is no longer relevant; it happened and the collapse of the housing market, combined with job loss (actual or feared), washes through the retail community like a tsunami… costing even more jobs and creating even more real estate defaults.

Why in the world does anyone think we can reach “bottom,” much less begin to turn this economy around, when 23% (a number that is rising fast) of all American homes are worth less than the outstanding mortgages? Look at these numbers (the percentages of homes in each designated state that are “underwater” or have “negative equity”):

Nevada 47.8%
Michigan 38.6%
Arizona 29.2%
Florida 29.2%
California 27.4%
Georgia 23.2% (approximately the national average)
Ohio 22%
Colorado 18.3%
New Hampshire 17.2%
Texas 16.5%

What to do? Let me repeat (broken record Dekom) one possible path that seems to be vaguely on the radar screen, in scattered parts. But I sure hope we do not have to wait 70 days to begin implementation as a rudderless lame duck administration seems paralyzed and continues to focus on institutional rescue plans at the expense of homeowners.

1. Impose a 120 day moratorium on foreclosures, and a 60 day grace period (loan extension) for those in current default by act of Congress. Lame ducks, start quacking!

2. Impose a cap on all mortgage interest rates (I recommend 6.5%) on U.S. based owner-occupied residential real estate by act of Congress.

3. Congress should direct the Department of the Treasury (with the FDIC and the FHA) to establish reasonable criteria ("Federal Standards") on what constitutes a creditworthy borrower and the basis of the appraised value of a home. Appraisals could be per property appraisals or, if there were sufficient volume, average price decreases could instead be based on an overall sub-zip code analysis.

4. We would mandate that the bank or thrift originating the loan (including successors that bought these banks) be charged with dealing in good faith with residential owner-occupied real estate borrowers who meet the above Federal Standards. They would be required, as a condition of maintaining FDIC status, to make the requisite reevaluations, but of course, they can require applying homeowners to pay appraisal fees. This would apply even if such banks "sold" the mortgages to a "bundling" hedge fund or other financial institution, which fund would be automatically subject to the restructure.

5. On petition of a federally regulated bank or thrift, based on reasonable due diligence by that lender, Treasury and/or the FDIC would be required (perhaps to a cap to keep the mega-wealthy from benefiting) to pay the petitioning bank a sum equal to the amount that value of the home in question exceeded the loan against the property if the borrower and the property meet the above Federal Standards, provided that: the homeowner accord the government a flat percentage of the gross selling price (whenever they sell with no time limits) reflective of that "underwater" contribution by the feds and that the homeowner would then continue to service the readjusted loan and occupy that house as the primary residence. I would suggest that this percentage owed to the taxpayers vary to no more than somewhere between 5%-20% of the selling price (depending on the size of government investment), but the homeowner would be forced to pay this percentage only to the extent that the sold property will have appreciated above the mortgage price.

This structure keeps people who can afford the "carry" in their homes, reduces foreclosures (but clearly cannot eliminate foreclosures on property where there is no economic justification to subsidize a loan with a borrower who simply cannot pay a real mortgage), helps stabilize the housing marketplace (only bad credit borrowers would be defaulting), begins to restore consumer confidence (since most our economic perception is based on our jobs and our homes), gives taxpayers a real shot of getting their money back (maybe even a profit), does not create a massive federal bureaucracy to deal with millions of homes (the work is done by the originating banks), does not reward the institutions who built their net worth on buying derivatives by bailing them out, and takes a smaller tranche of money - only enough to cover that part home loan that is underwater (not the whole loan) - which effectively supports the rest of the loan (a huge multiplier of value).

The Federal Housing Agency announced an effort earlier in the week – to be implemented through Fannie Mae and Freddie Mac (which own or guarantee half of U.S. mortgages) – to begin a “restructuring” plan for those 90 or more days behind in their payments but who still have home equity of at least 90% of loan value, reducing the principal balance so that interest costs cap at 38% of the relevant homeowner’s income. Isn’t that just like the government – helping only those in serious default while ignoring the rest? So to get government help, you need to stop paying your mortgage?

JP Morgan Chase, Bank of America and Citigroup have all announced plans to freeze current foreclosures and restructure home loans with customers who are able to continue payments but might otherwise face negative equity. While the government is “considering” different additional “plans,” when the private sector believes that they can’t wait for a federal solution to the hemorrhaging housing marketplace, you know government action was needed “yesterday.”

By addressing this huge grassroots problem while restoring jobs, the rest of the markets can find that bottom that will trigger a recovery, albeit a long slow process that could take years. The old rule that the stock market is the first leading indicator of recovery seems to be a myth. True, the Dow reacts faster than any other indicator... but let's face it, the markets need to see a sustainable path to react to.

I’m Peter Dekom, and my voice is getting hoarse from screaming this so often.

The 19th Hole

There are approximately 8,500 banks in the United States; two fewer as of this past Friday. One in Houston (Franklin Bank) and another in Los Angeles (Security Pacific) were shut down by the federal regulators. A total of 19 so far this year. Writing for the Associated Press on November 8, Marcy Gordon presented the details: “The Federal Deposit Insurance Corp. was appointed receiver of Franklin Bank, which had $5.1 billion in assets and $3.7 billion in deposits as of Sept. 30, and of Security Pacific Bank, with $561.1 million in assets and $450.1 million in deposits as of Oct. 17.”

A reflection of our times, but the real story in all of this resides with co-founder and chairman of parent Franklin Bank Corp., Lewis Ranieri, a pioneer – a legend actually – in the hallowed “vaults” of modern banking history. He must have been deeply saddened as he watched his 46 branches being transferred to the Prosperity Bank of El Campo, Texas. Gordon noted when the bank’s board of directors first spotted an issue: “Last spring, the audit committee of the company's board found in an investigation certain weaknesses in accounting, disclosure and other issues relating to residential real estate loans.” Routine stuff, really, except for that “special something” that defined Ranieri’s role in banking history.

You see, about two decades ago, Mr. Ranieri unwittingly lit the fuse – a really slow fuse – that would eventually explode in the subprime derivatives bomb. Ranieri is credited as the inventor of the mortgage-backed security – a commercially tradable piece of paper which reflects the aggregate value of a bundle of mortgages (i.e., the value of mortgages themselves supported the tradable paper). This allowed banks to “sell” bundles of mortgages to funds, investors, other banks, etc. – who rated the risk and profited from the income generated by homeowners’ making interest payments – at a lower value than the face of the aggregated mortgages (hence buyers could make money on the difference). This gave the selling bank a slightly lower profit on the originating loans, but it freed up capital to make lots more loans. They literally “made it up in volume.”

This did create “distance” between the homeowner and ultimate buyer of the mortgage – the originating bank was out of the loop now – but it allowed a larger pool of money to be available for people to buy homes. This is all a bit complex – and you may have to read this more than once – but yes, a mortgage-backed security is a pretty classic “derivative” – a tradable financial contract, or financial instrument, whose value is derived from value of an underlying asset or a pool of like-kind assets bundled together to create an averaging effect. The underlying asset(s) on which derivatives are based can be elements such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI), according to Wikipedia.

Yeah, residential mortgages. Where the derivative is based on some aggregation of debt, it can also be referred to as a “synthetic collateralized debt obligation” – whew, except “synthetic” is at least kind of a warning sign to look closer! Picture an aggregation of thousands of mortgages, separated into relative risk pools, where you can buy a “security” (a piece of paper like a stock or a bond) whose price is based on the total value of those pools (corrected for risk).

The real damage came years after Ranieri first introduced his mortgage-backed security… as this aggregation of mortgages was used in the post-2004 era primarily to bury and “rate” mortgage risk into manageable pools, which would enable the system – bankers believed – to tolerate lower lending standards and generate higher yields associated with higher risk loans. In short, when less-than-prime customers could borrow money where they would have been clearly denied a home loan in the past, this “mortgage-backed security” was supposed to manage the risk by pooling the loans to minimize the impact of individual defaults. From 2004 until the market dropped, home loans were now flowing like a raging river. Hmmmm?

With about $7.2 trillion in these subprime mortgage derivatives “out there” (many in default) and the bulk of the 23% of U.S. homes where mortgages exceed the value of the home falling into that subprime category, let’s just say they were wrong. Really, really wrong. There weren’t just a “few defaults” as the system had predicted. And with half of America’s banks likely to tap into the temporary FDIC increase in deposit coverage ($250,000 per accounts) and $40 billion of FDIC estimated losses from bank failures expected by 2013, isn’t ironic that the inventor of mortgage-backed securities was brought down by his own creation?

I’m Peter Dekom, and I learn something new every day.

Tears in Their Coffee

‘Tis a sad day on Wall Street. For they have had to endure the pain of slorping at the federal bailout trough. How humiliating! Recovering from an insane April 28, 2004 SEC deregulation of the debt-to-equity ratios applied to the mega-investment banks that permitted all this insanity in the first place (a certain Goldman chairman named Henry was one of the supplicants), those poor decimated “remaining and surviving” big financial companies were forced to use the federal access to capital to shore up their balance sheets and to acquire weaker financial institutions or pick-up inexpensive "bolt-on" companies - even if that meant buying U.S. Treasuries with borrowed money and losing money on the interest differential.

They called it "de-leveraging" (now that Morgan Stanley and Goldman were banks, the rules on debt-to-equity were rational), creating "risk" reserves (somebody has to pay on those credit default swap calls) and/or "consolidation." What these large financial players didn't do is release money into the grassroots lending markets to shore up receivable financing and fund the underlying payrolls. They elected not to be “team players” as the government had hoped.

The sadness doesn’t stop there. Oh no! Their upcoming end-of-year bonuses – $20 billion many say – were under Congressional scrutiny. That could be devastating! And those poor “private equity” firms – the cash cows supported by large minimum investments only the super-rich could afford [a few have since gone public] that plied their trade of “leveraged buyouts,” “buy, fix and flip” strategies often predicated on massive “restructuring” (read: lots of layoffs)… well they clearly were suffering. Experts were predicting that bonuses and overall compensation in those Wall Street “private equity” companies would fall by as much as 75%. Woe is their plight. And they really did post huge losses. Citing the 2009 Private Equity Compensation Report by Glocap Search LLC and Thomson Reuters, thedeal.com noted Kohlberg Kravis Roberts & Co. posted a loss of $1.1, Blackstone Group LP posted a net loss of $156.5 million, etc.

Bonus cuts? The facts seem to have proved otherwise. According to today’s thedeal.com: “The average salary not including bonus for senior associates at large buyouts is now $435,000, a 4% increase over their 2007 levels. (Don't be misled by the "senior" in senior associate; these are first year M.B.A.s...) At the principal level, large buyout funds pay an average salary (not including bonus) of $885,000, also a 4% increase from last year. Bonuses for principals at these funds rose 6% to an average of $607,000…

“But here they are, reporting increases of 6% to the average bonus?... [How is that possible? The] driving force behind the increases in compensation is [these private equity firm’s] growing asset base. Yes, deal volume has slowed considerably, but 2008 has been a relatively strong year for fundraising. When combined with 2007, which set a record for capital inflows, private equity funds continued to have the resources to maintain compensation levels and in many cases increase them, according to Glocap. This jibes with what Blackstone reported in their last quarterly: [Assets under management] of $119.4 billion, up 30% from a year ago.”

The funds indicated that pay scales and bonuses might not be so rosy next year. Tissue futures must be up. I am so sad.

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

Christmas on Wall Street

Ho! Ho! I feel like a ho! While many Streeters are compensated on a commission or performance basis – salaries are not the real candy jar – well let’s just say if this is free market capitalism, we need to find another word to apply to what I am about to describe.

Today’s thedeal.com reported: “A Bloomberg report said that Wall Street's banks still have roughly $20 billion set aside to pay bonuses for 2008. Last year, when the situation was far less grim, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. paid out a record $39 billion.

”A brief run-down of the allocations banks have set aside for bonuses:

• Merrill Lynch: $6.7 billion - posted losses for five consecutive quarters
• Goldman Sachs: $6.85 billion - still profitable, the bank slashed the bonus size by 32%
• Morgan Stanley: $6.44 billion - also profitable, bonuses here will decline 20%
• Lehman Brothers: $2.5 billion - the bank walled off the money for its U.S. unit before filing for Chapter 11”

How does reading that make you feel? The bailout focuses on CEOs, but in Wall Street firms, traders and investment bankers often out-earn their CEOs, so the net needs to be wider. Gee, I’d sure hate to lower these guys’ taxes, wouldn't you? That spare Aston Martin might not be a wise purchase this year. Remember, these are the folks who created the derivative market and profited wildly from it. They caused the problem and then made more money “shorting” the market (betting on the fall).

Okay, we know the mood in Washington is going to clamp down on this practice, and when it comes down to pulling the trigger, there will be some reductions. But with fewer financial players in the market, when the world begins to restore, there will be the same or more money spread around to fewer remaining players! Does a body good to know that. You think they see any “patriotism” in paying a bit more to the government? Yeah.

Fact is that with so-caller “higher taxes” in the U.S. that some people are complaining about, in the meltdown, hedge funds withdrew their money by the ton from other countries (with vastly lower taxes) and pulled it back into the United States . Foreign markets experienced greater currency declines that both the U.S. and Japan . And these rich folks are most certainly not relocating overseas or taking the underlying jobs with them. In fact the worst jobless rates happen to be in nations with low taxes or that have a bad habit of not collecting them. Remember, it’s not the taxes you pay, it’s what you can buy with the dollar left after all the taxes are deducted.

So when you read these numbers, and look at the lower end of the housing market and the lay-off notices, how do you really feel about taxing the folks making all that extra dough off the misery they caused?

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

Why People Still Matter

This morning, the Treasury began writing the checks under the bailout plan. $125 billion as a stock purchase to nine of the largest U.S. banks. Another $125 billion is slated for larger regional banks later this year. This “partial nationalization” effort will eventually include a nine figure purchase of bad assets from these financial institutions as well. Nothing for local banks. Nothing for people. Nothing for homeowners. Market reaction (the “truth detector” of business)? Instantly down on this news of course; the market rose later (part of the up-and-down volatility that won't end soon) based on news that sales of new single-family homes rose by 2.7% in September (mostly distressed properties at bargain rates, unfortunately), and then, the market flipped and ended “down.”

It will take months, by Treasury’s own assessment, for this bailout money to trickle down into the grassroots problems that need attention “yesterday.” That’s assuming you believe in that “trickle down theory.” Helping “people” seem too difficult, so why even try? Payrolls will go on bouncing checks, lay-offs will accelerate, and foreclosures will grow as housing prices continue to tumble.

Alan Zibel of the Associated Press wrote an article yesterday as to why the mortgage mess is so hard to fix. There are so many complications – such as investors for whom “fixing bad mortgages” means reducing their investment portfolio of “bad” subprime mortgages (and they're threatening to sue anyone who tries to fix this!), housing speculators who have no vested interest in home ownership and who walk away when their real estate is worth less than the mortgage, and there are lots of folks who chipped away at the truth to get loans they really knew they should not be getting.

Here are Zibel’s facts:

1. “Each day from July through September, more than 2,700 Americans lost their homes in foreclosure… That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.”

2. “More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.”

3. “The median home price in the U.S. dropped 9 percent in September from a year ago to $191,600, and is down 17 percent from the peak in July 2006, the National Association of Realtors said Friday.” California and Nevada were hardest hit.

4. “Already, 23 percent of homeowners with a mortgage owe more on their loans than their homes are worth, and that figure is expected to rise to 28 percent by this time next year, according to Moody's Economy.com.”

5. “The No. 1 reason people fall behind on their mortgage is loss of a job, or some source of income, perhaps from a divorce or death of a spouse. If a borrower is unemployed, lenders don't have many options but foreclosure… Two years ago, about 36 percent of mortgage delinquencies were caused by loss of income or unemployment, according to research by mortgage finance company Freddie Mac. But that number has risen to 45 percent this year as the unemployment rate has ticked up to a five-year high of 6.1 percent.” And it’s going to go a lot higher.

Which brings me back to why this meltdown has to be addressed from the bottom up… the markets cannot turn around unless the underpinnings of our economic system are solidified first. You don't build a house from the roof down; you need a solid foundation. Past blogs have focused on the specifics – how you actually start from the bottom and work up. People who say this is just too tough to deal with at the bottom so we might as well fix the top first just don't understand – sooner or later it’s the people who support the system that need the help… and then … well, the system will begin to work again.

Holding and creating jobs (and making sure payrolls are funded) is priority one, and stopping foreclosures and resetting interest rates and principal balances for solid and creditworthy homeowners is priority two (the federal government should focus on that portion of the real homeowners’ value that is below the loan value!). Everything else is down the list!

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

The Double-Edged Sword

Stock markets rose on word that the Fed might cut interest rates... 400+ points. Great! Look the market now. Not so good, huh? Without policies that work – sustainability – that’s what markets do when they are lost and looking for answers. They just rise and fall on any news. A rate cut at the Fed? Didn't stop hoarding last time; the credit markets didn't unfreeze, and while it looks good to think you will save money with lower interest rates, are you even able to borrow assuming good collateral? Dropping interest rates can also push the dollar lower, making imports more expensive.

Speaking of imports, let’s look at oil and the good news: the price has plummeted in recent weeks. Yet countries with vast natural resources are often considered wealthy; they even occasionally fall victim to using that power and wealth – we politely call it “check book diplomacy” – to buy, bribe and bully. Our buddies in Russia , Iran and Venezuela , predicting our demise, were paying to expand their internal (and external) power base and challenge the perception of America as a superpower. With all this new “natural resource” power, they funded and purchased new allies and stridently screamed at “evil” America . The problem is… well to have a valuable commodity, you have to have a market, and to have a market, you need buyers with money.

Sorry, Vladimir V. Putin, Mahmoud Ahmadinejad, and Hugo Chávez, your buyers seem to be unable to buy as much of your “stuff.” And what they can pay, based on what their people can afford and what they earn, seems to be a lot less than your “stuff” was selling for earlier this year. Didn't think the economic crisis, that you were sure would sink the America , would affect you, huh? Thought oil prices would hold and rise? Hope you didn't spend all the money you were counting on! Maybe you'll remember this lesson when the market for oil rises some day, and it will – some day – that it is easier to try and make the world work together than assuming that you will always be riding an economic escalator and can dictate everybody else’s future. In the past, that attitude didn't work for us particularly well either. Welcome to “global integration.”

Now for the other side of the sword – as oil prices drop, so do our internal priorities and incentives to seek alternative, non-fossil-fuel-based energy. Even though each and every one of us knows that the price of oil will rise again, the issue has been moved, you should pardon the expression, to a back burner for the moment. But if we have learned anything in this meltdown, you'd hope is that it is much better to deal with obvious issues before a crisis takes away your power to deal with such obvious issues calmly, efficiently and effectively. Alternative energy development must remain one of this nation’s highest priorities and should not be tied to the vagaries of the “markets of the moment.”

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

What’s Going On?

Okay, the Treasury just announced that is implementing that part of the bailout that raises the government guarantees on bank deposits, even beyond the $250,000 per account temporarily increased Federal Deposit Insurance Corporation (FDIC) coverage that was specifically approved. About $1.5 trillion in bank debt and half a trillion dollars in deposits in banks and savings & loans will be eligible for new government guarantees, and the program will expand to providing unlimited coverage for “non-interest-bearing accounts” and the highest levels of unsecured loans of such lending institutions (debt that is not tied to a security interest in a specific asset or revenue flow). That’s good. Sort of a back-handed way of doing a modified European plan.

But since it doesn’t apply such open-ended to protection to the larger interest-bearing accounts, it a. doesn’t reward saving and depositing money into banks and savings & loans where it would provide liquidity, and b. doesn’t exactly guarantee banking in the broad-based, confidence building assurances found in Europe. Coupled with a cram-down of the Treasury’s new forced preferred stock buy-in (which carries interest at 5% for 5 years, and 9% thereafter) on all levels of banking, whether they want it or not (hey, is that the American way?), we are a long way from seeing the credit and stock markets issue a vote of confidence in the new bailout announcements from Treasury.

Sure Treasury seems to be trying to level the playing field by making solid banks carry the same preferred debt load as the smaller banks that might (few seem to want it) need the Treasury’s money with that huge and expensive interest string. But how do banks pay for higher costs? Trust me, they will find a way to sock it to the consumer and the business borrower. By putting borrowers and transactions in higher risk categories – even where not necessarily merited – they can raise interest rates charged at the grassroots level. Raising financing & service fees and transaction costs is another route.

So Treasury wants the taxpayers to benefit from the interest they believe will be generated by these preferred stocks, except that the same taxpayers – directly or indirectly through higher prices – are funding that same interest cost (because the banks are passing it on to them anyway). Huh? So Treasury is prepared to let confidence and trust in the credit markets erode further – with all the nasties that I have described in earlier blogs – just for the cosmetic appearance that the banks are paying the load? It doesn’t matter that the money they are putting in one pocket is the same money – less a transaction charge – they took out of the other pocket… of the same taxpayer’s pants? And still nothing directly for the homeowners and small businesses?

The markets are plunging, and we are watching you, Mr. Paulson!

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

Next

We've seen how the markets have reacted to the Paulson repurchase program – and today, the US major stock exchanges are continuing the global steep drop in share prices. But how have the banks themselves and the governmental bank regulators reacted to the news? I mean surely the Treasury would have asked those in change of the banks what they thought of the plan… and maybe ask the executives of the local banks if they believed the government’s proposed structure would pump cash into the system where it is critically needed… before they announced it to the world.

Apparently, preferring instead to rely on the failed structural advice of the highly paid financial advisors (the Treasury cronies – financial advisors and big law firms – who were part of the problem in the first place), they seem to have missed this one.

According to this morning’s Washington Post: “Community banking executives around the country responded with anger yesterday to the Bush administration's strategy of investing $250 billion in financial firms, saying they don't need the money, resent the intrusion and feel it's unfair to rescue companies from their own mistakes. ... But regulators said some banks will be pressed to take the taxpayer dollars anyway. Others banks judged too sick to save will be allowed to fail.”

In a long closed-door meeting, the Treasury even told some banks, nine of the biggest, that they had to agree to accepting the partial “buy out” – those preferred, interest bearing shares – “or else.” We know they resisted… they even said they didn't need the bailout, but in the end, reluctant bankers agreed. I’d love to have been a fly in the wall in that meeting. Bullying is very like to turn even the top of the food chain against the government. It’s got “loosing strategy” written all over it.

Did I mention that companies can't fund their payrolls, and the resulting level of job loss will drop the economy down one big notch that makes recovery that much harder? Kind of makes tax breaks and the government’s buying bad mortgages from the top companies who made the biggest mistakes… without addressing the people affected the most at the other end of the economic spectrum look truly stupid. Did I mention that not stopping the foreclosures, at least long enough to create solid long-term solutions, will make those bad mortgages even worse and may even turn good mortgages into bad ones as real estate values continue to plunge? Oh I did…

So Treasury and government, your plan is a bust. None of the goals will be accomplished. You have yet to convince the stock markets you know what you are doing or the banks that they can weather the storm – even the good banks. And we know the people in the middle and the bottom of this economic world (the middle are flowing into the bottom in record numbers, by the way) think you are only making the bad situation worse. Well over 80% of Americans believe we are on the wrong track!

Dump the program. Address the short term bleeding, and focus on “functional solutions” without generating expensive and unworkable programs. Next!

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

Freeze the Status Quo & Build the Right Solution vs Slow Response with No Support

We might just call it the European approach – freeze the status quo by guaranteeing your inter-bank loans until you can implement longer-term regulations and financial solutions versus the American approach – leave the markets completely alone while you design a cumbersome and tedious structure to invest expensive capital into institutions that are struggling enough with cash flow and then implement a confusing set of parameters that local banks simply do not understand.

Remember how markets tell you exactly how the financial community feels about any particular financial issue by voting with buying or selling stocks. Guess which plan the markets liked and which one they have rejected. The European approach was announced over the weekend, and the global stock markets exploded, with the Dow rising almost 1,000 points into a day. By the time the complex American plan was released and digested by the financial experts, the markets began trading down, falling globally.

The financial press had a field day analyzing all of the obvious defects of the Treasury’s Capital Purchase Program, mostly pointing out how long it would be for anyone to see any real market changes, assuming struggling local banks even accepted the structure at all. So many economists were now challenging the viability of the very theory that the Treasury bank buy-back plan was based on: trickle-down economics, where money placed into the top of the economic food chain (through lower taxes or supporting the big institutions) is supposed to trickle down to the consumers. Pretty much the kindest description of the profoundly flawed Paulson plan was an Associated Press headline reproduced on AOL: "Federal bank buy-in no economic quick-fix."

The above AP story provided an apt consumer-based analysis of a story that had been reviewed all day in the more financial-industry-directed press: “The pain will almost certainly drag on as vanishing jobs, shrinking paychecks and nest eggs, and slumping home values continue to force millions of Americans to pull back.

“Sales at the nation's retailers are expected to drop in September even as they get a break from record-high energy prices. Uncertainty about the economy — and their own financial fortunes — probably will force consumers and businesses alike to hunker down further, spelling more problems for the already troubled economy.”

OK, the markets have rejected this plan, the financial press is tearing it apart, and there isn't a slight hint of a Treasury Department strategy that would work. Congress, on a recess, was talking about lots of “plans” to fix the mess. Both Presidential candidates seemed to have joined the chorus of rejection for what the Treasury had proposed.

My choice – well you've read it here so many times, but hey – a version of the European plan tailored for the specific American differences: 1. place a moratorium of residential foreclosures to stop the disintegrating real estate market while we figure out which are the good loans and which were procured through fraud or cannot be sustained under any view, and then set meaningful and viable interest rate caps (restructuring values where necessary) and 2. place a short-term federal guarantee on receivable bank financing (applying the same loan standards that have always applied to such loans incurred in the ordinary course of business) to allow payrolls to be funded immediately while we determine a longer-term solution to bank lending liquidity. And then create oversight and regulations to prevent a disaster like this from ever happening again. Start with the derivatives market.

Or we can let the Treasury continue driving this railroad train down a hill off the tracks!

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

The Psychology of Panic

If there is a lesson in the soaring stock prices, it’s about just how much of the market is psychological. The traders were looking for a sign that responsible government action would guarantee the financial viability of the credit markets – an excuse to take advantage of overly discounted stocks, to take the first steps that launched a stampede. They didn’t get that reassurance from the American government. Instead, they got their comfort overseas this past weekend, as European countries (both the pound sterling-based British markets and the Euro-based European markets) guaranteed, at least on a temporary basis, that their banks would not fail, and that the European governments would be the guarantors.

Look at the results, even as the U.S. seemed caught like a deer in the headlights! The markets sky-rocketed on Monday, a process that might even continue on Tuesday… but without American solutions to our localized credit freeze on small businesses and with nothing to stop the free fall of mortgage foreclosures from subprime mortgages (and the continued imploding of housing values as a result), Americans could find themselves back at the bottom of the feeding pile in the very near term.

That there are great buys out there, with stocks trading well below their normal average 12-13 times earnings, is without any doubt. But if trust and confidence are not rebuilt quickly in the hearts and minds of homeowners and those holding down the basic jobs that support our economy, that market surge will, at least from an American perspective, be short-lived as the markets vacillate up and down searching to find the bottom again. We really need more than Europeans' solving the problems; we actually need some American action!

We know that the Federal Reserve has joined a number of international central banks to help insure that there is more “liquidity” in the market, but inter-bank lending rates are still rising around the world. If the central bank efforts were working, that trend should be reversing (rising inter-bank rates are an indicator of lending banks’ fears, of a basic distrust in the solidity of the credit markets in general). And Mr. Paulson’s folks have said that they intend to use over 1/3 of the $700 billion to fund local banks and unfreeze local credit markets. Stop talking about it, and “get her done”! And please don’t forget about the homeowners themselves!

If our government addresses those foreclosures at a consumer level (a moratorium on foreclosures, as I have repeatedly noted, would be a great step pending sorting out the good from the bad and resetting viable home ownership with livable interest rates) and recharges the small business credit market sooner rather than later, I believe that we have already seen the bottom, and while I do not expect a spectacular recovery in the near term, I also think we can keep from falling through the floor. But if trust and confidence do not return and stay with the basic American consumer/homeowner groups, well… we’ve already seen where that can lead.

Maybe, before it really takes action, the government has to make sure that Treasury’s cronies are on board with fat retainers for the big law firms and major financial advisory fees for the bankers – all for a group of folks who found and exploited the loopholes that got us here in the first place. Come on… the middle class and those at the bottom of the economic ladder need some representation too. Trickle down seems to mean trickle up into the pockets at the top.

We’re not out of the woods by any means… we just found a clearing – let’s not mistake that for “mission accomplished.”

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