My proposed solution to the current financial “crisis”
Posted by Mike Sylvester - 9/23/08 @ 9:07 pm - Filed Under National Politics
The idiots in Washington DC want the Federal Government to step in and spend at least 700 billion taxpayer dollars to purchase “toxic” debt held by banks who allowed people to purchase more house then they can afford. This is a stupid and irresponsible solution. I have researched this a lot and I feel the problem can be mitigated by a simple approach. I do not think my solution would solve everything; however, I think it would resolve much of the mess and better yet would setup a process to fix the problems that created this mess in the first place.
Step 1 is to change the mark to market accounting rules for sub-prime loans. These sub-prime loans are loans that were made to borrowers who should never have been allowed to borrow large amounts of money in the first place. Mark to market accounting requires banks to value their loans once per quarter and to adjust them on their balance sheets to the amount they would sell for on the open market. This works well for stocks and mutual funds that are sold daily on the stock market; it works poorly for sub-prime loans since no one is buying them right now. In fact Merrill Lynch just sold their sub-prime loans for 22 cents on the dollar. Since the market is so “toxic” right now these loans are being marked down to approximately 20 cents on the dollar and they are likely worth at LEAST 40 or 50 cents on the dollar. If I were King I would have one of the Federal Regulators set a value on all sub-prime portfolios in the United States once per quarter until step 3 below was implemented. Once step 3 was implemented we could use the actual numbers from the sub-prime loans sold off by Fannie Mae and Freddie Mac to set a more accurate value. This would mean banks would not have to take massive and unrealistic losses due to an illiquid market.
Step 2 would be to change the rules that the Federal Government uses through Fannie Mae, Freddie Mac, and the FHA for home loans. These organization currently allow people to get loans with a down payment of only 3.5% and often times they will help you get your down payment. This is absurd. The down payment assistance program should be abolished. On top of that on Jan 1st of 2009 the minimum down payment should increase to 4%. Each year thereafter it should increase by 1% per year up to at least 10%; preferably 20%. This would mean that far fewer loans would fail in the future and it would be implemented gradually so as not to unduly affect the housing market.
Step 3. I would pass a law that would make Fannie Mae and Freddie Mac temporary organizations. They are a large part of the problem. I would like to see them phased out over the next fifteen years. Over each of the next ten fifteen years I would require them to sell 5% - 15% of the mortgages they hold. At the end of fifteeen years they would be dissolved. Their mortgages would be sold in a public auction to the highest bidder.
Step 4. I listened to the head of the SEC plead with the Senate Banking Committee for someone to step in and oversee and regulate Credit Default Swaps. This is a 58 trillion dollar market that is currently not regulated and ties into this whole mess. I would listen to the SEC Chair and I would step in and oversee and regulate this market starting tomorrow.
Step 5. I would investigate the regulations in place and see where they failed through a series of investigations done by professionals; not Congress. We need to abolish ineffective regulation and we need to put more effective regulation in place. I think we have too much regulation and we need to make it smaller and more effective.
Step 6. I would increase the reserve ratios required my many institutions. They have been lowered to far in my opinion. Too many banks have leveraged their debt too far; increasing the reserve requirements will prevent them from leveraging things as much.
That is it. It would not cost any tax payer dollars. It would address the core problems as well as the current problems.
What do you think?
Mike Sylvester
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20 Responses to “My proposed solution to the current financial “crisis””
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Mike:
Since we know this isn’t going to happen what about:
1. Removing mark to market (at least for now) - since it is the culprit of the problems.
2. Extending FHA insurance coverage to sub-prime (this would restart the marketplace) and could probably be done at about 10% of the $700 billion?
It’s a start. Where did that idea come from?
Neil,
I like my plan much better!
The plan you outlined is better then the plan they have come up with since I think it could be done for ABOUT 35 billion dollars (5% of the assets insured).
Mike
Observant, now we are all on the same page.
Amazing, how we can come together.
It was not Neil’s or Sylvester’s sound finance
idea’s but a collabrative idea of many folks.
Agreed… Absoulutely!
I do not want to bail anyone out that has not used good judgment.
I hope you all paid cash for your
cars, and can aford your rent/home payments
& the taxes we surely will all have to pay.
Better budget your gas, food, and extras, too.
Silly for me to think like we have been always lived in a repression.
Well pay your debts and your neighbors debt too!
Good Luck!
Bobbett,
The plan Neil outlined is supported by Dave Ramsey and several economists…
My plan is mine alone!
Mike Sylvester
Mike:
I like your plan much better as well, but there no way we’re going to get that done this week (which sadly appears to the be the train).
We need stop killing these companies with mark-to-market. It’s a wonderful idea in principle because it keeps companies from having bloated balance sheets, but it only works when there is a continued market for items - unfortunately, there isn’t for these sub-prime bonds. You’re the CPA so I’ll let you judge if I’m correct…
But it appears to me that we just need to get the market moving again.
P.S. Mike, glad you’ve heard of Dave Ramsey! :)
Mike,
I hope you have sent your plan to Luger,Bayh,and Souder. I will do so and if enough of us communicate they might get the message.Suspending the mark-to market,regulating “swaps” and the derivatives market would do 85% of the job.Just MHO as a conservative economist.
Neil Kelty,
Not only have I heard of Dave Ramsey, I am his endorsed local provider for Certified Public Accountants in the Fort Wayne area!
Mike
Mike,
While I see some good points to your plan but here comes some questions.
1- How to find where the “subprime” loans and the poor performing loans? They are two two issues.
2- Was the Merrill Lynch sale of “subprime” or in fact the sale off of “charge offs.” When you get down to 20 cents on the dollar they are little more then the paper they are written on. The homes have been reproed, in most cases, the remainder balance is sold off.
I think the media grabbed and ran with something before they checked out the facts.
3- I agree with your plan after we isolate the bad loans. To pour through the millions of loans and isolate their tangled tails through the entire financial world will take months and maybe a year or so. How do we keep the fiancial world go when no one knows where they are and how wide spread they are?
I do disagree with your 10% down but agree with returning to 5% with A+ credit. Keep in mind Fort Wayne has some of the lowest cost of housing of any place in the United States.
JQ,
Let me answer you questions in order.
1. It is easy to do. These obligations are often bundled together. The companies owning them can and do bundle them by risk.
2. The sub-prime loans from Merrill Lynch were purchased for 22 cents on the dollar. It is my understanding these were sub-prime loans purchased at a “fire sale” price.
3. The financial world is still operating and the mainstream media is re-printing the talking points given to them by the Bush Administration. Let me give you some examples:
a. I have a friend who is single, 25, and bought her first home last Friday. She got financing with no problem.
b. I have a client last week who purchased a $40,000 SUV and financed the entire thing on credit just last week.
c. I called my bank yesterday and asked them if I could borrow another $100,000 if I wanted to. (I do not plan on borrowing it, I just wanted to see if I could) Their answer was yes; however, it would take an extra day or two to process the paperwork.
There is plenty of money available for people and firms with good credit and a solid banking history; at least that is true in Fort Wayne. Credit is harder to get for people who have maverage or poor credit; that is how it should have been all along.
4. Why do you disagree? I said 10% down minimum, I prefer 20% down. 5% down is not enough to protect us against what just happened. We need to LEARN our lesson.
Mike Sylvester
JQ:
20% down protects us from getting homeowners into the short sale mess they are currently in - it also ensures that you don’t pay PMI and that you are ready to buy a house.
Mike, here is back at you point by point..
1- One has to unbundle each mortgage, pull the app, recheck the credit, and revalue the house worth. Then grade it. That would allow you to grade them if they are preforming or unpreforming loans. Not just to find subprime loans. That process will take years to complete.
2- I saw the story on the “fire sale” but think about the houses would be worth between 50-75% of most every loan made. Hence, selling below 50% across the board is plain stupid even for a fire sale. Even to raise cash would bring more money at auction. This one just does not add up to common sense and I think the media messed it up. Which would not surprise me.
3- Talking points by Bush via the media seems like a stretch but tell me CNN and MSNBC would love to make him look like moron if they could. Why would the Democrats in congress just go along with this BS if they could blow him up?
a- While your friend may have sailed through and congrats to them. However, the fact is home purchasing is in the tank here in Allen County, Indiana, and the United States. Values have been falling before this bailout/loan came to light. Not being a smartass Mike but there where mortgages made right during the depression.
b- Good for your client on the SUV. I bet the price was a far cry from what they where they where a year ago… Car sales have tanked even with low loan rates…
c- I do not know your bank but I can tell you there is one locally owned bank that you best have A++++ credit and plenty of security to go with it. Be it business or private loan.
If banks where flush with money why don’t we see the ads about them having money to loan. During the good times they all where running ads to get their money out there. There seems a lack of ads now.
As for the downpayment issue. At one time your loan payment could not be more then 25% of your monthly take home pay. That your total mortgage could not be more then 2.5 times your annual income. All of your remaining bills for the month could not be more then 25% of your monthly net pay. Plus a perfect credit history. Then you had to have at least 5 years on your current job. Then with 5% down you could get a house. That was the cheapest way into a house outside of being a Vet and using the VA.
I will tell you if they go by your 20% down the housing market will come to a standstill for a long time. Values will continue to decline. First time home buyers will not be in the market for two to four additional years as they save up the down payment. That means those who are seeking to move up will not be able to sale their homes…
I see no reason to set a high downpayment rate because some group may break the law. Those people belong in jail and congress should be tossed out. What you are proposing will hurt the person at the bottom of the food chaim because of the top of the food chain are crooks.
Sort of double talk about not wanting to bail the AIGs of the world out but want everyone in the future to make a downpayment large enough as to cover any down turn in vlaues caused by the AIGs breaking the law in the future.
I think before you promote 20% a bunch you talk to the people in real world and see what impact that will have on future home sales.
Again I ask this question, what is your proposal if you are wrong and we follow your path? How far will you allow us to slip into a RECESSION before you start a bailout program?
Neil,
Right on partner. 20% radically lowers the chance of default.
Mike Sylvester
J.Q.
1. I think it could be done; however, I concede it would take a period of time; however, that is the banks fault for bundling them into CDO’s. I expect it would take them several months at a minimum.
2. No they were bought at 22%. I think that all sub prime loans shoul be valued for ABOUT 50 cents on the dollar. That is a conservative guess and would work for me. Realize that there are legal costs, foreclosure costs, maintenance costs, selling costs, etc.
3. I think you are missing the point. Today in American ANYONE with good credit or with verifiable assets can get a loan and I have given you several examples. The ONLY thing that has changed is banks have INCREASED their lending requirements and now people with poor or average credit cannot get loans as easily.
It is likely that the banks have over-compensated and are likely turning down some people who they should give loans. That is normal and will adjust in time.
As far as downpayments go I said to increase them by 1/2% to all of 4% next year and then 1% per year. That would have a minimal effect on the housing market. It would bring nothing to a standstill because it happens over 16 years.
I will handle the rest of your comment in another post because this is getting too long as it is.
Mike
J.Q.
You wrote:
The above paragraph makes no sense to me.
Of course I do not want to bail out AIG. They ran an unsuccessful business and should be dissolved. Of course I think homeowners should pay downpayments of 10% - 20% when they buy a house. That would prevent a lot of things and I will spell them out for you:
1. If homeowners put 10% - 20% down then they have a vested interest in their house. They will do everything they can to protect their house because their money is in the house.
2. The failure rate on loans with 20% down is likely around zero. That is good for everyone.
3. Our entire economy is built on layers of debt. This is bad and I want to see that changed. The change will be painful.
4. BY requiring minimum downpayments of 10% - 20% on a house we will force Americans to leanr how to save. This would be good for the future of our Country.
Mike Sylvester
J.Q.
You next wrote:
Once again J.Q. my proposal is to increase down payments from 3.5% (as it is today with FHA) to 4% on Jan 1st 2009. Then I want to increase it by 1% per year up to 20% if you get an FHA loan.
My plan would increase down payments over a sixteen year time period. That would have little effect on the housing market.
My CPA firm filed 500 tax returns this year and I talk to a wide variety of Fort Wayne residents every day of the work week.
You are right that people would have to in some cases buy smaller houses and in some cases they would have to rent for a year and save up that extra .5% I want them to put down starting next year. That is not a big deal and would not effect the housing market significantly.
Mike Sylvester
J.Q.
Next you ask:
Once again I will answer your question.
Then we will go into a recession. We need to go into a recession. We need to wake the American people up and we need to teach them to stop borrowing money for everything they buy. We need to become a “lay-away” culture rather then a “charge it now” culture.
I want the recession to occur now. I do not want to pass it along to my kids and grandkids.
We need to take responisbility and let the correction occur.
Mike Sylvester
So if the recession turns into a depression that lays off millions, maybe putting the final death nails into the american automakers, maybe loose many of our small businesses, people in their mid 50’s taking a major hit to their retirement funds,and so forth is fine with you.
I have issues over the amount, oversight, and taxpayers first. I have a bigger problem of congress changing the laws so it “never happens again.” Which I think ties to some of your points.
Thank goodness they are not following your method.
Mike,
I am sure you talk to all kinds of people from about every walk of life. I also trust you have more insight into true accounting then I will ever have. However, I think this problem is much bigger, and with more impact then you may give it credit to be.
I guess why I may be more concerned is I set on the sidelines (in management but way down the ladder) as one of the largest companies in the US raised cash to purchase a second company in a non-friendly take over. Both raising the money and the take over may have not been illegal but the word moral was not a word ever used.