This is what I recently wrote to my Maryland federal representatives:
If these mortgage derivatives are so complex that the businesses that paid Ph.D mathematicians and physicists to construct them don't understand them, then why is it that overnight or in a matter of weeks we will be seeking to place all this "toxic waste" on my balance sheet!
Please consider the model of FDR during the run on the banks in the 30s. He did not say, “Oh. These banks have lost a whole bunch of money by imprudent investments and improper lending, lets give them $700 Billion dollars to continue what they were doing before!”. FDR closed the banks. He had the books examined, then re-opened the viable among them with appropriate guarantees.
It is not possible to send good money after bad on a faulty business model. If tomorrow, a terrible financial tragedy such as the Chinese and Russians decide to liquidate all of their Mortgage Backed Securities from Fannie Mae and Freddie Mac, then perhaps a direct intervention should be done. But even in that case why intervene? If they dump good MBSs on the market at low prices, it would allow the American People to buy overpriced debt for pennies on the dollar and hence it may even help underwrite the high cost of some ill-advised mortgages that many recent buyers have.
It is not lost on me that the threats posed by Russian and the many Asia MBS holders to the current interest rate levels. I suspect the threat of 20% interest on new mortgages and car loans may have a tendency to focus the mind. Well guess what you could use that $700 Billion to a Trillion dollars that is burning your pockets. It could be used to subsidize future mortgages offered by Fannie and Freddie. Ergo, at the closing table have GSEs show up and buy whatever points are needed to buy down the mortgage rate to a percentage equal to current inflation rate plus one percent (the normal appreciation rate of residential real-estate for the last 70 to 100 years!).
Please consider the following calculation:
(1 Trillion dollars ) / (2 million foreclosures ) = $500,000 per foreclosure.
I am sorry, but this just does not COMPUTE!
I truly think that the problem may be that Goldman Sachs and other firms may have a few unexpired options with expiration dates spread throughout the coming year that 700 Billion may help cover. Please don’t fall for this.
As far as granting job security to Wall Street executives who failed basic math and failed to realize that the purpose of derivatives is to decrease the volatility of returns, not increase them, I don’t think so! As a student of mathematics and basic finance myself, I assure you that these fellows well understand what they have on there books and what is in Congress. They have on their books some bad bets, and in Congress they hope that they have enough folks that are gullible enough or corrupt enough to bail them out.
Please just let the market work and flush the “bad money” out. Don't let them rail road you into "stupid stuff" like the expected 3 trillion dollar bill for the current Iraq adventure that if you divide by 30,000,000 Iraqis nets out to about $100,000 per Iraqi citizen.
Please don't have the history books cite you and the other current office holders as the “most simple” group of legislators the world has seen. Please read the fine print, the same way I have on 5 fairly priced contracts my wife and I have offered on homes in Maryland. Each contract rejected because of some higher bid placed by folks who were probably not offering any down payments nor reading anything but the lips of the real-estate agents, loan officers, and appraisers who assured them that a $300,000 dollar house was worth $700,000 and that real-estate only goes up in price. (Please tell that to the Japanese after the last 15 years that they have experienced.)
One of the most dramatic effects of having NO bailout is that concerns such as Infosys and SATYAM may have less money to fund outsourcing efforts! Ergo, more American software and electrical engineers can stop trying to sell real-estate and start paying off those mortgages they took out by working at jobs that they trained for.
The London Economist starting tracking the problems in real estate 2002, sounded alarm in late 2004: http://www.economist.com/finance/displayStory.cfm?story_id=3477796.
The inflated values have been known by regulatory officials for some time: Real Estate agents informed me in late 2004 that the FBI has begun threatening jail time for fraudulent appraisals:
http://realtytimes.com/rtapages/20050202_appraisalcrisis.htm (Apparently, they took no action!)
A discussion of the Mathematics, dynamics, and Psychology of the Real Estate Bubbles delivered at a conference sponsored by the Federal Reserve and the World Bank
http://realestate.wharton.upenn.edu/newsletter/bubbles.pdf Keep this one in mind as you see Federal Reserve officials pretend at surprise and amazement at the on going difficulties in the Real Estate market. This was presented in 2002 about the same time that the Economist started tracking the phenomena.
The following article is a real gem. It outlines in a fairly complete fashion the geometry of the mechanisms that created the bubble:
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html
Please note that the article is dated April 2004 and cites information from the London Economist which noted that the current situation was a CERTAINTY, with the historical data to support the thesis.
Let the market work and use that $700 Billion to give my neighbors and my family healthcare and a quality education system that we as Americans can be proud of.
