Wednesday, February 11, 2009

Being for Insane Ideas

Recently, Tom Peters wrote regarding the financial crisis, "I, for one, cannot conjure up any 'sane' fixes to deal with this insane situation." Perhaps a very good "insane" solution may be not to buy these bad assets on bank books that CEOs created and boards sanctioned in order to collect fat fees for shuffling Collateralized Debt Obligations (CDOs) that had no value. Bond insurers also got in on the deal, writing policies against these bogus instruments, collecting fat fees too for creating value that did not exist.

If banks want to clean their balance sheets, why not do the insane thing and adjust mortgage rates without fees to allow homeowners to stay in homes? Would this not decrease homes that will go into foreclosure over the next few years, creating more bad assets for banks? Why not also do the insane thing and sell off these bad assets at the current market value or below and start again? Maybe banks should take a loss this time. After all, how much did they gain in the scheme?

My partner and I have created value by going directly to the banks, buying these assets with cash, and putting people back into home. (Some banks are opposed to directly buying from them, perhaps because they don't know the value of the assests and don't want to lose, although they're losing big already. Middlemen also want to continue collecting fees.) On a relatively small level it has worked wonderfully and we have created jobs and rescued neighborhoods from potential blight. (Our homes are mostly in middleclass suburban neighborhoods. We know others doing the same in other communities with success too.) If banks do not want to clean their balance sheets through creative means that actually create real value in the US economy, maybe we should let them fail.

The value that banks created has been for themselves to the detriment of others. Do not think for one second that these guys did not know what they were doing. They most certainly did. They now seem to be waiting for the government to step in and buy these bad assets that they themselves created.

It used to be so that banks did not like such assets and they were not in the housing business. I guess greed placed them squarely in the housing market. Now, they appear to be sitting on these homes in hopes of a return on an incredibly bad investment. The value of homes can then take on the present market value, returning to more of what the homes are actually worth. The investment vehicles created by banks and sanctioned by credit agencies have no real value anyway. Maybe we have to rebuild value.

Banks created the perfect storm through engaging the credit agencies and bond insurers, who were all too happy to collect fat fees also; gullible homeowners got into bad mortgages even when credit worthy and greedy ones used their homes as bank machines to take trips here and there and buy boats and other toys. (Some also sent their kids to college or built up their businesses.) This way there was plenty blame to go around.

Maybe we should ask where the problem began. It seems like the problem began with these large investment banks in cahoots with credit agencies and bond insurers. Perhaps we should let these banks fail that produced no real value in comparison to the disaster created and allow the market to re-create value for these homes. Perhaps a great many people who created these bogus investment instruments and CEOs and board members who went along with them should be prosecuted and sent to jail.

Warning: This post is written by a non-economist, non-banker, two-bit entrepreneur. But perhaps this insane idea, may, in fact, be sane. What do you think?


Bob Foster said...


I too am a non-economist and non-banker, but I like your idea of letting the few bad banks self-destruct, and the leaders of these banks punished. There are many, many good solid banks across the country that never played the get rich quick game; never made a subprime loan, and they should be allowed to operate as they always have. The rest should pay the consequences.

At the same time, I realize our economy runs on pure emotion, not just money or banks. The stock market and other Wall Street schemes are more insidious than the casinos of Las Vegas—and we call it our economic system. Consequently, our government must try to save the few bad banks just to stop people’s emotions from getting out of hand. Maybe what we really need is a whole new economic system.

With regard to being a two-bit entrepreneur…I congratulate you. There are 21 million businesses in the U.S. that have no employees. This is about 70% of the total. Almost all of these businesses are “two-bit” entrepreneurs, because that is about what they started with. They saved, they sacrificed, they borrowed from family and friends, and they used their credit cards—because no one else would take a chance on them. These small, non-employee, businesses contributed $1 trillion to the GDP last year, and I take my hat off to each and every one of you.

Keep up the good work Judith; your voice is a breath of fresh air in a world that is pretty dreary right now.

Bob Foster

judith ellis said...

Bob - I cannot express in words how your words so encouraged me. Please suffice it to say that I am terribly appreciative of them. They are indeed those that keep me moving forward. Being an entreprenuer has not been easy, but it has most certainly been most enjoyable. In fact, all that I have ever done has been just the same. Thank you so much.

I absolutely loved your opening, no truer words could have been spoken about banks. John Bogle has an excellent analysis of what happened after Geithner gave his speech, one that I had not heard elsehwhere, even from a friend trader who has done rather well over some 25 years.

I have read a number of books over the years that have really got me thinking about the game aspect of the stock market. "How I made $2,000,000 dollars in the Stock Market" by Darvas and "Reminiscences of a Stock Operator" by Lefevre about Jessie Livermore are both very fascinating books, not only for what they say but for what they don't say.

Your point about the economy running on emotions is so very true. The really sad thing is those who are in power, such as many Wall Street bankers who caused such messes, offer apologies, simply sitting on the sidelines waiting for the ire to subside and return with the same practices. We've been here more than once.

What to do? For one, we should hold them personally responsible and do the just thing and begin prosecuting those whose practices are so unethical that they cause such worldwide disruption. Many may have gone beyond bad ethics to breaking the law. The attorney general of NY is looking into the practices of Merrill Lynch; I support this.