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A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

In a time of economic crisis, where every moment brings more bad/alarming news, what does it mean that the government is essentially in a holding pattern for the next two months?

Many people are concerned this will mean a continuation of the Paulson strategy of throwing good money after bad. (”Am I the only one worried that by the time Obama is sworn in on January 20th, the Paulson Treasury will have run through almost a trillion dollars to little or no effect?“) Currently there are attempts to qualify GM as a bank so it can get a cut of the bailout money (LOL!!!). A similar request by GE makes more sense to me because GE is a well-run company. Several large cities are also making requests for funds. Personally, I’d give funds to Wasilla before I’d hand a dime to GM.

Still others think that Paulson and the Congress will take this moment to do nothing — and that’s a good thing. Oklahoma Sen. Jim Inhofe thinks this is such a good thing that he wants to legislate a freeze on the remaining bailout cash. (Inhofe’s willingness to rip Paulson a new one is a great indicator of how the Bushies are closer to dead-duck instead of merely being lame: Senator Inhofe suggests Paulson “may have given the [bailout] money to his friends.”)

The last major outbreak of government stasis — when Gingrich et al. shut down the government and kept passing level-funding resolutions for all departments — certainly resulted in a lot of good things. It got us our long-departed budget surplus. It got us the truly amusing Monica-gate (remember when we thought that stuff was important? Ahh, the good old days.) And it showed us exactly what a wiener Gingrich was. A bipartisan win! Of course times were different then. We weren’t in two wars and a “recession”. Tax revenues were rolling in and not spending them meant putting money in the bank.

This time it is difficult to see maintaining the status quo as a good thing. Despite swearing that he wouldn’t reat this money as a blank check and just spend it on whatever he wanted to, Mr. Paulson has done just that. Even so, doing nothing is probably a bigger risk. Taking minimal action was how we wound up with the Great Depression, after all.

Fortunately, the Bushies and the GOP are against bailing out the auto industry. Also, I am not particularly worried about the proposed bailout of the auto industry in this rump session. If Congress even manages to pass the clearly needed extension on unemployment, it will be nothing short of a miracle. Sadly, my hopes diminish with the next congress.

What is clear is that it is time to shorten the time from the end of an election to when the new regime takes over. We’ve done it before. Originally inauguration day was March 4th. It clearly needs to be moved up to at least Jan. 1.

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Nothing happens until the new prez takes over. Good or bad?

I’m afraid many of the New World Order conspiracy theories will have to be laid to rest after this weekend’s G20 meeting. Worldwide coordination of anything other than a rate cut here and there will never fly. Not even the power of the dark side is sufficient to get substantive agreement among the G20. So, what came out of this weekend’s meeting? Pretty much nothing But, you ask, no new world currency, no new North American currency, no revaluation of the price of gold, no renegotiation of trade agreements, no dropping the US$ as the world’s reserve currency? Nope, nothing. However, based on their recent track record, this was probably the best outcome.

Telling It Like It Is

Last week I said the economy was going through deflation. That was just a trial balloon and an attempt at being PC. We’re entering into a depression. Things are a lot worse than underwater mortgages and SUVs losing trade-in value.

“The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself,” former Goldman Sachs chairman John Whitehead, 86, said at the Reuters Global Finance Summit on Wednesday. “I think it would be worse than the depression,” Whitehead said. “We’re talking about reducing the credit of the United States of America, which is the backbone of the economic system.” When you’re 86 years old and Social Security and Medicare’s got your back, why mince words.

Here’s what another senior citizen, George Soros, has to say, “Our greatest economic depression is ahead of us.”

One more retiree, Warren Buffet, in September said, “This is an economic Pearl Harbor. There’s no plan B for this . . . we were at the brink of something that would have made anything that happened in financial history pale.” (Pale by comparison . . . finish your sentences Warren).

Former Fed chairman Paul Volker, a downright New Age positive thinker by the standards of this group, says, “There’s a 75% chance of financial collapse within the next five years.”

From academia: “The United States is bankrupt. Our economic situation is worse than Brazil, worse than Argentina, worse than any nation in the world,” according to Professor Laurence Kotlikoff of Boston University. I never heard of this guy before, but he’s got a way with words. And from government service: “When we look back 10 years from now, we will see 2008 as a fundamental financial rupture,” says Peer Steinbruck, Financial Minister of Germany.

Associated Press on Friday reported that the mayors of Philadelphia, Atlanta, San Jose, and Phoenix are requesting bailouts. They’ll have to get in line behind the entire state of California, NYC, Chicago, Detroit, and LA.

There are a few bright spots, though; gun sales are one of them. The FBI reports that gun sales increased 13% in October and had a huge 49% spike in the first six days following the election. Hurry and get yours before supplies run out.

It’s time to prepare for hard times. There are a number of lists of “100 Things that Disappear First.” Google one that addresses your lifestyle and climate. Many of these items, like manual can openers, make good stocking stuffers. By the way, no Gift Cards this year. Gift cards are not yet guaranteed by the FDIC. If the store goes out of business, that’s the end of the gift card. Same thing with product maintenance contracts.

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G20 Meeting a Non-Event, Depression Full Speed Ahead

One of the terms that veterans of the stock market often use to describe buying patterns is ‘smart money.’ Smart money refers to buyers who are informed, intuitive, and quick enough to anticipate market trends before they actually occur. Conversely, the term ‘dumb’ money is the money from buyers who rush in after the boom occurs, and get stuck holding assets that are worth less than they paid for them in the first place. The relationship between smart money and dumb money is a natural part of any speculative market, and is as old as time. Ironically, a smart investor can easily become dumb money when the market turns against him.

Nowhere was this more evident than in the housing market. The problem with the housing market is that while it was a speculative market for many, a large amount of buyers simply regarded it in the same way that they would regard a car. The mindset of these buyers was that housing, like food and clothing, was a fundamental need. As a result, many of these people assumed that whatever price they were able to negotiate and afford for their house must have been a reasonable one. They planned on living in their houses for an extended period of time, perhaps even the life of the loan. Sure, they might occasionally withdraw equity from the house, but only in cases of need and importance: things like college tuition, home improvement, or paying down other debt. All of these seemed reasonable, since home values would always go up in the long run, right?

But even though the paradigm of rising home values is still intact over the long-term, no one had considered the possibility of a severe short-term decline in home values. Unfortunately, that is precisely what has happened over the last year and a half. Suddenly, a huge swath of people suddenly seemed like dumb money. What separates dumb money from smart money, of course, is the ability to react constructively and profitably to a negative situation.

So I spoke with a veteran real estate agent (of 30 years, no less!) last week, to get her opinion on what be smart money might be doing in these market conditions. In no uncertain terms, she said both herself and her colleagues believe that the market is not anywhere near its trough. A true rebound, she said, would only occur when prices dropped far enough that credit-worthy first-time buyers would feel comfortable making purchases. These would be the buyers who fit into the profile I mentioned above, who regard housing first as a necessity, and second as a long-term investment.

These people weren’t quite the same as the smart money I had in mind, so I clarified my line of questioning.

“The people with money to spend, who know how to spend it…what are they doing right now? Are they just waiting on the sidelines, or have they started to brave the waters again?”

With that definition, she immediately knew who I was referring to. She pointed me to a few recent statistics, conveniently located on a website she frequents.

“You’ll see that it shows a [5.5%] rise in existing-home sales, but an 11.5% drop in new-home sales,” she commented. “Now think about it…does that seem rational?”

Of course, those numbers, indicating a huge spread, do not seem reasonable in the least. I told her so.

She explained the discrepancy by saying that “What it means is you have banks who are just beyond desperate to get rid of these, and are willing to do so in any way they can.”

As she said this, I realized that I had my answer. “So smart money could be hedging the values on their own properties by swooping in on foreclosures and short sales.” Yes, I said it more as a statement than as a question.

She responded with a characteristically Midwestern aphorism (she is originally from Nebraska, I discovered). “I can’t say for sure, but I’m pretty sure. So take that and two dollars, and buy yourself a cup of coffee.” I took her advice, and took a walk to my neighborhood Starbucks that evening.

The next day I discovered during a meeting at my office that my manager was considering making a hedge play on her own real estate property. She lives in a three-bedroom condo about twenty minutes from Los Angeles (by my estimation, probably worth around $600,000), but shared with us that she was strongly considering buying either a house or a condo in San Diego.

Sometimes the difference between smart money and dumb money can simply be the ability to sense opportunity. As I said above, the long-term paradigm for home-ownership has not changed. Unlike tulips and tech-stocks, people will always need homes, and it logically follows that home values will always appreciate over the life of a mortgage. So when banks start accepting short-sales (as in low-ball) offers on homes, smart money sees a potential profit at a very low risk. It’s worth noting that these are not the flippers, who so famously created artificial levels of demand in the housing market that contributed to the bust we are all suffering through. These are shrewd individuals with high credit scores, who see a significant opportunity to improve their net worth over a long period of time.

It doesn’t mean that we’re in for a quick recovery. But that is logic you can’t argue with.

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The Housing Crisis: What is the Smart Money Doing?

The Federal Home Loan Bank (FHLB) system was established in 1932 to fill the need for a stable funding source for residential mortgages created by the undermining of the American banking system during the Great Depression. Today, the 12 Federal Home Loan Banks and their members are the largest source of residential mortgage financing in the country. Yet until this year, no one had taken a hard look at how membership in the FHLB system affected commercial bank risk.

“Although our findings suggest that the cumulative impact of FHLB membership and advances on bank risk is modest, we caution that our sample period was one of robust economic growth, and that serious moral-hazard problems could arise in bank leverage ratios revert to historical norms,” explains Tim Yeager, associate professor of finance at the university of Arkansas’ Sam M. Walton College of Business and co-author of the study which was published in the Journal of Banking and Finance. “The increasing reliance on these advances is a potential safety and soundness concern because access to them can undermine market discipline, and the FDIC [Federal Deposit Insurance Corp.] cannot raise premiums sufficiently to deter risk-taking.”

Yeager and his colleagues, Dusan Stojanovic at the Federal Reserve Bank of Chicago and Mark Vaughn at the Federal Reserve Bank of Richmond, VA, found that liquidity and leverage risk were modestly higher for FLB members than for non-members. Credit risk and overall risk of bank failure were unaffected byFHLB membership. FHLB members were exposed to less interest rate risk, which measures the effect of variable interest rates on bank earnings or equity, than non-members.

“Although the evidence fails to produce a ’smoking gun’ the worrisome incentives embedded in FHLB advances should give policymakers pause,” Yeager said. “We argue that bank supervisors should remian vigilant, and only careful monitoring by state and federal supervisors can prevent distressed banks from responding to the moral-hazard incentives associated with FHLB funding and underpriced deposit insurance.”

Commercial banks have turned to FHLB advances to help close the gap between loans and deposits since the early 1990’s when legislation opened the system, previously restricted to thrifts whose focus was on accepting deposits and orginating home mortgages, to commercial banks and credit unions. Researchers suggest future legislation or regulation may impose usage restrictions on advances similar to those used on brokered deposits on a capital charge on institutions having large amounts of collateralized obligations. The FDIC recently announced that it will be FHLB advances into account when setting deposit insurance premiums in 2009.

The issue of bank risk, whether associated with FHLB membership or not, should not greatly worry insured depositors. Uninsured depositors and those wishing to ascertain the health of their bank should monitor the risk levels of their financial institutions. Detailed information on specific banks can be found on the FDIC web site at fdic.gov. According to Yeager, if a bank’s core capital is below 5 percent and has been falling over time, the bank’s solvency may be an issue.

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Is the Federal Home Loan Bank System Hiding Risk ?

There was an eruption across news networks and websites earlier this week as Henry Paulson announced that the Federal bailout package, dubbed the TARP (Troubled Asset Relief Program) would no longer function as a program to purchase troubled assets. Sparing no time to allow the irony of this to sink in, Paulson proceeded to outline what many of us have been suspecting all along. The first portion of the bailout money, approximately $260 billion, has been set aside to purchase stock in banks.This has been fittingly dubbed the Capital Purchase Program (CPP).

There are a few different ways to look at this, but it would seem that the Treasury believes that their primary goal is to ensure that survival of the American banking system, and that the best way to do this is to provide them with excess capital and allow banks to meet the demand for loans. It also would seem that the Treasury is making it up as they go along, but that’s another discussion for another day.

So what to do with all those bad, ugly subprime loans that they were going to purchase? Is there some way to make them, well, not so bad? Ah, yes, by rewriting them! The Federal Housing Finance Agency, in an almost simultaneous announcement, outlined a plan to restructure delinquent and troubled mortgages held by Fannie Mae and Freddie Mac. Homeowners would have the terms of their loan adjusted as follows: payments could not exceed 38% of their household income, the maturity date of the loan could be extended to 40, rather than 30 years, and a portion of the loan principle could be deferred.

I won’t bother to elaborate on the philosophical quandaries presented by this proposal, but rather I will focus on the issues of practicality. First, the fact is that only 20% of the subprime mortgages in America are owned by Fannie and Freddie. Second, of that 20%, only a fraction are actually the whole loans. Since loans have been chopped up, bundled, and sold in fractional shares to investors, any one of those investors could stop the loan modification from going through.

But then why would those investors want to block the restructuring? After all, doesn’t that help them retain the value of their investment? Well, yes and no. Most of those investors are not individual retail investors, but rather are institutional investors, such as banks, investment banks, trusts, hedge funds, etc. That means that in addition to holding the mortgage backed security, they also own the collateralized debt obligation (CDO) tied to that security, and more likely than not have also probably issued a CDO or two (or several) on that security. So whereas with a traditional investment in a security, you have a winning bet and a losing bet, with mortgages and mortgage-backed securities, you could have one winning bet, but multiple losing bets. Michael Lewis, the celebrated author of the Wall Street classic “Liar’s Poker,” describes the situation succinctly in this article.

Let’s not forget that additionally, from the perspectives of homeowners, it would exacerbate the plunge in home values across the country, and could potentially encourage non-delinquent homeowners to stop paying their mortgage in hopes of a loan modification.

Is it any wonder that we’re in this mess?

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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

From its inception, the primary focus of the $700 billion bailout package was on businesses or, more importantly, banks and financial institutions. The plan was aimed at providing financial support to a system that had ceased to function properly, with credit markets freezing up and firms gasping for the additional capital they needed with no one willing to give it to them. Of course once the government gave them that capital it’s been having a hard time persuading them to lend it out again. Still, it appears that the Treasury is ready to broaden the bailout’s goals and provide assistance to an entirely new demographic: Consumer debt.

Treasury Secretary Henry Paulson came out today to let us know that Uncle Sam would not only be bailing out banks and other troubled lenders, but is going to (attempt) some rescuing of consumer debt firms as well. This “second stage” of the bailout, as it’s being called, officials are hoping to bring in some private money as well, which would give the bailout efforts more weight. In a surprising change in focus, Paulson said that the government will no longer be planning to buy troubled mortgage assets, which was its original intention, but will continue to examine ways to help homeowners so that they can somehow stem the tsunami of foreclosures that’s appeared in recent months to be gaining momentum.

Paulson noted that “Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions, “Second, the important markets for securitizing credit outside of the banking system also need support,” he said. “Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.”

What this means is that the Treasury will not be aiming efforts at loosening up another important aspect of our economy: consumer spending. These consumer finance companies that he mentioned are the ones who provide us with car loans, student loans, and credit cards. Much like investors don’t want securities that are backed by mortgages anymore, they’ve lumped investments backed by other loans into that pack as well, and so firms like American Express are having some trouble getting the funding they desperately need.

The thinking is that by providing them with capital, they’ll once again begin lending out to consumers, which should get us to spend more and help support the economy. Then again that was the idea when they bailed out the banks, too, and getting them to start lending again has been much akin to pulling teeth. As a result there’s been a good amount of criticism that these banks are using the money for their own purposes rather than helping struggling homeowners and the overall economy. What’s stopping consumer lending firms from doing the same?

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Bailout Efforts Shift To Consumer Debt

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

At this point in the economic down-turn there’s really only one question on most of our minds: How can I become a commercial bank or an automaker?

My old friend Helen Kennedy put it succinctly in The New York Daily News: “Two more pillars of the American economy are coming to Washington hat in hand: American Express and Detroit’s Big Three. The struggling New York-based credit giant reportedly wants a $3.5 billion bailout. American Express got permission to become a bank holding company this week, making it eligible for a piece of the $700 billion bailout.”

The Federal Reserve gets to make the decision about who gets to be a bank. Since the Fed has already decided to leave us all holding the bag for bank companies, it seems only fitting that we should also get a chance at being a bank holding company as well.

Use the following checklist to see if you qualify:

• Do you need to cut borrowing costs?
• Are your main sources of funding in danger of going away?
• Do you need access to government money?
• Has your inability to get credit endangered your fiscal health?
• Would the ability to issue government-backed bonds keep you solvent?
• Are you willing to take deposits from both consumers and companies?
• Is your current role in the financial system mostly watching your investments lose money?

If you answered yes to all these questions then CONGRATULATIONS!!! You clearly meet all the essential qualifications needed to be a bank holding company.

Not sure of all that it takes to become an American car company but I do know I can fulfill one of the basic obligations: I guarantee no one will want to buy a car I build.

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How to get a piece of the government bailout package

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

There is considerable discussion as to whether we are in, or entering into, a period of inflation or deflation. It’s important to know which one it is and why, to be able to plan effectively.

It’s deflation, and we’re already in it.

The simplest working definition of inflation and deflation is an expansion of the supply of money and credit in the case of inflation. Deflation is the opposite, a contraction of money and credit. Despite recent price surges in food and oil, prices are declining across the board, and even those two headline-inflation items are down from recent highs. An interesting explanation of how this happens is on Mises.org: If the price of a good goes up (in the absence of an increase in the money supply), consumption must be reduced on some other good. This sounds more like common sense than economic theory, especially after the recent run up in gasoline prices.

The rule of thumb in deflationary environments is cash is king. This is no time for major purchases or unnecessary expenditures. Why buy today when the price will be lower tomorrow?

Stock Markets

Here’s what’s been happening in the Dow for the trailing 12 months.

This performance has had dire consequences throughout the economy. As one example, at the beginning of October, retirement plans had lost as much as $2 trillion — or about 20% — over a15 month period, according to Congress’s top budget analyst .“The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers’ savings, forcing people to hold off on major purchases and consider delaying their retirement,” said Peter Orszag, the head of the Congressional Budget Office. Savings across the board, even Harvard’s endowment, have taken a hit.

The US markets haven’t been the worst performers. “World equity markets lost an estimated $5.79 trillion during October, the biggest monthly loss ever,” according to Standard & Poor’s Index Services. “The October loss eclipsed the previous record, which was set just one month earlier, when 52 global equity markets lost a combined $4 trillion. Through the first 10 months of 2008, world markets have lost about $16.22 trillion.”

Commercial Real Estate

Due to store closings and company bankruptcies, losses in commercial real estate are mounting. On Tuesday, General Growth Properties, one of the largest mall operators in the country, announced that it is near bankruptcy. Its stock closed at 35¢ today. Its only hope now is to become a bank holding company.

Residential Real Estate

Residential real estate losses are unrelenting and the magnitude of losses is staggering.
Here’s the latest from Case-Shiller.

And faithful readers of BlownMortgage know the worst is to come.

The Deficit

OK, here’s something that’s up, the national debt, which reached $10.6 trillion the other day. The increase year over year since 2005 isn’t all that much.

However, if you look at the increase over a several-decade period, it looks like this.

Unemployment

CNNMoney.com reports that “The government reported more grim news about the economy, saying employers cut 240,000 jobs in October, bringing the year’s total job losses to nearly 1.2 million. According to the Labor Department’s monthly jobs report, the unemployment rate rose to 6.5% from 6.1% in September and higher than economists’ forecast of 6.3%. It was the highest unemployment rate since March 1994.

These figures notoriously underreport unemployment, but the trend is clear.

I hope everyone has a few bucks in the house, at the very least enough for groceries and gas.

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Everything is Deflating, Not Just House Prices

Congress gave some struggling homeowners a gift last December. On December 20, congress enacted the Mortgage Forgiveness Debt Relief Act of 2007 allowing homeowners whose mortgage debt has been partially or fully forgiven to claim special federal income tax relief.

Normally, debt forgiveness generates taxable income. Under the Mortgage Forgiveness Debt Relief Act, however, debt forgiven in 2007, 2008 or 2009 may qualify for tax relief. The Emergency Economic Stabilization Act of 2008, also called the “bailout bill”, extends that relief through 2012, according to Boston.com, the online face of the Boston Globe.

Relief is available only for debt forgiveness granted on the taxpayer’s principal residence. Taxpayers may exclude mortgage debt forgiveness if the total principal balance of their loan was less than $2 million. The debt forgiveness limit for married persons filing separate returns is $1 million. In addition, the debt must have been used to buy, build or improve the residence as well as being secured by it. Refinancing debt less than or equal to the amount of the mortgage principal prior to refinancing is also eligible for relief.

Not all forgiven mortgage debt qualifies for relief un the Mortgage Forgiveness Debt Relief Act. Debt that does not qualify under the Act may still qualify for exclusion for income taxes under the insolvency exclusion, if the debt was discharged in a Title 11 bankruptcy, if the debt is qualified farm indebtedness or if it is qualified real property business indebtedness.

Taxpayers whose debt is forgiven during 2008 should recieve a year-end statement (Form 1099-C) from their lender after January 1, 2009. This form must show the amount of debt forgiven and fair market value of any property given up through foreclosure.

To claim relief for debt forgiven in connection with foreclosure or reduced through mortgage restructuring, taxpayers must complete the relevant portions of Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it and Form 1099-C to their 2008 federal tax return. Taxpayers reorting forgiveness as a result of foreclosure on their principal residence need only complete lines 1e and 2 on Form 982. Taxpayers reporting forgiveness resulting from the modification of mortgage terms while retaining ownership of the residence need to complete lines 1e, 2 and 10b. More information about the Mortgage Forgiveness Debt Relief Act can be found on the Internal Revenue Service (IRS) web site at irs.gov and in the instructions on Form 982.

Remember, just because the federal government offers taxpayers mortgage forgiveness debt relief doesn’t mean individual states are. Taxpayers need to consult their tax preparer/advisor or state tax law to determine what, if any, relief is available at the state level.

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Tax Relief for Mortgage Debt Forgiveness

Is American International Group, Inc.’s (AIG) hosting of a conference for independent financial planners a sign that the company is rising from the ashes with the help of a newly announced bailout from the U.S. Treasury and Federal Reserve or just the latest in a string of high-profile and expensive mistakes?

Two months ago, the U.S. government and American taxpayers saved AIG from collapse by loaning the company a record $85 billion. AIG executives used the money to go on the now infamous hunting trip. Not long after that, the company paid more than $400,00 to send top-performing insurance agents on a week-long retreat. So it is understandable that people - the media, taxpayers, politicians, regulators - view AIG’s hosting of a $343,000 conference in Phoenix, Arizona with some skepticism.

The skepticism is deserved. Especially since the bailout increased to more than $150 billion on Monday. The solution, outlined in a public statement from AIG distributed to the media on Monday includes:

• The purchase of $40 billion in newly issued AIG perpetual preferred shares and warrants to purchase the equivalent of 2 percent of outstanding AIG common stock by the U.S. Treasury Department. The perpetual preferred stock carries a 10 percent coupon with cumulative dividends. Proceeds from the sale of the preferred and common stock will be used to pay down the credit issued by the Federal Reserve Bank of New York (FRBNY).
• The existing FRBNY credit will be revised to reflect a total commitment of $60 billion, an interest rate of LIBOR (London Interbank Offered Rate) plus 3 percent annually, a 0.75 percent fee on undrawn commitments and a 5-year loan term.
• AIG will transfer mortgage-backed securities to a newly created financing entity capitalized with $1billion in subordinated funding from AIG and up to $22.5 bilion in senior funding from FRGNY.
• The purchase of approximately $70 billion in Multi-Sector CDO exposure by a second financing entity created by AIG and FRBNY.

“Today’s actions send a strong signal to our policy holders, business partners and counterparties that AIG is on the road to recovery,” Edward M. Liddy, AIG Chairman and CEO said in a statement. “Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our structuring process successfully for the benefit of all our constituencies.”

Comparatively, the $23,000 that the Arizona Republic reports as the total cost AIG said it incurred for the Phoenix conference barely registers. Even if AIG picked up the full cost of the conference, it’s only slightly more than 0.2 percent of 1 percent of the total bailout cost so far. In addition, the company reports that financial planners like those attending the conference generated almost $200 million in revenues this year, as of September 30.

After being exposed by local then national media, Larry Roth told the Arizona Republic “Our success in enlisting product sponsors to pay for the vast majority of costs, while charging financial planners a registration fee and for their travel, has resulted in minimal cost to AIG.”

Liddy concurs, saying “We conducted a top-to-bottom review of all expenses of the Phoenix meeting in advance and found that it was consistent with my October 10th directive [to reduce expenses, conserve cash and cancel all nonessential conferences and meetings, unnecessary travel and excessive overhead]. This conference was approved because it provides the kind of communication we must conduct with the people who sell our products if we are to be successful and repay the U.S. taxpayer.”

Minimal cost is not free. The public is understandably skeptical of AIG’s explanations given their past behavior. There are some indications, however that this explanation has some truth to it.

Phoenix is the headquarters of AIG Financial Advisors (AIGFA) minimizing travel costs for AIG employees. Nearly 2,000 independent, fee-based financial advisers are affiliated with AIGFA, a registered broker-dealer and member of financial Industry Regulatory Authority (FINRA). On of the responsibilities of a registered-broker dealer under National Association of Securities Dealers (NASD) Rule 1120, Continuing Education Requirements, is providing registered covered persons with formal product- and regulatory-related training.

The goal of the bailout was to allow AIG to survive. Some conferences and formal training are part of doing business for a financial company. If AIG is to continue operations, let alone begin rebuilding itself or repaying taxapyers, they are going to have to spend some money to do it. but they have only themselves to blame if the public uses past experience to judge the company’s present and future actions for some time to come.

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Past Haunts AIG as Bailout Solution Announced

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

In hind sight, it’s easy to point fingers as to why Fannie Mae and Freddie Mac were so hopelessly reckless with their money. Where this crisis started and ended was in the government, spurred ever onward to grow by Uncle Sam, these firms became increasingly reckless despite their major role in the mortgage markets. Repeated attempts to bring them under control on the government failed. The average tax payer was forced to pay for these mistakes as the government took control of these two firms that had fallen so far from grace that bankruptcy was imminent and allowing them to fail could have had catastrophic consequences.

Yet officials seemed cautiously optimistic about the takeover. They hoped that it would begin a lengthy process of stabilizing the housing market. Lender balance sheets could be cleaned up, and mortgage rates and fees could get cheaper as a result of this. Mortgage securities owned by Freddie and Fannie could also be turned into Federal paper, which would boost confidence for foreign investors. Most importantly, the line of thinking was that the government could work with existing home owners and modify the terms on delinquent loans that could allow them to keep their homes with more flexibility than lender owned mortgages.

Yet today’s news of Fannie Mae’s loss of $29 billion serves as a sobering reminder that the government takeover is not the be-all end-all of mortgage fixes. The mistakes made by both Freddie and Fannie are not something that will be repaired overnight, much less in the near future. With this most recent loss, firm officials said that it hasn’t had to tap into the $100 billion of allocated tax dollars just yet. However, the firm filed on Friday that “if current trends in the housing and financial markets continue or worsen…we may have a negative net worth as of December 31, 2008.” If your a taxpayer, this probably doesn’t sit well with you.

So where did the losses come from? $21 billion was from non-cash charges related to how it accounts for tax credits it had been carrying on the books. As the firm continues to hemorrhage money, the firm is “no longer confident that it can make enough money to use those tax credits. Loans also continued to fall into default unabated despite government intervention and more push being given behind government programs designed to keep consumers in their homes. Credit-related losses accounted for $9.2 billion. This is after they lost $5.3 billion in the second quarter and $1.2 billion in losses a year earlier. Doesn’t exactly inspire confidence for the future, does it?

Despite these losses, however, it doesn’t appear that the housing market will be able to operate without Freddie or Fannie. Together, the firms guarantee about $5 trillion in mortgage loans, and they’re pretty much the only firm left that can bundle loans into securities to sell to investors. That ability, it appears, is an important source of funding for banks and other lenders, who need to sell loans to make room for funds for…more loans. This means that no matter how much financial pain Freddie and Fannie cause to the government’s already ballooning amount of funds given out with taxpayer money, we’re just going to have to bite the bullet.

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Despite Government Takeover, Fannie Mae Still Bleeding

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

In hind sight, it’s easy to point fingers as to why Fannie Mae and Freddie Mac were so hopelessly reckless with their money. Where this crisis started and ended was in the government, spurred ever onward to grow by Uncle Sam, these firms became increasingly reckless despite their major role in the mortgage markets. Repeated attempts to bring them under control on the government failed. The average tax payer was forced to pay for these mistakes as the government took control of these two firms that had fallen so far from grace that bankruptcy was imminent and allowing them to fail could have had catastrophic consequences.

Yet officials seemed cautiously optimistic about the takeover. They hoped that it would begin a lengthy process of stabilizing the housing market. Lender balance sheets could be cleaned up, and mortgage rates and fees could get cheaper as a result of this. Mortgage securities owned by Freddie and Fannie could also be turned into Federal paper, which would boost confidence for foreign investors. Most importantly, the line of thinking was that the government could work with existing home owners and modify the terms on delinquent loans that could allow them to keep their homes with more flexibility than lender owned mortgages.

Yet today’s news of Fannie Mae’s loss of $29 billion serves as a sobering reminder that the government takeover is not the be-all end-all of mortgage fixes. The mistakes made by both Freddie and Fannie are not something that will be repaired overnight, much less in the near future. With this most recent loss, firm officials said that it hasn’t had to tap into the $100 billion of allocated tax dollars just yet. However, the firm filed on Friday that “if current trends in the housing and financial markets continue or worsen…we may have a negative net worth as of December 31, 2008.” If your a taxpayer, this probably doesn’t sit well with you.

So where did the losses come from? $21 billion was from non-cash charges related to how it accounts for tax credits it had been carrying on the books. As the firm continues to hemorrhage money, the firm is “no longer confident that it can make enough money to use those tax credits. Loans also continued to fall into default unabated despite government intervention and more push being given behind government programs designed to keep consumers in their homes. Credit-related losses accounted for $9.2 billion. This is after they lost $5.3 billion in the second quarter and $1.2 billion in losses a year earlier. Doesn’t exactly inspire confidence for the future, does it?

Despite these losses, however, it doesn’t appear that the housing market will be able to operate without Freddie or Fannie. Together, the firms guarantee about $5 trillion in mortgage loans, and they’re pretty much the only firm left that can bundle loans into securities to sell to investors. That ability, it appears, is an important source of funding for banks and other lenders, who need to sell loans to make room for funds for…more loans. This means that no matter how much financial pain Freddie and Fannie cause to the government’s already ballooning amount of funds given out with taxpayer money, we’re just going to have to bite the bullet.

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Despite Government Takeover, Fannie Mae Still Bleeding

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

On this Veterans Day 2008, there are 23.4 million military veterans alive in America. Of those, The U.S. Department of Veterans Affairs estimates that on a typical night about 154,000 veterans are homeless at some time during the year. About 2,000 of those are people who served in Afghanistan and Iraq.

While this is a long-term problem, it will get worse as vets return from the current conflagrations to an economy that’s figuring out how far down “the pits” are. Vets face a unique set of challenges when they come home. In the best case scenario they are merely adjusting to a life without a constant threat to their lives and safety. That is really no small thing.

If you are in the National Guard or the Reserves, that best-case scenario also involves going back into the work force after a year or more away and at a time when most companies are laying people off. These problems are only compounded if you are self-employed or run your own business. In addition to that, most in the Guard and Reserves have been receiving substantially lower wages while they were on active duty and have had to spend out of whatever savings they’ve had to support their families.

And, like I said, that’s the best case scenario. In addition to any physical wounds, a huge number of vets have to contend with mental health issues – from post-traumatic stress disorder to addiction to sadly much more. All of which were acquired on behalf of us.

Whether or not you supported the George Bush Desert Classic (full disclosure: I was against it from before the start and I have a brother in the Reserves who’s already done a year in Iraq), the truth is we owe all of these soldiers, sailors, marines and airmen. Maybe you wish we only had to send troops to “good wars,” as we now call World War II. The fault for whether or not to fight in this war lies not with the troops but with the generals, our leaders and the people who elect them – i.e., you and me. So we owe these people who did what we corporately decided needed to be done.

There has been plenty of press coverage (but still not enough) about the failings in the Vets medical-care system. While some steps have been taken to address their fiscal issues as well, more needs to be done

The VA has long provided support for vets to get mortgages.

From 1944, when VA began helping veterans purchase homes under the original GI Bill, through December 2007, more than 18.4 million VA home loan guaranties have been issued, with a total value of $967 billion. VA ended fiscal year 2008 with almost 2.1 million active home loans, reflecting amortized loans totaling $220.8 billion. In fiscal year 2007, VA guaranteed 179,000 loans valued at $36.1 billion.  During fiscal year 2008, VA’s programs for specially adapted housing helped 550 disabled veterans with grants totaling more than $24.6 million.

While the VA has never guaranteed subprime mortgages, wnder the Veterans’ Benefits Improvement Act of 2008, the department is providing more help to veterans who currently have subprime loans.

• Veterans who wish to refinance their subprime or conventional mortgage may now do so for up to 100 percent of the value of the property. The maximum amount for these refinancing loans has been raised from $144,000 to $729,750.
• Further, some states are also offering programs to help. In Massachusetts, the Home for the Brave loan program offers veterans 100 percent financing with no down payment on a single-family home or condominium.

That is a start. We must increase aid and support to the families of veterans and that support must continue once the deployment is over. The truth is if we want to truly help with financial issues we must also address the health-care issues as well. It is unfair to expect someone to deal with their fiscal health when they are already have physical and mental-health problems as well.

BTW, U.S. Vets has a great website that is loaded with ways for vets and their families to get help.

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Mortgage crisis poses extra problems for military personnel

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

This meme—government confiscation of retirement accounts— is rapidly gaining credence. On November 4, Carolina Journal Online reported that Democrats have been meeting to discuss transferring currently-voluntary private retirement accounts to eventually-mandatory government administered retirement accounts that would produce a guaranteed rate of return. Further, the now tax-advantaged plans would lose tax incentives and deductibility.

On the surface, this doesn’t look very appealing. However, there are two ways to look at this plan: 1) protection of retirement accounts to the tune of a guaranteed 3% per annum; or 2) confiscation of retirement accounts to the tune of loss of control and, effectively, loss of ownership.

As currently being discussed, the plan would entail transferring private retirement plans, such as IRAs and 401ks that are invested in stocks and bonds, into government retirement accounts (GRAs). These new accounts would be invested in newly-created government bonds yielding 3%, adjusted for inflation.

Further, the current tax-advantaged, voluntary plan would become a mandatory savings of 5% of wages with no tax deduction for either the employee or employer. These accounts would be administered by the Social Security Administration. Actually, the money would not be invested in government bonds, per se, but would earn “pension credits.” The wage earner would continue to pay into Social Security and Medicare. To make this more palatable, the transfer price might be calculated at market prices pre the recent cliff dive, assuming that it would be put into effect this year.

But wait a minute, there’s another way to look at this proposal. In her report, Ghilarducci said that “GRAs would guarantee a fixed 3% annual rate of return (vs. the volatility of returns in the capital markets, which have devastated savings this year). In place of tax breaks workers now receive for contributions and thus, effectively, a lower tax rate, workers would receive a $600 annual contribution from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants. Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that “savings incentives are unequal for rich and poor families because tax deferrals provide a much larger carrot to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”

For more information, see: US Congress Committee on Education and Labor hearing on October 7, 2008 “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions” (PDF) testimony of Economics Professor Teresa Ghilarducci on “The Impact of the Financial Crisis on Workers’ Retirement Security.”

This proposal is similar to Argentina’s recently announced plan and we don’t hear any crying down there. Rock throwing and other expressions of civil unrest, but not crying; and a stock market crash; and money escaping the country; and, what else, oh yeah, increased likelihood of sovereign default.
Buck up, Americans, this is what you can do for your country.

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Confiscation of Your Retirement Account