Freezing in NH

Inquiry Assails Accounting Firm in Lender’s Fall

A sweeping five-month investigation into the collapse of one of the nation’s largest subprime lenders points a finger at a possible new culprit in the mortgage mess: the accountants.

Yeah, because accountants are just such edgy law breakers.  I suspect the finger (in all senses of the phrase) goes to the boss of the accountants. 

There are so many people who did things wrong here, it’s hard to pick just one.  In this case, the auditors signed off on some things they shouldn’t have.  But they didn’t make the decisions, just agreed they were okay.  And that makes them a total failure as auditors, but not exactly the main culprit. 

Imagine you’re driving down the road as the sun is going down with your headlights off and you pass a cop.  Now the cop really should pull you over, but if he doesn’t and you crash into a tree when the road curves, it’s still your fault.  You can blame it on him but you’re the one driving in the dark. 

New Century made a whole series of bad choices, some of which may turn out to be illegal.  KPMG audited them, and didn’t catch everything.  So while KPMG should have caught the problems, it was New Century that created those problems. 

I suspect this is far from the last article that will compare this mortgage mess to Enron.

ABC News has an article Small Businesses Feeling the Squeeze.  I think these folks are going to end up somewhere they don’t want to be.  They claim that they’re keeping an eye on the bottom line, but in an economy like this they need to be pretty proactive. 

They have cheaper competitors in China, they are having trouble getting paid by buyers, heating costs are going up, it doesn’t look good.  They’ve got to economize and adapt, or close.  They’re dipping into personal savings right now.

“With the recent pay cut that we both just took at the business, I’m concerned that by now our outgo is more than our income and that means it would only get worse, not better,” Diane says. “If it should come to another round of layoffs, my son is next on the list. And that would break my heart.”

I understand that she feels bad, but maybe your son should take a look at what it’s doing to you and go get a different job.

Diane says she is constantly assessing what she calls “the point of no return” for the company and she says she is determined not to let things get so bad they would face insolvency. But some weeks now — to stay afloat and make payroll — they dip into their personal savings.

While that takes the pressure off at work, it adds to the stress at home. The Dearings are more than $100,000 over budget and wondering how to make a dent in that debt.

“The business is in difficult straits,” Diane says. “We are overextended personally because there is no profit to bring home.”

Sounds like they’ve got some difficult choices to make.

The NYTimes has an Op-Ed Stop Those Checks.  The premise is that economists don’t think the checks will solve the problem, so we shouldn’t give them out.  That’s great, but you can’t tell people they’ll get a check and then not give it to them.  Maybe the checks are a bad idea (I kind of think that myself) but once you announce them you need to follow through. 

The Op-Ed suggests using the money instead to clean up the mortgage mess. 

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually and that the sooner the financial sector goes through detox the better it will be for everyone.

If he’s so sure, why doesn’t he just set up a non-profit to do that and ask people to sign their checks over to it?  It should be fully funded pretty quickly, right?  I suspect he’s on crack, most people have already spent their refund in their head.  Now you’d be taking away “their money” and they won’t thank you for it.

Sure the money could be better used shoring up the financial system or creating government jobs (either directly or by starting projects that hire outside contractors) but it’s a little late to make that decision.

How bad could economy get? Hold on!

No question the economy is at a crossroad.

So what if I give you a choice? We could have either a short, even steep, recession or a long bout of stagflation, that combination of stagnant growth and high inflation.

I’ll take the recession.  Most people seem to think that’s the worst choice, but I’d rather go through a couple years of pain and be done with it than have it drag on.  Most people can survive a short period of job loss with credit cards and sleeping on friends’ couches, but surviving a long slog of prices rising faster than income is not pretty.

The country had a decade of stagflation in 1970’s. Economic growth was lackluster while inflation skyrocketed at double-digit rates, peaking at a little under 15 percent. Unemployment was also ruinously high and real per capita income actually fell in three of the years of that decade. Not a pretty picture.

Worse, the cure for that bout of stagflation was, as it always is, a nasty recession. When the Fed finally crunched down on money and credit to bring down inflation, the economy tanked. Between 1981 and 1982, unemployment peaked at over 10 percent. And the economy shrank about 3 percent in 16 months.

So recession now or stagflation and recession later?  I’d rather do it now.  Rip that bandaid off and it will feel better soon.

I personally like the Hitchhikers Guide to the Galaxy, and right now it’s good advice.  The NYTimes actually titles the article Time to Assess Finances, but they really mean “don’t panic”.  The basic advice is sit tight, don’t make any emotional decisions, don’t sell stocks you meant to hold long term while they’re down.

“Small investors always make the worst timing decisions because emotion is involved,” Mr. Tysk said. “This is precisely the wrong time to move to safer options. The stock market has dropped dramatically and now is the time to invest — don’t close the stable door after the horse has left.”

They do talk about TIPS, which is something I hadn’t seen much of in the press until very recently.   They’re a good choice for folks who need stable money, such as folks past retirement who have a significant chunk of their portfolio in bonds but need to worry about inflation as well.

Treasury Inflation Protected Securities, known as TIPS, are securities whose principal is tied to the Consumer Price Index.

With inflation, the principal increases, while with deflation, it decreases. When the security matures, the United States Treasury pays the original or adjusted principal, whichever is greater.  

The one thing they just gloss over is job security.  It would probably be a stronger article if they left it out entirely, here is everything about your job:

The first thing to do is take stock of your life. Determine how secure your job is, which, in these uncertain times, may not be easy.

If your job is relatively safe, step back and look at your financial situation.

And if your job isn’t safe?  That advice must be in a different article, because it’s not in this one. 

I’m expecting $600.  There are three main categories that you can do with any cash, whether it’s coins picked up the street, salary or windfall.  Those things are save/invest, spend and give away.  I suppose invest could be a separate category if you’re talking about starting a small business vs savings account, and spend could be divided between necessities (food) and non-necessities (going out to eat).  So maybe it’s five categories.

Anyway, before I get off track, here are the first things that went through my head:
Go out to eat
Get a massage
Join a gym
Save - “for the future”
Save - for vacation at the end of the summer
Buy a new vacuum cleaner
Buy part of a share of Berkshire Hathaway
Buy a domain name or two
Donate to charity

I’m probably going to split it three (unequal) ways to match my three categories above.  My general rule of thumb for “windfalls” is spend half, save half.  Spending half still feels like you get to do something special, and saving half is certainly better than none.

I saw somewhere (and I don’t remember where, sorry to whomever it was) recently the theory that by saving you’re not depriving yourself, you’re splitting it with “future you”.  I get this picture of me now handing that $300 to myself at 50 and saying “here, you can retire one day earlier”.  That helps with any resistance I have to saving. 

Anyway, it will probably go like this:
$100 to charity
$200 spend: probably a meal out, and maybe the gym, but I don’t want to commit to a membership until I have a higher paying job.
$300 invest: part into short-term savings like summer vacation and part to potential income generating items like a sharebuilder investment in BRK-A or maybe a domain name for a business idea.

We’ll see if I have any better ideas come May.

I like to have a larger, but not too large, goal in mind at any given moment.  It gives me some focus and a reason to do things like pass up a daily latte.  (I don’t drink coffee, but you get the point.)  For various reasons, at the moment I don’t have a good mid-term (3-6 year) goal.  I have some long term goals, e.g. retire at 50, but that’s relatively nebulous and subject to course corrections along the way.  I also have some short term goals, but since my debt except mortgage is paid off, most are very short.  E.g. a vacation at the end of the summer, a new vacuum cleaner, etc. 

I have an emergency fund set aside, and I could increase it but it covers 6 months and increasing it isn’t a priority.  I’m covering all my bills out of current income, including the outrageous heating bills (not on budget plan this year), so my frugality has seemed a little wan and lackluster.

There are some (personal) reasons that I don’t have a medium term goal.  There are some very good reasons for abandoning my previously set one, and I’ve accomplished the one before that, so I’m kinda adrift.  So I did some brainstorming.  Originally I was just going to pick one of the goals I brainstormed and go for it.  But it’s hard to go after a goal with gusto if you’re not committed.  Brainstorming is a fun procrastination technique, so I did it anyway.  Out of all those ideas there are a couple of winners, and a couple that are exciting to think about (e.g. I could buy a boat and sail around the world) but wouldn’t necessarily be that great to live (I get seasick).  I took all the ideas that were either rational or very exciting, and figured out what the next steps would be.  And in most of the cases they really are the same.  Save up some cash, get rid of clutter, get things in order, get a better job, finish up here. 

Having all the goals need the same steps seemed like a clear sign that those steps needed to be done no matter what.  In six months or so I’ll be in a better position to choose a medium term goal, and I’ll be part way there already.  Obviously the goal will dictate the amounts (e.g. amount of money, amount of clutter to get rid of), but I can still head in the right direction.  So I printed out a few things to remind me of all of the goals and stuck them up on a bulletin board.  I’m sure most of you out there use this technique, but I heartily recommend it.  So now there’s a picture of a lake house, an apartment building, a boat and a flat in Paris.  Instead of feeling adrift, goalless, and spending money frivolously I’m looking at the board excited with all the possibilities. 

There’s an interesting article on Slate: The Case for Foreclosures: One Family’s Sorrow is Another’s Joy.

If you’re facing foreclosure, Treasury Secretary Henry Paulson wants to help. “If someone is willing to make a call to reach out,” says Paulson, “there’s a chance we can save their homes.” But Paulson can’t save these homes because the homes are not endangered in the first place. They stand to change hands, not to vanish.

None of these foreclosed houses is going to disappear. After a foreclosure, one family moves out, and another moves in. We see the sad faces of the people moving out, but we don’t as often see the happy faces of the new homeowners moving in. Nevertheless, those happy faces are out there, and we should not discount them.

I kind of want to quote the whole article, it’s worth reading.  And there’s a point that’s not really made in the article that I’ve been thinking about.  My thesis is thus: The bottom of the housing market is a relatively fixed place, where all the people who can’t afford a house have been tossed out, and the rest of the people feel that things are stabilized enough to get back into the market and buy a house.  Since I think this point is a fixed value, I think it’s better to get it over quickly like ripping off a band-aid.  Let the banks foreclose on everyone who can’t make payments, sell those houses at auction, let the auction determine the new price, and move on.   The longer we sit in this place of uncertainty, the longer it will take to get people moving and buying houses again.

One of the few things that’s been proposed that I actually agree with is the plan to freeze payments for people who can afford their house at the current payment level and cannot if it increases.  I think it makes sense for the banks, since at this point foreclosing is probably not going to bring in any extra cash.  Folks have gotten HELs and such and have little if any equity, so the bank should prefer a person in the house making payments to an empty house they can’t get rid of.  But these are the folks that banks have always been fairly willing to work with, if only they contact the bank before they stop paying.   I must admit feeling a little jealous since my loan will eventually adjust (7/1 ARM here) but I will be able to make the increased payments, and the fewer houses in foreclosure around me, the better.  

From an op-ed in the NYTimes: George Speaks, Badly.  (I really want to cut and paste the whole thing…)

Watching George W. Bush address the New York financial community Friday brought back many memories. Unfortunately, they were about his speech right after Hurricane Katrina, the one when he said: “America will be a stronger place for it.”

All I can say is “George, you’re doing a heckuva job.”

The president squinched his face and bit his lip and seemed too antsy to stand still. As he searched for the name of King Abdullah of Saudi Arabia (“the king, uh, the king of Saudi”) and made guy-fun of one of the questioners (“Who picked Gigot?”), you had to wonder what the international financial community makes of a country whose president could show up to talk economics in the middle of a liquidity crisis and kind of flop around the stage as if he was emcee at the Iowa Republican Pig Roast.

I just wonder what goes through his head?  Does he think this isn’t serious?  Does he think it is serious but just doesn’t know how to show any empathy? 

The country that elected George Bush — sort of — because he seemed like he’d be more fun to have a beer with than Al Gore or John Kerry is really getting its comeuppance. Our credit markets are foundering, and all we’ve got is a guy who looks like he’s ready to kick back and start the weekend.

This is not the first time Bush’s attempts to calm our fears redoubled our nightmares. His first speech after 9/11 — that two-minute job on the Air Force base — was so stilted that the entire country felt like heading for the nearest fallout shelter. After Katrina, of course, it took forever to pry him out of Crawford, and then he more or less read a laundry list of Goods Being Shipped to the Flood Zone and delivered some brief assurances that things would work out.

Yeah, maybe things would go better if we had a VP that was camera ready.  Our current one can’t do anything except snarl. 

But wait — more positive news! The secretary of Housing and Urban Development is proposing that lenders supply an easy-to-read summary with mortgage agreements. “You know, these mortgages can be pretty frightening to people. I mean, there’s a lot of tiny print,” the president said.

Er, there’s already a one-page HUD summary before the closing.  Not sure what else could be here except “hey dummy, if you pretended your salary was twice as high as it really is, you can’t afford this.”

Really, if he can’t fix the economy, the least he could do is rehearse the speech.

Poor Bernanke, he means well. 

I’ve been reading through a series of articles, and nothing is removing my opinion from a month or so ago: Bernanke messed up.  At the beginning of all this mess, he was still focused on the rising inflation numbers, so he was increasing rates to slow down inflation, not cutting them.  This is sound fiscal policy, if we operated in a vacuum.  But we don’t, we live in a time when the media is screaming for attention.  And Bernanke seems to have missed the fact that we act like lemmings. 

NYTimes Buiness Article:
“The Fed rate cuts aren’t doing anything for my clients except confuse them,” Steve Walsh, a mortgage broker in the Phoenix area, wrote in an e-mail message at the end of January.

He seems to live in a world of numbers where people act rationally.  And from personal experience and watching the news, there is very little rationality out there.  Despite rising inflation, he needed to see the housing panic coming, and he didn’t.  Now he’s got some more ideas that are perfectly rational but not going to happen. 

NYTimes again:
The chairman of the Federal Reserve, Ben S. Bernanke, urged mortgage lenders and investors on Tuesday to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay.

This is brilliant, give homeowners enough equity that they feel responsible for their houses.  But it is missing the point at the moment.  People are not sending their keys back to the lender because they’ve lost equity, they’re sending keys back because they can’t afford to keep up with their payments.  Okay, some are dealing with lost equity because they have to sell for a move, but most are giving up their house because they can’t afford it month to month. 

Additional equity is great if it means folks can re-finance, but with tightened standards many folks are not going to qualify.  Especially if they got in with a no-doc loan, and now are dealing with increasing prices for gas and food.  They’ve got less money left over at the end of the month, and since they can’t round their income up any longer with a no-doc (and that’s assuming that one or both of them hasn’t lost a job in the meantime) they’re stuck.  But if they had equity they could sell and move into a rental I suppose.  If they’re going to be that logical.  Most people aren’t, when it comes to uprooting their family.

Who’s to Blame for the Subprime Mess:
In reality, there’s not one element here that is solely to blame; what we’ve got is a cornucopia of reasons and factors and a clustering of events that have come together to conjure this disaster.

And one thing we shouldn’t leave out: the personal responsibility that homeowners have to take as participants in this predicament. It doesn’t help that victims themselves have made it easy for the bad guys to prey upon them, as evidenced by the following survey results.
[…]
almost 7% of mortgage holders have negative equity
34% of homeowners don’t know what type of mortgage they’re carrying
34% of adjustable rate mortgage (ARM) holders don’t know what they’d do once interest rates adjust

There are a lot of factors in this mess, but I have difficulty understanding how someone would let themselves be pressured/talked/etc into making the biggest purchase of their lives without understanding the terms.  Were they afraid to look stupid by asking questions?  There’s a contract at the closing, both parties are held to what they sign, why wouldn’t you read it? 

Anyway, I’m getting very far afield from my original topic (poor Bernanke, he’s trying so hard).  People don’t look at the total cost of anything, just the monthly payment.  So increasing equity only affects those who plan to sell.  And I’m sure Bernanke will have some more good ideas in the coming months, but he really needs to get a couple of psychologists or something on staff.  The logical solution is not always going to work with illogical people.