Sub prime meltdown - Part deux

A quote printed on June 29th 2000 from the New York Times: 'People who don't have good credit are preyed upon in all sorts of areas -- when they try to get a credit card, when they try to get a home-equity loan, when they try to get a mortgage on a house'' - Frank Torres, from an advocacy group that publishes Consumer Reports.

A quick scan of the results of typing in the words ‘gap rich poor America’ into any search engine will make it easy to understand how deep a problem we face with respect to the growing disparity between the haves and the have-nots. Many studies are now coming out with even more dire results that state that this gap is only set to widen with the fallout being that definitions of ‘middle class’ will become ever more murkier.

From a study by economists Arthur Kennickell and R. Louise Woodburn: “The richest ten percent of the US population - about ten million households - owned eighty-four percent of the stock and ninety percent of the bonds held by individuals. The bottom eighty percent only three percent.”

Sometime back, I had written a bit about the sub prime mess that we are living with right now… and for some reason I thought that in all of their pristine wisdom, we would see some kind of legislation come out from the lawmakers that could potentially help forestall devastating home foreclosures that are leaving families out on the streets because they are unable to pay devious mortgage payment schemes dreamed up by our ever inventive mortgage companies.

Terms like adjustable rate mortgages are but one example of an egregious trend of hoodwinking the ordinary citizen into believing that s(he) can dream to be a homeowner at a affordable rate of interest on the loan when in reality the rate would adjust itself in response to prevailing market indicators after a set period of time. Of course, a little transparency would have worked, but in a rush to close deals and ensure market capture, transparency and understanding the fine print were left as discretionary options resting on the shoulders of the confused homeowner (when in reality it should have been the responsibility of the mortgage company to come clean and spell it out).

In this troubled scenario of the citizenry, I was hopeful that the lawmakers would come to help the aggrieved, but was in for a rude shock yesterday when just the opposite happened. The lawmakers had acted, but clearly in favor of protecting the super-rich… I noticed that none other than the Treasury Department stewarded a deal in which various well off banks get together and create a ‘super fund’ of sorts that can in theory raise up to 200 billion in what can be called a ‘veiled bailout’ of the debt markets. Of course, nobody is going to call it a bailout, but the fact remains clear.

A report in the New York Times makes the case abundantly clear, but a few paraphrased words from the article will help us understand how the rich manage to take care of its brethren.

1. The biggest banks in the US, with active encouragement from the Treasury Department, unveiled a plan to keep the housing-related debt crisis from worsening.
2. The new entity, called a Master Liquidity Enhancement Conduit, or M-LEC, could raise as much as $200 billion or more through the issuance of its own securities
3. The banks hope to take minimal risk and avoid actually investing any of their own money
4. If the banks’ initiative works as planned, many investors that helped to finance risky loans will be spared distress

Here, it is clear from #3 that the wealthy investors/owners behind banks take minimal risk and avoid losing any of their money – while still protecting their bottom-line (of course, they always bring up the fact that they are doing all of this to stave off recession).

It is also clear from #4 that the wealthy investors who knowingly financed risky loans (the loans were risky because they depended on manipulating the goodwill of the poor hapless individual who buys homes using fancy mortgage vehicles like adjustable rate mortgages) will be spared distress and ensure return of their monies with the appropriate returns that were originally guaranteed to them.

Of course, the Treasury has repeatedly said that it was only a facilitator and no government money was involved. “I don’t see this as a bailout,” said James Paulsen, chief investment officer at Wells Capital Management. “There is no public money involved in this. The government’s role here is facilitating discussion among private players to take care of this them. If the private players can find a way to help alleviate this, then why shouldn’t they?”

OK, a silent question that remained unanswered amid the clamor and din at the end of the day was this: When is facilitation of the same kind going to be extended to the growing ranks of homeowners who are going to be homeless due to the financial machinations egregiously played by the Street?

Update (October 18, 2007): The treasury secretary outlined the plans behind helping people in distress yesterday: From the yesterday's NYT: Mr. Paulson predicted that foreclosure proceedings would begin on one million homes this year. But his main proposal was a voluntary alliance of mortgage-servicing companies that would try to reach out to homeowners before they fell behind on payments. He tiptoed around the issue that many analysts have argued is a central conflict of interest for rating agencies: that they earn their fees for evaluating a new security offering only after the offering has been sold to investors.

C'mon, when you knowingly admit that 1 million homes are going to be foreclosed over the next year, one would be expected to take stronger proposals than thinking about the creation of voluntary alliances to help consumers...