Tuesday, January 20, 2009

Biff Destroys The Economy (But He's Hardly To Blame)

Your blogmaster penned the following article for The Daily Del Franco. It can be found there, and for the dunderheaded few who peruse this site, below:

If I tried to sell you a steaming pile of shit, would you pay me? A filthy, hulking, noxious lump of dung; in a paper bag for ease of transport. You’d appreciate that I bagged it, wouldn’t you? I mean, I could’ve just left it on your stoop, per our hypothetical agreement, letting you rummage through twenty years of garage surplus to pull out that rusty wheelbarrow, or hand truck, or pitchfork, all while fighting the swarm of flies now festering on my extraordinary gift. I’ll bet with a firm handshake and solid eye contact, you’d take this off my ass, excuse the pun. Look at me, for goodness sake; I’m not wearing a red and green checkered suit like that shifty maniac at the used car lot, or the vagrant that’s been making eyes at your wife from behind the gas pump. And you know what, because I like you, I’ll wrap this log in cellophane and place it in a gift basket with a few colorful party favors and a sack of tasty nuts. My nuts score the highest marks in the ratings, you know. Consistently. Hell, everyone loves my nuts. Your wife loves my nuts. OK, now you’re sold.

Sound crazy? It’s a near mirror analogy to this Wall Street housing debacle cum economic implosion. When your buddy took out his 5-year option ARM interest-only embarrassment of a home loan, or when you locked in that 30-year fixed rate mortgage at 5.75%, there’s a very good change the lending institution sold the loan to be packaged into a pool of mortgages with similar terms. In the glory days of housing flips, these loan packages were peddled on Wall Street as investment securities. Much like stocks and bonds change hands over the course of daily trading, pools of mortgage-backed securities (MBS) were bought and sold like any other financial instrument. The interest payments distributed to investors were collateralized by the underlying mortgages. So long as homeowners continued making regular monthly payments to their banks, the securities could make regular interest payments to their holders. This worked great, until eventually, it didn’t.

Throughout the past decade, Uncle Sam relaxed mortgage lending rules tremendously. For a while this was constructive, as it dropped the American Dream into the laps of countless, hardworking individuals. When combined with low interest rates (housing bubble, anyone?), your boy Biff at the car wash could qualify for home loans at an obscene multiple of his yearly after-tax income. To the disbelief of more educated brethren, income documentation was nary a requirement, or so it went in the more duplicitous corners of the mortgage brokering world. Of course, the terms of Biff’s mortgage weren’t quite so stellar once you read the fine print. But Biff doesn’t read because he was too busy crushing skulls before he dropped out of high school and failed his GED. To add insult to injury, Biff’s loan was packaged into a mortgage pool as well. True, it was a lower quality product, as anyone with half a brain could see, but perhaps there was a way to jam these low-rent loans under the same umbrella as the nobler ones. Surely some MBA pencil-neck could structure that complex monstrosity to afford it the highest score from the bond rating companies, namely “AAA.” Especially if those fellas from Moodys and S&P (the aforementioned raters) were treated to a nice steak dinner on the house's dime, followed by a wink and nod. For years, these polished triple-A securities were held by the billions, on the balance sheets of staid (and no longer so staid) institutions from Goldman Sachs to (*cough*) Lehman Brothers.

Well, eventually Biff realized that his insanely low teaser rate was going to balloon like an unloved housewife. Refinancing would be difficult because his credit score was an abomination. Likewise, income requirements were more stringent now, as the recession bit hard and transparency was all the rage. So Biff defaulted, and the bank foreclosed on his expansive home in South Beach, or Scottsdale, or Riverside, or some other overbuilt sunbelt tract lacking character. In fact, a tidal wave of foreclosures swept across the country, decimating neighborhoods while bankrupting some of the largest holders of MBS. And suddenly that triple-A security has plummeted in price. Because it’s toxic, and because no one will touch it. The next morning, the AAA is a B, steak dinner be damned. How long can a bank weather these losses before having to commit enormous write-downs on its books? How long can a firm survive when its peers on the Street have pulled their credit lines and shuttered their reciprocal trading activities, for fear that said firm is burning through cash faster than Charlie Sheen in a whorehouse. Ask Dick Fuld of Lehman, or Jimmy Cayne of Bear Stearns (assuming he wasn’t toking up with his geriatric Bridge club when you caught his ear). They know the answer. And so do the hundreds of thousands of Americans losing their jobs in the midst of this fallout. Economists call this a negative feedback loop: Crippled banks institute layoffs. Layoffs curb spending and propagate defaults. Lower spending kills retailers. Retailers close stores. Defaults weaken banks. The stock market tumbles. Banks lose more money and institute further lay-offs. Suddenly your next Christmas is straight out of a Dickens novel, the bad chapters. And so on and so on.

What? You think this doesn’t affect you because you work at your old man’s tire shop in downtown fucking Des Moines? Vote against the bailout plan, right? Those money hungry crooks on Wall Street don’t deserve billions after they defrauded and defrocked the masses, then escaped with the spoils of guerilla ambush! And you got nothing! Well, relax for a second, cowboy. Do you have a retirement plan? A 401(k)? Have you checked your statement recently? Have you checked the Dow Jones average? Think you’ll make back that 30% shortfall if, say, Morgan Stanley blows up tomorrow? So the next time I come knocking on your door with my blistering bundle of crap, maybe you shouldn’t be so eager to open that wallet, even if I’ve got a few Tupperware containers to mask the smell and nuts to sweeten the deal.

Either that or take a ride to Sleepy’s, buy a big mattress, and start saving for the future. You’re still young. Right?


Anonymous said...

Well written, funny, and insightful. Just wanted to add that the blame can be spread all over for the mess we're in, including the following: stock analysts covering banks, weak bank boards agreeing to move away from long-term strategies, loan officers and appraisers who together inflated home values, irresponsible borrowers for not questioning their loan approval, ratings agencies, investors looking for solid returns with minimal risk, and regulators who allowed such irresponsible lending.

A good example of prudence: Hudson City. When investors were clamoring for more returns (i.e. more risk), management and the board stayed true to their long-term strategy: make good, low-risk loans with a relatively low return. Slow and steady wins the race, Hudson City is a perfect example.

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