#196. Main or Wall Follow-up

Posted on | The Agurban

As expected, we had dozens of responses to last week’s Agurban, “Main or Wall”. The responses varied, but the overwhelming majority, about 10:1, were in agreement with my point that this is not a Main Street, but a Wall Street rescue. I stand by my views. And further, I believe if “it’s too big to fail, then it’s too big to exist”. In our capitalist economy entities “too large to fail” should be broken up until they are small enough to fail. 

We started with over seven pages of responses, but have pared that down to three. These are very well thought out responses, and we thank all of you who took the time to reply. (Comments are separated by **).

** Obviously with our 401K’s, 403B’s and other investments and retirements hanging in the loom, the present financial crisis has us all nervously watching the outcome from this entire mess. I read about the warning signs some 6 years ago indicating that this very thing would or could happen.  Coupled with inflation in the energy, food and commodity sectors it is presenting a double whammy to both businesses as well as individuals. Despite all the productivity initiatives and other cost cutting we have been employing at my place of employment, I am now faced with the difficult decision around headcount and staffing.

My general comment is this. You live by the sword AND you die by the sword. We as individual, middle income, members of society make decisions and we ultimately have to face the consequences; positive OR negative. I don’t expect the government nor my neighbors to come to my rescue when I make a poor decision. This is obviously a different scenario if my health suddenly deteriorated or there was a catastrophic disaster such as a fire, flood, tornado, etc. My friends and family would come to my aid as I would theirs.

The problem is HUGE and VERY complex. There are no simply answers except there will be a lot of pain suffered by all involved. Those who were responsible for the decisions that led up to this situation SHOULD answer for their actions and likewise suffer the consequences. Unfortunately MANY good people work(ed) for these folks and they too suffer and this is VERY unfortunate. If there is any kind of bailout it should be focused to those innocent of the actions that led to this outcome but are negatively impacted. For the borrowers that knowingly overextended themselves, well, tough times have arrived and they need to share in the pain of this recovery hopefully without losing their homes. This is what makes this really difficult; how painful do you make it and looking forward, how do you put fixes in place that are long lasting AND effective?

Our investments, economy and potentially our very livelihood depend on these decisions.   
** I agree whole heartedly with your article, if capitalism is allowed to work and the folks on Wall Street fail, maybe they will learn from their mistakes but most assuredly someone stronger and hopefully smarter will take their spot!

Now how do we get congress to act with common sense instead of politics???  

** I agree totally with the article about Wall Street. Let local banks deal with local economies. Everybody wins then!  

** (From Australia) – I totally agree with your observation about the $700 billion package being a case of capitalism on the way up and socialism on the way down.

But let’s be honest. A huge slice of American society has believed in unfettered capitalism. I was shocked on my first visit it the US in the 70s when I saw people sleeping under cardboard sheets on the sidewalks of downtown San Francisco, and people stepping around them. What sort of society allows this?

But what is totally puzzling is the USA’s huge leadership in business thinking – the professors, universities, think tanks, the critical thinking. How did this all this leadership become so easily blind-sided?  

** Good explanation and I fully, 100% agree that the federal government should not “nationalize” mortgage lenders nor collateral. A government bailout will create economic suffering that will last for years, perhaps even generations (think FDR). If they allow the markets to correct (with) the Buffetts and others to pick up the crumbs, the blow will be mighty but we’ll survive and recover more quickly and will be far healthier in the future. 

I do not know your audience so this thought likely irrelevant: I am very surprised at the number of people who have called asking if they should take their money out of the bank. They hear of runs and are worried that their funds, even their CDs are at risk. Though they know they are insured, if a run happens, maybe FDIC won’t send them money for months.

I reassure them. Then I explain that how the bank takes in money from depositors (CDs, checking, etc) and then loans most of that money back into the community in the form of mortgages, business loans and such. We do not keep all the money in the safe. The bank keeps only enough to cover normal business, withdrawals, etc.  

This is not a 1930s banking collapse. It is an investment collapse. It’s a liquidity crisis. It’s like a nuclear leak in a region with many homes. No one knows how much the homes are now worth, which were affected, will buyers return, etc. When the bank holds mortgages that may have lost value, they pull back, they stop lending. If the area never recovers and the homes are without value, the bank folds.  

We don’t know what homes were affected nor can we determine the value of those homes. This uncertainly freezes the market.  

** It’s darn funny to me that we need to underwrite Wall Street with virtually no assurance of repayment. During the farm crisis in the eighty’s, the government LOANED Farm Credit I think $8 billion dollars to be drawn as needed for 15 years. A total of about $3.8 billion was actually drawn and PAYED back early with interest. I doubt very much that that is the intent of the current situation!  

** I agree with you on the disconnect between the loan originator and the people who end up owing the securities containing the mortgage. This was a real problem with the lending system. Small town bankers don’t tend to make 100% no-doc loans. 

I do, however feel that you were way too easy on Main Street. Every one of these mortgages needed a borrower to do the deal. Greed runs both ways here. There may have been some predatory lenders involved but what percentage of the total loans could that be? Not a very great percentage I would guess. Miami and Las Vegas are good examples of consumer greed.  

** I agree with the Boomtown analysis that was sent today, except in one Big Area.   

It is NOT really a Wall Street problem, though there is enough blame to go around, I think it was a subversive element in our county call Greed! It seems to begin with our Government, our Political System, the Media, right on down to the Main Street hometown bankers.   

Just like you state, “1999, the lending criteria was dramatically loosened and as a result, in hindsight, crazy loans ended up being made.” Yes, this all started with the Clinton administration wanting to “make homeownership more available” and his pushing Congress to pass new, less stringent guidelines for home loans. The Main Street, hometown bankers then took advantage of this relaxation of rules and did more home loans to sell them on the Secondary Market to places like AIG and Fanny Mae and Freddy Mac!     

For years and years, it has been the standard that only 66% of Americans made good homeowners. Well, these firms kept buying home loans the local banks didn’t want, until we reached 69% of Americans with home loans. (Interesting, Mae and Mac has 3% of their loans in default!) When this all was made public, many people panicked and now, we have the “mess of today”. Wall Street firms could not have “latched onto those loans”, IF the banks making these loans in the first place, had not put them up for sale! Stop and think who started “loans were sometimes made to people who should never have gotten loans”, in the first place, not AIG or Mae or Mac. Then I fully agree with your statement above and the “This MAJOR disconnect between the lender and collector is the root cause of our problems today.”   

I too am very opposed to the buying of the hometown banks by larger Big Banks.

I too want to defend the local banks, IF they are truly local. If the banks you mention are in  as good a shape as you describe, then they either are very, conservative indeed, or they sold off their questionable home loans causing the problems and now have that money as their reserves.  

In your defense of Main Street, PLEASE don’t forget small town America, or Main Street, if you will, is made up of a large percent of retired people who depend on “Wall Street”  and their investments to live. To say, “firms on Wall Street need to fail, may be signing the death certificate of “Main Street”, but removing buying power from the retired citizens and making them totally dependent on Social Security that may or may not be in the future! 

Well, being an election year and having the self-interest seeking media of today, who knows what will happen. “We” have become so conditioned to not trust our government; we won’t believe them when they are telling us the truth. 

This is a very complex problem, but let’s not ruin one part of our economy, the retired folks income, while trying to fix a Government started problem that played to people’s natural tendency to Greed. 

Jack’s Response to this comment:  Thanks very much for sharing with us your thoughts on the bailout. You raise some very good issues in your email and are correct that it was not just greed on Wall Street that led to our current problems but Main Street shares some blame also.  

We are blessed in my hometown of 12,000 to have a number of truly local banks where decisions are made locally and the local banker has to live or die with those decisions. If they make bad ones, they will go out of business or be bought out. We’ve had a couple that have gone through that painful process but the rest appear to be in very good, conservative shape. And they are continuing to make loans in this current environment.

I had not thought of the impact upon retired people with this crisis and you were wise to make me aware of their impact.  My thought with this, is that they probably should be more diversified if they are retired and not be so invested in Wall Street. Perhaps having a few more CDs in the local bank might be a more prudent investment for them and also a benefit to the local community which would take those funds and loan it out locally.  

** I humbly disagree with the way you have glossed over the problem and your view. I understand your bank, and many others, did not get caught up in the CRA problem (hard to when you don’t have CRA areas) that helped create the subprime mess. But, the reality is that the lack of credit has become a major issue that will trickle to your banks in the near future if the bill is passed, even though I hate seeing us do it, as well, but it is vital to the country. We are hearing of State of Washington small banks well away from the Seattle area who have suddenly found that their additional credit sources (correspondent banks and the like) have dried up. Consequently, the Seattle Times just ran an article on various companies that are saying they may miss payroll. That is a Main Street problem that will roll through the country.

When you see arguably the best large company in the US, General Electric, have to forgo issuing Commercial Paper, because they cannot find buyers and maintain their AAA rating, and then go to the “Bank of Warren (Buffett)” at very unfavorable terms as well as issue stock when the price is at a multi-year low, it tells you there is a big credit problem. When the biggest and best had to pay 10% to get credit, what will the smaller companies have to do? That is a Main Street problem. With 30+ years in the Investment Business and a co-owner of a $1.1 billion Wealth Management firm, I can say that this is one of the worst crisis periods we have seen in my career, but also the most mis-understood. For many, there are have been only two positions in the market to hold to maintain sanity, Cash and Fetal! 

As an aside, given the extremely low mark to market levels that we are seeing (mark to market in my view standing along side the CRA as the major reasons we are in this mess), I firmly believe the government will make money on the rescue plan, not lose it. This view is shared by many savvy investors and analysts I know around The Street, including Warren Buffett who said he would love to be able to get apiece of the plan on the terms the government is getting.