Sarah is a recent college graduate who has immaculate credit. She is now a school teacher in Northern New Jersey – Let’s say Hoboken. Sarah makes $52,000 per year gross. She wants to buy a condo in Red Bank, a nearby trendy community. The condo costs $350,000. How many mortgage brokers will it take to approve her for this 100% mortgage with a 7 year adjustable, interest-only loan with a balloon at the end? 2007 answer? 1 broker. Any one broker. 2008 answer? Good luck Sarah, get back in the apartment, if you can find one.
The above exaggerated story is only a story. I made it up on a plane. However, I bet there is a real Sarah, and I bet she was foreclosed on this year. The reality is that when my wife and I bought our current home, we found a place in Cary, North Carolina. Based on what our mortgage broker told us, we could take a loan for up to $500k or more. This payment would have been in the range of $3,500-4,000 per month. This was after I told him we have almost $700 per month in student loan debt. He also knew I would be unemployed and that my wife was starting a new sales job in a new market and she was predominantly commission based. I mean seriously, if there was a couple with a higher risk profile, they would be legally dead. So we took the initiative and set our upper limit based on what we have paid previously, and sent our house target price accordingly.
But those brokers were out there for the past decade, and when bad things happen to good people, like unemployment, illness or life in general, these loans are defaulted on, and Sarah is out on the street in the heat. But on the news, on Monday morning. we are told we are in an economic crisis (and congress is shutting down until after 11/4. People are losing their homes, because they are over-extended in a market of shifting interest rates. And honestly, while I feel for them, I know that they can re-bound with a life lesson. I really do feel bad for them, but I too have made bad investments. Like losing about 10k in the dot-com collapse. I felt like an ass, but I had no one to blame but me. However, as an American, as a taxpayer, and as a voter, I do have someone I can blame on behalf of all of us.
Underwriters for these loans, investors in these loans and those who gamed the markets or allowed them to be gamed are responsible. And today, we announced a $700 billion bailout to shift the momentum of the markets and pull us out of this mess. Nice idea. I can solve a lot of problems with that kind of money. Really, that is a heck of a party. (Like the size of our total investment in the war in Iraq, or the amount of money we send overseas every year for foreign oil.) But I will play along. Let’s assume that it will take $700 billion dollars. I want some strings attached. For example –
Employee Salaries - If you are an employee of one of these companies, you are capped at 200,000 per year from now until your company pays off the bail out. This isn’t a gift, as I doubt you all have paid $700 billion in taxes collectively since the industrial revolution.
Leadership - If you are currently among those in charge of anything related to this fiasco, like you have a title with president, director, head, board member or the like, then guess what. You owe us. First you owe us collectively an apology. The market didn’t do this to you; you did this to the market. You get no pity, no sympathy. Second, your parachute? Your retirement? Sorry, you lose until you fix this. You collect the $200,000 per year maximum, no more than the President of these United States that you are ruining, and you work until the problem is fixed. As voted upon by the American people. Or you go to jail (I am seeking a sharp prosecutor to find the correct charge, but there is something here). This is the equivalent of gross misconduct by a military officer or economic treason.
Repayment - You're paying this back in a profit-sharing system. The US Government now gets 50% of all profits until you pay this back at 4% interest. Sorry, this is the downside of a capitalism that pays you for failure. . . Again, if my wife and I want a loan, we pay you interest, and at 4% you are doing better than we would. And right now, your collective credit rating is worse than ours. We haven't asked for a bailout - ever.
Oversight – I don’t want Congress watching this. Frankly, they didn’t see this coming and I doubt they would know how to balance a balance sheet, let alone figure out how to manage these guys. I want a panel of 5 smart economists/accountants watching who belong to a third-party watch dog group. They are paid out of this $700 billion and are incented financially to report red flags.
Put these measures in place and you can have my $2,000 (my share of the bill). However you can’t have it all this year, or they get my house too. Just add it to the other 11.3 trillion dollars in debt we have. By the way, on a personal note, I wonder how you spend 11.3 trillion dollars. Ever. I would like to try to spend 11.3 million someday.
My favorite quote of this entire debacle summarizes it sweetly. If you bail out these companies every time, you remove the downside to capitalism, so there must be controls on these bail outs. My wife and I own a shoe store for kids. We plunked down our savings on red, and right now the ball is still spinning, bouncing through black, green and red. Every day, we see the risks and the potential rewards. However, if the company succeeds, it is our profits, and if it fails, I have no expectation that Uncle Sam will get me a check for my investment. This is the beauty of America, and if tomorrow Bill Gates fell flat on his hindquarters, I doubt he would be there for a hand out. Richard Branson. Donald Trump. None of these entrepreneurs would do this. They would knock the dust off, and go figure out a different manner in which to generate wealth.
So, at the end of the day, this is my plan, which no one will read. However, again the therapy of writing this has made me less likely to move to England today (more on my pending move overseas later). I now resign myself to the regularly scheduled programming of Continental Airlines flight from Portland to Newark. Yes I am writing this in the air at around 0130 EST, but it was either this or watch an Ashton Kutcher movie about marriage in Vegas. I would rather get out of the plane right now.
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