Wall Streeter opines upon the sub prime mortgage disaster

Ethan Penner, “a pioneer in real estate finance” shared his thinking with us on yesterday’s Wall St Journal op-ed page. He laments the fall of “securitization” and the business model for large sections of Wall St. He feels that credit rating agencies are completely capable of assessing the worth and risk of mortgage backed securities. Right there, we can see the difference between the Wall St world and the real world. A home mortgage is a sound investment only if the borrower[s] are both willing and capable to make their payments until the either they sell and move, or they pay the mortgage off. No way can a paper pusher in an office at Moody’s Investor Services have the faintest idea about the stability of a borrower. An experienced loan officer conducting a face to face interview with the borrowers can make a pretty good call (most of the time) but without that personal contact with the borrowers, you don’t have a clue. To say nothing of inspecting the property to see if its sale value is somewhere close to the amount of the loan. If the borrowers cannot/will not make their mortgage payments, the lender is going to take a huge loss. After foreclosure, the lender has to sell the property to get any money back. If the house was salable, the owners would have sold it to pay off the mortgage. Only the unsalable properties get as far as foreclosure.

Then Mr. Penner explains the difficulties doing thirty year mortgages with depositor’s funds with can be withdrawn at will. He blames the 1980’s savings and loan (S&L) disaster on depositors withdrawing their money from the S&L’s. In actual fact, the S&L’s went broke after Congress repealed the laws that restricted S&L’s to doing home mortgages. They used this new freedom to play the stock and commodities markets. Being unsophisticated newbies, the S&L’s got taken to the cleaners by sharp/dishonest salesmen. In the real world, a bank, even a junior bank like an S&L, can increase deposits by paying depositors higher interest.

Mr. Penner’s suggests a new system where the bank keeps owner ship of the mortgage, and issues some sort of trick bond to raise cash to do more mortgages. He doesn’t understand that, with or without trickery, such a bond works just like the ordinary bonds issued by ordinary companies every day. Investors buy ordinary corporate bonds based on the reputation of the issuer and the interest rate promised. The “securitized mortgage bonds” that fueled the sub prime lending spree, and of which Mr. Penner is so fond, were “backed” by the mortgages. Starting last summer, investors learned that the “backing” was worth no more than the underlying mortgages were worth, and surprise surprise, those mortgages turned out to be worthless.

A basic fact of mortgage lending, the lender has to borrow the funds for LESS interest than that charged for the mortgage. Today my local band is offering 30 year fixed rate mortgages for 6 and a fraction %. That means no way can an investor in mortgages make more than 6 and a fraction %. Mr. Penner states that investors could earn mid to high teens and that wasn’t very appetizing. This is the sort of thing a mortgage backed security salesman might say.

One Man’s terrorist is another man’s freedom fighter

Taxpayer funded National Public Radio (NPR) is calling the FARC “rebels” rather than terrorists. Doesn’t matter that FARC has been kidnapping for ransom, holding hostages chained to jungle trees for years, drug dealing, and murdering anyone who gets in their way. Doesn’t matter that the government of Columbia, against whom they “fighting”, is democratically elected and enjoys solid popular support. No matter, NPR likes the FARC and supports them, calling them by the romantic label “rebels” rather than calling them terrorists, which they are.

Let’s hope the Columbian armed forces are able to defeat the FARC in short order.

The Price of Gasoline is going down

Heard that on the BBC just this evening. Wonder what world they are reporting from?

Let’s Move to France

The clock radio came on as usual this morning, tuned to NPR. I let it play for a while before facing up to the awfulness of getting out of bed. The commentator was waxing lyrical about the French health care system. He talked and talked, and he made France sound like the most civilized and humane place in the world.

Except he failed to mention a single number. Such as the life expectancy and infant mortality rates in France, as compared with other places. Such as the cost of health care. The US is spending 16% of gross national product on health care. This is a shameful amount of money going to drug companies, insurance companies, hospitals and doctors. Hell we only spend 4% of GNP on defense. The medical community is sucking up four times as much money as the old military industrial complex.

The Europeans only spend 8% of GNP on health care, half what we spend. But NPR didn’t mention this fact, and said nothing about any possible restrictions upon expensive treatments this might cause. This reporter was convinced the French have it right and the Americans have it wrong without bothering to explain to us listeners why he felt this way.

Aviation Week calls for Air Force Cleanup

This is Aviation Week, the old time, highly respected, very well informed trade journal of aerospace, airlines, and the Air Force. We have a serious industrial player bashing the military part of the famous military industrial complex.
They mention the recent Boeing-EADS tanker procurement fiasco, the not-so-recent Boeing tanker lease problem, the two protests over the award of the combat search and rescue copter, the loose nuclear weapons blunder, serious cost overruns on satellite programs. Then there is crony linked contract to promote the Thunderbirds, and charges of religious proselytizing at the Air Force Academy. And footdragging in supplying unmanned aerial vehicle (UAV) support to the ground forces in Iraq. The iceing on the cake was lobbying Congress to fund more F22 fighters after the Administration had decided to put the money into things of real use in the real war we are fighting.
That last got the Defense Secretary to fire both the Chief of Staff, and the Secretary of the Air Force. Aviation Week is calling for more blood, namely firing the officers responsible for the other screwups.

How to save GM?

GM is close to doomed. The stock is down around $10, which makes the entire company, once the biggest corporation in the world, worth only $5 billion. Sales are down, they don't have cars that people want to buy, the price of gas has destroyed demand for SUV's and pickup trucks. They will burn through the rest of their cash in a year or so.
The Wall St Journal opined that only the development of desirable bread and butter sedans would save them. There's something to that, if you are going to be a car company, you have to have cars that people like. But better is to invent a new car type. Lee Iacocca did this repeatedly in his career. He fathered the Mustang, the K cars, the the minivan. GM needs someone like Iacocca who has a feel for the market and creates things that sell. Rick Waggoner ain't that guy, he barely knows where the ignition key goes, let alone what makes a hot selling car.
GM ought to try making a two seat micro Corvette. Do a very small, low cost, two seat sports car. Figure out some way to get surfboards, snowboards or skis into it, or onto it. A roof rack, a fold down rear window , a pass through from the trunk to the cockpit, something. Make it light, offer a 5 speed manual, a 4 cylinder engine, get the gas milege up over 30, get the front rear weight distribution 50-50, give it the pizazz of the 'Vette at a third the price point.
Second new car, the micro hauler. A car in the Cobalt class that somehow allows the owner to get 4*8 sheet goods back from the lumber yard or furniture back from the auction. Doesn't have to seat more than two, but must handle the cargo, and be cheaper and less thirsty than a minivan.

Real Solar Energy (as opposed to imaginary solar)

The don't drill, no nukes, conservationists get all excited about "Solar" with out ever explaining what "Solar" is. For most of us, in the lower 48, real solar energy comes from home heating or cooling. Shining in through windows the sun pours a lot of heat into a house. In the winter, this is all to the good. In the summer, it makes the air conditioner draw more expensive electricity. Every window needs a sun shade, positioned to let the low winter sun shine in, and shade the window from the high summer sun. The sunshade needs no moving parts, and in fact properly designed eaves do the job very well.
Here in New Hampshire, I have enough solar gain through the windows that my furnace stays off during the winter day. With the solar gain, my furnace gets through the winter on about the same amount of fuel as my car uses all year. Without the solar gain, my furnace oil costs might double.
Home buyers ought to check the sunshade/eaves/awnings situation on the windows before falling in love with the house. In heating country, a good house faces south to get more sun. In air conditioning country, the house ought to face north for more shade. If buyers cared about these things then builders would furnish them.
The technology of building to take advantage of the sun has been well understood since the days of the Roman Empire. Where as solar electric technology still lacks decent batteries to give you electric lights after the sun goes down.