Buyer’s Choice Realty blog

My main man Hank Paulson, head of the HPHF, has changed his mind about spending some of the $700 billion that he hopes to soon access. As of today, Paulson has roughly $60 billion left of the initial $350 billion which has been spent buying preferred shares of banks and insurer AIG.

Remember the Troubled Asset Relief Program (TARP)? The initial plan was to buy illiquid/mis-priced mortgage securities in order to get them off the balance sheets of huge companies in order to stabilize the market/economic system. The Treasury is the only entity that could afford to hold them for a couple years in hopes that the housing market would level out and the price of these securities could return to normal/par. Well, that is not going to happen.

Hank announced today that he wants to go in a different direction. Read all about it. My favorite part of this Bloomberg article is as follows,

“Paulson’s remarks are an acknowledgment that the centerpiece of the $700 billion bailout request to lawmakers was ill-conceived.”

Anyway, Hammerin’ Hank now plans to throw money at consumer lenders so that Joe Q. Public can get a car loan, credit card, or student loan more easily. How will that happen? There is plenty of illiquidity in the consumer lending sector, and adding billions of dollars to that sector will ease pressures. Well, maybe.

So much for helping the housing market. Unfortunately, Paulson essentially has carte blanche regarding how he wishes to spend TARP money, and is not even required to announce plans for spending tax dollars.

The motto of this bailout and associated plan(s) of action? Ready, Fire, Aim…

Finally! Some tough questions for the CEOs of the big three: Moody’s, Standard & Poor’s, and Fitch, the credit rating agencies that many feel are ultimately responsible for the sub-prime crisis and ensuing meltdown on Wall Street. For a little background, see my previous post questioning who is to blame for the sub-prime crisis.

As Jeff Macke says of these agencies on CNBC, “they should be taken out and annihilated…they are bringing economy around the globe down”.

Simply stated, the ratings agencies did not do their job. They are the symbols of trust and credibility to a giant industry that spans the globe, and they have failed. When will someone be punished for this amazing lack of common sense? Not everyone that works for one of these companies is to blame, but the fact remains that the companies made money by bestowing AAA ratings on suspect mortgage-backed-securities (MBS). For an example of how ridiculous this behavior became, check out this article.
Looking for a scapegoat to blame for your declining retirement savings? Here are three:

Raymond McDaniel, Moody’s CEO

Stephen Joynt, Fitch CEO

Deven Sharma, Standard & Poor’s President

It appears our economy is in a bit of a spot right now. No kidding, right? We learned over the past few days that our U.S. banking system has effectively been nationalized. How did this happen? Hammerin’ Hank, of course.

Paulson conspired worked with his Wall Street buddies, the Federal Reserve, and the FDIC before deciding how to use the first $250 billion that we recently invested into the HPHF.

What do you mean, ‘nationalized’? The always insightful folks at the Wall Street Journal wrote an informative blog post describing what actually happened early this week. Basically, Hank bought a bunch of super senior preferred shares from many of the country’s largest ‘banks’. Goldman Sachs, a bank? Apparently it is becoming one. A few of these firms got $25 billion each, and a few got $10 billion. JP Morgan Chase, Wells Fargo, Citi group, Bank of America, you get the drift. These preferred shares mean that the HPHF owns up to 28% (in the case of Morgan Stanley) of the shareholder equity in each of these companies.

HPHF stands to make out pretty well. They will be paid 5% per year for the next five years on their investment in the form of quarterly dividends. The government gets its share before any other preferred or common shareholders do. After the initial five-year period, they will make 9%.

Hank himself terms this capital injection a ‘temporary investment’ in order to restore confidence in our banking system and encourage private equity to reinvest in these companies.

What effect does this bank bailout have on real estate/the housing market? It is HPHF’s hope that banks will now send that new money through the system by writing new loans and providing liquidity to the credit markets. Will more folks be able to qualify for a loan? Probably not, but here’s hoping. Keep an eye on the LIBOR, which has dropped almost 30 basis points over the past few days, and is a solid indicator of where mortgage rates are going.

The Federal Reserve opened its coffers once again in an effort to abate the current credit crisis, at least in this country. One of the big current problems involves banks and other companies refusing to lend each other short-term money, often referred to as commercial paper.

The major problem involves lack of trust between companies. Company A refuses to lend to Company B because they are unsure of the value of assets or collateral Company B will put up for the loan. This complicated part of everyday business has been boiled down to a simple example, but this is part of the reason why pundits and politicians keep referring to the ‘credit crisis‘.

The Fed is throwing out $99 billion (for now), essentially as a third-party. Their hope? Company A will now lend to Company B because the Fed tells Company A that Company B’s assets/collateral are valid. As a result, very short-term commercial paper rates (one day to one month) should drop significantly, back to the low rates businesses have counted on for years in order to continue operations, order goods, make payroll, etc.

What does this have to do with real estate? Plenty. Almost everything in the business world is interrelated to other aspects of the economy. For example: Your client, employed by Company B, is in danger of being laid off due to their employer being unable to come up with new work, and as a result, payroll. No pay for your client equals no approval for a loan equals no ability to buy that new house.

Sure, this is a stark hypothesis, but think of other situations. Job stability is a major factor in large decisions such as whether to buy a new home, new car, or any other big-ticket item. The huge drop in the stock market that has happened as a result of the credit crisis, panic, selloff, and resulting flight to safety has caused many potential buyers huge problems coming up with an expected down payment.

Ruh-roh, Reorge!

The power brokers in Washington just met for a photo shoot and gave some brief comments about the pending bailout that has dominated the news in recent days. After negotiations between both parties, Sen. Chris Dodd announced that they have agreed, in principle, to the principal amount. Got it? Here are the vague details that Dodd, among others, provided.

• Congress will give Paulson the money he needs (assumption: $700 billion)

• They have agreed on protecting home ownership (how?)

• They have agreed on executive compensation limits (this will be part of the terms of the bailout)

• There will be taxpayer protection (likely story)

• The federal government will get equity stakes in the form of warrants from the companies that participate in this bailout. (exactly how much, how this will happen has not been disclosed, nor agreed upon as of yet)

Thus far, there has not been consensus reached regarding who exactly will be covered under executive compensation limits (not giving golden parachutes to executives). Is it only the top officials from these companies, or will it encompass all executive officers, of which there are hundreds in the large Wall Street firms.
When will Wall Street get this money? Most likely the money will be paid out in installments. The mortgages and associated securities will be sold via reverse auction to the government. Pricing these assets is the tricky thing. Companies will need to write off these assets and most likely raise new equity (here comes…. shareholder dilution!).

Whether you think this bailout needs to happen or not, your opinion does not really matter. It will happen, and they will most likely be voting on the bill Friday or Saturday, according to many reports.There are still many items to negotiate and iron out, but things are progressing at a fairly rapid rate.

Big Hank went before Congress today to ask for a sizable investment into his fund. He says he needs $700 billion from us, and congressional folks are so far trying to sate him somewhat by contributing $150 billion over the next couple months. The questions are many, and for those of us who are not money market, credit, derivative, TED, swaps experts, they are a bit overwhelming.

Here are the main issues:

• Should we give Paulson a blank check so that he can, according to Senator Dodd, “act with absolute impunity“, in rescuing our nation’s financial system?
• What amount of money will be sufficient to overwhelm the system in order to restore confidence?
• What exactly does the plan/bailout entail? Sen. Dodd, commenting on the Treasury’s plan, called it, “stunning and unprecedented in its scope and lack of detail.”
• How can we be sure this plan will not fail? Clearly that is an impossible question to answer, but those in power need to get this right, the first time. In truth, this needs to happen, as unfortunate as it is for each of us that pays taxes. Also, it needs to happen within the next week.
• How will this plan help to stem foreclosures? HPHF will be buying risky mortgages so that lending can again take place in the market as a whole. Will HPHF renegotiate with homeowners on their mortgages, or allow them extra time to refinance at a fixed rate?

Please enjoy some great quotes from the testimony today:

Sen. Bunning said the plan would, “take Wall Street’s pain and spread it to the taxpayers. It’s financial socialism, and it’s un-American.”

Ben ‘the beard’ Bernanke, “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.”

Sen. Schumer, “Even on Wall Street, $700 billion is a lot of money.”