Don't you love it when the government continues to get it wrong? Too much debt is one of the problems that plagues many small businesses yet, the current administration feels that it must get them in deeper through government guarantees and other lending mechanisms. What is really needed is for the government to remove some of the regulatory burden and reduce their taxes. That will free their money to invest in their business.
If the problem is cash flow, what good will new borrowing do? Let small businesses keep more of their cash and they will figure a way to survive.
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts
Sunday, March 15, 2009
Thursday, October 2, 2008
Making Tough Decision
I almost titled this post "The Bitter Pill" but thought better.
The Senate has voted in favor of a $700 Billion bailout of Fannie Mae/Freddie Mac. Wow. $700 Billion is a lot of money no matter how you view it. What do the taxpayers get in exchange? We get to be in the mortgage investment business corporately (as in we're all in this thing together). We will own $700 Billion worth of mortgages which are secured by about $560 Billion worth of real estate (assuming a 125% of value mortgage).
Once we own those mortgages what will we do with them? The first hope is that we could re-sell them on the open market. That could be a problem. The one's the government will own are the one's no one else wanted in the first place. Will we foreclose on the properties for those mortgages that are non-performing? Hmm -- I have a hard time seeing that happening although it does in small doses already. FHA has been foreclosing on real estate for a long time.
Let's say that we eventually will recover about half of the $700 Billion by either selling the mortgages or the foreclosed properties. That means about $350 Billion will be non-recoverable debt -- that will be made up from taxes. That's what makes this such a bitter pill to swallow.
But, let's look at the other side of this. What happens without a bailout?
First, we have a bankrupt Fannie Mae and Freddie Mac. Their assets are liquidated by the court and the net result to the economy will still be a loss of about $350 Billion. But we also have all of the $5.3 Trillion in mortgages that were guaranteed by Fannie Mae/Freddie Mac whose guarantees are now worthless. Any of the mortgage based securities sold to various financial institutions and individuals that are non-performing are now worth considerably less than their previously guaranteed value.
In the case of securities held by individuals, it is a matter of writing down their value, taking the loss and moving on. In the case of those held by financial institutions there is suddenly a huge problem. When the securities are written down, the financial institutions must then "classify" those assets as non-performing. Those classified assets offset the capital of the financial institution and cause many to drop below the minimum threshold required by the FDIC or other regulatory bodies. It also drops the available funds for lending to borrowers even though they may be well-qualified borrowers. In other words, the credit market dries up and many banks fail.
What happens when the credit market dries up? Business comes to a halt. Grocery stores can no longer stock their shelves. Auto dealers can no longer extend credit because somewhere behind that dealership is a bank or other financial institution underwriting the loan. In fact, many businesses will fail if credit becomes tight. When businesses fail, people lose their jobs. When people lose their jobs in an economy which is contracting due to unavailability of credit, there is little hope of finding a new job. We enter into a Depression.
This financial disaster is NOT a Wall Street problem alone. It is a Main Street problem. It affects the stock market because corporations must have credit to operate. The real problem though is the impact on the credit markets. Without credit, our economy comes to a halt. The taxpayers are going to be hit whether a "fix" is passed or not. The hit will be much harder and much more severe without a fix. No fix means Depression and huge loss of equity in retirement plans and many other assets. A fix means buying time to come up with a longer-term solution.
I applaud those Senators, like John Cornyn, who voted in favor of the fix. They knew that it was not the popular thing on Main Street. But, they also know that it is sometimes necessary to make tough decisions. I mention Senator Cornyn because he is up for reelection this year. His opponent can make political hay of this vote and if he's smart, will do his best to make the Senator appear to favor Wall Street over his constituents. In fact, it's the other way around. By making the tough call, Senator Cornyn is siding with the people of Texas. I pray that he will have opportunity to present legislation that will begin the process of fixing the underlying problems that created the financial meltdown in the first place. We need to send him back to Washington for another term.
The Senate has voted in favor of a $700 Billion bailout of Fannie Mae/Freddie Mac. Wow. $700 Billion is a lot of money no matter how you view it. What do the taxpayers get in exchange? We get to be in the mortgage investment business corporately (as in we're all in this thing together). We will own $700 Billion worth of mortgages which are secured by about $560 Billion worth of real estate (assuming a 125% of value mortgage).
Once we own those mortgages what will we do with them? The first hope is that we could re-sell them on the open market. That could be a problem. The one's the government will own are the one's no one else wanted in the first place. Will we foreclose on the properties for those mortgages that are non-performing? Hmm -- I have a hard time seeing that happening although it does in small doses already. FHA has been foreclosing on real estate for a long time.
Let's say that we eventually will recover about half of the $700 Billion by either selling the mortgages or the foreclosed properties. That means about $350 Billion will be non-recoverable debt -- that will be made up from taxes. That's what makes this such a bitter pill to swallow.
But, let's look at the other side of this. What happens without a bailout?
First, we have a bankrupt Fannie Mae and Freddie Mac. Their assets are liquidated by the court and the net result to the economy will still be a loss of about $350 Billion. But we also have all of the $5.3 Trillion in mortgages that were guaranteed by Fannie Mae/Freddie Mac whose guarantees are now worthless. Any of the mortgage based securities sold to various financial institutions and individuals that are non-performing are now worth considerably less than their previously guaranteed value.
In the case of securities held by individuals, it is a matter of writing down their value, taking the loss and moving on. In the case of those held by financial institutions there is suddenly a huge problem. When the securities are written down, the financial institutions must then "classify" those assets as non-performing. Those classified assets offset the capital of the financial institution and cause many to drop below the minimum threshold required by the FDIC or other regulatory bodies. It also drops the available funds for lending to borrowers even though they may be well-qualified borrowers. In other words, the credit market dries up and many banks fail.
What happens when the credit market dries up? Business comes to a halt. Grocery stores can no longer stock their shelves. Auto dealers can no longer extend credit because somewhere behind that dealership is a bank or other financial institution underwriting the loan. In fact, many businesses will fail if credit becomes tight. When businesses fail, people lose their jobs. When people lose their jobs in an economy which is contracting due to unavailability of credit, there is little hope of finding a new job. We enter into a Depression.
This financial disaster is NOT a Wall Street problem alone. It is a Main Street problem. It affects the stock market because corporations must have credit to operate. The real problem though is the impact on the credit markets. Without credit, our economy comes to a halt. The taxpayers are going to be hit whether a "fix" is passed or not. The hit will be much harder and much more severe without a fix. No fix means Depression and huge loss of equity in retirement plans and many other assets. A fix means buying time to come up with a longer-term solution.
I applaud those Senators, like John Cornyn, who voted in favor of the fix. They knew that it was not the popular thing on Main Street. But, they also know that it is sometimes necessary to make tough decisions. I mention Senator Cornyn because he is up for reelection this year. His opponent can make political hay of this vote and if he's smart, will do his best to make the Senator appear to favor Wall Street over his constituents. In fact, it's the other way around. By making the tough call, Senator Cornyn is siding with the people of Texas. I pray that he will have opportunity to present legislation that will begin the process of fixing the underlying problems that created the financial meltdown in the first place. We need to send him back to Washington for another term.
Tuesday, June 10, 2008
Clinton's Campaign Debts
For one who has made her lifelong ambition to live off of public funds, Mrs. Clinton took the art of using other people's money to a new high in her campaign for the Presidency. She owes a record amount to businesses who will likely be short-changed. She also "loaned" the campaign a large amount of money which she has until the General Election in November to repay (or she is limited to $250,000). Any bets as to who gets paid back first?
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