CNBC's Specious Reporting on the Housing Plan 20 comments
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So, by now you’ve heard of the rant of some guy I’d never heard of before, Rick Santelli. (Not to be confused with Barron’s Michael Santoli). Does anyone else find it amusing that Mr. Santelli was ranting on the floor of an “open outcry” trading pit? That’s right, he was ranting about wasteful spending to help homeowners while standing on a monument to inefficient execution in finance.
Mr. Santelli, I completely accept the fact that you are most likely compensated based on how many viewers you reel in and your entertainment value, and certainly not based on the quality of your analysis (this is CNBC after all, the house of Cramer), or even your grasp of reality. You should still, every now and again, try reading something. From the details of the government's housing plan one could learn some simple things:
1. The plan is available only to those people whose mortgages are owned by Fannie Mae (FNM) or Freddie Mac (FRE) or those mortgages that are backed by Fannie and Freddie and securitized by them. Fannie and Freddie have strict limits on which mortgages can go into those pools. They have to have high FICO scores, relatively low LTVs, and there is a maximum size allowed.
Please note that this restriction, in and of itself, totally disqualifies sub-prime mortgage loans. Let me repeat: sub-prime mortgages and agency-backed mortgages are a totally different set of mortgage loans–there is no overlap.
2. The program does not reduce principal owed. So, in essence, there is no forgiveness of debt, but only a reduction in interest rates and, perhaps, an extending of the term of the loan to reduce monthly payments. People still owe the same amount as before. Sounds like a welfare state to me…
3. The program doesn’t allow refinancing of second homes or investment properties. So all the speculators that own 3 houses that were supposed to be flipped cannot refinance any mortgages except for the single first mortgage on the house they currently reside in.
4. Second mortgages aren’t covered under the plan. All the people who took out HELOCs to borrow money to buy stocks aren’t going to be bailed out either.
5. There is about $75 billion being used to help stabilize the multi-trillion dollar mortgage market. This number alone implies that there is some selection process to weed out unworthy borrowers from being given government funds.
Look, I want the economy to improve as much as the next guy, but I think swelling the unemployment rolls by one idiotic reporter might be the kind of change I can believe in. Oh, and let’s finally close down the value-destroying open-outcry trading pits. Maybe removing that friction in our economy can help us save a few dollars.
I was going to stop here, but I’ll be honest… the complete and total stupidity of Santelli and those knuckle dragging dinosaurs who still use hand motions to make money, add transaction costs, and keep the computers at bay (not all of them, but most of them, I’m sure) on the floor of the C.M.E. are the reason middle America hates everyone in finance.
Further, it’s the reason we need a bailout. How often did I hear “not my problem” or “because that’s where the market is” or any number of other, totally tone-deaf incantations from the mouths of people making seven-digit bonuses? Often. And, to be honest, do we have even single piece of tape with Mr. Santelli yelling about taxpayers paying for Citi (C)? Bank of America (BAC)? How about AIG (AIG)? No? Well, we gave Merrill Lynch $15 billion and around $4 billion of that was immediately blown through to mint 696 seven-digit bonuses.
At least I can take comfort in knowing that Mr. Santelli will be forgotten in 100 years and that his rant likely has no lasting impact on our society. It showcases the worst, most base and uninformed stupididty. Children, pay attention in school or you’ll wind up working on the CME trading floor for CNBC.
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This article has 20 comments:
Yes children, pay attention in school. The government will teach you how to get your fair share of other people's money !
I have been listening to Santelli for years now. His rant was a result of a cumulative seething that permeates America today. Way too much accomodation to illegals, and to the poor poor pitiful that have for the most part brought it on themselves.
Unfortunately, and another of Rick's themes, the government has facilitiated this over the years. Buy, buy, buy then go look for politicians to make it better. If the govt was really concerned for these people they would have better education programs in place to help everyone understand the consequences of their actions.
Govt needs to go, Santelli needs to stay.
gd
And anyone who claims that they follow markets and the economy, who doesn't know Rick Santelli is either lying or is not as clued in as they pretend.
This bailout has added billions tot he national debt. We the taxpayers are going to have to pay for it one way or another through higher taxes for ourselves or for future gnerations. Do you think America's creditors are going to agree to reduce the principle amount the US owes?
"..those knuckle dragging dinosaurs who still use hand motions to make money, add transaction costs, and keep the computers at bay (not all of them, but most of them, I’m sure) on the floor of the C.M.E. are the reason middle America hates everyone in finance."
No Johnboy, the reason Middle America hates finance is because of all of the shady deals that financial firms tend to do. (Junkbonds anyone? IPOs for dot com stock anyone? CDOs anybody? )
Middle America, as well as all of America, couldn't give one fig about the old fashioned way some markets trade, its the CEOs who get millions and a golden parachute when things go wrong while the workers get pink slipped to make profits look good is what enrages Middle America, not inefficient markets.
That is why people are so mad.
For example, see the WSJ article ("Power to Modify Mortgages Sits Well With Judges", Jan 12, 2009 online.wsj.com/article...) in the 2nd paragraph:
"Top Senate Democrats are advancing legislation to let bankruptcy-court judges approve new repayment terms ... The proposal allowing so-called mortgage cramdowns, in which the principal amount of the loan is reduced".
www.youtube.com/watch?...
www.youtube.com/watch?...
If I could find even older videos I'd post them, but I'd very much like you to substantiate your claims both on being a Bush cheerleader or for him fighting against derivative regulation.
So if anybody comes across as an uneducated whiny cry baby, it is you. Do your research before you post anything, because it makes it seem that you were the one who did not pay attention in school.
The Democrat's suggest ALL homeowners will benefit if prices are stabilzed. This is true. However, those who can barely afford their mortgage cannot also afford routine maintenance/upkeep of premises. This fact diminishes neighborhood values more than temporary foreclosure signs. Let's face reality. It you bought high - and CAN afford your mortgae - you have negative equity in the near/middle term. Just have to suck it up until economy turns. You recieve no benefits for being responsible.
Case #1:
I moved to Alaska in mid 1980s. The Alaska pipeline was completed in 1986. Layoffs were extensive! Banks were stuck with absurdly high priced real estate - as thousands of mortgage holders defaulted, taking their earnings to the lower 48. Economic chaos ensued. Housing values plummeted for those who remained behind. Military personnel lost big money on homes bought during their temporary tours. And numerous well leveraged banks went belly up. In time, a multi-page HUD supplement was inserted in the Sunday paper. Homes for sale, pennies on the dollar. Those living in trailers could now afford condos. Those with condos graduated to houses. Within 5 years most of the real estate was absorbed. Prices are now back to normal. Moral: The free market works given time. Govt intervention can only lead to friction among the classes.
www.youtube.com/watch?...
As far as fixing the problem, it's called kicking the bastid's out and re selling the house to someone with the money. We did it back in the Carter- Reagan years. The house was forclosed and sold for the CORRECT price to people with the money to pay for it. There are trillions of dollars sitting on the side lines looking for a good deal. I did it myself. I bought my first rent house back then for about 2/3's of what it was sold for in the first place. High inflation brings irrational prices. If I can pay a carpenter to build a house for $100 a square foot, wouldn't you balk at buying a house for $500 a square ft? They didn't, and they lost, period! Instead of the bank balking at the price, they just adjusted up their appraisals. Don't say bad things about Moody's if you can't see the appraisers were padding the prices to sell the loan. In capitalism, you don't pay, your out. I don't understand all the hand wringing unless you are still clinging to the socialist whore that brought you to the massacre in the first place. Giving loans to people that didn't qualify is what got us here and is socialism, and now they are saying capitalism has failed. Force the banks to liquidate the bad paper and someone will pony up the money if it's 20 cents on the dollar. It would be over in a year instead of dragging it out over decades, costing trillions.
Remember the Laffer Curve?
It claimed that if income tax rates were cut, investment and production would be so stimulated that a fall in tax rates would increase tax revenue and balance the budget. When the budget was most emphatically not balanced, and deficits instead got worse, the supply-siders threw Laffer overboard as the scapegoat, claiming that Laffer was an extremist, and the only propounder of his famous curve.
If your memory is fuzzy on the path we've travelled since 1980, let me remind you:
Flash back to the neo-con's answer to 1970's stagflation and Milton Friedman's Shock Economics Theory he plied so well in South America for right wing fascists.
Roll tape a bit forward to the Gipper. Cut taxes, spend on defense out the wazoo, run record deficits, de-regulate markets and watch Uncle Milties' magic work.
While every right wing neo-con tape loop is buzzing with out-of-control GSEs, we all seem to conveniently ignore how all of this silly and frightening theoretical economic approach played out around the world through the likes of the IMF, World Bank, Halliburton, and their ilk.
Look at any country where this supply-side, trickle down, deregulated gambit has played and look at how eeiry is the similarity between those countries and this one:
1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.
2. In terms of inherited wealth only 1.6% inherit more than $100,000. 91.9% receive nothing. Yet the "death tax" was/is the highest priority on the ultra-conservative agenda.
Now for some sobering reminders:
Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $1.4 Trillion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.
Under Reagan the deficit increased to, at that time, a whopping $200 Billion from $50 Billion under Carter.
It wasn't because Clinton was an economic genious. He simply returned out-of-control revenue reduction (tax cuts) back to the Reagan rates and chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).
As for the free market to right the ship by itself "over time", I have a few tickets on the Good Ship Lollipop for those knuckle dragging leftovers that can't seem to get it through their heads that they lost the last two national elections trying to teeter on the same tired platform that got us into this mess.
Move! And don't expect me to pay $.01 to spare speculators the annoyance of dealing with movers.
From the Whitehouse website (www.whitehouse.gov/blo.../):
--------------
* Will refinancing reduce the amount that I owe on my loan?
No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.
-----------------
Can a lender reduce the principal amount? If they own the loan, sure. Does this legislation do anything to affect that right? Or compel them to do so? No.
As for knowing about Rick Santelli and CNBC, let me be unequivocal and unambiguous about this: The reporting on CNBC is completely surface. Having sat on a bulge bracket institution's trading floor for years I pity anyone who defines knowing Rick Santelli as either necessary or sufficient for being informed. The only thing CNBC is good for is hearing rumors about corporate actions such as mergers, layoffs, management changes, etc.
If you rely on CNBC for trading, being informed about the market, or understanding the real issues in finance, then I can't help you. One needs to read primary documents, do their own research, and get a breadth of opinions before they can be considered informed. As a matter of fact, if you consider watching CNBC informed, then please call me when you want to do a trade--I'll take the other side gladly.
Some commenters refer to Fannie and Freddie as having started this problem. They have missed the boat missed the boat. I refer you to my previous writing on the matter -- (dearjohnthain.wordpres.../).
As for open outcry, please stop carrying water for this antiquated system. Yes, I know there are electronic methods for trading that exist next to the pits. However, claiming open outcry has value versus electronic trading is a farce. It might be true only because of limitations put on electronic trading by those who have a stake in open outcry systems. Most equity option exchanges are electronic -- algorithms price the illiquid securities and those markets function just fine.
Normally, in a market where capital would be reallocated to a more efficient area of productivity, this would promote both capital and market efficiency. Anyone who has read Galbraith and others who follow economic history know that this is not always the case. In fact, markets can behave in capital destroying cycles that ca lead to near-permanent reductions in value, including property values in relative terms.
That is what is happening now in American real estate.
Read this article:
money.cnn.com/2009/02/...
See how Marinez is underwater but can make his payments. See how he will only see negative returns on his payments. See how it is far better for him to undergo a rational default. Any economic theorist would actually encourage him to do so and shaft his neighbours. If he pulls an Ayn Rand, all his neighbours properly values spike down as well, not just the estimated $450k, but below that. And then the cycle begins again.
Martinez gets foreclosed because he stops paying into a depreciating asset, and then simply rents next door, reducing the net flow of capital from his household to the bank. The bank is underwater as a result as this action multiplied thousands of times destroys its capital cushion and reserves. It stops lending. Now 2 people in the neighbourhood are laid off as a result. The FDIC takes over the bank, but cannot sell the house for even $450k, and dumps it for $300k to a guy who just sits on it, grass un-mowed. The taxpayers eat the losses (you'll pay somehow). All other properties suffer from the dereliction. Martinez doesn't care. He's just renting. Lower property values mean lower taxes for the city. They close a library, shut some schools, fire some police officers and firemen and the quality of life deteriorates. Now the property is further devalued. The guy who bought the house from the FDIC receiver realizes it will not bounce back and dumps it to another fellow for $260k. Now a dozen more people in the neighbourhood are underwater. They too contemplate rational default, and the cycle continues. The neighbourhood has gone from an 70% ownership rate to a 40% ownership rate and so has no continuity (like the projects).
Where is the incentive for Martinez to stay? You need an economic incentive. Moralizing (like Santelli) will not do it. A stick (credit rating) will not do it. Only the carrot will get him to stay and pay. Martinez acting rationally in his own self-interest (the premise of American capitalism) is skewering the local economy and taking all his neighbours with him.
So the dilemma is how to reduce the principal amount. Is foreclosure really the best way? If someone says "cut me a reasonable deal" and you spurn him, he can take action that will subsequently devalue everything you own by a substantial margin. We are all seeing that with the markets.
So Santelli can rant and moralize, but is he right? Martinez acts like a capitalist in the "this is America" way that Santelli advocates, but in doing so he destroys the joint value of a neighbourhood. That cannot be good. Perhaps rewriting contracts and taking group losses is better. Then write better rules so this does not happen again. The law is very firm that a person can walk from a unproductive mortgage and suffer the consequences to themselves. In this case, Martinez loses credit and equity. But the net effect for everyone else is far, far, far greater. The unintended consequences of the current foreclosure system are worse than anyone (except maybe Peter Schiff) ever imagined. I doubt a majority of Americans will continue to pay into houses that will not appreciate to their original value within their lifetime. If these cycles are not broken, that is the inevitable outcome. It happened in the Great Depression. It is happening again.
This can get much worse.
This was the last straw for me, I've decided never to watch CNBC again and have lost all respect for Rick Santelli, what a nut case not to mention CNBC broadcasting Mangement that would allow this to air.... very very shameful in my opinion.
BLOOMBERG TV is the best financial cable station airing these days, they would never allowed their staff to behave in this manner....
Thank God!
A lot of them switched their vote to Obama only after the stock market crashed post Lehman.
Populist policies sound good when coming from that deep baritone voice as Obama is one of the best orators of all time....but Obama could also sell snow to an eskimo in the dead of winter.
A good chunk of this country think OJ was innocent...Obama has a free pass to continue to use that sweet sounding deep baritone to run this country into the ground and set up his 2nd election term.
I would not be surprised if he built a monument of himself with the second slug of stimulus money he will ask for under the guise of acting "boldy and swiftly".
You write that:
"The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%."
The point that well-meaning socialists like yourself fail to address when quoting this tired statistic is your (unexamined) first premise. I assume you think that it's wrong that so much wealth be controlled by so few people? If so, why is this distribution "unfair" or otherwise repugnant to you?
What makes wealth (if not inheritance, which you point out in your second point)? Could it be talent? Ingenuity? Luck? Risk-taking that others will not engage in?
Or are we to believe that it's because the top 1% of financial wealth owners stole it, or came to it by fraud? If this is your take, please provide some evidence to support your claim.
If the cause of wealth is any of the four possibilities mentioned above, then I think we have to conclude it was a "fair" distribution.
Don't get me wrong - I love soicalists/liberals. They make me laugh. They provide entertainment to issues otherwise deemed too "dark" to be entertaining. At the risk of losing that comedic element, I'd like to see them explain their first premises more often. It is not a foregone conclusion that a skewed wealth distribution is "unfair" or not desireable.