The Fossils Know How to Save the Dinosours

So Detroit can't make it without a bailout.  Congress proposes voting on a rescue once they see the Detoit automakers' magnificent plan before December's decision to bail them out.  This implies that Congressional career politicians with less business experience than the average Americans know what a good plan is.  First Daimler and then  Cerberus bought Chrysler and could not make it work.  This firmly cements to me, it is just not plausible that Congress would know a good plan from a bad.  Pardon my cynicism but their track record is less than admirable.  

The Ant and the Grasshopper

Imagine your political leader proposes setting up a system that rewarded the people who squandered everything and penalized those who saved? Sounds like a real winner doesn't it?

If you were one of the to be penalized, how quickly would you sign up for such a program? How long would you stay in? You would be better advised to pursue the path of the squanderer. No penalty for risk since you can lay the cost of failure on those foolish enough to expect a raining day. I would not expect a program like this to last very long and I truly hope we stop before the penalties get too high.

Where Do I Sign Up?

All these great loan modification programs and I keep getting turned down. I was reading about this great program from the FDIC about loan principal forbearance and reduced interest rates. I was thinking, "That sounds fantastic!". So I was looking for the registration link to get my deal but you can't but help to notice all the criteria for this special deal. Let us go through those criteria:

* Eligible Borrowers: The program will be limited to loans secured by owner-occupied properties.

CHECK

* Exclusion for Early Payment Default: To promote sustainable mortgages, government loss sharing would be available only after the borrower has made six payments on the modified mortgage.

OK Loss sharing after 6 payments - ok but I plan on paying so NOT APPLICABLE


* Standard NPV Test: In order to promote consistency and simplicity in implementation and audit, a standard test comparing the expected net present value (NPV) of modifying past due loans compared to the strategy of foreclosing on them will be applied. Under this NPV test, standard assumptions will be used to ensure that a consistent standard for affordability is provided based on a 31% borrower mortgage debt-to-income ratio.

OK have better then a 31% debt-to-income ration - GOOD


* Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.

This applies to servicers so NOT APPLICABLE

* Reduced Loss Share Percentage for "Underwater Loans": For LTVs above 100%, the government loss share will be progressively reduced from 50% to 20% as the current LTV rises.1 If the LTV for the first lien exceeds 150%, no loss sharing would be provided.

CHECK - my LTV is well less than even 100% - this sure would be a horrible deal for the government (i.e. taxpayers) if they were crazy enough to take on loans with LTV rations even near 100%. Government isn't that stupid right?


* Simplified Loss Share Calculation: In order to ensure the administrative efficiency of this program, the calculation of loss share basis would be as simple as possible. In general terms, the calculation would be based on the difference between the net present value of the modified loan and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net of disposal costs as estimated according to industry standards. Interim modifications would be allowed.

Again, this applies to servicers and I plan on paying so NOT APPLICABLE

* De minimis Test: To lower administrative costs, a de minimis test excludes from loss sharing any modification that did not lower the monthly payment at least 10 percent.

Sweet, looks like I am going to be getting at least 10%. That sounds to good to be true!

* Eight-year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of the modification.

Well in eight years - unless you modified loans in Las Vegas, California, or Florida how could there even be a need for loss sharing? NOT APPLICABLE

So, where is the sign up link? Weird! No Link. Hmmm, look at the "fine print" - you have to be 60-90 days past due! I am not past due. What a crappy deal for the people who pay their mortgages and anyone crazy enough to pay their taxes.

This is insane even for the government.

The FDIC thinks it is going to take on 2.2 million crappy loans and only lose 5%. Those sure are favorable estimates considering the median price is (was) well over $200,000. This is a great deal - for the imprudent.

And the really annoying thing is, that as a taxpayer, I get stuck with the (woefully underestimated) loss sharing.

GM Bankruptcy Deception

The misinformation defending the huge bailout is that 2.5 million direct and indirect jobs will be lost. That is absurd!

The net purchase of vehicles is not going to change - besides cyclical change. The change will be where (and who) will build the cars. It is completely ridiculous to presume that anywhere near 2.5 million jobs will be lost and never return leaving people starving. Unemployment in a location dependent on one industry is going to be chaotic. Yes people will have to relocate or find new careers.

Production assets, brands, engineering talent, management talent, production line experience, and resources would be (re)allocated to more efficient producers and/or producers with better product mixes. Will there be dislocation, certainly, but that has been going on since the 70's in the auto industry. Places like Michigan and Ohio have watched this industry decline around them for 30 years. Yet they have not adapted there policies or re-tooled there economic policies.

All of the "lost" jobs will not occur in one geographic location either. It will be spread around from Canada to Michigan to California. Bankruptcy protection or liquidation will result in assets being purchased for more productive uses or even alternative uses. The woes of the American manufacturers is the direct result of poor management and stifling labor contracts. Nothing more.

Crappy Union Jobs

Unionization, in the long run, makes for a terrible way to be employed. A non-senior union employee has much to fear because they know they are not going to find a replacement job similar pay. The reason is simple - in a competitive labor market those very high wages are bid down by the party seeking the job. Most people don't want to lose their job, but losing it is not the end of the world because they are paid MARKET wages. They will find a replacement job with a substantially similar wage. The union employee, in an industry such as the auto industry, has very much to fear indeed.

The Day After

Well, in the words of Kent Brockman ... "I, for one, welcome our new Socialist Overlords." The election is finally over, which is reason enough in itself to be thankful. And the majority has spoken. Well, somebody once described democracy as three wolves and a sheep sitting down and voting on what to have for dinner. To get a little advance peek at what kind of tax hikes to expect next year, read this story about HENRYs ... as in, "High Earner, Not Rich Yet". Or as Obama would say, "Greedy Rich People who don't pay their fair share." That used to mean anybody who makes $250,000 a year or more, although that threshold seems to be floating downward as of late. In case this sounds like sour grapes, it's highly likely that McCain would have raised taxes too; he's certainly not going to fight against them, in his eagerness for a "bipartisan" Senate. Might be a good idea to read up on Limited Liability Companies. Just because I'm going to get plucked like a Christmas goose doesn't mean I need to make it easy for them. Think I'm paranoid? ... don't assume that your 401(k) is safe, either.