Every diet from Dr. Atkins to Dr. Zimmerman has a simple idea at its core, whether it is counting calories or carbs or something else. The Wall $treet Journal embraces these differences between various diet philosophies and attempts to apply these to managing personal debt, especially credit cards. It sorta works, too, except for the Grapefruit Diet. Yuck!
1 Comment » Posted by cringely / Other People's Ideas
I’ve been thinking a lot about the $700 billion that Congress has earmarked for bailing banks out of the mortgage crisis, or what we used to refer to as the mortgage crisis. Remember the Treasury was going to buy-up bad mortgages for more than they were really worth then decided, instead, to inject capital directly into the banks. This latter capability, which was literally forced on the Treasury by Congress, is not in itself a bad deal because as the banks recover so will the value of the bank shares now owned by you and me. Or at least that’s what Paul Krugman tells us.
And maybe it’s true, but there sure doesn’t seem to be much lending going on, is there? And wasn’t that the whole point of this bail-out? So far the only upside I can see for you and me is that we ought to be able to go into any big bank in America and demand to use the bathroom as shareholders, but even that concept is as-yet untested.
So the first $350 billion of the total $700 billion has been used for something completely different from the original pitch and the result of this change of course is doubtful. Things may be better for the banks but they aren’t better for any of the rest of us. Bankers are magnanimously foregoing bonuses while regular folks are more and more foregoing salaries.
But enough of this pissing and moaning, what I wonder is whether we should have seen this coming? And the answer – at least in my case – is “yes.” Whether you or the guy down the street or Hank Paulson should have seen it coming or not, I should have, and I am sorry for not having brought it to your attention.
The reason I should have known this was going to happen is because of an experience I had about 30 years ago working on a research study for the U.S. Department of Agriculture.
We were looking at how information technology could help agriculture. Farmers in Kentucky were given access to Department of Agriculture computers to look at all available data in near real time. They could check weather forecasts, crop yields, prices, look at economic projections – whatever was available to the Secretary of Agriculture was available to those farmers, each equipped with a little Texas Instruments paper terminal connected to the government through a telephone and an acoustic coupler.
This was pre-Internet, remember.
We were able to look at how much each farmer used the system and what they looked for. We could then relate that to their crop decisions, planting plans, and ultimately trace the flow of information right into their bank accounts at the end of the season. Or that was the plan.
Here is what we learned. Some farmers used the system a lot, some very little. But no matter how much they used the system, none of the farmers seemed to make any farming decisions based on that data. They just did what they had done the year before. Yet at the end of the year nearly all the farmers made more money than they had the year before – more money than we expected them to given that they hadn’t seemed to make any operational changes based on the new information.
Was this a placebo effect? Was just having the data enough to make the famers more successful? That was very unlikely. So a team flew to Kentucky to do interviews and find out what was up. Alas, I didn’t go on that trip, but I can share with you what they learned.
The farmers didn’t change their operations because they generally felt they were already optimized. There wasn’t that much to change without making bold moves like, say, deciding to no longer be a farmer. But the new information did give them insights in areas where most of them hadn’t been active before. Most of the farmers were using the Department of Agriculture data to guide them in hedging their crops by trading futures. They had data better than and earlier than the traders in the pits at the Chicago Merc and used that advantage to make more money for their farms and families.
Why didn’t we think of that?
Jump with me now back to the $700 billion bank bail-out. The banks were given $350 billion as capital injections aimed at getting them to give more loans. The money was exactly analogous to the information we gave to the farmers in Kentucky. But just like those farmers, it was soon obvious to the bankers – some of whom had the money literally FORCED on them – that more lending wasn’t in the best short-term interest of the bank – short-term interest being these days the only kind of interest that apparently matters.
So the money flowed to where it would do the most good in the view of the bankers receiving it, which was generally for bolstering reserves against the Winter they all saw approaching or for financing acquisitions of weaker banks.
We shouldn’t have been surprised it worked out this way. But had we thought this through for more than a minute, maybe we would have done something else with the money – something more in the interest of the people actually paying the bills.
What a novel idea!
3 Comments » Posted by cringely / What Passes for Wisdom
Actually, we don’t have kill them. The mortgage brokers are dying on their own, or rather with the vigorous help of the banks. Tens of thousands of mortgage brokers are currently out of work, their firms shut down, as part of the current financial crisis.
Mortgage brokers are hunter-gatherers who function in the wholesale mortgage ecosystem. They bring supposedly qualified mortgage applicants to the big banks and lending companies and somehow are able to get us through the loan process for less money (to the bank) than if the banks had done the loan directly (called a retail sale). So for the bank it is cheaper to go through a broker than for you to walk in the door down at the corner branch, which makes no sense to me and only shows how inefficient banks are on that level.
Banks prefer to deal with truckloads of money, not wheelbarrows full.
But if mortgage brokers are so helpful to the banks, then why are they dying? Because the banks in this financial crisis would rather first kill the mortgage brokers than their own retail operations. The banks are confident that, when conditions improve, the brokers will grow back overnight like mushrooms. They’ll give up their barrista jobs at Starbucks and go back to bilking us for thousands in loan fees like they think God intended.
As it is with nearly everything else in this crazy market, then, the wholesale mortgage business is operating the opposite of how it should. Banks are paying MORE, not less, because they view that as the better way to make more, not LESS, which is of course backward.
Why are we surprised?
But don’t feel sorry for your ex-mortgage broker. Just order from him or her a vente non-fat vanilla latte with extra foam.
5 Comments » Posted by cringely / Mortgage Horror Stories
Joe Nocera, a financial columnist for the New York Times, two weeks ago busted JP Morgan Chase by revealing that the bank intended to use the $25 billion given to it by the U.S. government not for lending to customers but rather for acquisitions and other stuff. Nocera listened-in to a Chase conference call reported here:
</a http://www.nytimes.com/2008/10/25/business/25nocera.html>
Tough news for Chase, eh? Generally speaking the big banks that accepted $125 billion over the last 10 days don’t intend to lend ANY of it — or didn’t until Nocera’s column hit. His may have been the most valuable — and expensive — piece of financial journalism in history. And as a result Chase is now coming up with a plan to rework 80,000 primarily alt-a mortgages by lowering interest rates, possibly converting some mortgages to fixed rates, or even forgiving some principal. Yeah, right. It’s all described here:
</a http://www.nytimes.com/2008/10/25/business/25nocera.html>
Now we come to the good part. The loans Chase is adjusting are coming primarily from two recent and troubled acquisitions — WAMU (that’s where my mortgage lives) and EMC Mortgage, which was part of Bear Stearns (and is where my mother-in-law’s mortgage lives). To get the spectre of Nocera off its curmudgeonly shoulders, Chase had to announce the workout program this week even though the details aren’t supposed to be ready for another 2-4 weeks. This puts the bank in a very difficult position that it is handling through the simple expedient of….. more lying.
The idea of this program, like the IndyMac and CountryWide programs that preceded it, is to change the terms of troubled loans in order to help homeowners stay in those homes — the idea being in part that foreclosures are more expensive and should be avoided if possible. So these are troubled loans — loans where homeowners have had to have been, at least for awhile, in default. But with only half a program announced, how can we expect mortgage holders to respond? They’ll stop paying, if course, which is exactly what Chase DOESN’T want them to do.
Listen, to be considered for this program, we’re led to expect, homeowners need to be in default. Yet as part of the announcement the bank has strongly suggested homeowners not continue to be in default because that might make them ineligible.
Huh?
You have to have gotten behind on your payments to qualify, but if you get any further behind on those payments, you might then become suddenly UNqualified. It’s as though there is a sweet spot of just enough — but not too much — financial default.
This is hooey and an insult to all involved. If you want to be included it is clear that the best move is to stop paying your mortgage or you’ll never get a chance to participate. And saying that homeowners who haven’t paid their mortgages for 2-3 months are now supposed to somehow find the money just as the economy get WORSE, not better, well that’s crazy and the bank has to know it.
The truth is they intended not to announce anything yet except Nocera interceded (bless him) so now Chase will spread some horse manure on the story in hopes of minimizing the damage. All of which leaves me with the question of where this falls under the Truth in Lending statute?
4 Comments » Posted by cringely / Mortgage Horror Stories
