Thursday, September 25, 2008

What Is Good For Warren Buffet and Goldman Sachs Is Good For America

What Is Good For Warren Buffet and Goldman Sachs Is Good For America

150 years ago we are all familiar with the snake oil sellers roving around America trying to scam the public with their self proclaimed remedy quick cure for most ailments. They would draw crowds with some sort of performance such as music and fast talking sellers would draw in the crowd claiming all sorts of quick cures that their elixir was good for. People buying the elixir were lucky if the product did not harm them. Many were harmed and sometimes the snake oil seller was run out of town if they were lucky and sometimes the public physically harmed them.

Today’s snake oil charmer sells homes that the buyers cannot afford. Some snake oil charmers sought homeowners that built some equity in their homes for them to refinance their short-term debt with renegotiated first or additional second mortgages effectively zeroing out any equity they may have had. Many mortgage applications are called liar loans because they misrepresented the facts of the property and the applicant. The sellers were paid for their property, the real estate brokers made their money, the mortgage company made their fees, the buyers had a nice place to live temporarily, and the banks made money also until the buyers could not make payments. With all of this fraud and misrepresentation going on no one has gone to jail but the FBI is doing some investigation. Better late then never.

Now banks, insurance companies, brokers around the world are holding maybe 1 trillion dollars of this questionable paper consolidated from hundreds of thousands of mortgages that the snake oil charmers made.

President Bush and Congress are trying to form a Bill for the government to buy these undesired mortgages to the tune of $700 billion dollars. Many citizens think this will turn out to be another gift to the rich, where the executives and stock holders benefit and the public gets stuck with the bill. This is the best idea the President and Congress have come up with to solve the world credit problem and the American banking system from widespread failures.

If I had the money I would never buy any of these mortgages and take possession of any of these properties sight unseen or not to investigate each one. No one knows how well these properties were managed. Some properties may have been washed away by a hurricane or burned by fire. Some may not be otherwise livable and require a lot of repair for other reasons. Many may have been foreclosed by non-payment of taxes and sold by the local sheriff. Other mortgages may be over inflated and exceed current market valuation of the mortgaged premises. Evidently, many homeowner incomes were not vetted properly, many homes were not appraised, some homes may not have been adequately insured, some may not have recently been surveyed, and some may need maintenance if not major repair, many mortgages may have been wrongfully approved, and some institutions may have kept these “assets” off of their balance sheets.

Tax losses should appear for the banks in full because they did not perform their due diligence on each accepting each mortgage. The banks should take their medicine when they bundled the garbage for others to purchase taking the mortgages off of their books and placing it on the books of other institutions.

Most states license real estate brokers, real state salespeople, real estate appraisers, real estate mortgage brokers, and bankers that work with real estate products where the state and federal administrators should examine the practices of each and penalize those that broke the law. Those that broke the law should have their licenses revoked.

If America is going to buy mortgages, let’s buy with knowledge about each underlying property and pay no more than what the underlying property is worth or maybe even a little less than that.

If it is necessary to throw investment money at these institutions then call it that and put in big sweeteners for the taxpayers like first make these funds loans with heavy interest so that they can be paid back and the treasury bills can be repurchased and those buyers can get their interest and the American tax payer can obtain a profit. Secondly, these companies should grant common stock as a sweetener for the loan for additional taxpayer profit. Finally, these federal loan money should come with conditions so that executive salaries are halved, no executive bonuses are paid or even accumulated until the loans are repaid, and that no other profit sharing, bonuses, stock payments are made or accumulated for anyone in the company until the loans are repaid to the Federal government. Force the institutions to clean up their own messes rapidly by establishing severe fines on them if they do not meet or exceed imposed management schedules.

Why should the United States get terms less than those Warren Buffet received for his $5 billion dollar investment lately in Goldman Sachs?