Last week I wrote about the government’s $700 bailout plan and asked for your opinions. I got an incredible response, both by email and on the blog. I really appreciate hearing what you had to say and it helped me to sort out the whole mess in my head. Today instead of writing a column, I’m just going to reprint many of your letters. Some of you were outraged about the plan, while others urged its passing and still others came up with their own plans for the $700 billion. We love hearing what you have to say, so write to us anytime via email or join the robust discussion on our blog, http://www.iconoclast-investor.com. Enjoy!
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“Why would anyone ever think that congress would come up with anything at all! They have no interest in running this country. They have seen to it that they get raises when we have a recession, i.e., they vote their own raises. They have made sure of their own retirements at our expense.
“Congress has no reason to do anything that is not in their best interest!
“Here’s to a happy day :)”
D.B.
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“Since the government is having to “buy” the mortgages, why not create a housing agency to manage the properties, and rent them to the previous owners, with a term limit for the eventual purchase of the house they are renting.” E.R.
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“Whereas I absolutely abhor the idea of the government getting involved, I think the bailout has been misrepresented.
“The plan basically involves the U.S. Treasury using money to run a distressed debt fund. In other words, the U.S. Treasury will raise funds (by issuing bonds rather than by adding a surcharge to taxes) to buy (at knock-down prices) assets that are hard to value right now given the pervasive lack of confidence in the market, and that are therefore being written down more than could possibly be justified by any sane analysis of their true future potential. The RMBS and CMBS assets are valuable so long as people keep paying their mortgages/notes. They have inbuilt protections for loss--with someone having to bear that loss--but the valuations of the ABS bears no resemblance to real losses. For example, Merrill sold its portfolio for 22 cents on the dollar, which implies that 78% of debtors would default 100%.
“That is just not going to happen. There might be a 10% or 15% default rate on mortgages--everyone can see that the highest hit states only get just above 20% in specific areas/cities/sub-divisions of cities--and the default is not 100%. There is some recovery value in the house/land on which the house is built.
“Consequently:
(1) The U.S. Treasury would stump up loads of cash now--and this cash would come from whoever usually buys U.S. Treasury bills, which means many, many non-U.S. entities--to buy assets dirt cheap.
(2) The U.S. treasury would hold and manage those assets for a period of time.
(3) The U.S. treasury or its managers would sell those assets in a process that does not resemble a fire sale over time. The U.S. Treasury is as likely to realize a profit on its investments as any distressed debt investor ... or indeed as any investor in the stock of a fallen angel. Warren Buffett bought Salomon Brothers the last time things went pear-shaped, held the asset for a period of years, and then sold at a profit. Warren Buffett is doing exactly the same thing this time with Goldman.
“What is the downside for the taxpayer? It’s first that the government is getting involved in the markets, and second that the issuance of additional debt may well have a negative effect upon exchange rates so that going on holiday abroad or buying foreign made products may be more expensive.
“What is the upside for the taxpayer? The ABS--many of which are still performing entirely as anticipated--will continue to generate revenue with which the U.S. Treasury can amortize the US treasury bonds and interest on them. Once sanity returns to the markets, including to the real estate market, the U.S. Treasury will likely be able to sell the ABS at a profit.”
M.M.
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“Investor’s Business Daily in a series of five front page articles says that the conditions leading up to the present situation has been well known for several years and they say it could have been prevented. Since the same cast of characters is now wanting to “help us” I would prefer not to ask them to concern themselves any further on my behalf but rather let the economy work its way unaided. It might be draconian but with appropriations to stimulate repairing the infrastructure, aid local governments to some degree, increase funding for medical care, education especially for returning veterans, and other charitable causes, etc., all with the same money now requested we could live through what may happen,
“Your report on the man J. P. Morgan was interesting. I think J.P. Morgan Chase, Bank of America, and a few others will be survivors and will be of help in keeping a reasonable amount of fluidity in the economy.
“It is best that we do not ask for the government’s further meddling.”
W.W.
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“Sometimes your letters are thoughtful and philosophical. I enjoy them and the letters that I subscribe to.
“Since you asked for thoughts on the new plan (bail-out) for the economy, I can only say that, like many, I am angry at our government and they way they have handled or not handled our country. From what information we have been given, it seems like it is necessary and a consequence of their mishandling their responsibilities. Wall Street and the banks have a problem, but they usually work within the rules laid down to them.
I am old enough to consider John McCain a young man. Obama scares me, but he is smart and seems to learn as he goes. Change is always stressful.
I fear for our country and our way of living under a capitalist guideline.
At my age I have learned that life must be balance ... time for your work, your family, and yourself. Many put their selves last or forego it because they are too busy.
Please continue your letters, and the others that I subscribe to. They help me make decisions, some good and some not so good, but better than I would do without outside financial opinions. There is an old saying that when you have a problem, it is better if you share it with someone or get a consultation.
Have a nice day. The coming week ... should be interesting.
D.S.
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“The bailout plan MUST be approved as the only way to avoid financial disaster affecting all. The so-called socialist and inflationary aspect is a red herring. The Treasury will have unlimited time to dispose of the assets, and at a profit, in addition to gaining equity stakes.”
G.S.
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“Bailouts of banks only treats the symptoms of the disease and will lead only to higher inflation, further damaging the economy. Same goes for any bailout of the people in the form of “stimulus packages.” We live in a country (the U.S.) where 70% of GDP comes from consumer spending. To jumpstart the dying economy, consumers will have to start spending again. But the American consumer has run out of cash, and is $15,000 in debt on his/her credit cards, and therefore cannot spend, or borrow more to spend. The only way to fix the problem is to allow taxpayer consumers to keep more of their income, to reduce taxes, drastically. The only way to reduce taxes drastically is to downsize government drastically by eliminating non- or under-performing departments of government that serve no or little benefit to the citizens. Until federal government is drastically downsized, there is no end in sight to the economic woes. Sure, there will be Band-Aids for temporary fixes, but financial debacle comes closer and closer.
“As usual, the underlying cause/disease/problem is very simple to see if we aren’t spending all our time focusing on the symptoms. All of the various symptoms that can be identified regarding the bank crisis are simply symptoms of the disease. If every American taxpayer were allowed to keep 10% more of his/her total income, how many more foreclosures would there be? How many new cars could be purchased? How many more big screen TVs? Boats? Vacations? College educations for children? Insurance policies? Restaurant dinners? Wardrobes? And on and on.
“Or we could just sever ties from the Central Bankers/Federal Reserve system and go back to the system Jefferson envisioned and advised the People keep!”
B.W.
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“Put all the main manipulators of finance, the bankers, insurance agencies and stock exchange owners in one room and get them to come up with regulations to prevent future Enrons, Fannie Maes and the current players involved in the excess use of credit. When agreement is reached on federal regulations to be passed by the government, pass the 170-200 billion package and pay off the holders of mortgages up to one million dollars at a rate of 70 cents to the dollar of the value of the loan/mortgage.”
A.M.
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“I AM A NAM-VET ... My mind is well but it is hard for my body to follow ... I HURT EVERYDAY ... and now I hurt more for I and AMERICA have been betrayed!!!!!!!!! It is time to send all greedy CEOs to jail and replace the Treasury Secretary with any college financial professor! You cannot TRUST these CEO’s that got US into this mess. PUT THEM ALL IN JAIL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! GOD BLESS AMERICA.”
C.M.
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“The original proposed bailout plan from Treasury Secretary Paulson should have been immediately approved with no strings and bipartisan support as promised by Nancy Pelosi, Harry Reid and other Congressmen a week ago. There would have been an immediate vote of confidence by everyone and other issues could have been left for another day. This major problem required an immediate fix to avoid the steamrolling effect of investor confidence and some of the major banks could have been saved ... this politicizing has cost U.S. citizens and enterprise billions unnecessarily ... shame on Congress for creating the problem with deregulation and encouraging Fannie and Freddie to issue marginal loans and then not acting in good faith to save the country when the chips were down”
R.S.
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“In my humble opinion, we should:
1. Indict all of upper management for each of the banks that allowed the practices that got us in trouble. Fine them heavily--let’s say equivalent to their individual compensation packages for the past five years.
2. Take all lobbyist donations to political parties and add it to #1 above.
3. Limit the terms of those “serving” in the Statesmen positions (Congress, Executive Branch, etc.).
4. Cut the incomes of those serving in our government by 28% (the more realistic inflation we’re experiencing) and add that to the “pot.”
5. Take all of the Wall Street fat daddy executive incentives and throw those into the “pot.”
6. Quit paying tax incentives to oil companies.
7. Quit paying farmers to NOT grow certain crops and instead, subsidize them for growing needed items.
8. Feed and house our poor, our hungry and our sick ... charity begins at home. It is not charity to give to others (foreign nations) when you can’t take care of yourself.
9. Quit dragging your feet and step up to the plate when it comes to “greening up.” How about--all cars/SUVs must get 35 mph CITY by 2012? How about special lanes for vehicles that don’t get that mileage and those lanes pay tolls? The tolls then go into the “pot.”
10. Completely redo the election system. Instead of spending hundreds of millions campaigning and having caucus after primary after caucus in order to have a convention--have all candidates (even if they only have 1% of the vote) answer the questions on national TV.
“Use the “pot” to pay down the deficit.
“Why is it when I lost my job and I was upside down, nobody wanted to bail me out, but everybody wants to bail out the banks?”
J.K.
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“We should not bail out these companies that are paying unreasonable salaries to executives while the little taxpayer is so underpaid, there is some thing wrong with our system when the $10.00 an hour person is bailing out the $1 to $10 million executives and with all their fringes while the $10.00 person has no insurance or other fringes”
S.
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“NO BAIL OUTS FOR THE CEO’S AND COMPANIES THAT MADE ALL THE WRONG DECISIONS, INCLUDING ALL OUR HEADS OF STATE. WE MUST NOT BECOME A SOCIALISTIC STATE. WE ARE AMERICA. THE HOME OF MAKING COMPANIES AND CEO’S RESPONSIBLE FOR THEIR SCREW UPS. LET THEM FALL! KEEP AMERICA CAPITALISTIC, NOT SOCIALISTIC! WE MAKE OUR CHILDREN RESPONSIBLE, SO SHOULD WE MAKE THESE CEO’S RESPONSIBLE!”
S.C.
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“I also think that the $700 billion would be better spent on purchasing the houses that are going into foreclosure. Having those as a hard asset, which can be rented or have their loans restructured (45 years is possible) so that the monthly payments closely match those that the original homebuyers can afford. This will remove the excess inventory from the housing market, stabilizing pricing.
“The equity in the homes will be the guaranty of the lost equity in these bad loans. The housing could form the financial platform for many of our struggling social programs in the future. Let the financial markets deal with the remaining bad debt as best they can with minimal government funding. The banks need to get back to sound banking practices not fantastic financial schemes aimed at instant obscene profits.
“The people who attained these loans on marginal credit for the most part are Americans who are following the Dream, and if handled properly can be changed from a liability to a long-term asset to the nation.
“Finally the nation and the world needs to reassured as to the overall stability of our system, every year we watch the Jimmy Stewart movie, “It’s a Wonderful Life.” The world’s money is not sitting in banks, it is in the bricks and mortar of our homes and industry in the cars and goods, commodities we have purchased. If at this time in our evolution the best we can do is panic we have no future as we have known. The lives we lead are far richer and diverse than our parents and grand parents could even dream of. We have created this reality through our dreams and imagination and together we can continue the dream. This cannot be achieved through fearful reactions to the situation of the moment.
“All this said there is one final component to this most amazing of times. The course we have set is fraught with uncertainty at the environmental level, not just global warming but the very life forms that we have taken for granted for millennium after millennium, Fishing stocks are depleted, forests have vanished from some countries and are vanishing from others. We need a global conservatorship of all earth’s natural resources. How can we put a monetary value to this process? How can we quantify all of these varied life forms? This is work for the mathematician and biologists, but an interesting starting point would be to consider the redwood tree. How much would it cost to grow a 200-foot redwood in space? We are building our ark, the stepping-stone to the planets and beyond, taking life away from our planet. As we sell our forests, for sometimes as little as a dollar a tree, what is the true value of the planet that we have? Establish a true value and the asset value of the planet and then we can fund and finance the most amazing renaissance of the human story.
“All the best
B.R.
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“There should be no bail out plan by taxpayer’s dollars. I am all for tax breaks and incentives of that nature.
“Let the lending institutions grind to a halt. There will be other institutions that will step up to the plate.
“So what if you have to come up with 20% to buy a house. Maybe that is what this country needs.
“No more instant gratification loans.”
T.
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Again, thanks so much for all your letters. We love hearing what you have to say, so write to us anytime via email or join the robust discussion on our blog, http://www.iconoclast-investor.com
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, we have links below to each issue.
Cabot Wealth Advisory 9/29/08 - My 700 Billion Dollar Solution
On Monday, Timothy Lutts responded to a reader’s inquiries about the government’s bailout plan and the current economic situation. Tim reminded readers that in investing, it’s not about being right or wrong, it’s about making money. And the best way to do that is to watch the market. Tim also wrote about a biotech company that’s bucking the market’s trend. Stock featured in this issue: Sequenom (SQNM).
http://www.cabot.net/Issues/CWA/Archives/2008/09/My-700-Billion-Dollar-Solution.aspx
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Cabot Wealth Advisory 10/2/08 - Keeping Your Head While Others Lose Theirs
On Thursday, Michael Cintolo wrote about keeping your personal feelings about the bailout separate from the financial decisions you make. He also recounted a time several years ago when he got greedy and made some investing mistakes, reminding us to embrace our mistakes--and learns lessons from them--so we don’t make them again. Mike also wrote about how biotechs are still in pole position to lead the market’s next advance. Stocks featured in this issue: Google (GOOG), Research in Motion (RIMM), Apple (AAPL), Baidu (BIDU), First Solar, Alexion Pharmaceuticals (ALXN), Illumina (ILMN), United Therapeutics (UTHR), Cubist Pharmaceuticals (CBST)
http://www.cabot.net/Issues/CWA/Archives/2008/10/Bailout-Bonanza.aspx
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Until next time,
Elyse Andrews
For Cabot Wealth Advisory
Editor’s Note: Despite the economic ups and downs of the last 27 years, thousands of investors have benefited from ideas and recommendations found in the Dick Davis Digest, a bi-weekly publication featuring market insights and informed recommendations from the Best Minds on Wall Street. We review hundreds of financial newsletters and institutional research publications and after careful screening, we bring you the ideas with the greatest profit potential, even in today’s volatile market. To start your subscription today and reap the benefits offered by the Best Minds on Wall Street in any economic climate, click the link below.
http://www.cabotinvestors.com/dddii05ec01.html
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