Wednesday, April 29, 2009

Commentary: The "Green Shoots" of Potential

The NY Times ran two interesting stories this morning, the first one linked to above, the second you can find here.

Both reference a potential change in the way the administration could handle the financial crisis (no it hasn't passed) in the future.

The first article speaks to forcing creditors to take losses before taxpayers. It only makes sense that those who took on credit risk be the ones who pay the price for being wrong, not the taxpayers. Wall Street keeps pointing to the Lehman failure as a reason not to first hit the bondholders of these financial companies, however this arguement is self serving as the financial crisis was not caused by Lehman's failure - it was caused by too much leverage in risky assets. It was made worse by the governments erratic response (saving Bear, a much smaller version of Lehman), letting Lehman fail, then saving AIG. Wall Street and banks say the market won't function if bondholders are forced to take losses, this is ridiculous. Markets work when bad decisions are punished and good decisions are rewarded, by bailing out bondholders you distort the market and create further problems down the road that taxpayers WILL have to solve.

My point: perhaps the administration is warming to the idea that the people who lent the institutions money should first pay BEFORE TAXPAYERS.

The second article focuses on the mortgage program that I think is already dead in the water. It acknowledges for the first time that there are second-lien holders that are causing problems in modifying loans - they need to be worked with. The Administration is coming out with what I think is another dead in the water plan to address the second lien holders. So, why am I least a little bit? Perhaps the administration is realizing that this crisis is not over and will accelerate (in terms of foreclosures). The sooner they realize this and facilitate an orderly resolution to the foreclosure crisis, the sooner we can recover.

To recover bondholders will have to take losses and banks will have to take losses - both can be compensated for a portion of those losses with equity (bondholders with actual stock, banks with property appreciation rights (read Hussman)).

While we are not even close to being out of the foreclosure/housing crisis, there are "Green Shoots" (the buzzword of the day - yes I'm kind of mocking it!) of potential out there - the question remains whether they shoots will be watered and cared for so that they will blossom, or whether they will wither and die.

Scott Dauenhauer CFP, MSFP, AIF