Reprinted from THE WEST INDIAN this week by Dhanpaul Narine America’s Financial Crisis

In a bright and cheerful real estate office sits a broker and a client. The paperwork is being filled up for a mortgage. The client loves the house and the broker wants a sale. The snag is that there is no way that the client can afford the house with his income. But a sale is a sale and the broker is aggressive. By doctoring the books to show inflated incomes for the client and his unemployed wife, and using his contacts in the banks, a mortgage is approved. This has been part of the game that is well understood by many brokers, banks and attorneys for years.
Recently, these corrupt practices have been exposed, especially when buyers have begun to fall behind payments and to lose their homes. The economic downturn with a weakening dollar and rising prices have led to a situation in which mortgages cannot be repaid. There simply isn’t much money earned by families to make ends meet. When one or two clients face foreclosure that could be part of the normal operations of the market. It represents only a tiny drop in the financial bucket and steps would be taken to correct any default loans by banks.
But what we have seen in the last few months is not the occasional or normal foreclosure. Countrywide, there have been foreclosures in the thousands. This means that the banks are losing millions of dollars and the housing market is depressed. What has led to this situation and what options do the banks have at the moment? A New Yorker bought seven houses in Orlando, Florida for investment purposes. In January of this year the tenants of five of the houses moved out. They could not afford the rents anymore. The tenants of the other two houses refused to pay the rent or to move out and they are facing legal proceedings.
In any case the landlord has to fork out the mortgage on the seven houses every month with no income being generated from them. The landlord has put the five houses for sale but no offers have been made. He is now struggling to pay the mortgage and recently he made a decision to stop payment. He would, “let the banks do whatever they want.” Those seven properties are worth over 2 million dollars. The banks have to bear the loss and millions of such cases nationwide.
This anecdotal reference highlight the mess Americans face as the country grapples with a recession that is big as the last Depression. It has long been the view that America is a nation of debt. Foreign banks for instance own 1.5 trillion dollars from the mortgage giants Fannie Mae and Freddie Mac. China, the Middle East and Russia have around 700 billion dollars in debt that they owe America and which they cannot repay . When this happens, the cost of living of Americans rise and standards of living fall.
In 1938, Fannie Mae was founded by President F.D.R. Roosevelt to provide liquidity to the mortgage market. Today Fannie Mae and Freddie Mac own almost half of all home loans in the United States. When millions of homeowners foreclose, these institutions face billions of dollars in losses. The subprime crisis last year affected many people in many states. In a six- month period, the construction industry folded in some parts of America.
For example, in Rhode Island, those who were involved in construction lost their homes because no new houses were built between November 2007 and March 2008. In Missouri, families were behind in their mortgage payments after they lost their jobs and the same applies to North Carolina and other states as well. How is the inability to repay ones mortgage related to Fannie Mae and Freddie Mac?
Most home mortgage lenders depend on these two giants to provide the funds. They are big on Wall Street as other banks do business with them and as we have seen other foreign countries have billions of their funds tied up in debt securities. According to the New York Times, “there is a real panic on Wall Street right now and sometimes a blaze like that grows almost without reason. There wasn’t really any new news to set off this crisis. The stocks just started falling and did not stop.” About a year ago, the shares of Fannie Mae and Freddie Mac were trading at 60 dollars, but this has dropped by over half since.
Last week, America was stunned when there was ‘a run on the bank.’ While the government was trying to reassure the country that Fannie and Freddie were healthy, IndyMac customers thought differently. Bancorp, a huge mortgage leader collapsed and the Federal Deposit Insurance Corporation (FDIC) set up a new bank to oversee IndyMac’s assets. IndyMac has had a ripple effect in the finance industry. Wachovia, the fourth largest lender in the US tried to allay the fears of its borrowers only to find its shares sinking further.
The lesson from IndyMac is that no bank is too big to fall. Once public confidence is eroded in a banking institution collapse is imminent. Another lesson is that funds for ailing banks are not limitless. IndyMac was good in getting customers by offering attractive interest rates but once this profile was in crisis there was a ‘run’ on the bank. But the financial crisis has been the subject of several ‘spins’ over the last few weeks. The government has tried to put a brave face on it. President George Bush said that there was little to worry about. Exports, he says, are increasing and the economy is growing. The financial problem for him was therefore a temporary setback.
Hank Paulson, the Secretary of the Treasury, has echoed this message. But Bernard Bernanke, the Chairman of the Federal Reserve has other ideas. He pointed out that there were significant’ downside risks to the economy’ and inflation looks likely to increase. He has calculated that inflation has risen by June 2008 to about 5 per cent. According to the ‘Economist’ “ falling real incomes, slumping shares and house prices and tighter credit all cast a cloud over consumer spending. The Fed’s trouble is that, though the economy has avoided recession so far, it may not do so for much longer.”
However, there are other areas that have to be looked at as well. The tax relief in last February’s stimulus package had only a short- term impact. The construction industry experienced only a temporary upswing. The vacancy rates for office and commercial space has hit rock bottom and retail chains are closing, with Starbucks and the Gap being among them. The second point is that consumer spending has dropped. The tax rebates saw an increase in consumer spending in April and May of 2008. But the rebate came at a time when food prices had increased and so had the prices for basic utilities, including gas. The economy then was hardly stimulated by a one-off payment.
The final area concerns home equity loans. As banks cut mortgage refinancing more homeowners turned to borrowing against the equity of their homes. But care has to be exercised here because it so easy to fall to the temptation of easy money. What is the best possible hope to get out of the mortgage crisis? The short- term solution depends on increased local production and a strong overseas market. But if inflation rises Bernanke may have to raise interest rates soon.
Advice has come from an unexpected source. Yoshimi Watanabe, Japan’s Financial Services Minister has recently spelled out what America can do to stem the crisis. Writing in the Financial Times he said that, “ it is essential for the US to understand that given Japan’s lesson, public fund injection into the financial sector, is unavoidable.” Public funds will undoubtedly be injected into Fannie Freddie and interest rates will increase, leaving the lower and middle class to bear the brunt of the hardships.

Wow! Dr. Narine is spot on.

In speaking about the fraud that was/is pervasive in the real estate and mortgage markets Dr. Narine stated: "This has been part of the game that is well understood by many brokers, banks and attorneys for years."

Has Dr. Narine just corroborated my thesis that I have been propagating on this forum for over a year now?

Well, Elizabeth, you are the guru and Dhanpaul is just trying to walk in your distinguished footsteps.

Thanks Alexander ,

Unfortunately at the present moment I don't have a Ph.D., YET!!

Dr. Narine is a brilliant man and I cannot compare my understanding of the financial system to his financial acumen.

NY Times:
City and State Brace for Drop in Wall Street Pay


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By PATRICK McGEEHAN
Published: July 26, 2008

Government officials in New York are preparing for what could be the biggest single-year decline in pay on Wall Street in history and with it a vexing shortfall in city and state revenues.
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A review of the latest statements from the largest financial companies based in the city shows that they intend to hand out about $18 billion less in pay and benefits in 2008 than in 2007. The cutting of payrolls is well under way, but the full effect will not be felt until the year’s end, when bonuses for employees based in New York could shrink by $10 billion or more, according to city officials and compensation experts.

A decline in bonuses of that magnitude would easily eclipse the drop of 2001, the year of the 9/11 terrorist attacks, when total bonuses declined by $6.5 billion, according to the state comptroller’s estimates. City and state officials said the coming plunge in pay would have wrenching effects on the local and regional economies.

It would mean about $10 billion less in taxable income and several billion dollars less to be spent on apartments, furniture, cars, clothing and services. For many investment bankers and traders, year-end bonuses traditionally account for at least three-fourths of their income. But the downshifting of the Wall Street lifestyle has already begun.

“As long as I’ve been in the business, I think this is the worst,” said Vincent Nastri, whose Barclay-Rex tobacco shop down the street from the New York Stock Exchange sells cigars for as much as $35 apiece. “It’s been a little on the quiet side — a little shaky.”

All told, Wall Street firms, which employ about 178,000 people in the city, have announced thousands of layoffs in the last year. One of the seven largest financial companies in the city, Bear Stearns, nearly failed in March before it was acquired by JPMorgan Chase & Company.

It is already clear that employees whose jobs survive the deep cutbacks will, as a group, take home much less money than they did last year or the year before. The latest financial statements from the remaining six of the seven largest firms show that their compensation costs declined by a total of $9.5 billion in the first half of this year, compared with the first half of 2007. Along with JPMorgan Chase, they are Citigroup Incorporated, Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers.

Analysts familiar with those companies said the cuts so far implied an aggregate decline in pay and benefits, including bonuses, of more than $18 billion for the full year. About half of that amount would have gone to people employed in New York City, they said.

The impact on the state and city budgets is likely to be severe because the financial-services industry provides almost one-fourth of all income earned in the city. That pay accounts for about 10 percent of the city’s tax revenue and about 20 percent of the state’s, said Kenneth B. Bleiwas, deputy state comptroller for New York City.

“One of the things that highly compensated people do is they spend money,” Mr. Bleiwas said. “So when Wall Street suffers, the pain ripples through the rest of the economy.”

The impending decrease in the personal income of so many New York-area residents, Mr. Bleiwas said, “is a significant reduction which will affect not only state and city coffers but also have a direct impact on other sectors.” He said the jobs on Wall Street pay so well that on average, each one spawns two jobs in other fields in the city and a third in the surrounding region.

The state’s budget department estimated that the projected decline in bonuses would reduce state tax revenue by about $700 million this fiscal year, which ends March 31, said Jeffrey Gordon, a spokesman for the department.

The city comptroller’s office is forecasting a drop in bonuses this year “in excess of 30 percent,” according to Frank Braconi, the chief economist in the comptroller’s office. That would amount to a decline of about $10 billion, based on the $33 billion that the state comptroller estimated was paid out in Wall Street bonuses in each of the last two years.

Marcia J. Van Wagner, the deputy city comptroller, said the steep decline in pay on Wall Street brought an end to a period when the city’s growth outpaced the nation’s.

“The local economy was propelled longer by the fact that there’s been such enormous bonuses,” Ms. Van Wagner said. “There was a lot of income kind of zinging around the local economy and keeping us afloat.”

Ms. Van Wagner described her outlook for the city economy as “gloomy but not bleak.” But some compensation consultants said they were beginning to think their forecasts had not been bleak enough.

Alan Johnson, who as president of Johnson Associates has tracked pay on Wall Street for more than 20 years, said he had been expecting a decline in bonuses of 30 percent to 40 percent this year. But lately, he said, the debate among his colleagues has been: “Is it actually going to get even worse?”

With a steadily spreading credit crisis, Wall Street executives are no longer hoping for a rebound this year, Mr. Johnson said. Nor are they worrying about competitors hiring away their best employees, as they still were when they paid out surprisingly large bonuses at the end of last year, he added.

Chris Marcello, who uses complex formulas to trade large investments, said he got a preview of the pay drought on Wall Street at the end of last year, when he received a “token” bonus of $1,000 from his boss at Bear Stearns. After Bear nearly collapsed, Mr. Marcello, 35, found work at a smaller firm downtown, which pays him monthly bonuses of $1,000 or $2,000, he said.

For traders accustomed to receiving bonuses of as much as $500,000, the ramifications of the pay cuts are “huge,” Mr. Marcello said. “That’s the base of most people’s compensation.”

Down the street at William Barthman, a jewelry boutique that has served the financial district since 1884, the manager, Joel Kopel, lamented the loss of customers.

“The top market is fine. Upper-end people can still afford their Rolexes,” Mr. Kopel said. The marked drop-off has come in sales of items priced between $500 and $2,500, which he described as midrange.

Gesturing toward the luxury-goods stores lining Wall Street, John Russo, who has worked in commercial insurance for 35 years, said the steep fall in pay was bound to cause disruption in the financial district.

“Look across the street: BMW, Tumi luggage, apartments,” Mr. Russo said. “When things get bad, the moving trucks come.”

David Giambusso contributed reporting.

quote:

Originally posted by Elizabeth:
Wow! Dr. Narine is spot on.

In speaking about the fraud that was/is pervasive in the real estate and mortgage markets Dr. Narine stated: "This has been part of the game that is well understood by many brokers, banks and attorneys for years."

Has Dr. Narine just corroborated my thesis that I have been propagating on this forum for over a year now?

Sorry to burst your balloon, but I used to regularly exchange lines of thought about this subject with a certain individual who once logged in to the board under the alias Nuff. Not that anybody could understand what we were on about since we were both well ahead of the GNI crowd with a more critical view of the mortgage versus lending market, but I would like to put the record straight both on behalf of myself and Nuff.

Mr T, you are right but the more we talk about the current crisis constructively, the better our people can understand it and dont make mistakes.

quote:

Originally posted by Mr.T:
Sorry to burst your balloon, but I used to regularly exchange lines of thought about this subject with a certain individual who once logged in to the board under the alias Nuff. Not that anybody could understand what we were on about since we were both well ahead of the GNI crowd with a more critical view of the mortgage versus lending market, but I would like to put the record straight both on behalf of myself and Nuff.

hahahahahahahaha...you have posted some funny shit on here..but that there takes the cake.....you da man!!!

Liz...watch out man...there are some really bright boys...on here...and if you notice..they are not shy about it either....

this is one funny place.....I'm just sitting here watching the wheels go round and round...I just love to watch em roll..(or is it blow)...

Not quite sure what you mean here but the Feds want to bail out homeownwers but do you really think that the small man would gain?