Archive for the ‘Security & Excahnge Commission’ Category

The Big Short and Understanding Finance

December 25, 2015
My 2 flat in Rogers Park, Chicago's 49th ward.

My 2 flat in Rogers Park, Chicago’s 49th ward.

It’s Christmas Eve, 2015, and I went  to see “The Big Short.”  Although the movie was not well reviewed (Michael Phillips of the Chicago Tribune said that  financial markets were too complicated for the average person to understand. Hence, this movie was boring), I found it well scripted, edited, and acted.

Perhaps  it is because I, also, could see how over heated the real estate market was…and I will tell you  how.

In the mid 1980s, seeing that I would never get rich by grooming dogs, no matter how well I  managed my budget, I decided to learn about the mortgage market and selling commercial paper.  That’s right.  I learned that not just banks, but private investors bought mortgages and you really didn’t need years of college education to sell mortgages.  You just had to know the concepts of present value of future cash flow, loan to value—and the formula to  figure out what a cash flow was worth.  That was it.  Simple as that.  Yes, you need a special calculator to  figure this stuff out, but you can easily learn the formula in a few minutes.

I  learned, via audio tapes, that  brokers sliced up payment streams, and sold portions of mortgages.  You didn’t have to buy 240 payments (a 20 year mortgage), but could by payment 12, 18, 32…whatever.  How would you manage to get paid if the mortgage was sold or the mortgagee defaulted?  Ah, there was the rub.

I wondered how this could be legal.  Well, it was legal because it was not ILLEGAL, and frankly, most people who buy bundles don’t look that closely at what they are buying.  I mean, they don’t look at the value of the property the mortgage is on, trusting appraisers.  They don’t look at the credit histories of the borrowers.  The assumption was that someone was  checking out this stuff…but in reality, nobody was. It just seemed to risky for me.  The only way you could  make money was if you were  a lawyer, and even then, it was an iffy investment.

My niece learned the  mortgage business (and was a lawyer), and I called her about a mortgage because I wanted to lower my payments.  She got me a ‘no document’ mortgage, meaning I didn’t have to prove income.  At the time, I was earning under $30,000 a year, but my credit was good, and my  ‘loan to value’ on the house was very good, so it wasn’t a problem.  After a few years, I thought I could do better, and wanted to retire a line of credit which was never very transparent, and I could never get a statement  on how much principle I owed, so I , again, refinanced with a broker who got me  a mortgage based on the LIBOR (London Interbank Offered Rate—a rather bogus index used in the USA), which was  at 3%, but adjustable. The broker told me  the rate was very stable, and rarely fluctuated more than .25, but that turned out  not to be so, and within  six months the rate climbed from 3% to 5%, and I again refinanced.

I just love HGTV, and I loved the shows about house flipping and people house hunting.  What I was seeing, on those shows, was people were being approved for  mortgages with no or hardly any (2%?) money down, based on their incomes, not expenses, and clearly people were buying much more  home than they could afford.  But it was legal.

I was seeing this with some friends as well. I thought that this could not possibly go on.  People were trusting banks, were carrying too much debt on credit cards, and all that needed to happen was for energy prices to go up or people losing jobs for whatever reason, or becoming over extended (a good one was  investors buying a bunch of property, not keeping the property up, getting rent payments but not paying the mortgages on time because  that’s how  some people manage their finances).

This movie shows that—all of that—really well…and virtually all the practices that led up to this are still legal.   Our Chicago area schools are not really teaching finance, or compound interest, or budgeting…especially not in low-income areas…and we still have people thinking this is  just not an interesting subject.  These are the same people who don’t bother to  check out the political candidates positions online (easy enough to do, but they go for the bloviators), and don’t vote, anyways.  Then, they complain.

I had read excerpts of Michael Lewis’ book, and learned about Michael Burry (excellently portrayed by  Christian Bale).  This movie should be shown  to every highs school student.

William O.Douglas, Supreme Court Justice, first head of the SEC

February 29, 2012

I was a teenager in the late 1960’s.  We had the Conspiracy 7 trial in Chicago. The music group Chicago, and Crosby Stills & Nash sang about it. The whole world  (is)watching …The Democratic Convention  in 1968, which the Yippes, working with other left groups, were  going to disrupt if the Democratic Party if they didn’t  put  planks in to end the war in Viet Nam, and address civil rights. The Black Panthers were active, and President Johnson, who only became president due to the death of Kennedy, declined to run.  Hubert H Humphrey lost to Nixon, who promised to end the Viet Nam war.

Of course, it backfired.  Nixon got elected.  About this time, William O. Douglas  published Points of Rebellion  .  He addressed what progressives expected   of their elected leaders…everything from civil rights to an end to unjust wars, to environmental conservation.  He really spoke to me.

Douglas  wrote a lot of books.  In retrospect, it is hard to believe he found the time, and I will explain.  He was the  first head if the Security & Exchange Commission.  He was appointed by FDR.  He saw straight away that  it would be virtually impossible to regulate public companies, and their official, legal filings were always inaccurate—to use a term.  He saw that  ultimately  staff would be in league with the  entities they were charged to regulate—-&  told FDR that the  SEC should be abolished in 10 years, and reformulated another way with other employees—and that  government employees should never be allowed to work for the  companies they  once regulated (it took over 50 years to get some sort of law addressing this—&  there is no retrospective on this…Newt Gingrich, the  most obvious…).

Douglas had a lot of integrity when it came to addressing what affected the citizens of the USA.  Check him out on Wikipedia….  so, then you wonder….

When did he find time to court the 4 women that he married—-& if you notice  the chronology, he was always cheating.  He was a womanizer.  &, you have to wonder about the 2nd, 3rd, & 4th wives…the last one being about 40 years younger than he was.  All you can think is that he was charming beyond words.

I recently read one of Douglas’ biographies, Go East, Young Man  .  Having been  IWW, I was very interested, as I was a Wobbly, and because he had so impressed me in my youth—-but I got to thinking….we really don’t teach out own history very well to our  high school students—the ones who will be voting.  I had no idea how the SEC came into existence, but what  with what happened at the end of the Bush administration—-running into what Obama inherited, and the bailing out of AIG and many, many other public companies—bailouts that  did NOT help  the majority of Americans deal with the fall-out they caused—and—in fact—-kept us all in horrible economic circumstances (so—if you believe Obama is a socialist—this bail out was proof he is not—-he is in league with the rich) where so many  families lost their homes…& nobody explained what could possibly have happened if AIG actually failed…..this is a travesty.

In any case, Douglas was a progressive, an environmentalist, and had a huge effect on what is now conventional wisdom in this country, womanizer or not. Do we really care about his sex life?  No.  But you would think, in writing Go East, Young Man, with all the name dropping…he would have said something about his wives!