By Mark David Blum, Esq.
Two hundred fifty eight dollars is all it cost. That is how much every man, woman, and child in this nation paid to buy a mere 80% interest in the Insurance Industry giant, AIG. Since I know I did not pay my share and am fairly sure nobody I know paid theirs, this is yet another debt incurred in my name and dumped into the laps of my children. (Do the math: $85 Billion divided by 330 million is 257.57575757575). That sum of $258.00 is but one bill incurred during the past eight years. As John Stewart quipped, “anything to stop that socialized medicine.”
Arguing that if AIG failed, it would have serious market repercussions, this fantastic nationalization of a major insurance company makes me a 1/330 millionth of 85% owner of AIG. Big deal; I want to cash out. AIG insured all those Adjustable Rate Mortgages that are now causing massive system failures.
Fasten your seatbelts because more money is going to be thrown after bad. Thirty Billions Dollars; the number ‘3’ followed by ten zeros, is what New York State Senator Hillary Clinton had been offering those citizens who gambled on a high risk venture and lost. Because so many are at risk; guilt and election year pandering are driving the candidates to pander to the thousands if not millions of Americans suckered into Adjustable Rate Mortgages and who are now getting killed by rising interest rates. Buy outs, bail outs, forced re-negotiation, and a whole new set of government oversight is about to set up shop. Our pockets are going to be picked so as to assure than bank investors get their return. It is not the homeowner who benefits from a bailout; it is the mortgagor. More taxpayer dollars thrown at big banks and big insurance.
Imagine you walk into a casino. Finding a blackjack table, you plop down $100.00 for chips and sit and play for a couple hours. Your winnings go way up and you walk away from the table with $500.00. Feeling hot and lucky, you go on to another game and sit and play but this time your luck turns sour. Knowing how much money you can make by taking this risk and despite losing not only your winnings and your $100.00 original stake, you pull out your credit card and take a cash advance to keep playing. Alas, but the House odds take over and you leave the casino floor flat broke. As you are walking out the door, you approach the management and complain about being out of money and want some help to get back on your feet. Can you hear the laughter now?
Or, how about a walk down the State Fair Midway: You are down to your last $5.00 but there is a booth where you have a chance at winning a prize worth ten times that five dollars. Throwing down your Lincoln, you get your two balls, take your best shot, and miss. Shrugging about losing, you ask the Carnie for your money back. What are the chances?
The same dilemma is now facing millions of Americans who gambled and lost. Many years ago, a friend and I were discussing the issue of interest rates. Being far older than am I, my buddy told me that he remembered a time when interest rates were down to 5% and that someday they would be again. Of course, I did not believe that we could see such rates would ever come around again. As with everything else, my friend was right and interest rates did indeed come down to 5% and even lower.
Yet, this time there was a catch. Folks could go out and get home financing for 5% IF they bought an Adjustable Rate Mortgage (ARM). Boiled down to its gravy, an ARM is a loan that ties your payments to the Fed and the Prime Rate charged to banks. For so long as the Prime Rate remains low, so too will the borrower’s monthly payments.
Millions of Americans went out to take advantage of what was perceived as being something so good that you could not turn it down. After all, this was the first time in the last 40 years that you could buy a home and finance it at manageable rates. So an entire nation went out and bought homes, borrowed against equity, and engaged in leveraged buying at levels never before seen. The real estate market exploded and it was a seller’s market at every level.
While my older and dear friend may remember interest rates at 5%, I can remember interest rates at 17%, 19%, and even 21% in the 1970’s. The day he decided rates had come down enough that he was going to refinance his home and consolidate all his debt, we had a heated discussion. Obviously I was sticking my nose in where it was none of my business. But I cajoled, nagged, and yelled at him until I got it through his thick skull to NOT take out an ARM but pay a couple points more and secure a fixed rate. Only through stability, can you make financial forecasts.
Here we are today. Interest rates are starting to creep up just a tad which in many cases is the difference between staying in your home and losing it to foreclosure. The real estate market is flat and prices are falling. Nobody is buying.
In response, Ben Bernacke, head the Federal Reserve, has been tampering with interest rates. To prevent rapid rise in rates and so as to try and save millions from losing their homes, the Fed has been holding down interest rates. One more rate reduction, and its all over. Nobody listened to former Chairman Alan Greenspan way back when he opposed President Nixon taking our economy off the gold standard. We still live in Nixon’s hell.
The result of false and incompetent interest rates being held down, is that there is an explosion in the inflation market. Look no further than the cost of fuel, foods, staples, and transportation. Prices are off the charts and are eating away at what little discretionary income most Americans have. For this reason, the Fed has held down interest rates so that while they may starve, at least folks will be able to pay their mortgage. After all, the banks have to eat too.
Now however, there is a new hue and cry. It is coming from all sectors. What is being demanded is that the federal government provide welfare for homeowners who gambled on interest rates … and lost. From the President on down, demands are being made that the government adjust tax rates, provide price supports, and create a bank of funds akin to the famous Savings and Loan bailout of the 1980’s.
Boiled down to its gravy, Americans are being asked to provide welfare to gamblers. These same folks who borrowed over their heads and failed to take into account the very real possibility that their ARM could rise significantly ahead of their income, are now crying poverty. They want their money back from the casino. For years, they enjoyed the benefits of a low interest rate and lavished in the luxury that they could otherwise not afford.
But now these same gamblers have lost their winnings and their stake. Even by going into deeper debt, most will not be able to hold onto their homes. They are going to end up in foreclosure, bankruptcy, and having to start all over again. Indeed these same folks may (shudder) have to live in an apartment while they get their financial house rebuilt.
Under no set of circumstances should our government; namely, us, the American taxpayer, act like the Midway carnie and return the gambler’s investment. There is no good reason why we should all suffer for the gambling and risk taking of the few. Nobody bailed me out when I ran into financial trouble and I certainly did not ask taxpayers and the government for help.
My heart goes out to these folks. I know very well the pain and misery of losing everything you own. The scars I have from financial disaster, bankruptcy, and loss of my home will probably never leave me.
But as a nation predicated upon the principle of capitalism and one which encourages risk taking and reward, we must also teach the very hard lesson of risk taking. The lesson is very simple; risk implies chance of losing. The greater the risk, the greater the reward and the greater the loss.
Anybody who believed banks were offering ARM’s out of the goodness of their heart is clearly mistaken. Anything too good to be true is indeed just that. The only reason any bank would have offered a low ARM is because their financial forecasters knew that rates were going to increase in the near future. Profit taking was just around the corner. Ownership of large numbers of high priced real property gives the banks and lenders absolute control over the real estate market. Realtors are now subservient to the banks instead of lenders having to “compete” for your business.
As much as I respect and wish well upon my fellow Americans, I cannot sit quietly and watch more billions of tax dollars thrown down a sinkhole. Iraq is a big enough disaster. Katrina and Rita and now Ike completely drained our national resources.
Rushing to bail out millions of gamblers or even one big one is the wrong move. Let the market forces do their job and control prices. Otherwise, get your checkbooks out because this one is going to be a massive financial fiasco. I refuse to be a part of it and I refuse to mortgage my daughter’s future to bail out the greedy gamblers who took a risk and lost.