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Inside the Bailout: A Different Perspective

By Rich Schiffer

Real Estate Agent

September 30, 2008 05:25 AM

Many people are vocal about their opposition to the "Bailout Bill" that is about to get a second chance in the House of Representatives.

The common thread of the arguments against the bill boil down to this:

"My money should not be used to line the pockets of greedy corporations that couldn't make sound decisions. Artificially proping up the economy is un-American."

I can understand that point. Three years ago, I might have had the same opinion. But since I started my careeer in Real Estate, I have learned a lot about financing and economics. This is not to say that I am an expert on the economy, or on the financial industry. I do however have a different perspective than most people, because of what I know, however. This article is intended to help people understand why I see this as a great opportunity to invest in our future.

What many people fail to realize is that this "bailout" is not a bailout at all.

It is not a handout to companies that got too greedy, although it has that initial appearance.

What it boils down to, in the final analysis, is the American People investing in their own economy.

If you could buy a 1 dollar asset for 15 cents, wouldn't you jump at that opportunity?

What the "financial market rescue bill" will do is allow the Treasury dept to purchase "at risk" mortgage assets that lenders have not been able to sell on the open market. Once the lending institutions can divest themselves of those "bad loans" they will be able to resume lending at normal levels. Don't worry -- they learned their lesson. Those high-risk loans are not likely to be seen again.

Those "bad loans" which the government will buy are not worthless.

Not all of them will go into default and not all of those that do will go to foreclosure.
Everyone of those "bad loans" is secured by real property.
Real Property, unlike corporate stock, never reaches a zero value. The loans that do foreclose will give the government an asset that can be sold, potentially at a profit.

For taxpayers, this is good news, because it could eliminate a large portion of our federal deficit (or dare I suggest our debt?) down the road.

Warren Buffet once said, "If you want to go fast, go alone. If you want to go far, go together."

That is essentially what this bill will do -- bring us together, as American Taxpayers, to invest collectively in our own economy. It will be as if we created the largest mutual fund in the world, investing in assets that are backed by real estate. This could end up being seen as the largest government acquisition of land since the Louisiana Purchase.

Keep in mind that real estate over time is a sound investment.
(Since WWII, real estate has appreciated on average about 5.5% per year.)

This is definitely not about "bailing out" the corporate big-wigs that failed to see this collapse coming.

It essentially is about taking advantage of a once in a lifetime investment opportunity -- investing in the future of our country.

Remember, that any monies loaned to these corporations (like was recently done with AIG) will be repaid to the taxpayers, with interest. In addition, stock warrants will be issued, making the American People stockholders in these companies -- stockholders that stand to reap large dividends and gains when these companies stock goes back up.

The Financial Markets are treading on thin ice, wondering what will happen in the days to come. We have a great opportunity to invest in the "bottom" of the market, buy essentially defining the bottom ourselves. As soon as we take this bill goes into effect, the markets will rebound like never seen before, and the economy will be back on track -- but with American taxpayers making the biggest profit, not the Wall Street CEOs.

Investing in America's future. That seems like a patriotic act to me, and I am urging everyone I know to support it, despite the outward appearance of rewarding companies for greedy behavior. Seen from a different perspective, passing this bill should be a non-partisan no-brainer.

For more on this topic see the following articles:

Bail or Fail (EDIT -- Kristal Kraft hit the nail on the head!)
Bail Out Bill
What does NAR think of the Housing Stabilization bill?
The Bailout Bill is being called a Buy-In!
Link for the draft of bailout bill...
Bail out Bill Fails-Be careful what you wish for.....

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Susan McQuaide

Keller Williams - Simpsonville, SC

Rich - I understand where you are coming from and believe we need to do something. The problem with buying these mortgages is that no one has been able to set a value to them. 15 cents on the dollar is so low that it probably not would help the financial institutions holding them. 90 cents on the dollar may help them, but screw the tax payer. Who knows? This certainly above my paygrade...

Sep 30, 2008 05:36 AM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

Even 15 cents on the dollar would restore their ability to make new loans. Their purse strings are tied, by their portfolioed loan holdings. Once they clean house, and get back to writing (and holding) only paper that can be sold on the open market, things will get back on track.

Sep 30, 2008 05:52 AM

John Guiney

Keller Williams Realty - Quincy, MA

e-PRO, CBR

Rich - It doesn't take a salesmen to sell $20.oo dollar bills for $15.00 does it? Of course it makes sense for Americans to support this bill. The problem is the republican house decided that it is some form of socialism and they voted it down.

Sep 30, 2008 06:21 AM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

It wouldn't be fair to blame the Republicans in the house for failure of the Bill. The Democats are in the majority. They could have passed it on their own. The leadership on both sides of the aisle failed to explain the effects of the Bill (and the effects of not passing it) to their party members.

Sep 30, 2008 06:33 AM

John Guiney

Keller Williams Realty - Quincy, MA

e-PRO, CBR

Rich _ The reality is that this should have been a bipartisan effort so that all congressmen would have to answer for it upon reelection. Asking Democrats to vote for it when it was essentially a republican bill from Paulson, Bernanke and Bush is a bit more than naive.

Sep 30, 2008 06:46 AM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

The bill may have originated from the administration, but it was a bipartisan effort to reach the agreement that came to the floor for a vote.

By not passing the bill, and taking advantage of this opportunity, we may see more dominos fall before they finally see the wisdom of moving forward with it. Moodys is already predicting an additional 450,000 jobs lost 2-3 months from now if an agreement is not reached in the next week.

Read this for more information: Without a bailout, what happens next?

Sep 30, 2008 07:57 AM

Michael Delp

Mortgage Pro - Telford, PA

Rich, You hit the nail on the head! You put on paper what i have been trying to explain to people. It is an investment in our future, backed by real property. If done correctly, this Bill can help the American Taxpayer.

maybe we should look into WHY the Republicans shot it down. Was there pork added to the bill? where is a line item veto when you need one?

Oct 01, 2008 04:04 AM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

Michael -- Thanks for your support. There is no doubt that a lot was added to the bill during the bipartisan conferences that led to the "agreement." What started as about 3 pages, ended up as about 110 pages going into the vote. You can read the whole text in one of the links in my original post. Those republicans that have come forward to speak about the reason for voting against it have so much as admitted that the reason was petty -- they were "offended" by Speaker Pelosi's remarks about what got us to this point in the first place -- the "de-regulation" of the financial markets, a cause championed by the republicans in the years leading to this mess. I say "petty" because I think to put ones own pride before the best interests of the nation is just that. I could pick a few more choice adjectives, but I don't feel the need to stoop to the level of Washington politics.

Oct 01, 2008 05:31 AM

Daniel J. Brudnok, REALTOR

Berkshire Hathaway Home Services Fox & Roach, REALTORS - Exton - PA License #RS-225179-L / Delaware License #RS-0025038 - Downingtown, PA

SRES, e-PRO,ABR,GREEN,CSP

Rich,

The need to act is real.....what we need to act on and who will truly benefit is still the question.

Oct 01, 2008 05:42 AM

Anonymous

steve madonna

companies that make poor decisions should fail . They have been for 200 years now . The function that they served will be met by another company, a better run company no doubt . Yes , the taxpayers can stop some job losses here but who's next in line ? There's a huge financial mess right now in the US auto industry . They employ alot of people . Should we "lend " them money next to keep them upright ? a trillion dollars would probably cover it. or should they have made better cars and wiser financial decisions over the last 20 years?

Oct 01, 2008 05:43 AM

#10

Tom Ash

Agentspayingforward.com - Sacramento, CA

Sorry to hijack your post Rich, but to Steve, Chrysler was "lent" money in the early 80's in order to be rescued. They paid the money back before it was due. There is a definite need to act, but I believe many are concerned that we are treating only a symptom when we should be treating the disease.

Government intervention in the market is one of the main culprits of the problem that we now face. The CRA laws that were passed made it such that banks had to lend to people less qualified that in prior times: they risked government sanctions if they didn't. Wall Street, mortgage companies, the public, being capitalistic took advantage (and went too far). CRA is one of many instances where the government's intervention led to horrible consequences.

This bailout is a fait accompli, but we have a systemic problem in this country that needs to be fixed. Politicians using the country's purse strings to ensure re-election, but destroying the economy of this country. America will rebound from this debacle, but it didn't need to happen. I fault a lot of selfish people, but I believe our government "leaders" really let us down: and that applies to both sides of the aisle.

Oct 01, 2008 05:01 PM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

Steve -- In a way, I agree with you. Take your comment and replace the word "companies" with "countries", though, and you will see what I mean. This company (our country) made some poor decisions (the Community Reinvestment Act that opened the door for this disaster being one of them.) Companies (and countries) have the ability to change policies and practices and restructure to correct for prior poor decisions. That is what this bill effectively does.

If a person lets a potentially dangerous animal out of its cage, and the animal attacks people, causes damage to property and creates a general panic, don't we hold the person responsible?

The government opened this cage, and let the proverbial tiger out. Don't simply blame the tiger. We now must do the responsible thing - clean up the mess, pay for the damages, and put the tiger back in the cage.

Tom -- I don't consider adding to the conversation to be "hijacking". Comments are always welcome.

The Founding Fathers, when creating what they hoped would be a lasting government, had the foresight to create a system with built in checks and balances, to prevent abuses of power and violations of the rights of the populace. Laws were then established to allow for inter-state commerce, and those laws also had built-in checks and balances intended to prevent abuses by corporations. Unfortunately, with the movement toward "de-regulation" in many sectors (the financial sector, in this case) we effectively removed some of the protective checks and balances. The argument was that "big government" regulation cost too much. We are now seeing that the absence of those checks and balances has a much greater cost. There is a parallel with flood insurance, as well -- many people, given the choice, do not purchase it, thinking that it is too expensive. The problem is that floods do happen (just ask the folks in DesMoines, Iowa.) Without the flood insurance, the costs hit hard. Government regulation, like a costly insurance policy, is better than having to bear the burden of disastrous results.

Hopefully, we will learn from our lessons, and not throw out the wisdom of the Founding Fathers so lightly again.

Oct 02, 2008 02:21 AM

John Guiney

Keller Williams Realty - Quincy, MA

e-PRO, CBR

Rich - The Republican house members totaling 133 and the house Democrats totaling 94 should all be remembered by name and no re-elected. By their selfish action the Senate has now added even more prok to the bill and it has been blessed by both candidates even the one who says he is against pork. Who loses, we do.

Oct 02, 2008 02:40 AM

Rich Schiffer

Swarthmore, PA

Referral Agent, e-PRO

John -- I can't quite fully agree with you. Many of them voted nay, because their party leadership did little to have them understand the importance of the bill. Many of them heard from their constituents the cry of "don't put my tax money into greedy bankers pockets." An elected official shouldn't be blamed for listening to the people. The leaders in the house, however, who ruched it to the floor without giving their representatives time to consider the content and impact of the bill (or the impact of not passing it) they hold the brunt of the blame, in my mind.

The Senate's bill, though the price tag is $150 Billion more than the house's, is not so much "porked up" as the numbers might imply. Remember, in order for the Senate to initiatate a bill, it has to pertain to certain categories. This "Bailout Bill 2.0" is now attached to a tax bill that provides tax incentives to energy companies to research, develop, and implement alternative, renewable energy sources. (wind, solar, geothermal, CNG, etc.)

Oct 02, 2008 02:57 AM

John Guiney

Keller Williams Realty - Quincy, MA

e-PRO, CBR

Rich - The house leaders both majority and minority had reached agreement. The problem was the House Republican leadership did not deliver their promised votes. No one would have submitted the bill if they weren't told it would pass. This is what led to the nasty partisan comments that followed when the bill died.

Oct 02, 2008 03:12 AM

Jason Lopez

SmartRealty Solutions - San Diego, CA

Let me get this straight. The government gets to use our taxes to buy property at 15 cents on the dollar and then they can sell it for a profit to the next guy. Is that what you are saying? Why not let the next guy get it for 15 cents on the dollar? Buyers will now have to compete with the government to buy distressed properties. Boy that's a win- win if I ever heard of one! This is ludacris at best and criminal at worst. After the senate vote last night and all the expectations of this bill being passed by the house, you'd think the stock market would rally back. Seen the DOW today? DISASTER!

Oct 02, 2008 03:23 AM

Anonymous

Ed Lefevre (curious sort)

Rich, Merrill sold billions of dollars of these "assets" in a private enterprise transaction a few months ago, at these terms:

Bloomberg.com: Worldwide

"....In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage-related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

``Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position,'' Thain, 53, said in the statement.

Loss Estimate

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.".........."

Banks are restricted by federal regulators to leverage of no more than 14 times actual assets. Any bank that experiences a face value loss of just over seven percent of it's loan and investment portfolio, is insolvent if it is levergaed to the max. Notice that Merrill had to, in effect, pay a vulture to take this crap off it's hands, by agreeing to a giveaway price, and then to finance three fourths of the "sale".

Almost all US financial institutions are insolvent, and they all suspect each other of being in a similar condition, about to implode on a moment's notice. The distressed sale of residential, commericlal, and most other property in the near future, will stress the entire financial system and the economy. It is beyonf the government's capacity to "SAVE", by a bailout. It would be best for the government to save it's powder, than to shoot it into an abyss in a futile attempt to prop up asset prices. Prices went up dramatically because of ridiculously easy to get financing, creating scarcity of available asset, attractive because they were predictably rising in value.

Nothing will stop....only delay at the expense of increased national debt, much more difficult to service the interest on....or to ever pay back, in the coming deflationary depression. Look at oil and commodity prices....as demand pressure drove everything up....too many buyers trying to all squeeze at once throught narrow entry doors, selling pressure.....too many sellers all at once attempting to squeeze through a finite number of exit doors....the handwriting is on the wall. Warren Buffett has too many holdings to do what he would like to do...liquidate and exit in an orderly fashion....so he is doing what other elite like him demand that the government do....throw money at the sinking asset pile to attempt to shore it up.

Let Buffett waste his accumualted stockpile of cash on this futile effort....not the American taxpayer. Buffett does not have the cash to stop the decline, and his money is not borrowed.....ours is....and it would not be enough. Low prices shift an opportunity to a new class of potential buyers, and the cycle begins anew. No one tried to stop the up move in asset prices, to any extent....and that was where it should have been stopped....a ticking time bomb. Let the government save what remains of it's borrowiing ability for infrastructure renewal programs, soup kitchens, emergency shelter for the new wave of homeless, and leave the bailout attempts to the private sector to waste capital on.

What would prevent the government from using some of this borrowed $700 billion to make emergency loans to employers with stable credit ratings, to meet their payrolls, and to buy production and operations related equipment they have already ordered but cannot borrow in the private sector to complete the purchase of?

Oct 02, 2008 09:25 AM

#17

Anonymous

Rich,

Point taken, but one thing I hugely disagree with.

You said:

Once the lending institutions can divest themselves of those "bad loans" they will be able to resume lending at normal levels. Don't worry -- they learned their lesson. Those high-risk loans are not likely to be seen again.

Every decade, there is some type of bailout for the finacial market and the little guy pays for it.

LET IT BURN!

Mike Parker

Oct 02, 2008 09:32 AM

#18

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