Archive for June, 2009
June 20th, 2009
I remember when homes weren’t so … well, disposable.
Back when they weren’t comfortably furnished ATMs, that is, with money practically pouring out of the marble fireplace. When they were still valued by the people in them, in other words, and not only as a short-term investment opportunity.
At the height of the housing boom, too many people treated homes like cars — a new one every two years or so.
And that might have been a good plan five years ago, when property values were guaranteed to go up. That’s what Wall Street was determined to believe, anyway.
But somewhere in the boom, another belief began to take root. We cast away the joy of owning a house as it became the latest get-rich-quick scheme for Joe America.
It’s another consequence of the decidedly deflated housing bubble — in addition to several others, like the worst recession since the first time Chrysler asked the government for a bailout — one I fear will have further consequences down the road.
Even today, too many people are “waiting” to sell their homes. Just waiting for a year or two, they say, largely because they don’t seem at all confident that they’ll be able to find buyers. But they’re also waiting until the value of their homes goes back up to 2005 (or 2006) levels.
Such folly. They’ve managed to convince themselves — most likely because they really want to believe it, much like those Wall Street financiers — that their home’s true value is the highest one.
Don’t get me wrong. Their homes will return to those levels. But it will take years to get there, just like it’s supposed to.
A house, like a retirement account, is a long-term investment. Checking every month or so to see how much yours has risen in value makes about as much sense as checking your 401(k) balance every day. It’s really not worth it.
Assuming no catastrophic changes to the neighborhood, such as a hurricane or a hasty gentrification, your home’s value should rise at roughly the same rate as inflation, which averages 2 percent to 3 percent every year.
It’s not a very exciting process to watch.
And it’s one of the reasons more people should have seen this coming — in 2005 and 2006, home values across the country rose by 11 percent and 15 percent, respectively.
In other words, your home was never worth the value it was assigned at the height of the bubble.
It was phantom money. It never really existed. Your house, remember, is only worth what somebody else is willing to pay for it.
But humans are usually driven by hope and fear, and this is where we could get into trouble again — with the resultant consequences.
Too much fear, and the housing market never gains ground, which I believe it must (not everyone does) before the economy can start moving in the right direction.
But too much hope is just as dangerous. We’re too willing to buy into another bubble — even to will one into existence, just so we can get back to buying a house every two years.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
June 13th, 2009
If anything embodies the old saw, “Where there’s a will, there’s a way,” it has to be the new Chrysler Group LLC.
Although we could modify it, in this case, to “When the most powerful man on the planet wants something to happen, he tends to get his calls returned.” It’s not as catchy, maybe, but no less true.
I wasn’t particularly surprised, then, when the company’s bankruptcy proceedings seemed to occur exactly as President Barack Obama predicted weeks ago. The bankruptcy court judge seemed to know just how to rule on the various issues.
Indeed, the only blip came when U.S. Supreme Court Justice Ruth Bader Ginsburg ordered a stay on the judge’s decision to allow the sale of Chrysler’s assets to Fiat SpA, to decide whether it would hear the objections of a trio of pension funds.
It must have been the quickest Supreme Court decision in decades — it took a mere 24 hours before it decided to not take the case.
As I said: When the most powerful man on the planet wants to get things done in a hurry, things tend to get done in a hurry. And not surprisingly, those things tend to go his way.
At issue for the pension funds is the makeup of the New Chrysler. The United Auto Workers retiree health-care trust got a 55 percent equity stake and $4.5 billion note for its $10.5 billion unsecured claim, while Fiat stands to get an initial 20 percent stake.
That leaves the secured lenders holding the rest, the equivalent of about 30 cents on the dollar.
The major lenders, including JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs, backed off fairly early in the process. Then again, they are all recipients of billions of dollars from Obama’s inherited Troubled Asset Relief Program.
The smaller creditors, those in which the government doesn’t have a controlling stake, were holding out for 60 cents on the dollar.
If their objections came to nothing — the Supreme Court’s refusal means Fiat will collect Chrysler’s assets — I at least got a chuckle over Obama’s indignation as he triumphantly declared that Chrysler was bankrupt.
He vilified those pesky teacher and construction worker pension funds, all but calling them unpatriotic.
What sort of patriotism were they lacking, I wondered, those American teachers from the heartland — as if giving an otherwise worthless company to an Italian automaker somehow calls for a tearful rendition of “The Star-Spangled Banner.”
Then again, I’m probably looking at it the wrong way. Maybe I should have whipped myself into a frenzy of national pride the first time, when a German company took over.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
June 6th, 2009
I suspect that we’ll start hearing some good news from banks in the second and third quarters.
After a year of staggering quarterly losses, mostly because of the suddenly ponderous weight of residential and commercial mortgages and mortgage-backed securities, we’ll start seeing gains.
At least I hope we do. If not, we’re in for a really bad year.
But my optimistic projection isn’t because I believe we’ve passed some kind of magic hour in the financial industry, after which earnings and profits mysteriously climb back into the black. Nor is it because banks have suddenly remembered how to, well, run a bank.
Rather, it’s because a change has been made to the rules of accounting, in this case a relatively obscure rule known less-than-affectionately as mark-to-market.
Mark-to-market accounting requires banks to price assets on their balance sheets according to what you can sell them for on the open market.
The banking industry pressured Capitol Hill relentlessly this year because mark-to-market forces it to lower the value of such assets as derivatives, even though many of the loans that back those bonds have yet to default and perhaps never will. But each quarter, those losses amplified the bottom-line losses at a number of the nation’s largest banks, wiping out their capital.
When the bottom fell out of the securities market last fall — and remember, the edges were beginning to fray more than a year before that — a mortgage-backed bond worth $10 million at the height of the bubble became worthless almost overnight, effectively wiping out the bank’s $10 million. The market had literally evaporated.
It required the bank to post the loss and scramble to raise more capital to cover it.
And this was a market worth trillions of dollars, with every bank, investment house and hedge fund in the world participating.
You can see why the banks were so bitterly opposed to the idea — the longer they had to post these assets as losses, the closer to collapse they came.
And you can see the reason for my rosy outlook.
Banks had the option of adjusting their first-quarter results to reflect the change to the mark-to-market rule. And if you’ll recall, the stock market reacted with wild abandon when so many of the nation’s big banks posted better-than-expected results.
But remember, the banks aren’t conducting business differently. They’re just changing the way they crunch their numbers.
So do the first-quarter numbers better reflect the state of the banking industry? Or should we trust the results of the past four or five quarters, before the rule was changed?
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
