I continue to be revolted by the scale of mendacity, hand-wringing, crocodile tears and ideological acrobatics coming from politicians, economists, billionaires and sections of the media about the economic crisis and the need for “bailouts”.
Who really needs a bailout? Well, according to the most recent Vanity Fair, it seems anyone one Wall Street forced to limp along on a base salary of less than $4 million a year. [VF has a great track-record on reporting the crisis – check it out]
There’s a certain obscene symmetry to capitalism. Those floating across the top like so much soapy scum often clean up while those sinking under debt and unemployment usually get cleaned out. It’s prompted me to do some creative accounting.
I think I have found a way to save the victims of the toxic debt fall out and get some moral justice karma happening for those who we should be holding accountable.
I have been thinking about this for a while and I think it’s time I offered some free (gratuitous) advice to Presidents, Prime Ministers and b(w)ankers, before things get out of hand.
So far the major banks on Wall Street, such as Merrill Lynch, have been given $125 billion dollars in tax-payer funded bailouts. That’s a lot of money and it’s not the only bag of cash on offer.
But $125 billion is a staggeringly big number. Let’s start with some smaller numbers.
When John Thain became CEO of investment bank Merrill Lynch in 2007 he got a $15 million signing-on fee. He’s since left the bank, which has been taken over by Bank of America.
At the other end of the social scale there’s Kathy Lovelace of Zephyrhills, Fla. She’s recently lost her job, now her bank wants to foreclose on her mortgage and repossess her $200,000 home.
Here’s an idea, why doesn’t John Thain pay off Ms Lovelace’s mortgage out of his signing on bonus. Let’s assume that Ms Lovelace owes her bank $175,000. If Mr Thain paid this he’d still have $14,825,000 of his sign-on fee. In fact, if Mr Thain had left his $15 million in a bank account for one year at 2% he would have earned around $300,000 in interest. So he’d still be in front of where he started and way out in front of Ms Lovelace.
I think we can apply this principle on a massive scale and save the houses of the poor working folk who are being kicked out of their homes because of the actions of men like Mr Thain. Here’s how it might work…
Let’s start with another personal example.
Mr John Mack, the head of Morgan Stanley, another Wall Street bank that’s at the heart of the toxic debt crisis, earned a cool $70 million between 2005 and 2009. Given that Morgan Stanley is basically rooted and it’s mostly Mr Mack’s fault, how about we make him give back the $70 million plus interest. By my back-of-the-spreadsheet calculations at a modest 2% pa over four years that would come to $75 million plus change.
On that ratio if we spread Mr Mack’s cash around places like Zephyrhills Fla, we could probably save around 430 homes at $175,000 a pop. Unfortunately that’s really a drop in the ocean. Current estimates of the impact of the toxic debt crisis on US home-owners are scary:
Moody’s Economy.com estimates that nearly 27 percent, or 13.8 million, of the nearly 52 million U.S. homeowners with a mortgage face foreclosure or owe more than their house is now worth. Declining home values and the securities backed by mortgages that financed those homes are major causes of the deepening recession. [American Chronicle 19 Feb, 09]
That’s a lot of people on the streets. There’s a massive problem here for so-called “middle America”. Oh well, we could at least start with the Wall Street Vultures because there’s a lot of money changing hands in the form of performance bonuses in the big banks and money houses of the street.
Let’s see what happens when we spread the pain among all the high-flyers and “claw-back” the entire bonus pool for just one year.
In 2007, according to Vanity Fair (#583, p.135) the total bonus pool for the seven top payers on Wall Street was $85.1 billion dollars. So applying our formula ($175,000 average bad mortgage) that amount would help close to 80 thousand home owners hang on to their homes.
In fact, it would clear their debts totally. So let’s not be so generous. Instead of paying the entire mortgage, let’s help them out with a drip-feed. If we assume that the average monthly payment on $175,000 is about $930 and that each of America’s 13.8 million threatened home owners needs help with half the monthly payment for one year, where are we at?
Well, according to my estimates, to give 13.8 million struggling American home-owners an average of $465 per month for one year while they get back on their feet would cost around $76.5 billion dollars. That would still leave the Wall Street Vultures around $6 billion for their bonus pool.
I think that’s more than enough. In fact, that $6 billion would be enough to rehire the 30,000 or so Wall Street workers who’ve lost their jobs since October last year at $200,00 pa for 10 years. Surely that would be long enough for them to figure out how to clean up the mess they made and not do it again. And at 200 grand that’s more than a fair day’s pay for a fair day’s work.
[Note: I prepared these figures in a spreadsheet using Ms Lovelace as an example. According to Answers.com the average American mortgage is $225,000 and monthly repayments are $1780 over 30 years. So I’m happy with my figures.]
I think my idea’s much better than what Obama’s advisors have come up with. Here’s why. In my scheme the money goes straight to those who actually need it. In the Obama scheme it goes into the pockets of the rip-off merchants and sleazy mortgage lenders who created the toxic debt timebomb. American Chronicle explains how it would work:
Part of Obama’s housing plan targets 4 million to 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac, mortgage giants that helped fuel the housing bubble.
It would permit those loans to be refinanced at lower rates that will help borrowers afford their payments. The plan would change provisions to allow the two companies to renegotiate those loans even if homeowners have less than 20 percent equity in their homes, currently a barrier to refinancing.
The second part of the plan, targeting 3 million to 4 million homeowners at risk of foreclosure, takes more of a carrot-and-stick approach.
It offers incentives to the lending industry to help homeowners refinance on terms that they can afford. But it also calls for Congress to pass a new bankruptcy provision permitting judges to modify mortgage terms, something the mortgage industry has long opposed.
This part of the plan makes $75 billion available from the bank bailout funds to pay the incentives to mortgage companies, mortgage servicers and mortgage investors to help homeowners refinance.
It would give servicers upfront $1,000 payments for each eligible loan modification that meets certain criteria. It would then provide them “pay for success” fees — of up to $1,000 each year for three years — awarded monthly as long as the borrower stays current on the loan.
It also would provide an incentive payment of $500 to servicers, and $1,500 to mortgage holders, if they modify at-risk loans before the borrower falls behind, the plan says.
This seems to me to be rewarding previous bad behaviour. The money goes to “mortgage companies, …servicers and…investors”. It makes much more sense to me to give the money to those who are actually the victims, not the perpetrators. What’s interesting to note though is that the cost of my scheme is roughly the same, around 75 to 80 billion dollars.
I can’t get to Ms Lovelace to ask her, but my bet is she’d rather have my plan than Obama’s at this point.
I haven’t even mentioned the bailout funds. But I reckon we could also apply the same logic to the car industry which is currently negotiating for $30 billion in hand-out funds [Christian Science Monitor 18 Feb 09]. Others estimate the bailout fund as being closer to $50 billion [Flowchart, USNews.com].
Here the impact on the working class is also very significant. Around 50,000 jobs in the US car industry and thousands more across the globe. So effectively the government is giving these companies money to lay-off workers. Can you see why I hate the system.
We’re entering a recession, unemployment is set to rise and governments are giving hand-outs that help crippled capitalists to “restructure” and put even more people out of work.
I’d really like to know what Detroit’s car bosses are doing with the billions they’ve already received since December 2008. So far, it’s not certain that it hasn’t gone on bonuses to their top executives, like it did in the banking industry. In fact, there’s plenty of noise around about the idea that the US car industry should be allowed to fold, but not many are talking about the fate of the thousands of United Auto Workers (UAW) members who would be shunted onto the scrap heap. According to UAW president Ron Gettlefinger, most retirees from the auto industry are barely scraping by on ratshit inadequate pensions:
Our industry is about people. Like the 80-year old retiree, who left work long ago and is getting by on a very modest pension.
The average pension paid to a UAW retiree at GM, by the way, is about $17,000 a year. But those who retired many years ago are living on much less.
There are tens of thousands of retirees and surviving spouses who receive less than $8,000 a year, less than $700 a month, in pension payments.
It’s tough and $50 billion would go a long way to helping them out. Hang on, you say, shouldn’t the bailout fund be used for investment?
Some are excited about the concept of a “green car”, but others regard it as hype. Why not more public transport instead? At least General Motors has pledged to stop building the Hummer as of March 31 this year. So far though, there’s not much else of a sustainable nature in the industry’s restructuring plans [Green Car Congress].
I’d rather see lives saved at this point.
But what of the Fundamental Truths? I’ve just come across a LeftyBlog ring in the USA that’s carrying some interesting blogs. This one is by a guy in Ohio who says he’s an “ordinary Joe”. If this represents the scale of anger and intellectual engagement of people this ordinary, then I can retain my revolutionary optimism. Joe’s a committed Catholic who works in sales and marketing, not a dewy-eyed Marxist, but he understands more about the world than is comfortable for the ruling class.
A belief that if you allow the wealthy to get wealthier the benefits would trickle down. Instead what happened is that greed led to more greed, false wealth was created, many got rich, yet heaven forbid we blame them as they have money now and are “winners”, it’s the losers that are losing their homes at “fault”. Again I say, Crap!
Before you are quick to blame all these “losers”, you better take a quick look at the value of your house. What position would you be in if either you or your spouse lost your job? How quickly can you be suddenly jump from the “winner” category to the “loser” group.