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Mike Gasior on Why Subprime Bailouts Suck and why Oil Companies are Poised to Cut Production June 13, 2008

Posted by arikjohnson in Uncategorized.

I’ve been receiving a newsletter from Mike Gasior for a few months now and the newsletter he sent around this week is a great one. After reading this latest edition it struck me that conspicuous overconsumption of both housing as well as energy are inherently American cultural phenomena that are only very recently falling into disfavor. The only-live-once/who-cares-about-tomorrow idea that supplies of such basic commodities of life, whether we’re talking about fossil fuels or credit, are endless has led us to exhibit some remarkable behaviors, not unlike that of an addict trying to get a fix.

Anyhow, I tried to find it on his website but couldn’t so have taken the liberty of excerpting below the couple of provocative ideas I most agreed with:


Let me start this segment of the newsletter with a little of my own personal history.  I bought my first home in 1986 with a 20% down payment and a 9.75% mortgage (and if it makes it funnier for you, I paid three points to get that rate since the zero point mortgage rate was 10.5%).  My bank had offered me what they called a “step ahead” mortgage, so instead of paying $1,800 per month, I paid $900 every two weeks.  By making my payments bi-weekly I shortened the lifespan of my 30-year mortgage to 21.7 years.  On top of that, I always made extra payments and paid that mortgage off is just over nine years.  I always paid on time and after the real estate crash of the late 1980’s and early 1990’s, I was able to finally sell that house in 1999 and get out just a little better than even.

My current house I bought in 1999 and had a jumbo mortgage with an 8.375% interest rate, which I refinanced once and currently have a rate of 6.125%.  It is a standard 30-year loan and I have always made extra principle payments since inception.  Once again, I have always made my payments on time and since the house is on a 60 acre parcel (for which mortgage lenders don’t consider any land beyond a “typical” building lot and would not consider 59 of the acres toward the value of the home for the mortgage) the lender ended up requiring me to put up nearly a 50% down payment.  I hope to have this mortgage paid off no later than 10 years from now.

Regarding to these people who took out these subprime mortgages with little or no money down, and in some cases, took out loans in EXCESS of the purchase price.  Whose mortgages had ridiculously low “teaser” interest rates that would quickly jump to 10% to 12%.  Whose credit scores showed their questionable credit history and  possibility/probability they may never be able to pay these loans back. To the politicians of all ilk who are currently suggesting that the government bail them out of the situation they find themselves in.  To Benjamin Bernanke who recently suggested to an audience of Federal Reserve Bank members that they “forgive” some of the principal of these loans that the banks made to these sketchy borrowers.  To the investment bankers who packaged these loans and the investors who bought them and should have known better.  To ALL of these people, I only have one thing to say.

Screw you.

I made a new friend named Susan during a visit to a client in Washington D.C. last week and she suggested what I thought was a wonderful idea.  Her idea is that lenders should forgive 15% of the principle on loans for terrific and timely paying borrowers like her and me.  Not these lowlife, deadbeats who are currently sending the U.S. foreclosure rate to all-time record levels and creating a hairball in the windpipe of the American financial system.

Lots of you are currently reeling at my seeming lack of compassion for these “poor” homeowners who are going to lose their dream.  Or wondering why I’m not picking on whatever lender you’d like to martyr for employing predatory lending practices (you pick whatever company you’d like here).  To you I say that it is indeed a human tragedy that these people and their children perhaps are losing their homes and the media will have a field day in covering this story.  Yes, there were most certainly some VERY aggressive lending practices that took place during the past seven years or so.

However, it is simply a fact that turning 18 years of age in the United States carries a lot of importance and responsibility.  You become of “legal age” and are able to make decisions about your own life. “Land of the free, home of the brave.”  Now you can vote, join the military, fly to Vegas and marry Brittany Spears if you so desire and while people can gauge your judgment, nobody can stop you.  I love my country and I love the freedom that I’ve enjoyed damn near every moment of the past 30+ years where I’ve been in charge of my own life.  Not every decision I’ve made has been genius, but I’ve taken my lumps, learned my lessons and hopefully grown into being a better and smarter person.  It’s been a wonderful thing being a legal adult, with all the opportunities, freedoms and decisions that come with it.

Well, one of the freedoms that come with turning 18 years old is the freedom to sign the paperwork for a REALLY stupid mortgage.  Perhaps without even spending the couple of hundred bucks for a lawyer to represent you prior to borrowing hundreds of thousands of dollars.  You know what?  You made a mistake.  Oops.

But I’ll tell you one thing, I don’t want to be the one paying for your mistake.  If anything, guys like me should be getting 15% of MY principle balance forgiven and you should get 15% added to your balance.  AND to pay back EVERY dime you owe you should have to come mow the grass at the houses of guys like me until your balance is paid.  Now there’s a bailout plan I could get on board with.

I’m frankly sick of all these ludicrous bailout plans being thrown around.  These homeowners (and many subprime corporate borrowers) simply have to go.  They have to lose their homes or companies, and the market needs to adjust to reflect this new reality.  It’s called capitalism.  It’s called Darwinism.  The law of the jungle.  Otherwise, what’s next?  Credit card bill bailouts?  Gas price bailouts?  Mutual fund loss bailouts?  Politicians on both sides of the aisle need an immediate lesson in basic economics and the sooner the better.

This country is in the trouble it’s in due to overspending and undersaving.  No one needs an economics degree to figure that one out.  But what do the politicians have in mind to solve the real crisis in our economy?  A comprehensive energy plan to wean us off fossil fuels?  Cutting back on the spending habits of the Federal government?  Encouraging investment, saving and business?


Congress is investigating speculators and hedge funds looking for the bogeyman of the oil markets (even though I could have told them that it was Bernanke).  Obama wants another $50 billion of economic stimulus on top of the moronic $150+ billion package they already approved as well as windfall profit taxes for oil companies (more on this shortly).  McCain wants a gas tax holiday.  There are proposals to raise the margin requirements for speculators in the futures and derivatives markets.  I could go on and on, but I’ll spare you that misery.  Suffice it to say that all the ideas are just idiocy and will not solve a damn thing.  The government does nobody any favors with the example the set of overspending, undersaving and overpromising.

Frankly, there is not a single proposal currently being offered by George Bush or the U.S. Congress that is worth a bucket of spit with regard to solving the “crisis” trifeca of facing America and the world (housing, credit and oil).  In fact, they will probably serve to make the situation even worse.  It’s typical, really, and something we should remember come November.

So let’s please drop this conversation about bailouts of all order.  Let the market take its course and see where the chips fall.  Sure, there will be pain and suffering on the way down, but we need to find our where the bottom is and begin building the economy back from there.  This is the nature of the universe and there is no amount of Band-Aids the government and Federal Reserve can apply to this sucking wound that will ever make it appear to be a skinned knee.


The heading of this section sounds ludicrous and counterintuitive, but please hear me out before you commit to that opinion.

With oil prices now north of $130 per barrel, conventional wisdom would dictate that oil companies and oil producing countries would want to pump as many barrels as humanly possible and then head to the bank to cash huge checks.

And while that’s the conventional wisdom, there is an extremely provocative argument for why they will quietly and slowly tighten their production during this very volatile time.

Imagine the following scenario:

–You are the owner of an asset (oil), which is only gets more and more valuable every single day lately.

–You are wealthy beyond your wildest expectations and your income and profit margins make it seem like you’re printing money in your basement.

–The media is hounding you day and night about how the amount of money you make is obscene and argue how you should perhaps be ashamed of yourself.

–The U.S. Congress is calling you to testify in front of committees to explain why you’re making so much money and are proposing the creation of special taxes to take away some of the income you’re making because they view it as obscene also.

–And all of this is occurring when just a few years ago you were broke on your ass with a cup of pencils on the street when oil was $20 a barrel and gasoline was moving toward $1.00.  None of these people were taking up collections for you back then.

Perhaps you’d be angry.

Perhaps you’d even be bitter.

Perhaps your name is ExxonMobil, Chevron, Occidental, Sunoco or Shell.

Would you pump MORE oil and make MORE profits so you could attend MORE investigative hearings about whether you should pay MORE taxes than “normal” corporations?  I think not.

I would expect pipeline problems.  Offshore drilling issues.  Refinery outages.  All sorts of itty, bitty problems that will at least reduce their output in some minor way that will get the government out of their face and off of their backs.  OPEC will behave the same way.  George Bush was just in Saudi Arabia begging them to increase production and they told him to go pound sand. (Cute, huh?)

Every entity I mentioned in this section has PLENTY of money and there isn’t really any good place to invest any extra amounts right now anyway.  Their best investment is probably stuff they already own, which is black, slippery and thousands of feet underground.  I would personally keep this valuable asset tucked away for as long as possible.

What do you think they’ll do?



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