Monday, March 23, 2009

Damon Runyon: He Could Spot A Shell Game.

Damon Runyon was an American writer and newspaper reporter from early in the last century, and made his name writing about the criminals and mobsters of his day.

"I long ago came to the conclusion that all life is 6 to 5 against."

He moved to New York City in 1910, and began hanging around with the criminals and low-lifes on Broadway, getting to know the local crews and gathering colorful material for his writing. The characters and stories later were published in a series of books, made into movies and theatre productions such as "Guys and Dolls."

In the 1920s, the country was riveted by a murder case covered by the newspapers in lurid detail, known as the Snyder/Gray Murders. Runyon covered these murders and the trials. Years later, the basic story of the Snyder/Gray Murders became the basis of "Double Indemnity" (book by James M. Cain; film by Billy Wilder in 1944). Basically, the wife and her boyfriend murdered the husband by poisoning him, choking, and beating him to death. Here's how Runyon described the two killers:

"A chilly-looking blonde with frosty eyes and one of those marble you-bet-you-will chins, and an inert, scare-drunk fellow that you couldn't miss among any hundred men as a dead set-up for a blonde, or the shell game, or maybe a gold brick - on trial for what might be called for want of a better name: the Dumb-bell Murder. It was so dumb!"

If Damon Runyon was here today, he'd call today's Treasury Department proposal to buy up the toxic assets from the banks for what it is: a shell game in which the citizens are always the losers.

Here's the deal: the banks knowingly made bad loans, loans they knew were likely never to be repaid. They tried to doctor their records to hide the fact that these were bad loans, because as quickly as they could, they bundled the loans and sold them in huge packages to Wall Street businesses which, in turn, sold fractional interests of the bundles to blind, greedy, and stupid investors. The idea was to have gotten rid of all the loans before the system crashed. But they did not succeed, and therefore, they are stuck with lots of bad loans.

Let's say Citizen wants to buy a home, but finds housing has gone up by 300%. Citizen only takes home $1600/month in her paycheck, but wants to buy a condo for $250,000. Lender makes the loan with 100% financing. Special gimmicks are used to keep the payments down to $2100, but that's still $500 more than the total income of the citizen.

Citizen defaults. It's just a question of when.

In the meantime, the housing bubble bursts so the condo is now only worth $150,000.

If the bank forecloses, generally they just take back the condo. They can't get anything more from the citizen/buyer.

So if the bank forecloses, they now have a situation in which they loaned $250,000, did not get repaid, and instead received a piece of property only worth $150,000. If they sell the foreclosed property, they receive $150,000, and take the loss of $100,000. Which is how it should be.

Why? Well, they made the bad loan, and either they did it on purpose figuring they would sell the loan so they didn't care if it defaulted. Or they were incompetent. In either event, they should take the loss. But you know what? When you make a loan to someone that will require $2100/month in payments, but the borrower only takes home $1600/month in total, that's not incompetence by the lender. That's intentional fraud. The lenders made bad loans on purpose, planning to bundle them, sell them off quickly to the ignorant, and get their money out up front.

Another reason the lenders should take the loss is that the price of housing should be allowed to drop back down to a fair number, which in this scenario is about $150,000. Once housing falls, more people will be able to buy houses. As long as the bubble is propped up, nobody can afford to buy a home. Let's say the taxpayers buy up that house and try to sell it to someone for $250,000, stabilize the market so the other condos in the area can continue to be listed for sale at $250,000. But, no one will buy at those prices. Just because the taxpayers are stupid enough to come in and pay $250,000 for one condo does not mean that normal buyers will follow suit. Not if they know the condos in the neighborhood are really only worth $150,000. So the properties will be un-sellable. They will simply sit there, listed, but never sold.

Eventually (studies have shown) enough properties sit there long enough, everybody panics, and everybody will drop their asking prices radically, maybe to below fair market value. So that just means by propping up the real estate market now, we are simply putting off for another day yet another huge drop in that market.

What the Treasury Department is proposing to do (which cheered Wall Street so much that the Dow jumped 500 points today) is to buy up the bad loans on defaulted properties from the banks. Using mostly taxpayer money, with a tiny little bit of money from the same criminals that have stolen all the money to begin with: offshore, secret, private equity hedge funds. The government's idea is that they will go into a "partnership" with the same people who robbed us blind.

Ask Naomi Klein about this. See what she thinks. I think that these private secret equity hedge funds which are holding money off-shore, mostly money that was stolen from the rest of us, have just been waiting to come back in and buy everything up. And when they do, they will have even more control over our country that they already do. They will buy up all the excess housing, for example, and sell it back to us in 10 years, or rent it out now for grossly inflated prices.

For the citizens and taxpayers, what's our upside? Apparently if the "toxic assets" sell for a profit, the private equity funds keep all that. So the citizens are underwriting the continued speculation in the real estate market, taking over the losses of the banks, and getting nothing in return. It just doesn't make any sense at all. A shell-game. Tim the Tainted is trying to sell us swamp land.

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