The Conservative Cave
Current Events => General Discussion => Topic started by: USA4ME on March 17, 2008, 07:59:28 AM
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My last three months have been both exciting and interesting to say the least. I posted at CU after the first of the year that I had accepted an invitation to be a part of task force set up by Fed Chairman Bernanke, and we just completed our objective last week.
A little history. I got a call in late November from a good friend of mine who works for the Federal Reserve in Atlanta telling me about the directive that was handed to the 12 Reserve Banks from the Board of Governors and asking me to come on board, which I did. As it was explained to me, and as it generally worked out, the Fed wanted the 12 regional banks to put together two teams of 5 people each to act as liaisons between the Fed and the holding companies within those regions in trying to determine just how much they had been affected by the sub-prime market fallout, to provide various remedies, and to direct them towards possible action that might soften the blow for the consumer and the banks. It was felt that as agents of the Fed, but not being entirely beholden to the Fed, they would be more willing to discuss the true impact of what they were experiencing. While they’re never really going to admit all with which they were dealing, according to the one individual on our team who was a full time employee of the Fed, they were more open than they normally would have been, so in that way it was successful.
The Fed in DC divided the Regional Feds into 4 groups of 3 Feds each. Atlanta (Fed Bank #6) was in the group with Cleveland (#4) and Richmond (#5). This was set up so we could compare notes as things progressed and to notice patterns that might be more nationwide as opposed to regionalized.
We spent the rest of December just preparing for the job ahead, laying the groundwork, etc… We were divided into two groups of 5 people each. One group covered Georgia, Alabama, and Eastern Tennessee. The group I was with covered Florida and Southern Louisiana and Southern Mississippi. My only other assignment was that we did a team exchange with the Richmond Fed and I traded places with another man for 2 weeks when his group was covering North and South Carolina because I personally knew quite a few of the corporate bank officers with whom they were meeting. Nice change of pace, different people to work with, closer to home, so it was a welcome move. Other than that my group spent the majority of its time in Florida because that (and the Atlanta area) was the epicenter of the problems in the Atlanta District. I spent half a week in the Cleveland Fed, 2 weeks at the Richmond Fed (NC/SC work), one week in the NY Fed, and one week in DC. The rest of the time was mainly Florida and around 10 days in Louisiana and Mississippi.
It’d take me pages to go through all that took place and would be boring as can be. I’ll give you the following brief.
After listening to and studying where the banks stood financially, the various teams were able to discern some things the banks could do to ease the foreclosure rate. One of the main things we tried to do was to encourage them to re-examine their sub-prime loans to see which one’s they could salvage by restructuring the individual loans. For instance, if a borrower had obtained a mortgage that cost $2000/mo, and by examining the borrowers financial status it was determined they were within a reasonable proximity of paying the full amount, rather than foreclose we suggested the bank renegotiate the note to a payment they could afford. So instead of paying $2000/mo, maybe they could afford $1600/mo. Well, $1600/mo is less than what you wanted, but still better than the cost of foreclosure, taking back a house that might be upside down already and trying to resell in an otherwise flat or down real estate market, in which case you might just end up boarding up the house for several months or longer. At least this way the borrower has somewhere to live, they are working to purchase a home (through you will receive less than you had intended), and the place isn’t boarded up with no one living there which leaves, at least, the perception with the general public that things might turn around soon. If they can’t do that, the possibility of the borrower permitting a voluntary foreclosure and then the bank renting the house back to them with the understanding they can repurchase the property back within two years or their lease is up, was also considered. Anything but allow a bunch of houses to sit empty. And if the banks agreed to implement these suggestions, the Fed promised to view them with more favor should circumstances arise.
In mid-February, the main banks begin to implement this suggestion, even carrying it over to their non-subprime loans in an effort to try and help people keep their house. There were several others suggestions made along this line and other communication back and forth of which we acted as ambassadors. I’m not at liberty to tell you about suggested solutions that haven’t been released to the public yet, but I strongly believe you’ll see other moves like this by the banks if they can get the assurances they need from the Fed. It’s all politics.
The biggest drawback to getting the banks to cooperate was the current tax code, which favors write-downs. I can’t say that I blame them, but there’s a point where the write-downs are so large that they shake the market a little too much. We need a tax policy that isn’t centered around the question “If I do this, what are the tax implications?†Rather we need one that would cause both individuals and corps to ask, “What do I need to do to maximize profits?†and take the fear of the tax codes out of the equation. Good luck with that.
It’ll be interesting to see when this thing turns around. There were several in the Fed who were concerned the banking industry was getting ready to fold. I think it’ll work its way through, and the Fed is definitely taking the approach that the banks need to shoulder the responsibility for where they are. Yes, you see some interjection on behalf of the Fed, but they are maintaining a lot of restraint to this point given what the banks want them to do.
Out last hurrah was to go to various central banks in the world and to brief them on what we had been doing and where we expect events to lead over the next few months. There were 10 individuals’ chosen from the Cleveland, Richmond and Atlanta teams as representatives and we were sent to brief the Swiss National Bank, so off we went to Zurich. Other groups went to England, Germany, and Japan. Swiss Bank UBS is a major concern for the financial market, so there were lengthy discussions on that matter. Whirlwind tour. We left on a Sunday, arrived on a Monday, met with them that night and Tuesday morning, left out Tuesday afternoon, and were back on Wednesday. We were all tired, and would liked to have stayed longer, but were glad we were finally done. Took a couple of days in Atlanta and wrapped everything up, and we’re through.
I’ve been contacted by the FDIC and have a standing invitation to work in their Division of Resolutions and Receiverships as they bulk up to start handling what they predict to be several bank failures over the next year or two, but at this point I’ve had enough. I’d really just like to stay home, spend time with my family, and work on growing my business.
It was busy work, but rewarding. Hopefully we did some good. One of the main perks for me was networking with some individuals who could benefit my business greatly. I sold the retail portion of my mortgage company to my two top employees at the first of the year and retained the Construction Loan and Investment portion. I only had about $30M working capital last year, but with the new contacts I expect to obtain at least $75M+ by this summer which I badly needed to expand my range of operations. So all in all it was a good thing.
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Great report, USA4ME.
What I particularly liked was your pointing out that the tax structure currently forces investors to consider tax ramifications of doing this or doing that, rather than doing this or doing that because it's a wise thing to do.
We need to make taxes so inconsequential that they really don't matter in business decisions; that other factors are more important.
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I'm just happy to see you posting again!!!
Thank you for the update too. It was an interesting read and I look forward to hearing more from you.
Don't be a stranger.
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Great report, and relative too..... of my group of very best friends in college, one works for the Richmond Fed, and one owns (it may be past tense now) his own mortgage company in Atlanta. I'm sure you're not him, though...... his interest in politics is probably nil.
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Thanks for that interesting report. The sale and rentback option is gaining popularity here, but it it a private arrangement and has a number of problems associated with it. Mainly that companies will take advantage of distressed sellers and that the maximum lease length is 6 months, so it is interesting to see a way that it can work to the benefit of all.
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hey bud!
so, would you say then that the housing crisis is as big as the media is making it out to be? I keep reading conflicting reports about us having '67% up in foreclosures' but, if the actual number was only 4% of the whole housing market, that's not that bad.
do you know what the actual number is at this point? or is all your data just regional?
here in Seattle, we are still in a bubble somewhat but people are also skilled for the market. i dont actually believe we are in recession or really even near one at this point.. but of course, the media wants me to think otherwise..
curious what you think overall.. but congrats on the business end! :cheersmate:
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The biggest drawback to getting the banks to cooperate was the current tax code, which favors write-downs. I can’t say that I blame them, but there’s a point where the write-downs are so large that they shake the market a little too much. We need a tax policy that isn’t centered around the question “If I do this, what are the tax implications?†Rather we need one that would cause both individuals and corps to ask, “What do I need to do to maximize profits?†and take the fear of the tax codes out of the equation. Good luck with that.
Great point, the only problem is that no matter how you structure it, tax consequences will always be a crtical part of that ultimate "How do I maximize profits?" question.
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The biggest drawback to getting the banks to cooperate was the current tax code, which favors write-downs. I can’t say that I blame them, but there’s a point where the write-downs are so large that they shake the market a little too much. We need a tax policy that isn’t centered around the question “If I do this, what are the tax implications?†Rather we need one that would cause both individuals and corps to ask, “What do I need to do to maximize profits?†and take the fear of the tax codes out of the equation. Good luck with that.
Great point, the only problem is that no matter how you structure it, tax consequences will always be a crtical part of that ultimate "How do I maximize profits?" question.
this is exactly why i cant have a job - it would push us into an even higher tax rate and its just not worth the consequences for us.. or i'd have to be making a very large six figure income to offset the trade off. and ive been out of the work force for 9 years now, so that's not all that likely.
most of our financial stuff revolves around minimizing our tax burden at this point... which probably sounds like a nice problem to have, but it is limiting at times.