Is waterboarding torture?

Posted by Christopher S. Penn on Dec 13, 2007 in Politics | View Comments

I’ve got an easy answer for that. Pick five Republican senators and five Democratic senators at random, wheel a kiddie pool into the Capitol Rotunda, strap them to a gurney, and have them try out the technique – no permanent physical harm, we promise! – for 60 seconds.

At the end of the 60 seconds for each of the 10 senators, poll them as to whether it was just “aggressive interrogation” or if they felt they were subjected to a torture technique.

This would accomplish two things. First, the people making the decisions should have first-hand experience of anything that might be done in the name of the people that could be called torture. Second, perhaps we’d have fewer used car salesmen running for office if they knew they might have to experience what they legislate.

We really are in trouble in this country. This is just the beginning of it.

Posted by Christopher S. Penn on Dec 12, 2007 in Money | View Comments

“I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.”

-Patrick Byrne, Chairman and CEO of Overstock.com, December 2007

“If home prices decline by 30 percent, as one noted economist has said could happen, “We’re all going long apples and boxes to sell them in,” Syron said, invoking an image from the Great Depression.”

- Richard Syron, Freddie Mac CEO in today’s Washington Post

“The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis.”

- Alan Greenspan

The United States doesn’t -make- anything any more. For the last 5 years, our economy has been driven by increases in asset prices, namely housing. People cashed out equity and spent like crazy, driving the economy forward.

All good things must come to an end, and we’re seeing just the first inning of the housing bubble unwind in a game that’s going extra innings. As prices drop, equity vanishes, and mortgage owners owe more than the property is worth.

Next in line are consumer grade loans – auto defaults are already up, as are student loans, because when the choice is between a roof over your head or a student loan payment, you go with roof every time.

Housing equity can’t be used to pay down those loans any more, so they go red. The next wave after that is credit card defaults, because once you’ve maxed out, you’ve got nothing left and have no way to pay. Discretionary income? No such animal in a recession. Everyone’s paying just to stay afloat and with the basics.

All this plays out over the next 3 years. Mortgages are unwinding now, but subprime goes nuclear in March 2008 with the largest wave of rate resets yet, $65 billion worth, and stays at that level for 6 months. Defaults typically occur in 30 days of a rate reset; some borrowers don’t even make a payment.

Expect secondary loan (car, student loan, etc.) default rates to hit the wall shortly after the mortgage ones, and credit cards even sooner as the source of last resort financing, because the people who are in trouble are living lifestyles beyond their means.

Scared yet?

While I’m not a certified financial planner or anything, I’m going to give this piece of advice. If your money is in a place that is not insured, move it to an insured place. Insurance means FDIC coverage for up to $100,000 of cash per account. Money market funds are discovering they’re tainted with bad mortgage debt. Municipal bonds are finding out their guarantors overextended.

Anyone who promises a fix for this situation that isn’t “we have to ride this out” either has something to sell you or is running for office. Don’t believe them. This financial crisis took years to make and it will take years to unmake.

Exhibit A in Net Neutrality

Posted by Christopher S. Penn on Dec 11, 2007 in Rant, Technology | View Comments

Rogers Canada is modifying Web pages. Take a look at this Wired article.

Is this a marketing dream? A marketing nightmare? Bit of both.

If you searched for a student loan, I could buy a modification of the results you get from your ISP. Even if you wanted a loan from my competitor, if I paid enough, I could divert you instead.

If you searched for my company’s products, a competitor could do the same to me.

Expect this to become a hot button issue for net neutrality.  If this goes unopposed, just imagine what the political campaigns will do to every web site you visit. ISPs will be rewriting traffic all day based on bids. Rudy Giuliani needs a boost in Iowa, so he’ll pay Comcast to rewrite all requests for Mitt Romney’s web site to his. Someone might even play dirty and use soft money to redirect a candidate’s traffic to a Swift-boat style attack ad instead.

Stand up for net neutrality, or you won’t be able to trust a thing you see online – ever.

And if you use Rogers or any other ISP that uses these practices, drop ‘em. Vote with your wallet, because that’s the only language some of these people will ever understand.

Hillary Clinton is a financial George W. Bush

Posted by Christopher S. Penn on Dec 11, 2007 in Politics | View Comments

From HillaryClinton.com:

I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy.

Servicers aren’t afraid of lawsuits. They’re BOUND by the law to honor the contracts signed as part of the securitization of loans.

Refresher. Securitization is what lets the majority of people get loans. Period. If I loan you $100, I can’t use that money until you pay it back. If 20 investors get together and invest $5 in me plus a finder’s fee, they own the loan now, and I have $100 I can loan again.

Guess what, Hillary? The lenders and servicers DO NOT OWN THE LOANS that you’re referring to. It’s not a question of permission of the investors. They OWN the loans. Except as defined in the contracts, lenders and servicers cannot legally make changes to the mortgages they originated.

More importantly, reread:

I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors.

Translation: I’m going to try to make it legal for a third party to monkey around with someone else’s property without their permission.

What you’re proposing is no different that George Bush’s foreign policy. Arbitrary decisions made without respect for the law – however flawed you think it might be – are what got us into a bunch of very sandy places. Now you’re publicly posting on your own web site that you’re willing and eager to ignore laws as it suits you politically? Sounds awfully familiar to me. Apparently your time at Yale taught you the same respect for the law as your classmate, Mr. Bush.

Whatever meager chance you might have had for my vote just evaporated.

The Contagion Spreads

Posted by Christopher S. Penn on Dec 10, 2007 in Money | View Comments

The Contagion Spreads

If you want to talk viral, let’s talk about the disease of debt that’s spreading. What started out as a portfolio of subprime mortgages going bad is rapidly spreading to any financial sector that touches any form of credit or debt.

Last week, First Marblehead (ticker: FMD), one of my company’s partners, registered a half price haircut on its stock as their student loan portfolio was downgraded. Turns out that defaults may be higher than thought, and FMD might be forced to buy back bad loans.

What does this have to do with the mortgage crisis? Two things. First, securitization depends on available credit and liquidity, and the markets have neither in great supply right now. Second, on the consumer side, my gut instinct tells me a lot of people were paying their student loan bills with home equity. Now that the housing ATM is closed for business for the foreseeable near-term future, expect credit card and student loan defaults to rise precipitously. We’re going to do our best to help people avoid default, but there’s only so much you can do.

It’s getting ugly out there, folks. Cash is king now and will reign supreme in 2008.

If you have debt, and you have the capacity to eliminate it, eliminate it as soon as you can.

Debt is your enemy in uncertain economic times.