Refinance Free Credit

BusinessWeek highlights the ills that mega-hedge fund Cerberus has faced with its poorly-timed investments in GMAC’s ResCap and Chrysler.  Cerberus, which just pulled out of a deal to buy H&R Block’s Option One mortgage unit, invested heavily in ResCap and watched it hemorrhage cash for the last two quarters.  Chrysler hasn’t been doing much better; and the hedge fund is getting battered with higher costs of borrowing and renewal of its short-term debt financing as the credit crunch rolls on.

I think this article does a good job of showing how much of a pyramid the entire credit market really is.  When Bernanke was talking about containment of subprime mortgages he was clearly ignoring the dangers that belie the credit market house of cards.  The problem with credit is that it isn’t just constrained to mortgages - the entire American economy is propped up on a massive credit bubble.  Borrowing drives our growth.

Once the credit rug gets pulled out from under us we’re in for some difficult times (and we ain’t seen nothing yet).  The entire article is well worth the read; but here are some excerpts.

It’s unclear just how much work it will take to fix GMAC, the financing arm of General Motors (GM). A Cerberus-led group paid $14 billion for a 51% stake in September, 2006. Cerberus wasn’t exactly an industry newcomer. It had a front row seat at the subprime show with Aegis Mortgage, a lender it took control of in 1996. Yet Cerberus jumped into GMAC at exactly the wrong moment.

The short story? Aegis filed for bankruptcy in August, and GMAC’s mortgage group ResCap has been bleeding red ink. Cerberus watched GMAC continue to make subprime loans in the first quarter but has since reined it in. It wasn’t fast enough to prevent the pain. ResCap has lost $3.4 billion so far this year, forcing GMAC to pump $2 billion into the business to help it survive the mortgage mess. And Lehman Brothers analyst Brian Johnson forecasts an additional $1.3 billion hit this quarter and $600 million in 2008. “I don’t think anyone is panicked,” says one Cerberus insider. But “we sure as hell didn’t expect GMAC to be what it turned out to be.”

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Monday’s Blame Game: The Media

I wonder how much in my life I have the wrong facts because the media gets it dead wrong. They sure as hell have missed things in covering this conversation The media caused more problems with this mortgage mess than any other group I’ve blamed so far. By confidently reporting on the fiasco without first getting a baseline understanding of mortgage markets, the forth estate has

The Banks Aren’t Winning Either!

Story of the week: big bad degenerate banks have lured low income people into a trap. The low income people eventually can’t pay because their ARMS change. The big bankers win when they get the opportunity to foreclose on their house–somehow profiting from this exchange. The little guy loses, again. Well, in this case, banks were stupid–not corrupt. The demand for bonds in a post 9/11 world caused radically eroding credit quality. This caused banks to lend to people that never, ever, showed any inclination to pay any bills over any sustained period of time.

We’re All Subprime, Now. (HT/CR)

If you’re not reading Calculated Risk–you’re missing out. The media paints this as a subprime issue–or even a Countrywide issue–probably because we have some sympathy for the borrowers. The real truth is that even borrowers that have “A” paper are riskier than anyone thinks. By labeling this as a Subprime (read: poor people with bad credit), we make it a social issue. As a social issue, we can bail out these poor borrowers–and by doing that, the banks that stupidly made the loans to them. If we see the way lending was done as fundamentally flawed, overly inclusive, and a critical crisis, we’ll better understand what needs to happen.

You are a victim: you have permission to stop paying!

Another fun time that the media has done has been to give everyone tacit permission to stop trying. EVERYONE is failing. So why should I put forth any effort in paying my bills? Markets move on emotion–and people are either fearful or greedy. Some great companies were devalued temporarily during the bubble of 2000. Some great markets are losing out because of the number of “victims” that are around. As a victim–something was done to you. Nevermind the fact that you refi’d your house to get a plasma TV, a new Tahoe, and 40,000 for a boob job. You’re a victim. The media left consumers out of the people that caused this mess.

So–thank you media–for giving people permission to default, for not understanding the markets you cover, for not even bothering to learn about them. You have proven–again–that Dan Rather is no aberration, and you’re all a bunch of lazy, incompetent fools!

When he’s not closing loans for Realtors, Chris Johnson blames someone new every Monday for the mortgage fiasco. Do you have someone to blame? Email him at Chris@tendayteam.com.

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