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Wednesday, September 24, 2008

Financial Meltdown; Who To Blame?

The last two days I have listened to Federal Reserve chairman Ben Bernanke and US Treasury Secretary Hank Paulson testify before congress in favor of a $700 Billion package to "bailout" the financial markets and the US economy.

There is an old cliche that applies. It says when a person with money meets a person with experience, the person with the experience leaves with the money and the person with the money ends up with an experience. Usually Wall Street has the experience while tax payers and greedy investors start out having the money.

To me, blaming Wall Street it is similar to blaming the great white sharks off our California coast for eating the occasional surfer.

Earlier today Warren Buffett said this is an "economic Pearl Harbor" we are going through. When asked what would happen if the package proposed by Paulson and Bernanke fails to get quick approval, Buffett said
It will get worse. Last week will look like Nirvana if they don't go through with a plan to get the country back on the right track. Huge institutions in the World all want to deleverage at the same time. We need someone large, like the US government, to step up and provide liquidity. If they do it right, and I think they will, then the US Government will make a lot of money.
[See Warren Buffett on Goldman Sachs and Financial Bailout Package.]
When asked about punishing those responsible, Buffet said
I think the CEOs and directors should be punished for what they did, but I would not write this into the legislation.
Am I the only one who finds it odd that nobody is blaming:
  • The people who took out loans they could not pay back?
  • The schools for not teaching people enough to understand compound interest or that what goes up in price often crashes faster than it went up?
  • The people who bought homes as "investments" that went down in price? I know many here in California who were speculating on being able to sell for a quick gain before their teaser loan rates turned into very expensive loans. They gambled and lost just like some of us lost buying troubled stocks that went out of business.
If all the "sub prime" borrowers were smart enough to know
  • that their house would not keep going up forever
  • that they could not afford to pay their mortgages when the intro rates ended
  • that their house could plummet in value if they were the last one to buy before the housing bubble collapsed
then we would not be in this problem because the sharks on Wall Street could not take advantage of them.

The fault seems to be in regulations that didn't step up and notice many were getting toxic loans they didn't understand. At the peak of the bubble, my housekeeper was thinking of buying a house in the area of San Jose that is now off 40%. I took a few minutes to explain to her how dangerous the loans were that she would "qualify" for and the only one who PROBABLY will come out ahead in a few years is the person who gets a fee to get her to sign the papers. I explained to her what was happening and told her to not sign ANY papers until she let me look them over to see if she was getting screwed and could afford the payments should the economy sour where people decided to clean their own houses or her husband lost his job building new homes.... She didn't buy and they are doing fine as renters... and her husband cleans carpets now so they can pay their bills, drive nice cars and care for their kids.

If you really want to fault people
  • Fault the schools for keeping people stupid about math and compound interest.
  • Fault a society that pushed huge homes and expensive SUVs on people who could be happy with half the lifestyle and far less debt.
  • Finally, fault the greedy people who closed their eyes to the risks just like they do when they buy lotto tickets or trips to Las Vegas. One multimillionaire friend (at least he was two and a half years ago) asked for my advice about an $800,000 condo in Vegas he paid $4000 for the right to bid on (got a refund when his bid was accepted). I told him I would look to sell immediately as that was the classic sign of a top when they find people who will pay a finders fees to buy stuff that has not been built yet. He was so mad he did not set up the planned lunch to balance my buying him his lunch nor would he return my emails! Now I bet he wishes he listened to me.
Sure the people at the top knew their were selling loans to people that could not pay them back. Just as I have no problems killing great white sharks that eat humans, I believe the CEOs and directors at these failed companies should be punished. They had a duty to shareholders to manage their companies for the future. They should be held accountable in civil court by shareholders to disgorge every penny they made but lets not forget that the reason the sharks got so rich is the waters were filled with clueless swimmers.

Kirk Lindstrom's Investment Letter Performance

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