America, You're Stupid

Our leaders think you're too stupid to stop sticking your hand in the fire. Sen. Chris Dodd (D-Conn.), chairman of the Senate banking committee, is pushing the Fed to tighten what he terms predatory lending standards. Can you tell he's running for President? First of all, he needs to make up any kind -- something, please -- of standards for all the hedge funds in his home state. We bet he attacks that problem after the hedge funds are gone, too.

But back to the predatory lending. The predators have gone out of business, long before any standard tightening could occur. Seems they ate some bad prey. Now you can't get any type of mortgage that isn't Fannie backed. A question: Does Dodd consider jumbo-loan sellers predatory? Jumbo loaners must have been sharing lunch with the sub-primers, because they're shut down for the moment, too. The market can take care of it -- if you'll let it.

These guys are just protecting their cronies now, giving them a window to get out. (That's what you should be doing too, if you're an investor rather than a trader.) The folks who bought the sub-prime condos, they're not very book smart. But word gets out on the street. With all these people going belly up on their sub-prime loans, the flow of customers for these products would have declined significantly if they would just let the market do its business. Then the people who offer the sub-prime loans would have to adjust -- which means provide more favorable terms to their potential customers -- or they would be out of business. The whole reason this fiasco happened is because these products were new to the consumer. Now that most buyers understand the toxicity -- you can believe the sellers understood it -- of the products, they would have disappeared on their own.

As it stands now, the Fed has decimated the mortgage loan market. House prices are incredibly inflated, and their are no bids. This is the point in time where you want to make mortgages available to practically anyone, just to get the bids going. The tightening of lending standards will only exacerbate the base problem, the lack of home sales. The Fed is giving the money to banks, who are not giving it to the people in the form of eased lending standards. On the contrary, the banks are using the available loans to shore up their own financial positions. Where did all the money go? By the time it's all said and done, most of the profits made by corporate America over the past four years are going to have been spent -- poof! -- on buying their own shares back. Tightening standards only protects the banks at this point in time, not the consumer. The Fed has already failed the consumer.

Essentially, the risk that was inherent in these sub-prime products was bundled up and sold. Now that the risk has come due, nobody wants to own it. So now the risk is back out in the market. This bundling and selling of risk, in the form of these CDOs, was what propped the market up for the past four years. They're the reason we haven't visited Zone 1 on the DYR Phase Chart since March '03. Now the risk has been let out of the bottle and back into the market. CDOs don't exist anymore. Once the ones that have already been sold expire this year, nobody will buy them again for a long time. Hey there risk, it's good to see you again. Where you been?