Forest Gump Chimes in on the Mortgage Crisis

Mortgage Backed Securities are like boxes of chocolates. Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poor rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide.

Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted.

Mama always said: "Sniff the chocolates first."

Everyday Leader of the Week

I got a nice mention on Dan Mulhern's, Michigan's First Gentleman, radio show, Every Day Leadership with Dan Mulhern, this past Saturday October 11, 2008. He referenced my recent blog post entitled "It's Our Turn to Lead."

Dan also mentioned the blog post on his own blog, Reading for Leading, this morning. I was mentioned in the same breath with Governor Granholm, pretty cool stuff.

It's Our Turn to Lead

Every where I turn people are talking about the current state of the economy. We are all feeling this crisis in one way or another.

As a patriot and a leader I wanted to share a few thoughts with you to close out this historical week in our country's economic history.

It is an important time for us to all reflect upon the impact we have upon the world around us as leaders. We are all leaders at work, leaders at home, and leaders in the community. America and the world at large needs leaders, true statesman / stateswoman.

I believe that now is the time for us to step up and selflessly lead. I know times are scary, but if we don't lead who else will. I challenge all of us to consider the sacrifices that Tom Brokaw's "Greatest Generation" undertook during WWII to ensure our freedom and way of life and go out and lead in a way that would make them proud.

In my quest to be part of the leadership solution, I came across an article from the Harvard Business Review entitled "Leading in Times of Change" and found it very appropriate and inspiring. I encourage you to review the 12 To Do's During Times of Change suggested in the article below.

12 To Do's During Times of Change

1. Catalyze change: Champion an initiative or a significant change, consistently promote the cause, and encourage others to get on board.
2. Cope with transition: Recognize and address the personal and emotional elements of change.
3. Show a sense of urgency: Take action, move fast, and accelerate the pace of change for everyone.
4. Demonstrate realistic patience: Know when and how to slow down the pace so that people can cope and adapt.
5. Be tough: Make difficult decisions with little hesitation or second-guessing.
6. Be empathetic: Take others' perspectives into account; understand the impact of your actions and decisions.
7. Show optimism: See the positive potential of any challenge, and convey that optimism to others.
8. Be realistic and open: Don't shy away from difficulties, speak candidly about the true situation, and admit personal mistakes.
9. Be self-reliant: Be confident in your ability to handle new challenges.
10. Trust others: Be comfortable with others doing their part; stay open to others' input and support.
11. Capitalize on strengths: Know your individual and organizational strengths and attributes; confidently apply them to tackle new situations and circumstances.
12. Go against the grain: Show willingness to learn and try new things--even when the process is difficult or painful.

Source: http://discussionleader.hbsp.com/hmu/2008/09/leading-in-times-of-change.php

Have a great weekend! Go out and lead.

Lender of Last Resort: US Treasury

I just read in today's Wall Street Journal that the US Treasury is considering having the FDIC insure all US bank deposits and guaranteeing all bank debt, I assume inter-bank debt. This policy is very consistent with my previous posts on the value of the CDARS program to unlock the liquidity crisis in the banking community.

The proposal is only in the discussion phases, but I feel there is a strong possibility that this will come to fruition.

My vote is that they enact this policy today!

We need to restore confidence in the markets. The current liquidity crisis is more of a crisis of confidence than a cash crunch.

Sooner or later comes a crisis in our affairs, and how we meet it determines our future happiness and success. Since the beginning of time, every form of life has been called upon to meet such crisis.

Robert Collier
American Motivational Author

Suggested Reading for our Leadership

• Leading in Times of Change

Policy Consideration for the Federal Reserve Board - CDARS

Certificate of Deposit Account Registry Service^® (CDARS^®), owned by Promontory Interfinancial Network, LLC, are a great way to increase yield over T-Bills, while still having a security insured by the Federal Government.

I was speaking to a banker at a community bank today a community bank and found out how tough the current liquidity crisis is on their operations. Their loan portfolio is incredibly strong, written to rigorous underwriting standards, but their inter-bank funding has virtually dried up.

My suggestion to them was to shake the trees in the neighborhood for folks who have substantial cash reserves that are sitting in T-Bills and encourage them to move their investments into substantially higher yielding FDIC insured CD's with a CDARS participating lending institution.

CDARS^® is the Certificate of Deposit Account Registry Service^®. And it's the most convenient way to enjoy full FDIC insurance on deposits of up to $50 million. With CDARS, you sign one agreement with a participating local bank or other financial institution of your choice, earn one interest rate, and receive one regular statement. It's that easy.

Source: www.cdars.com

Wouldn't it be interesting if we could get the extremely well connected Promontory Interfinancial Network, LLC Founders to encourage the Feds to encourage investors to place deposit money with community banks, substantially increase the investors' yields without incurring any additional risks vs. treasuries, and break the liquidity crisis.

The CDARS vehicle could be a intermediate vehicle that the Fed could use instead of becoming the "lender of last resort" (acting as the counterparty on each inter-bank transaction). In my opinion, it is the community banks that are going to help rectify our economy, not the Wall Street firms or money center banks.

Presidential Implications

It could be an arrow in the quiver of whichever Presidential Candidate they support.

Patriotic Duty

I think it is our patriotic duty to try and save our economy. I am trying to do my part.

Ironic Foresight: Definition of Promontory

A promontory is a prominent mass of land which overlooks lower lying land or a body of water (when it may be called a headland).

Most promontories are formed either from a hard ridge of rock that has resisted the erosive forces that have removed the softer rock each side of it, or are the high ground that remains between two river valleys where they form a confluence.

Throughout history many forts and castles have been built upon promontories because of their natural defensive properties.

Source: www.wikipedia.com

How safe are my bank deposits?

With the global liquidity crisis in full force and many Americans worried about a "run on the bank," I started doing some research about protecting my bank deposits.

I came across some very well written articles and an innovative deposit security program called the Certificate of Deposit Account Registry Service^® CDARS^®.

Financial institutions can offer CDARS because they are members of a special network.

When you place a large deposit with a network member, that institution uses CDARS to place your funds into certificates of deposit issued by banks in the network. This occurs in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance.

http://www.cdars.com/how-cdars-works.php

One drawback to the convenience of CDARS is that you can miss out on higher CD rates offered by banks other than your own. If you're willing to do a little extra legwork, you could get around that by finding a bank in the CDARS network that you believe consistently offers higher rates and open an account with them specifically for CDs

Another factor is that banks pay a fee to join the network and then pay transaction fees. Some banks pass those costs on to CD buyers by reducing the interest rate, says Angela Baker, treasury officer at Allegiant Bank.

"We set CD rates every Tuesday and we've built in those transaction fees for CDARS. We reduce the baseline interest rate by 15 basis points across all maturities."

Pemberton says customers are willing to pay for the convenience.

"We price CDARS (interest rate) a little bit less than one of our weekly CD specials. The value with CDARS is the extended FDIC coverage. You're going to pay a little something for that. People have been very receptive; they understand the value."

Adding to CDARS value is the convenience factor of one consolidated statement from your bank detailing your CDs. But while you know exactly where your money is, the other banks don't know you by anything other than an account number. The only institution, other than your own bank, that sees your personal information is the Bank of New York, which handles the CD transactions for all the banks in the CDARS network, according to Jacobsen.

CDARS: Beat the $100,000 FDIC limit

Key Issues for Depositor:

The two key issues for me as a depositor are as follows:

1. Minimum CD Term is 4 weeks, I would like shorter maturities available to create full CD length CD ladder.
   
2. CD rates are dictated by the local bank where you physically make your deposit. Thus, you want to find the CDARS participant bank with the highest CD yield.
   

Suggested Reading:

• CDARS: Beat the $100,000 FDIC limit
• Surviving The Financial Crisis: Six Tips on FDIC Insurance
• Your Cash: How Safe Is Safe?

Thoughtful Response from the Federal Reserve Board to my Inquiry Re: "Bailout Package"

Dear Mr. Smith:

Thank you for your observations and comments regarding efforts underway to relieve the current strains on the U.S. financial system. Healthy economic growth depends on well-functioning financial markets. Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve.

The shortcomings and weaknesses of our financial markets and regulatory system must be addressed if we are to avoid a repetition of what has transpired in our financial markets over the past year. The Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

Again, we thank you for sharing your views. Please be assured that the Federal Reserve is working diligently to find and implement the best and most sustainable solutions to the current economic challenges.

Sincerely,

JPD

Board Staff

Original Email Content:

Following is the original e-mail received:

E-mail Content:

As a former Wall Street employee and concerned citizen, I am appalled by the House of Representatives' rejection of the mortgage bailout bill today. There have been a lot of headlines "bailing out Wall Street," I think the press should be focused upon the true issue at hand: saving our economy and way of life. ROME IS BURNING and I am not referring to Jim Rome, the sports reporter! ! ! This mortgage crisis extends much farther than Wall Street, it is a global crisis and if we don't capitate now and I mean NOW, we are going to see job loss, economic dislocation, and widespread global economic malaise for years to come. Congress is playing with fire and too many members of the House are focused upon their reelection campaigns vs. the true crisis at hand. This is a time where we need true leadership, not another Congressman groveling for votes and reelection. While the press chooses to focus upon the $700 billion package size, the real issue at hand is CONFIDENCE. The most important issue to address is the Crisis of Confidence. If the US Congress does not act swiftly the dominoes will fall and the crisis will only get more dire. I wrote this post because I am a patriot and I have no direct means of benefiting from the bailout package.

Financial Bailout: The Wisdom of Crowds

there's no real evidence that one can become expert in something as broad as 'decision making' or 'policy' or 'strategy' . . . And much of what we've seen so far suggests that a large group of diverse individuals will come up with better and more robust forecasts and make more intelligent decisions than even the most skilled 'decision maker.'

James Surowiecki
The Wisdom of Crowds

Modern Marketing

The Modern Marketing paradigm and social media toolsets at our finger tips as citizens and employees of Clear!Blue provides us all with an opportunity to shape the debate currently occurring in the White House and others. With the election just over a month away, people are talking all over the Internet about the pros and cons of each candidate. While the following is my opinion, and yours may differ, last night, I was able to start a conversation through social media. Thanks to the Internet, I made my mark on the debate.

There is panic in the street. Rome is burning and I don't mean the sportscaster Jim Rome. Our financial markets are in disarray and are on the brink of a global catastrophe.

The funny thing about this crisis is that it is more of a crisis of confidence than the typical cash flow crisis that almost all of us have experienced sometime in our lives. Cash is not the problem here; there is plenty of that being hoarded here and there.

The crux of the problem is that institutions that typically freely make loans and take deposits from each other are reluctant ("terrified") to trade amongst themselves and this lack of confidence could bring the economy to its knees if confidence is not restored here in short order.

While lawmakers in Washington are busy trying to protect their fiefdoms and ensure their re-elections, the crisis of confidence is steadfastly eroding options and pushing our economy toward depression, not just the current recession. Washington's inaction and failure to come to a compromise on the financial bailout package yesterday represented a colossal failure of leadership that will be felt for generations to come if something is not done to restore confidence in short order.

The bottom line is that once confidence reaches the tipping point, the domino effect will take hold and there will be no going back.

Step Up

In Bill Abele's words, now is the time for our elected officials to "step up" and selflessly lead. The stock markets 700+ point decline yesterday was a vote by the crowd that the "decision makers" made a grave error yesterday. Unfortunately, the stock market does not have the power to propose legislation in the US Congress. Hopefully, the US Congress is listening and will consider the wisdom of the crowd's vote and craft a solution that helps to maintain and restore confidence.

Individual Solutions

I spent two hours last night creating a blog post detailing my thoughts and opinions on the current financial crisis entitled: Bailout Voted Down: Colossal Failure of Leadership. When I started writing the post, I did not know what I was going to do with it, but figured I could at least get my frustrations off my chest. By the end of the night, I sent the post to the following people 9in additon to posting it on facebook):

• Office of the President
• Senator Levin
• Senator Stabenow
• Congressman Knollenberg
• Board of the Federal Reserve
• Secretary of the Treasury
• Governor Granholm
• Mary Kramer at Crain's
• Matt Roush at Great Lakes IT Report
• Eric Morath at Detroit News
• Free Press - Washington Bureau
• Emailed Numerous Friends

How are you going to change the world today?

Make it a great Tuesday.

Jonathan

Bailout Voted Down: Colossal Failure of Leadership

As a former Wall Street employee and concerned citizen, I am appalled by the House of Representatives' rejection of the mortgage bailout bill today. There have been a lot of headlines "bailing out Wall Street," I think the press should be focused upon the true issue at hand: saving our economy and way of life.

ROME IS BURNING and I am not referring to Jim Rome, the sports reporter! ! ! This mortgage crisis extends much farther than Wall Street, it is a global crisis and if we don't capitate now and I mean NOW, we are going to see job loss, economic dislocation, and widespread global economic malaise for years to come.

Congress is playing with fire and too many members of the House are focused upon their reelection campaigns vs. the true crisis at hand. This is a time where we need true leadership, not another Congressman groveling for votes and reelection.

While the press chooses to focus upon the $700 billion package size, the real issue at hand is CONFIDENCE. The most important issue to address is the Crisis of Confidence if the US Congress does not act swiftly the dominoes will fall and the crisis will only get more dire.

Lessons from the Past

The preeminent book on the topic of widespread panics and bubbles that have gripped the financial markets for centuries is:

I highly recommend the book, it is very insightful. Every member of the US Congress should read it, if they did they would be much more apt to take play offense vs. the defense posture that they take trying to ensure their reelection.

There are very few "True Statesman"

The true statesman’s art is to be able to judge the way of life of his nation and to know which institutions will preserve it and which will destroy it. This is a delicate business and requires a special knowledge of the particular customs of a nation and their relation to its whole way of life.

Jean-Jacques Rousseu

Politics and The Arts
Introduction XXIX

I only wish there were more true statesman in the US Congress. The implications of their indecision and selfish dealings today will have unintended consequences for generations to come. WE NEED TO RETAIN CONFIDENCE IN THE US BANKING SYSTEM, lest we go back to the Gold Standard.

Global Implications

The implications of the crisis of the US Financial System are widespread. If the system fails because of a lack of confidence, the impacts will be felt from New York to Sydney to Timbuktu. Here are a few of the financial luxuries and conveniences that we may lose if the US Congress does not step up and lead.

• Credit Cards
• Auto Financing
  
• Mortgages
• Business Lines of Credit
• Convenience of Modern Credit Availability

I could write an entire doctoral thesis on the topic.

Conclusion

If US Congress fails to come to a compromise on this issue within the next week, generations to come will feel the impact of their failure of leadership. The Congressman who fail to lead today may win in November, but they won't win in the future, they will be viewed as authors of the first Great Depression of the 21st Century.

I implore the US Congress to stand up and lead and consider the interests of the whole over their selfish reelection concerns.

Note from the Blogger

I worked on Wall Street for 5 years at JP Morgan & Co., Deutsche Bank AG, and Arthur Andersen & Co. I am was intimately familiar with Mortgage Backed Securities, Credit Default Swaps, the Derivatives Market and bank treasury operations at one point in my career.

I left Wall Street in 1998 because I could not live my life surrounded by the culture of avarice and greed. I can remember eating dinner with my dad @ a dinner in Scotch Plains, NJ telling him that I could not continue to work on Wall Street because I did not agree with their ethics and conduct.

I sometimes questions whether I made the right decsions. Many of my friends made millions and millions of dollars, but I got to keep my soul.

I was somewhat vindicated on March 17, 2008 when one of the trader's I used to support was highlighted on the front page of the Wall Street Journal (Carlyle fund on ropes as banks get nervous: Lenders rush to sell assets tied to loans in mortgage market) because his $20+ bn portfolio of mortgage assests was being liquidated and his investors lost all of their equity. He may have made a lot of $$$, but I got to keep my integrity.

Final Thought

I wrote this post because I am a patriot and I have no direct means of benefiting from the bailout package.