Today the market tumbled again reflecting the underlying reality that earnings are much weaker than expected and this will have a long and deep impact on our economy. This isn’t going to be a minor downturn but potentially a severe one. The market wasn’t dragged down heavily even after all the craptastic data we got this week, that is until General Electric came out and blamed their earnings miss on Bear Stearns. This tiny little caveat was enough to wipe out $47 billion in market cap for the big GE. Of course, General Electric has a huge financial arm and we all realize that this is not the place to have your money in the current environment. Here is a fast and hard rule; anytime you hear someone saying “slam dunk” or “in the bag” run the opposite way:

“GE declined 13 percent in New York trading, wiping out about $47 billion in market value and sending U.S. and European stock markets lower. Immelt slashed the company’s 2008 forecast of $2.42 a share, a goal he said in December was “in the bag” and repeated on March 13.

Bear Impact

Fairfield, Connecticut-based GE’s stock dropped $4.70 to $32.05 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest percentage decline since October 1987. The shares had fallen less than 1 percent this year compared with a 7.3 percent decline in the Standard & Poor’s 500 index.

Immelt blamed the earnings decline on a seize-up in capital markets that forced GE to write down the value of loans and Chinese securities it held and thwarted some asset sales in the quarter’s final two weeks. The situation worsened after the Federal Reserve announced a rescue of Bear Stearns Cos. on March 14, the day after he had confirmed his annual earnings forecast on a Webcast with investors.”

If this is what happens when people say they have it in the bag I think most want the out of bag option. Clearly nothing was in the bag and blaming Bear Stearns for GE’s problems is like blaming the ocean for being wet. Of course this didn’t come out of left field but this once again shows how delusional the entire market is about the current state of the economy. The general sentiment is that we have reached some sort of bottom but we are miles away from any bottom talking. We are still having a hard time getting our government officials to agree we are in a recession! If you are wondering why this earnings miss brought down the market significantly just look at how few companies have this large of a market cap:

*Click to enlarge

And for all of you that think that high oil costs aren’t such a big deal, I ask you to take a nice hard look at the list and see who is there. In fact, if we are to only look at these top market cap companies it would appear that all we do is shop at Wal-Mart, talk all day on phones, drive around like maniacs, load up our Windows operating system, and brush our teeth with Crest. Where in the world are the manufacturing companies? We have come a long way from U.S. Steel.

College is for the Middle-Class

There is an incredible movement in the current market of giving the perpetrators of this housing bubble, you know the financial institutions and builders, the blessing and anointment of market repairmen. The idea stems from the philosophy of, “hey, who would know better what went wrong in this market than me since I was selling and pushing these loan products or overbuilding homes.” It is simply amazing. Here is a list of a few examples of what I am talking about:

The Fed: Giving them the ability to bail out select institutions and picking up rancid mortgage products for exchange with Treasurys.

Mister Housing Bubble says I Pity the Fool Who Supports this Because: Alan Greenspan dropping rates to 1 percent helped fuel this speculative boom. And it didn’t help that he was cheerleading for ARM products and now he is on a legacy revisionist tour trying to atone for past sins.

The Builders: Allowing them to get a $15 billion tax break for past profits because they are hurting in the current market for get this, over building. Of course they blame the credit crunch and tighter lending standards (look at Fed above) for the current mess and not over building the country as if they were a kid playing with LEGO building blocks.

Mister Housing Bubble says I Pity the Fool Who Supports this Because: Giving them tax breaks makes absolutely no sense since they are a primary reason we have record inventory on the market. Did these new homes magically appear out of the ground like a housing Chia Pet? Of course not. This happens in all housing run ups. Builders will build to the point of market saturation until the bubble bursts. And forget the affordable housing argument. Practically every new housing sub-division was a McMansion inspired dream. This was not about increasing housing affordability for the American people. It was greed plain and simple. Now they have to reap what they sow yet they are coming to the government hat in hand begging for help.

The Lenders: These were the cooks of the toxic mortgage stew. They could have easily pushed buyers into more conventional mortgage products but why? You don’t want to hurt your commission so stick them into whatever will get you the biggest kick backs. Fake documents, lack of due diligence, flat out corruption, are all reasons why these folks deserve very little in government aid.

Mister Housing Bubble says I Pity the Fool Who Supports this Because: It is astonishing that we are now seeing many ex sub-prime mortgage brokers working as loan counselors or “helping” those in foreclosure. This is absolute lunacy. We might as well ask Donald Trump what it means to live below your means or ask Bobby Brown what it means to be a sensitive husband. What in the world is going on here?

Stockholm Syndrome for Housing

There is a fascinating psychological response that happens when certain victims actually start having loyalty to those that are screwing them over. This has happened when hostages start associating protection and loyalty to those that have put them into harms way:

“Stockholm syndrome is a psychological response sometimes seen in an abducted hostage, in which the hostage shows signs of loyalty to the hostage-taker, regardless of the danger (or at least risk) in which the hostage has been placed. Stockholm syndrome is also sometimes discussed in reference to other situations with similar tensions, such as battered person syndrome, rape cases, child abuse cases and bride kidnapping. The syndrome is named after the Norrmalmstorg robbery of Kreditbanken at Norrmalmstorg, Stockholm, Sweden, in which the bank robbers held bank employees hostage from August 23 to August 28 in 1973. In this case, the victims became emotionally attached to their victimizers, and even defended their captors after they were freed from their six-day ordeal. The term Stockholm Syndrome was coined by the criminologist and psychiatrist Nils Bejerot, who assisted the police during the robbery, and referred to the syndrome in a news broadcast.”

This is the only logical reason I can arrive at for why the public isn’t marching on Wall Street and launching into mad protests over what is going on. The fact that some of these mortgage brokers are now trying to play both sides of the fence really shows how flexible their ethics have become. They said whatever they needed to say to get you to sign the loan documents now they’ll say anything to avert a public flogging. The fact that so many people were literally abused by these so-called financial professionals leads me to believe that folks still think these people actually knew a thing or two about economics. Let us look at the value of education here through a NPR piece on ex-subprime brokers:

“Amber Barbosa didn’t graduate college. But she did get an education – by working for the now infamous subprime lender New Century Mortgage Corp.

Barbosa was a quick study: A few years later, she struck out on her own as a mortgage broker.

“In 2006, I made close to $500,000,” she says. Not bad for a 28-year-old with no college degree.

By then Barbosa, who was living outside of San Francisco, had a nice boat, a 27-foot Bayliner. She had several houses, a Mercedes and a Cadillac.

“I was riding around in my ’07 Escalade,” she says. “God, I had three properties at the time – one right on the water with ocean access, another property worth $800,000.”

NPR checked the property records, and Barbosa really did own those houses. Since the crash of the housing market, though, she says she has pretty much lost everything.

But during the height of the housing bubble, brokers like Barbosa were working next to a river of money; all they had to do was reach in and grab some. Basically, the more costly and risky the loans they gave to their customers, the more money they made.”

There is nothing wrong with making a nice chunk of change without a college degree. But the fact of the matter here is that many of these brokers were making a mint selling financially and socially destructive products to their clients that is now leading to the current downturn. Sure, if we are going to blur the lines of ethics here we can make a lot of money by flying to Columbia and importing drugs to sell in our neighborhood. Yet this is illegal. That is what is so troubling here. Even the argument for the builder kickbacks is along this line. I’ve heard a few in the industry say, “how is this different from the bailing out of Bear Stearns?” They’re right. Both are huge mistakes yet hopefully on this one our leaders can show some restraint and vote it down.

But back to Amber, she was making $500,000 and now has lost it all? What about her safety cushion? Of course these folks in an ironic sort of way started to believe the crap they were peddling. Why not buy a home? It only goes up after all. They felt that the party would never end. What they did was flat out illegal and I encourage you to listen to the piece where you had an environment that was a wink-wink we’ll put down that you make $250,000 a year since everyone does and put you into this 2/28 option ARM mortgage. Falsifying documents, lying, and criminal activity are all part of the bubble world. Even if you didn’t commit something illegally, they knew deep down they were peddling a turd but turds don’t smell so bad when you get a $10,000 cut.  And buyers aren’t getting off either.  They have a financial Scarlett Letter and now that people are actually verifying credit and income, they’ll have to convince an institution to lend them money, sort of how things were done for decades before this decade long bubble. Many will lose their homes.  They have the option to rent another home.  You won’t be out on the street.  It isn’t like we have debtors prison anymore.  They’ll have to live with their financial mistake and with credit being tighter, institutions should own the paper they push out and have some skin in the game.  Next time, they’ll think twice about giving loans to everyone. So what do we do now?  Did we learn our lesson? Nope,  we now promote them as prescription to the ills of our market!

“From New Century to Nonprofits

NPR spoke with Barbosa while she attended training at the Neighborhood Assistance Corporation of America, or NACA. Some out-of-work mortgage brokers have now found their way to nonprofits like this one. NACA is working with borrowers facing foreclosure all over the country, refinancing or restructuring their unaffordable subprime loans.

Bruce Marks heads up NACA and now helps retrain former subprime loan brokers. Who better to untangle these unaffordable loans than the brokers who helped set them up, he says. The former brokers understand the “exploding ARM loans” and the “pick-a-pay loans,” Marks says. “They are the experts, because they were a part of that industry, and they know that business inside and out.”

You mean the same subprime loan you put them into? I think comparing the Stockholm syndrome here is much more than a curious observation. How are these people going to counsel the same person they perpetrated the fraud upon? There is nothing complicated here. The vast majority of these loans were financial time bombs. Most of these folks that they want to counsel here in California are now underwater. Here is their three options; short-sale, negotiate better terms with your lender, or foreclose. Do you really need a training session for that? And what in the world are they calling them experts for? Drug dealers know the inside of selling on the street. Does that mean we are going to make all of them rehabilitation counselors? Bank robbers know how to use negotiating skills and brute force. Are we going to send them to Iraq?

From the e-mails I’ve been getting I know that I am not the only one that feels we are living in some bizarro universe. If you feel outraged and appalled by what is going on I encourage you to contact you Congress person and let them know how you feel about the current situation. Not many people take the time to get in touch with their local representatives. In fact, many are betting on your apathy and lack of interest in getting some of these horrific bills passed. With enough noise, you’ll light a fire underneath them and if they don’t respond, you know what to do this upcoming election season. Here is a site that makes it easy to find your representative. Don’t sit idly back while Nero fiddles away.

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