Are you a prospective home buyer who can’t obtain a mortgage because of chaos in the banking industry? Or a prospective seller who can’t find a buyer? Then you’re a victim of the mortgage credit crisis, which has frozen the housing market into a state of permanent recession during the past two years.
In fact, during the past month, this crisis has actually worsened in increasingly bizarre ways. Stories about the crisis are now dominated by robo-signers who evict thousands of victims from their homes each month, and trench warfare tactics that pit banks against governmental authorities.
Tea party protestors have heatedly opposed the government bail-out of the financial services industry, arguing that America’s court system could have handled the case load if all of the nation’s major banks, insurance companies, and other financial institutions had simultaneously filed for bankruptcy in late 2008. Unfortunately, we are now learning about our system’s capacity to handle the simultaneous foreclosures of millions of American homes.
What are we learning? Suffice it to say that the results are not generating a sense of confidence in our system.
No One To Call
A few weeks ago, news of robo-signers began to rattle the mortgage industry. Who are robo-signers? They’re the employees who work for banks, enshrined with the responsibility of reviewing and approving the (mostly) computerized files associated with home foreclosure cases. Even though banks rely on computers to identify home owners who have defaulted on their mortgage payments, they must still rely on human beings to look for processing errors, lest they mistakenly seize the homes of innocent and financially responsible people.
But why are these employees called robo-signers? They’re not humanoid computers like Arnold Schwarzenegger’s Terminator or Paul Verhoeven’s RoboCop. Rather, they are real people who have been able to move at incredible robotic speed, reviewing and approving thousands of foreclosure cases each month.
Oddly enough, many of these bank employees are low-paid clerks who possess no industry knowledge or experience whatsoever. So how can they — or any one — possibly review and approve thousands of cases each month? Apparently, they have been blindly approving cases without reading them, and thus home owners who have been falsely classified as being delinquent cannot speak to knowledgeable bank reviewers about such processing errors. That’s because the reviewers themselves are not at all familiar with the cases that they have personally approved, and they’re far too busy robo-signing thousands of files to dedicate time to taking phone calls.
A Downward Spiral
Once news of the robo-signers spread across the markets, the housing industry fell into a downward spiral of cascading recriminations. Confronted with the need to defend themselves against charges of inappropriate home seizures, Bank of America (BoA) and other mortgage holders temporarily halted all foreclosure actions nationwide. That decision threw all home sales of foreclosed properties into states of extreme uncertainty.
BoA and others then resumed foreclosure actions a week ago, declaring that they had reviewed their policies and procedures and found them to be valid. But critics protested that BoA was simply denying its problems to defend itself against a multi-state investigation by state attorneys general to protect residents against illegal home seizures. Parties that bought mortgages from BoA before the global financial crisis then demanded that BoA simply buy back all of their bad loans, a demand that the bank angrily vowed to fight in court.
Just within the past few days, the chaos spread even more dramatically. In Britain, three prestigious hotels accused Irish bankers of wrongfully signaling that they were unprofitable and late on loan payments by transferring their debt into a high risk pool; they scrambled to reassure investors that they were actually profitable and current on their debt. And here in America, the Federal Housing Finance Agency estimated that Fannie Mae and Freddie Mac, guarantors of over half of the outstanding home mortgages in the United States, will ultimately require over $150 billion in government bail-out funds to remain solvent.
The Rule of Law and Due Process
Under assault, of course, is the fundamental premise that businesses and citizens can rely on the principles of the rule of law and due process to govern property disputes. After all, if home owners cannot rely on banks to review their own records before seizing their properties, they’ll never feel comfortable applying for mortgages and buying homes in the future. And if hotels cannot rely on lenders to classify their payment histories in an accurate manner, they’ll never borrow money to invest in growth opportunities again.
The American court system is now staggering under a wave of lawsuits that will require years of litigation. Would this same court system have been able to handle the simultaneous bankruptcies of all of these troubled financial institutions back in 2008? Perhaps so … but even Tea Party protestors have good reason to be skeptical about its capabilities.
There are also a wide variety of ailing banks that would have failed if not for bailouts by the federal government. Citigroup, for instance, owns many failing subsidiaries that are dragging down a purportedly healthy commercial banking core; that’s why CEO Vikram Pandit is striving mightily to shed those weak divisions. Bank of America also asserts that it manages a relatively healthy core banking operation, but that it has been weakened by a government induced shotgun wedding with Merrill Lynch.
Then there are the tiny Special Purpose Entity banks acquired by investment institutions like The Hartford. These banks are tiny specks of commerce that barely conduct any business activities at all; they exist for the sole purpose of positioning their financially unstable corporate parents to qualify for federal bailout funds. And investment houses like Goldman Sachs and Morgan Stanley may be strong financial institutions, but they are undeniably bad banks because they take no consumer deposits and make no consumer loans; they also chose to become bank holding companies for the sole purpose of qualifying for federal bailouts.
None of these banks, though, were intentionally created to be bad in nature; their descent into “badness” was a regrettable outcome of the Great Recession of 2008. So why would any one decide to create a bank that is intentionally bad?
Ask the Irish!
To whom shall we turn for an answer to this question? Let’s ask the Irish government! This past week, they decided to create a government owned bank that will purchase 16 billion euros of terribly risky assets for a discounted price of 8.5 billion euros from five domestic financial institutions that are desperate to be rid of them. The official name for this intentionally weak bank is the National Asset Management Agency, but the Irish have dubbed it Bad Bank to reflect the nature of its asset base.
Why would the Irish government make such a startling decision? Apparently, they believe that they’ve run out of alternatives. They’ve already invested a huge amount of capital in two giant insolvent Irish banks, the Anglo Irish Bank and the Bank of Ireland, but have failed to resuscitate them because of the poisonous impact of these toxic securities on their asset portfolios.
So the Irish have decided to create a new government entity that will purchase these securities from the Irish banks, thereby removing a fiscal cancer from their books and providing them with fresh capital with which to repair their operations. The hope, of course, is that these banks will continue making loans and stimulating the Irish economy.
Only in America
Before we Americans start to criticize this strategy, though, we might want to take a closer look at our own government’s decisions. Indeed, Washington has also opted to create intentionally bad organizations, albeit with uniquely American flavors.
For instance, were you aware that only one General Motors fell into bankruptcy, but two GMs actually emerged from it? The good GM is now manufacturing automobiles, but a bad GM is now functioning as well, liquidating the suffocating obligations that dragged the original GM into bankruptcy.
The American federal authorities arranged for the creation of Bad GM for the same reason that the Irish government created NAMA: to allow an organization that was deemed too big to fail to shed itself of toxic assets and/or overwhelming obligations. Such accounts are customarily written off in bankruptcy court, but creditors of the bankrupt organizations are traditionally required to write off their investments as well.
In the case of GM and the Irish banks, governmental authorities clearly believed that they couldn’t ask GM retirees and Irish passbook savings account holders to write off their entire retirement pensions and cash account balances. Thus, they stepped in and allowed these obligations to live on, secure in the hands of government sanctioned entities.
A Road Not Taken
Interestingly, during the early days of the 2008 banking crisis, the American government did indeed authorize Treasury Secretary Hank Paulson to spend hundreds of billions of dollars to establish a federal bank that would purchase troubled assets from failing banks. In fact, that’s why the controversial TARP bail out program was called the Troubled Asset Relief Program; it was designed to adhere to the same model that the Irish government implemented last week.
Paulson created quite a ruckus when he used those TARP funds to inject capital directly into bad American banks instead of purchasing their bad assets from them. He explained, at the time, that direct injections could be processed more “quickly and forcefully.”
The Irish government itself caused a minor ruckus last week when it established purchase prices that were significantly less than the levels originally forecasted by banks. Because Paulson opted to take a different road to bailing out American banks, we may ultimately be able to assess the relative wisdom of these alternative approaches by comparing the long term health of American banks to Irish banks, and of the American economy to the Irish economy.
Last November, GM CEO Rick Wagoner flew to Washington on a corporate jet and told Congress that bankruptcy would lead to the liquidation of the firm because research surveys indicated that consumers are unwilling to buy vehicles from a bankrupt automaker. And yet, just four months later, Wagoner agreed that a pre-planned bankruptcy might be manageable after all. Motor Trend magazine, the automobile bible for gearheads, labeled Wagoner’s recent comment a stark reversal of his earlier position.
Stark reversal indeed … and, at first glance, seemingly unjustified. After all, consumer spending in America hasn’t yet bounced back in any noticeable manner. So why would Wagoner suddenly change his mind about buyer sentiment? And should our government pay any attention to sentiment at all when making mammoth decisions about whether to allow GM to fail?
What Exactly Is Consumer Sentiment?
Consumer sentiment data are produced by snapshot polls that simply measure transient attitudes at fleeting moments in time. Politicians, for instance, are well versed in the “here today, gone tomorrow” nature of survey data. The first President George Bush’s Gallup poll approval rating soared to 89% in March 1991, and yet he was decisively voted out of office the following year. Likewise, his son’s rating peaked at 90% in September 2001, but then slumped to 25% later in his tenure.
Why did so many people change their minds about these presidential figures so quickly? Perhaps the world changed in dramatic fashion during these turbulent periods of time, triggering changes in the public’s opinion of their political leaders. And yet some polling experts warn us that the polls themselves are subject to exaggerations and misstatements.
In the business world, the Reuters / University of Michigan’s Index of Consumer Expectations is incorporated into the U.S. Index of Leading Economic Indicators as a monthly measurement of consumer attitudes and expectations. However, many analysts consider it to be a mere “reflection of uninformed opinion.” That hardly seems to provide a suitable foundation on which to make massive corporate bail-out decisions …
… or does it?
The Value of Snapshots
To give Rick Wagoner the benefit of the doubt, it is important to remember that snapshots do generate some value; after all, that’s why we build digital cameras into mobile telephones. We don’t expect to use our phone cameras to produce another Sistine Chapel, which reportedly took ten years to paint in the 1500s and twice as much time to restore in the 1990s. We simply want to create images that will be emailed to friends one day, and deleted from inboxes the following day.
We can certainly debate whether our federal government’s perspective should be short term or long term in nature regarding our economic revitalization strategy. But Rick Wagoner was pretty clear about his mental time frame last November: he bluntly stated that GM would go bankrupt in a matter of weeks if not bailed out by the government immediately. And President Obama maintains that his massive government deficits will help stimulate spending in the short term, even though the U.S. Congressional Budget Office warns that they may hurt the national economy in the long term.
So there is some support among the experts for Wagoner’s position that research polls of consumer attitudes may be helpful to decision makers, particularly when our considerations are short term in nature. And thanks to the internet … thank you, internet! … there are many free online web applications that business men and women can use to develop their own consumer polls.
Care To Develop One?
Would you care to develop your own consumer sentiment poll? If not for the entire economy, then perhaps for your own product or service?
It’s actually not very difficult to develop a poll. First, we must create a list of questions and find a representative group of people to poll; most statisticians recommend using Likert Scale questionnaires for randomly selected samples. But not every pollster uses such scientifically pure approaches; in the Tonight’s Poll section of the home page of CNN’s Lou Dobbs Tonight, for instance, any web surfer is welcome to supply a yes-or-no answer to rather uni-dimensional questions like “Do you think President Obama should follow Lou’s advice and send troops to secure our border with Mexico?” In fact, any web surfer is welcome to vote as often as (s)he pleases!
The next step is to gather all of the responses and record them in a data base, perhaps by employing any of the various web applications that are freely available online. Survey Monkey, for instance, allows users to create and maintain a wide variety of sophisticated surveys. And WordPress allows users to post simple poll questions directly on their blogs.
A Sample Illustration
The final step is to analyze and interpret the results. Let’s assume, for instance, that we ask five people a set of three questions: (a) on a scale of 1 to 5, is the cost of our product the most important determinant of your buying decision?, (b) is the quality of our product the most important determinant?, and (c) considering the level of cost and quality that we are promising to deliver to you, will you buy our product?
Now let’s assume that these five people respond to questions (a), (b), and (c) as follows:
#1: (a) 3, (b) 3, (c) 3
#2: (a) 1, (b) 3, (c) 1
#3: (a) 4, (b) 1, (c) 4
#4: (a) 5, (b) 5, (c) 5
#5: (a) 1, (b) 2, (c) 2
Although this data only presents a snapshot of their opinions at a single moment in time, it might still be helpful to know what our prospective customers would prefer: a cheap no-frills product or an expensive luxury product.
There is a clear answer to this question, one that requires a free statistical web application to quantify it. By using a correlation analysis applet, we can learn that the correlation between the responses to questions (a) and (c) is an impressive 97%. But the correlation between the responses to questions (b) and (c) is a meager 32%. So the answer is quite clear; far more of our consumers’ purchase intentions are correlated with cost considerations than with quality considerations.
Of course, these very consumers might change their minds tomorrow … as they often do when they consider their voting selections, their automobile purchasing decisions, and other significant choices. Nevertheless, if our time horizon is restricted to simply surviving the day, such information may be all that we want or need to live to see tomorrow.