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Location: Pantego, Texas, United States

Tuesday, September 23, 2008

A lot of investors like myself have lost a lot of money in the current financial system meltdown. Democrats I heard today in the Senate hearing said we deserved it, evil beings that we are. It was hard for small investors to avoid losing money on investments because we were lied to by everyone. It was apparent to me that the government was demanding that banks loan money (called sub-prime loans) to people to buy houses they could not afford, with no down payment with variable rate, interest-only loans. Real estate agents were eagerly selling homes to these people. (They encouraged people to buy homes the people could not afford, but the Agents got their commission immediately, and didn't care what happened to the foolish buyers.) I knew this was happening, and realized it was creating a real estate bubble, but didn't realize it would affect me directly. That was because it was thought that the government was guaranteeing these stupid loans. When I checked I was told that companies I was invested in had no exposure to these bad loans. It turns out I was mis-informed, whether I was lied to or that the brokers and CEO's of companies were just ignorant, I don't know. It turns out that they were unaware of the hazards of SIV's, but they were self-proclaimed geniuses paying themselves many millions of dollars per year in salary, and often hundreds of millions in bonuses so one naturally assumed they knew what was happening. I saw the CEO of one company (TMA) on TV saying his company had no problem so I bought more shares, and two days later he declared bankruptcy. The famous Bob Rubin, genius Treasurer of the Clinton Administration, was being paid $4 million a year by Citibank. It turns out he had never heard of SIV's when they collapsed and almost put Citibank into bankruptcy. But, since he is a genius, he is now running the place after the previous CEO was kicked out with a small fortune received for brilliantly leading one of the largest companies in the world to near collapse. The CEO's of the mortgage companies pulled the ripcords on their golden parachutes when things went south, and rode into the sunset with hundreds of millions of dollars. Former Clinton Administration officials checked out of Fannie Mae with big gains before the collapse: Franklin Raines got $90 million and Jamie Gorelick got $26 million mostly in bonuses because of increased profits achieved by cooking the books. (I think Raines gave some of the money back, but he isn't in jail, at least so far.) Based on what I saw in the Senate hearings today, they think we evil investors got what we deserved. But they are very concerned about saving the people who lied about their income, and bought houses they couldn't afford. The Congress very much wants to reward those humble folks. It is clear that instead of investing in the stock market I should have bought a multi-million dollar house that the government would help me pay for. One of the risks that the genius CEO's failed to recognize was the mark-to-market accounting rule that apparently came about from the Enron collapse. To prevent companies such as Enron from artificially valuing their assets, the accounting rules were changed so that companies had to use the market price of assets to determine their worth. This is an insane rule when applied to real estate mortgages. A company could have no loans that are not performing, but they cannot value those loans at the note value. Instead, if the value of real estate goes down they have to value the note at a "fire sale" value, that is the value that they could get if the real estate had to be sold today. Obviously no one knows what that value is, so it was put near zero. As the companies wrote down the value of their loans, they began to get margin calls from the people they had borrowed money from. It turned out that many of the mortgage companies were leveraged at an incredible 30 or 40 to 1(apparently done at the insistence of the government), so their stock quickly became worthless. This was helped along by clever Wall Street operators began to sell short the stock of financial companies, frequently by the technically illegal "naked" short sales technique which effectively increases the number of shares in the company since it sells shares that do not exist. (The FBI is investigating, and will probably send a few unfortunate sacrificial lambs to jail to make the public feel better.) To raise money Merrill Lynch sold some of their mortgages to a hedge fund at an alleged 22 cents on the dollar, but perhaps as little as 5 cents on the dollar in reality. The hedge fund will make a lot of money since most of the loans are performing. Warren Buffet put $5 billion into Goldman Sachs, and is already up about $400 million. As a home owner, how would you like to buy your loan for 5 cents on the dollar? Sorry, but you can't because it is bundled with a bunch of other mortgages in an SIV, and it may be that no one even knows who owns your mortgage now. But guys like Buffett can afford to buy the entire package of mortgages. I suppose that Buffett could still wind up losing money on his bet if Congress doesn't approve a bailout. Based on what I saw today, the Democrats would very much like to not approve a bailout because they could then blame Republicans forever for the ensuing depression, and might be able to stay in office for decades. The Democrats want to buy distressed assets at fire sale prices so that small investors will lose their money, and lots of companies will go bankrupt. Also, the government would make a lot of money since 95% of the loans are performing; this would amount to a sort of tax on investors. It will be interesting to see what Congress does. It appears to me that the government will come out OK on a bailout if they buy the paper at more than fire-sale prices, but below the actual note value. Buffett is a Democrat, and he probably knows what the Democrats in Congress are thinking, so it may be OK to stay invested since he is making a huge bet.

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