Thursday, October 16, 2008

Soros: Denmark Offers a Model Mortgage Market

There is a safe way to securitize home loans.

By George Soros

The American system of mortgage financing is broken and needs a total overhaul. Until there is a raealistic prospect of stabilizing housing prices, the value of mortgage-related securities will erode and Treasury Secretary Henry Paulson's efforts will come to naught. There are four fundamental problems with our current system of mortgage financing.

First, the business model of Government Sponsored Entities (GSEs) in which profits accrue to the private sector but risks are underwritten by the public has proven unworkable. It would be a grave mistake to preserve the GSEs in anything resembling their current form.

Second, the American style of mortgage securitization is rife with conflicts where entities that originate, securitize and service mortgages are generally not the same as those that invest in mortgage securities. As a result, the incentives to originate sound mortgages and to service them well are inadequate. No wonder that the quality of mortgages degenerated so rapidly.

Third, mortgage-backed securitizations, which were meant to reduce risk by creating geographically diversified pools of mortgages, actually increased risk by creating complex capital structures that impede the modification of mortgages in the case of default.

Finally, and most fundamentally, the American mortgages market is asymmetric. When interest rates fall and house prices rise, mortgages can be refinanced at par value, generating the mortgage equity withdrawals that fueled the housing bubble. However, when interest rates rise and house prices fall, mortgages can only be refinanced at par value even though the market price of the securitized mortgage has fallen.

To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. It remains the best performing in Europe during the current crisis. First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements.
There are no GSEs enjoying a quasimonopolistic position.

Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market. Indeed, the spread on Danish mortgage bonds is similar to the option-adjusted spread on bonds issued by the GSEs, although they carry no implicit government guarantees.

Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes.

To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.
The U.S. can emulate the Danish system with surprisingly few modifications from our current practices. What is required is transparent, standardized securities which create large and fungible pools. Today in the U.S., over half of all mortgages are securitized by Ginnie Mae, which issues standardized securities. All that is missing is allowing the borrowers to redeem their mortgages at the lower of par or market.

Because of the current havoc in the mortgage market, there is no confidence in the origination and securitization process. As a result, a government guarantee is indispensable at this time, and may be needed for the next few years. As the private sector regains its strength, the government guarantees could, and should, be gradually phased out.

How to get there from here? It will involve modifying the existing stock of mortgages, so that the principal does not exceed the current market value of the houses, and refinancing them with Danish-style loans. The modification will have to be done by servicing companies that need to be properly incentivized. Modifying mortgages that have been sliced and diced into securitizations may require legislative authorization. The virtual monopoly of the GSEs would be terminated and they would be liquidated over time.

A plan to reorganize the mortgage industry along these lines would inspire the confidence that would allow a successful recapitalization of the banking system with the help of the $700 billion package approved last week.

Mr. Soros is chairman of Soros Fund Management and the author of The New Paradigm for Financial Markets (Public Affairs, 2008).

Sunday, October 12, 2008

The end of an era... Soros on financial crisis

Friday night on the PBS weekly program, Bill Moyers Journal, Bill's guest was billionaire George Soros. Soros made his billions as a speculator and withdrew from the market quite a while back. (See former Federal Reserve Chairman Paul Volcker on that at the link highlighted above.) Republicans and others from the right don't like Soros, partly because he does not believe the free market, if left alone, will always work efficiently and partly because he funds liberal (a dirty word in rightist lexicons) causes and organizations. is one of them. He is also among those who believe global warming is the most urgent issue facing mankind.

Soros is 78 and his demeanor during the program was grave and at times quite emotional though reserved. When Moyers asked him if he thought the American Dream was dead, he shook his head and said, "Oh, no," softly and his eyes lit up slightly. But he did say that the Bush Administration was still "behind the curve" with solutions, adding that Treasury Secretary Henry Paulson was not up to the job. He criticized Paulson who came to Treasury from the Wall Street firm Goldman Sachs for being too enmeshed in the complex mathematical manipulations that had become standard among financial firms and that had led, in part, to the current breakdown.

Moyers also asked Soros, "Is this the end of capitalism?" Soros laughed gently and said something like, 'I hope not.' He did say that free market idealogues had been proven wrong, in that unregulated by government, the free market has fallen prey to its inherent weaknesses.
He added that the U.S. and the world were facing an end to an era of a certain phase of capitalism in which the global economy was based on unlimited spending by American consumers financed by cheap credit and soaring trade inbalances. Soros said this trend which has been going on for the past 25 years could not go on forever and had to come to and end.
He referred to this as the "big bubble" underlying the smaller "housing bubble." The current chaos in world markets is a result of the big bubble exploding which was "detonated" by the collapse of the housing market.

According to Soros, three things must happen to stabilize the world economy:

1. Banks must be recapitalized either privately or through government assistance.

2. Housing prices must be stabilized. Foreclosures slowed down as much as possible.
Homeowners with negative equity must me helped.

3. A new economic engine must be found to replace the endlessly expanding consumer spending by Americans which has driven the world economy over the last 25 years. Americans must learn to save and conserve energy. Capital investment and job creation could focus on development of 'green' energy instead of endless consumer spending.

For Part II of this post click here.

A ripple of hope... Remembering Bobby Kennedy

Too much and for too long, we seem to have surrendered personal excellence and community value in the mere accumulation of material things. Our gross national product now is over $800 billion a year but that gross national product, if we judge the United States of America by that, that gross national product counts air pollution and cigarette advertising and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. It counts the destruction of the Redwoods and the loss of our natural wonder in chaotic fall. It counts napalm and it counts nuclear warheads and armored cars for the police to fight the riots in the cities. It counts Whitman's rifle and Speck's knife and the television programs which glorify violence in order to sell toys to our children.

Yet this gross national product does not allow for the health of our children, the quality of their education, or the joy in their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debates, or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country.

It measures everything, in short, except that which makes life worthwhile and it can tell us everything about America except why we are proud that we are Americans.

-- Part of a speech by Sen. Robert F. Kennedy given in 1968, on his first full day of campaigning while speaking to students at the University of Kansas.

'A ripple of hope'
I first heard the above excerpt from Bobby Kennedy's speech while listening to National Public Radio on June 5, 1993, the 25th anniversary of his death. I was so moved by his words that I wrote to NPR to get a transcript of the program. I think I had to pay for it. That wasn't important to me. I wanted to remember those words. When I heard about Congressman John Lewis' recent warning to Senate John McCain about the increasingly negative tenor of his campaign and McCain's subsequent scolding of Lewis for being an alarmist, I begin to think about the 1963 Birmingham church bombing Lewis mentioned. Back then I wrote a poem about the bombing which I've kept in a folder with news stories about the incident. I got out the folder thinking I might finally put the finishing touches on the poem so I could share it; I found a copy of that NPR transcript of Bobby's speech in the folder. I read it again and begin to think of what George Soros had said on Bill Moyers' Journal about how the world financial crisis represents 'the end of an era' of rampant American consumerism which turned the engine of not just our own but the global economy.

In his beautiful speech of 40 years ago Bobby suggested a basis for the American dream that is beyond materialism, beyond owning things and the wasteful consumption of energy. I'm still not ready to put the finishing touches on my poem about the Birmingham Church bombing. But I couldn't resist reprinting his speech. I find it an appropriate reminder and encouragement for this time and the days ahead.

As for John Lewis and his warning, I agree that John McCain is no George Wallace, and I can understand why Sen. Barack Obama distanced himself from Lewis's remarks. But Obama was a boy during those awful days; Lewis was older and so was I. I remember how much hate was in the atmosphere; I remember how much we lost in the sixties. And I pray, oh God, how I pray that we never have to suffer those awful things again. Racial hatred is bad but it is not the only kind of hatred. And John Lewis is right; many people attending John McCain's political rallies are spewing hatred. I also agree with those critics of Sarah Palin who say that she is coming very close to inciting hatred in some of her speeches. Following is a short tribute to Bobby Kennedy which can be found at Home for Following the tribute is a video from 1968, that year of hope and heartbreak.

The assassination of Robert Kennedy on June 5, 1968, has never attracted the same level of public fascination and passion as the 1963 assassination of his brother, President John F. Kennedy. But, the passing of Bobby, as many affectionately called him, may have impacted our country in a more significant manner.

Robert Kennedy was unique in American politics; he reached out to the poor and disenfranchised, he reached out to working class whites, he reached out to inner city blacks, he reached out to the migrant worker - the very classes of people most politicians of that time ignored. He came from a place of privilege and money, yet passionately spoke for the victimized and the oppressed. Robert Kennedy embodied an attitude and idealism that is rare for any generation. By leading with an inspiring call to action he asked the American people of that time to support racial and educational equality, to accept environmental responsibility and to negotiate for peace in a war ravaged world. RFK asked Americans to believe that as individuals they could make a difference in the world.

Bobby understood that America's real greatness came from empowering its citizens through equal opportunities to secure a better life, but Robert Kennedy's vision for a better tomorrow was not limited to the United States. He went to Poland and Latin America to tell them that their dream of freedom was obtainable, and when South Africans suffered the tyranny of apartheid, RFK was there to say:

Each time a man stands up for an ideal or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centers of energy and daring, those ripples build a current that can sweep down the mightiest walls of oppression and resistance. - RFK

For a companion to this post click here.

Thursday, October 9, 2008

Mona Charen's 'scarf fantasy'

An open letter to the Tennessean:

Recently Kathleen Parker of the National Review, one of The Tennessean's many syndicated conservative columnists, came to her senses and admitted in print that Sarah Palin is unqualified to serve as vice-president. Meanwhile , Mona Charen, another Republican columnist The Tennessean publishes, is still grinding the GOP axe about Michelle Obama and her "jaundiced" view of the USA. (see "Michelle Obama's jaundiced view of compassionate nation," The Tennessean, Thursday, October 9, 2008, p. 13A).

It's easy to suspect she is trying to change the subject and turn attention away from McCain's huge error in judgment and his willingness to risk the well-being of the country he loves in order to win his political campaign. But face it, first ladies don't become president if their husbands' become ill or, God forbid, die in office. Vice-presidents do. McCain's reckless choice leaves our nation with the possibility that a tragically unqualified person would become our next commander-in-chief.

Charen shows her desperation (and her Party's?) by wrapping this worn out Republican saw about Michelle Obama in a bizarre fantasy about why people were so nice to her (Charen) while she was wearing a scarf! The columnist opines that the reason everyone was so nice was that they thought she was a Muslim.

Get real. No wonder this lady has trouble identifying with the concerns of Michelle Obama and other women of color.

As for her other fantasy, that all United States citizens are bending over backwards to reach out with compassion to Muslims and others who are different from them, perhaps she should talk to Juana Villegas, 33, an immigrant, with no criminal record, whom Nashville's sheriff handcuffed to her bed during labor after she was stopped and jailed recently for a traffic violation.

Finally, and this really deserves another letter, but the political caricature of Michelle Obama about which Ms. Charen's scarf fantasy was wrapped went way over the line. It reminds me of the dehumanizing caricatures of the Irish which were published in England during the Irish Famine and the equally dehumanizing caricatures of African Americans published here in the U.S. during slavery times and throughout the Jim Crow era. Shame, shame on the artist... Shame, shame on the Tennessean for publishing it.

And don't bring up that other right wing whine about "political correctness." I'm talking about respecting human dignity not political correctness. Political figures are appropriate targets for caricatures. It is not appropriate or even decent to publish demeaning caricatures of candidates' wives.

Wednesday, October 8, 2008

Dear Cremomma...Please forgive me

Dear cremomma, we certainly are coming from different places aren't we?

You have an advantage over me because I haven't seen the "televised event" which you describe. I do think "chanting" is a better word for what I was doing than "yelling." I was chanting "Obama" in a very low voice on purpose. A few of us had been chatting with Mr. Rich off camera; I gave him an Obama pin which he accepted graciously and then I teasingly suggested that he wear it. He refused politely. I think the fact that he hugged me at the end (was that on camera?) showed that he recognized and respected my heart.

What my heart was feeling was this:
the amazement and pride all of us Obama supporters had in seeing each other for the first time in such unexpected numbers in a state which our own governor has written off for McCain.

It was as if the thirst of a long lonliness had been quenched. It was a joy unseen and unobserved but something we all felt. I just wanted to testify or as my daughter said, "to represent."

Please forgive me. I do stand by what I said in my previous reply to you: All television programming has been skewed to entertainment values and the selling of image and image-related products. Values are packaged and sold like commodities and many in the entertainment media are unwitting accomplices.

When presented in that fashion values which are a matter of the heart lose their meaning and in fact become weapons we began to hurl at each other in what some people call a "Culture War."

I believe this is what many Obama supporters mean when we speak of "change." We long to get down to the "common humanity" that we all share. Your defence of young John Rich is heartfelt and noble. What I mean by "noble" is that it is selfless. But please allow me to defend myself.

I am 65 and remember watching the Vietnam War on television, sometimes during our evening meal. I also remember watching television coverage of civil rights demonstrators getting hosed by huge fire hoses, assaulted by police dogs and beaten on their heads and bodies with billy sticks or something like them. I remember when Life Magazine devoted its cover to tiny square photos of the faces of all the America servicemen who died in the war. I remember when it published photos of flag-draped coffins being unloaded at the airport on its cover. I remember when Martin Luther King Jr. was murdered in Memphis. I was working for a southern newspaper at the time; it published the news on an inside page near the bottom. I first heard his "I have a dream" speech during the television coverage after his death. I saw and heard the horror and devastation of war on television; I witnessed the civil rights movement on television and came to grips with my own country's terrible shortcomings through television.

It was very, very difficult for me to hear a young man, John Rich, sing about that old, awful, killing war as though it were a good, even glorious thing. It was very difficult for me to stand by while he lionized an old man with old ideas because he got shot down while bombing civilian and military targets in an old discredited war. Because we no longer have the draft, John Rich is in no danger of getting caught up in either the war in Iraq or the one in Afghanistan. What value, aside from entertainment value (and perhaps propaganda value), is there in his effort to "raise up" McCain, a man who glorifies war and advocates more and more warfare, as a hero? John Rich risks nothing in this song. And I am forced to wonder what kind of songs he would be writing and singing if he were subject to the draft. What kind of audience would he have if all young men (and possibly women) in the United States were subject to the draft?

The draft was abolished after the Vietnam War. Today the burdens of war are carried by a very few military families. The Bush administration has been sneaking the bodies of our dead soldiers into the country under cover of darkness without any media attention whatsoever. Until recently most Americans paid nothing but hollow rhetoric and the cost of a few flag pins for the Iraq War. We weren't even encouraged to conserve gasoline until recently. But things are changing. The current financial crisis has much to do with the limited sacrifices our people were asked to make for the endless war Bush started and McCain favors. Our war debt is owned by foreign countries most notably China. This has weakened the dollar, formerly the world's standard currency, almost beyond recognition.

And what has the media been doing while our country has been going down the tubes? Not much. Not much at all. Television which used to report the news has become an entertainment medium almost exclusively, pandering to celebrities and their fans and refusing to endanger advertising profits by focusing on news (truth). What television does best is the cheerful nonsense Harry Smith and others package up in morning shows like the one being taped Tuesday morning in front of Belmont University. This sort of media fare is as hypnotic as a narcotic drug but instead of inducing sleep it has allowed us to cultivate our own "in group" fantasies which pit us against one another and keep real life and real reality at bay.

Guess what, Cremomma? Reality is back and it's not a show on MTV or any other television channel, that is unless it is smuggled in by an outlaw or the Chairman of the Federal Reserve Board, Ben Bernanke.

Tuesday, October 7, 2008

Obama-rama in Nashville

Nashville's Obama Headquarters asked for volunteers to be a presence for the media who would be descending upon the city in advance of the presidential debate to be held at Belmont University tonight. Thinking about traffic and parking, I volunteered for the first shift: 5:30 to 8:30 a.m. We were to gather at Bongo Java, a coffeehouse across the street from the University. E-mails went out to announce a change in location but I haven't checked mine for a day.

It was after dawn when a few of us out-of-the-loop Obama volunteers got the word to move to another location. We got there in time to gather for a planned appearance by Rich of Big and Rich, the country duo, to sing his song about McCain for the CBS Morning Show. Obama supporters far outnumbered McCain people; our signs were visible in the background but we were told to keep quiet except to cheer on cue.

Most of us were astonished at the way we were being managed by the media for John McCain's benefit. Harry Smith kept mentioning the First Amendment as he admonished us to be silent while Rich sang and was being interviewed. Go figure. I was up front and kept trying to get my Obama sign into the picture but finally just moved in so close to Rich that he decided to hug me. The crowd which had been quite dissatisfied with its CBS designated role as a silent walk-on for McCain was relieved by my action.

Rich's song was "Raising McCain" and I just kept thinking about how Cain in the Bible killed his brother and when God asked him about where Abel was Cain replied to God, "Am I my brother's keeper?" Later on during an impromptu interview with Ann Payne, a reporter for the Tennessean, I brought that up as an appropriate way to portray the so-called maverick who wants to tax the poor and give the rich as many tax breaks as possible: "Just look at what Cain did to his brother?"

There were so many beautiful Obama people there including a lovely couple from Brentwood who recently moved here from Japan with the Nissan corporation which moved its headquarters here. I also found a soul mate, Keren or KB, a beautiful African American woman who was wearing the best Obama shirt I've seen; it featured portraits of Rosa Parks, Madame C.J. Walker, Harriet Tubman, Sojourner Truth and Coretta Scott King circling a portrait of Obama, larger in size and sort of golden hued. Later I met Tony, a young grandfather, wearing another beautiful Obama shirt. Another young man had on a T-shirt showing a muscular Obamish Kent Clark busting out as Superman. Along the way I got to meet Bob Schieffer who preceded Katie Couric as CBS anchor and now hosts a CBS news show Sunday mornings. A member of his staff even took my picture with him.

It was wonderful to be with so many beautiful, hopeful people...I'm so glad I was invited to be a part of the early morning Obama crowd.