BUZ LIVINGSTON: Crazy Things Going On

Buz Livingston

A leading cause of the Great Financial Collapse was undocumented home loans from borrowers with questionable credit. These mortgages were bundled into unregulated debt instruments, stamped with AAA credit ratings and sold as super-safe bonds. Lenders made all the profit, and someone else took all the risk. Said debt obligations were divvied up esoterically then traded as derivatives in lightly regulated markets. All was well according to the Gospel of Ayn Rand; markets regulate themselves. She was wrong; they adjust; there is a difference.

Now the Wall Street Journal reports big money managers, like Pimco, Neuberger Berman and Blackstone LP, propose resurrecting the first step in this process, “low-doc” or Alt-A loans. Continued low yields from fixed income create a demand for higher returns. Insanity is doing the same thing over and over but expecting different results. Prediction: This won’t end well.

Dodd-Frank financial overhaul legislation requires lenders to keep a percentage of the mortgages they make. Dodd-Frank also allows borrowers to sue any lender who provides an Alt-A loan. Congress passed Dodd-Frank, and another Congress could make changes under the rationale of job creation, less regulation or home ownership. Quicken Loans, a leading consumer lender, cited increased regulations as a rationale for staying away from Alt-A loans. To me it seems odd, there have to be regulations against lending money to someone with questionable credit. Be careful what you wish for because it might come true.

Derivatives, like the ones mentioned earlier, have been around for centuries. For instance, millers often buy wheat before harvest thus locking in a price. A miller could offset a price increase by a “futures” contract. Selling a mortgage to investors via a derivative frees up money for additional home loans. Unfortunately, another chapter in the continuing saga of low rates is investors using derivatives to enhance return. Short-term bonds are super safe, allegedly. However, since 2015, too big to fail banks, the usual suspects, have issued over 300 “structured notes” with returns tied to oil prices.

What could possibly go wrong?

Chasing yield means taking risk and if you don’t know who is taking the risk, it’s probably you. These notes provide the opportunity for double-digit returns, pretty sweet for a short-term investment. However, the upside is capped and, unfortunately, a condition not allowed for the downside. With the collapse in oil prices, these investments have headed south. Complicating matters, no one wants to buy them. One note, issued by HSBC and Morgan Stanley, will break-even only if oil company shares increase by over thirty percent by August.

Whether they like football or not, taxpayers fork over one billion dollars annually (that’s one thousand million dollars) in tax subsidies for billionaire NFL team owners. Local taxpayers along with some state revenue subsidize stadiums. Congress could stop this giveaway by ending copyright protection for any sports event held in a publicly financed facility. If they don’t, take Lombardi’s name off the championship trophy and call it instead the Crony Capitalism Trophy. Imagine how many miles of asphalt a billion dollars covers.

While you can’t always get what you want Buz Livingston, CFP can help you figure out what you need but don’t consider this personal advice. For specific recommendations visit us online at livingstonfinancial.net or come by our office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230. Follow us on Twitter @BuzLivingston.