I had to think long and hard about who the Stunad of the Year or “Stewie” should be. Actually it isn’t really that hard. It would be easy to put an individual in this position, but it would not be fair. There were so many deserving candidates, but I am not picking a person. I am picking a collapsing economic system. You may remember it as capitalism.
The abusers of capitalism are the winners of the Stewie for 2008. There were just too many to mention. It would be too easy to pick someone like Bernard Madoff. But, the thing is, as disgusting of a person that he is; I cannot really say that he is entirely to blame. I blame the investors and the SEC (Securities and Exchange Commission), more than Madoff. To quote Mike McDermott from the movie Rounders, “Listen, here’s the thing. If you can’t spot the sucker in the first half hour at the table, then you ARE the sucker.” I doubt Mr. Madoff held a gun to each investor and said, “If you don’t invest with me; I will blow out your brains.” Investors saw ridiculous returns and either did not do the research or did not care to know how or why these returns were so high. Naturally, you go out and you tell your friends to invest. So, when analysts did their due diligence and could not replicate the returns of Madoff’s hedge funds, who really cares, you are making money, and that clouds our judgment. Now, everyone points a finger at Madoff, and rightly so, what he did was complete fraud. Just remember when you point a finger, three point back at you. But, if the investors did their homework and the SEC properly investigated this Ponzi Scheme, this would have never gotten as far as it did. Our need for Greed, made old school principles of making money, a thing of the past. Oh, what a tangled web weave, when we first practice to deceive.
You are far from alone, Bernie.
An Unreal Real Estate Market.
The biggest lie you will ever hear is that you can’t lose money in real estate. Try saying that to someone today. Say that to someone who purchased property in the last 4 years and ask if they can sell back their property for more than what they paid for it. Those who made money flipping properties this decade are either lucky to be out of the game, or flipping out due to this crisis.
For the most part, yes, real estate is a solid investment. I will not argue that. Over the long term and if you can time the market appropriately you can make a nice profit. But over the last decade, I kept hearing, I want to get in on real estate while the market is hot. I could not run for the hills fast enough. It is always best to time a market, and the time to be in on a market is usually when it is not too popular. If a market is too popular and there is too much activity driving prices to levels where they do not belong, you need to stay on the sidelines.
Banks, mortgage companies, sharks were competing to give people a chance at the American Dream. The American Dream in their eyes was not home ownership, but a change to be highly leveraged. Being leveraged is just a fancy term for borrowing more than your equity. If you have a 20:1 ratio, that means that for every 20 dollars in debt you have, you have 1 dollar in equity to back that up. I know that there are those who want to blame the banks and the mortgage companies for coming up with these new ways to entice people in real estate. The terms “interest only” and “subprime” were introduced into society. These were terms that should have never gotten a chance to become household names, but boy they sure did. Over $600 billion is involved in subprime mortgages. 43% of those borrowers did not have a penny down on the home. While, I certainly do not agree with the way these mortgages were sold; I can only fault the banks so much. Once again, I do not think anyone held a gun to a person who did not have favorable credit and say you must sign this mortgage. They were duped, but if you know you have debt and that you have defaulted on car loans, credit cards, etc., you probably should not be anywhere near the housing market in the first place. Personally, I have held back on owning a home because I knew I could not afford it at the time.
The Credit Crisis.
Bear Stearns (began in 1923), Lehman Brothers (since 1850), Washington Mutual (since 1889), gone. Nice to know you. A combined 362 years of business, that seemed to vanquish in about a week. Merril Lynch, Wachovia, Citigroup, Morgan Stanley, AIG, etc., needed a life raft bigger than the Queen Mary to stay afloat.
These banks put so much of their risk into some the riskiest investments the world will ever know. So, the subprime mortgages started to fail, but don’t worry the banks had the credit default swaps to rely on. Oops. Once Lehman Brothers defaulted, the protection went away, and the bank was stuck holding the debt that no longer had insurance and had very little value. These were risks that should have been seen a mile away, and because of the need for greed, multibillion dollar companies fell faster than dominoes and were re-sold for pennies of their actual worth at one time. But, the orchestrators of these deals, their feet are not put to the fire. They were able to jump ship and sail away on their golden parachutes. In fact, these companies were rewarded with $700 billion of our own money to bail them out and keep our economy from filing chapter 11. And now, since some of the stable banks have received the money, they do not want to lend it out!
The Oil Crisis.
Here is another myth. There was never an oil crisis. The reason oil prices go up and down is based on word, speculation. The United States itself, has over 2 trillion gallons of oil in reserve. Demand did increase as well as inflation, but it was not due to supply, but do to decreased production. Those lovely countries in OPEC, like Iran, Saudi Arabia, Venezuela, etc., know this all too well and they will try as hard as they can to reduce production and keep the world dependent on their oil as their only pathway to profitability. These countries are not stupid, they will not give the oil away. They want to hold the rich nations by the strings. Well, hopefully their days of control are numbered and that the alternative sources we hear so much about will become more prominent in the years to come. Having these countries oversee oil production is equivalent to having Michael Jackson as your kids’ babysitter. One thing good that came out of 2008, was that even with OPEC reducing production the price oil fell sharply and gas prices were cut in half.
The Auto Bailout.
We bailed out our struggling car companies. Companies that lost market share and have proven to be less competitive. The government did not come to airlines rescue, the steel industry, the textile mills, the necessary afterschool sports and activities that closed, and so many others never got a chance or a dollar to state their cases.
GM, Ford and Chrysler will be back to Washington for more money someday; I do not think that is even up for debate. One or more than one will make it to bankruptcy very shortly, it is only a matter of time. What should happen, is they should merge all three into one. Take the best parts of the three, take the quality in Ford’s trucks, the good sales of the Chrysler’s Jeep and minivan line, the GM cars that are over 30 miles per gallon, and create one car company that can be powerful and profitable. The number of overall car models is far too many to make decent profits. If you look at Toyota or Nissan, do they have more than six models of cars/trucks? Bailing out the American car manufacturers only allows their practices to continue without looking at the real problems. Unfortunately, reducing the industry will cost jobs, but maybe those people who had jobs in the auto industry will come to realize that they should not have been so dependent on the industry and will learn to develop new skills and find new opportunities.
The bailout comes at a cost more expensive than $700 billion, or any amount of money.
The cost is that our government, “Big Brother” will have more of a stake in what we used to call the free market system. The blame lies on we the people, and our need for greed and that makes the abusers of capitalism winners of the inaugural 2008 Stewie of the Year Award. I hope this winner will never repeat as champion. In 2009, I think there are opportunities to buy stocks at uncommon levels, but we need to remember fundamentals. I will get into that in a later column. The Stewie of the Week will return on Thursdays.