Pre:TLDR - it’s super long, if you aren’t full retard and want to understand this, read it. If you don’t have the brainpower, there a TLDR.
I'm a Loan Officer for one of the larger retail lenders. Here’s an overview of how the Fed gone and fucked over mortgage lenders.
Credit for the content below should go to Barry Habib of MBS Highway.
THE CORONAVIRUS MELTDOWN The current coronavirus crisis is having a critical impact on the mortgage industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that's required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.
HERES HOW THE MORTGAGE MARKET WORKS Let's begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor (Fannie/Freddie/Ginnie), paying taxes and insurance, and answering questions, etc. While they maintain or "service" the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae, Freddie Mac, or Ginnie Mae. The loan then gets placed in a large bundle, which is put in the hands of an Investment Banker. The Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts.
The Servicer's role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or "strip" equal to about 30 basis points (bps) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30 bps annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money the Servicer makes. In many cases, the Servicer may want to use leverage to increase their level of income. Therefore, they may often finance half the cost of acquiring the loan and pay the rest in cash.
SERVICER DILEMMA As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio.
But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.
I'M FROM THE GOVERNMENT AND I'M HERE TO HELP In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility.
But what has not been yet contemplated is the fact that a borrower who does not make their first mortgage payment causes the loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.
MARK TO MARKET This week - Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.
UNINTENDED CONSEQUENCES The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a loan is nothing more than a lender promising to hold an interest rate for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes.
If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.
Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.
But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls are staggering. They run in the tens of millions of Dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.
Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing.
EVEN STEPHEN KING COULD NOT HAVE SCRIPTED THIS It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived. Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.
WHAT NEEDS TO BE DONE NOW Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same. We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.
So, that’s what’s going on - I’d love some input on the best way to use this info for trades. Personally I think that mid-sized loan servicers with minimal diversity are most at risk. Quicken isn't publicly traded, Wells Fargo is too big for their mortgage servicing alone to cripple them.
Edit: adding this - There are three main issues: 1.) margin call 2.) inability to sell recently originated loans with a forbearance in place prior to the first payment 3.) a servicer still needs to pay Fannie/Freddie/Ginnie even if someone with an existing loan is in forbearance
These can combine to be a huge cash burn. The fix for #1 is just that the Fed stops buying MBS but the second two require legislation.
So, what servicers are at risk?
EDIT MADE: I’m an idiot and the original post contained some figures for commercial MBS servicing by banks.
Originally I proposed a ticker weighted in CMBS and someone pointed out I’m an idiot. A couple people have commented COOP - Mr. Cooper has a $548B servicing portfolio, which is massive. They aren’t a bank and are solely a mortgage lendeservicer, so I do like that play.
So, 10/16 COOP 5p
TL;DR: If you want to know details of how residential mortgage loan servicers are at high risk due to CARES Act, theres about 20 mins of reading. Or, just know they are at high risk unless the government fixes some shit they broke.
submitted by Just finished watching Tuesday's (longest ever?) episode of Dark.
The show ran just short of two hours, with thirteen matches on tap. Since Dynamite isn't on until Thursday this week, more action offered to tide you over.
Commentary - Veda Scott, Taz, Tony Schiavone
1) Best Friends vs. Storm Thomas & Demetri Jackson
A new found anger on display with Best Friends starts the show against two newcomers. Storm Thomas was solid but didn't stand out. Demetri Jackson had a fluid sequence of offense early that shows he's got some skills! He also avoided a bad bump by just tucking his head under in time from Trent's planking rope suplex. Trent did most of the heavy lifting in this one, scowling through much of his attacks. He's obviously still upset over his mom's van. Back-to-back low piledrivers on Jackson allowed Chuck Taylor to get the pin. Orange Cassidy approved. Good workout for all involved.
2) Shawn Spears vs. Jessy Sorensen
Two brutes beat the crap out of each other. That sums up this slugfest of strong style, little flash competitors. Spears ultimately hits his Death Valley Driver to secure the win. And yes, he sadistically adds some post match punishment. Spears hits Sorensen's "surgically repaired neck" with a deliberate strike from his loaded left glove. Intro by Justin Roberts made sure to emphasize "legendary Four Horseman member" Tully Blanchard, keeping the tease alive for a new version. Subtle cool when Tully removes his facemask at this moment, inadvertently mimicking an outlaw from the old West like a true horseman would.
3) Red Velvet vs. Mel
Mel's mean stare usually means bad things for her opponents. On the receiving end in this dull match was Red Velvet. Mel's size advantage was glaringly apparent. She "rag dolled" Red with a choke slam to win easily. Mel has a "Lance Archer" assassin vibe about her. She needs a little more polish in the ring, but can be a force in the women's division.
4) Lance Archer vs. D3
COMMENTARY MOMENTS
Veda Scott, "I talked to D3 before this match. I'm glad because I don't think he'll be available after it." (Awesome!)
Taz, "D3 might be D.O.A. in a sec." (!) and, "He almost caught rain on that chokeslam."
Archer continues his "Everybody Dies" campaign (second only to MJF's #NotMyChampion campaign) by tossing around Italian newbie D3. Once again, size difference is almost uncomfortable to watch - I said almost! Archer's push in AEW seems to be stuck in limbo since his TNT Championship Tournament run ended. I wonder what storyline he wants to pursue and against whom in the short term. I would like to see him have matches against the likes of Wardlow, Cage, and Hager. But with no audience in attendance yet, that would be wasted for pop. They better do something with him soon as this squash match run is getting old.
5) Luther & Serpentico vs. The Initiative
Last week, Cutler's "polyhedral die" roll landed on 15. This week, it landed on a symbol (just above an upside down 14). Is there a non-number symbol on the die? I thought it was just 1-thru-20. I'm sure someone can comment below and inform the masses!
Fun match yet again involving our loveable losers The Initiative (Peter Avalon, Brandon Cutler). Avalon emphatically swore (in Monday's "Being The Elite" episode) to do whatever it takes to win! He almost secures that win with a rollup on Luther but only got the "two-and-a-half" count. Luther kept using his partner Serpentico as a bodyslam accent on top of their opponents several times. I'm not sure Serpentico enjoyed that. Avalon's obessesion to get a win comes back to haunt him as he mistakenly strikes Cutler with "the book". Luther holds a dazed Cutler (a la Jim Neidhart of the Hart Foundation) as Serpentico leaps and hits a double-knee to Cutler's face on the way down. 1-2-3. The Intiative's tag streak continues, now 0-and-11. Booooo!
6) Nyla Rose vs KiLynn King
Rose and manager Vicki Guerrero come out quite confident as KiLynn King awaits. King is getting many viewers' attention each time she performs. Her sleek build, and long legs lend themselves well to her in-ring style. Her spin kick resembles that of Luchasaurus. She even gets a momentary upper-hand on Rose when she hits a Crucifix (or Samoan drop) on Rose for a close two-count. But ultimately she falls, thanks in no small part to Vicki. As if Rose needs outside interference to win, Guerrero shoves King from the top rope as she set up to jump for a move. Rose distracted referee Aubrey Edwards long enough to let that happen. Rose then hit her devastating power bomb for the pin. Aubrey! Turn around next time! Sheesh.
Post match, Vicki gets on the mic (oh no) to coin their alliance, "The Vicious Vixens". Viva la Vixens!
7) Billy and Austin Gunn vs. Frank Stone & Baron Black
Not too much to say on this match. The Gunn Club prevailed without dominating their opponents much. Frank Stone looks like an up and comer with good power. Austin Gunn nailed his "quick draw" tuck suplex off the ropes on Black for the pinfall. Not sure where the Gunn Club is going yet, stay tuned?
8) Penelope Ford vs. Heather Monroe
A whole lotta platinum blonde goin' on in this match. Ford is strong in her offense yet again. Her opponent, Heather Monroe, the "Killer Bae" in Championship Wrestling From Hollywood, is used to being top of the class. In AEW, she's just getting started. She shows enough in this match on the heels of her Dynamite match against Shida to have confidence. Ford hits her "FisherLady Buster" (thanks Taz!) for the pinfall. (Heather - just lift your free shoulder! No? Why? LOL).Newsflash - Kip Sabian is not only Ford's boyfriend, but also her #1 fanboy.
9) Santana & Ortiz vs. Metro Brothers (Chris & J.C.)
Proud and Powerful prevail easily with a thorough dismantling of debuting team Metro Brothers. Highlight of the match was Santana's triple suplex sequence without letting his opponent go during it. They used the same power bomb into a facekick finish for the pinfall. Post match (you knew it was coming), Best Friends came flying out to throw hands with them. Out on the floor, through the ringside table, and up the ramp to the parking lot is where they traded blows. No love lost. I was hoping for a chair shot from Best Friends to repay PnP for the van. Not yet!
10) Ricky Starks vs. Shawn Dean
Team Taz in the ring represented by Absolute Ricky Starks. His back is still showing signs of Darby Allin's tacked skateboard. Ouch. Shawn Dean keeps getting good opponents in his matches and shows a bit more each time out, as he does again here. But in the end, Starks hits his rochambeau reverse face down suplex for the win. Strong pin position on display with his full arm extension and weight pressed down on Dean. Excellent technique Ricky! Love the expression too.
11) Jake Hager vs. Marko Stunt
I thought wrestling always had weight classes. No? Oh, AMATEUR wrestling - got it.
Marko Stunt (120lbs.!), why do you sign these match contracts? Jake Hagar? Oh no. And why are your tag partners Luchasaurus and Jungle Boy never out to support your solo matches? You're always out to support their matches. Mmmmm?
Jake doesn't seem eager and confirms with referee Bryce Remsberg that this is a mismatch. He even lets Stunt headlock him once before telling Marko to leave. "You don't belong in this ring with me." Stunt kicks the bottom rope to nutjob Hagar in response. Stunt also does his floss dance to further infuriate the MMA man.
That's it. Hagar proceeds to treat Marko like any other man in his way and destroys him. Even chokes him out for the submission win. Oh, NOW Jungle Boy and Luchasaurus come from the back - a little late, guys! "Don't do it, he's a kid," Luchasaurus pleads. Hagar still knees Stunt into next week before fleeing. Dang you Inner Circle!
12) Frankie Kazarian vs. Kip Sabian
I was caught off guard with the finish of this one. Members of SCU have been marginalized recently from the tag team division. Scorpio Sky is "concentrating on his singles career". Daniels and Kazarian have been in singles matches separately. And their tag team isn't even in the Gauntlet match this Thursday on Dynamite. I was fully expecting Sabian to take this one, especially with Ford's interference prevalent. Sabian should have pinned Kazarian with a feet-on-ropes added rollup. But surprisingly, Kaz kicked out. Then, he countered Sabian's suplex attempt into a "version of a Scorpion Death Drop" (thanks Taz!) to gain the pinfall. Great form on the winning pin with Kaz close-fisted around Sabian's shoulders and pressed down fiercely atop him. Frankie also gets a closeup shot to say he's "tired of being overlooked, and under appreciated", I think. Respect. New storyline needed for these guys.
13) Sonny Kiss & Joey Janela vs. The Hybrid 2
The main event lived up to its top billing. Both of these tag teams are fluid and quick throughout the multi-move bumps and tumbles. Highlights include Angelico's low ground, multi-limb leg tie-up of Kiss. That was great, and is worthy of a submission win in future for sure! Janela's 1-on-2 move from the top rope also looked sensational. He leaps into a reverse neckbreaker on Angelico, who inadvertently DDTs Evans (who was stuck in his gut after Janela threw him there).
Agonizingly, Kiss goes to the top rope one too many times and is punched silly by Angleico. Evans retrieves Kiss from the top buckle, and backslides him into an inverted spider web clamping pin. Excellent form, and greatly believable.
Super match for all four performers.
Dynamite at 8pm on Thursday night! Take care. [end]
submitted by I was just alerted that my post from 7 years ago had a broken link.
https://rbcpa.com//wp-content/uploads/2016/12/Notes_To_Margin_of_Safety.pdf I posted my entire notes, quite long, and I think the link would provide an easier view.
Notes To The Book “Margin Of Safety” Author: Seth Klarman 1991 Prepared by: Ronald R. Redfield, CPA, PFS According to
www.wikipedia.com "Margin of Safety – Risk-Averse Value Investing Strategies for the Thoughtful Investor" is a name of a book written by Seth A. Klarman, a successful value investor and President of the Baupost Group, an investment firm in Boston. This book is no longer published and sometimes can be found on eBay for more than $1000 (some consider it a collectible item). These notes are hardly all encompassing. These are notes I would find helpful for me, as a money manager. I do not mention Klarman’s important premise of looking at investments as “fractional ownerships.” I don’t mention things like that in these notes, as I am already tuned into those concepts, and do not need a reminder. Hence a reader of these notes, should read the book on their own, and get their own information from it. I found this book at several libraries. One awsome library I went to was the New York Public Library for Science, Business and Industry.
http://www.nypl.org/research/sibl/index.html Throughout this paper you will see items in “quote marks.” The quotes exclusively represent direct quotes of Seth Klarman, from the book. As I read this book, and through completion, I felt fortunate that I have been following most of his philosophies for many years. I am not comparing myself to Klarman, not at all. How could I ever compare myself to the greats of Klarman, Buffett, Whitman etal?
What I did experience via this reading was a confirmation of my style and discipline. This book really put together and confirmed to me, so many of the philosophies and methods which I have been using for many years. These notes are a means for me to look back, and feel my roots every so often. At times in these notes, I have added sections which I have found appropriate in my workings.
Introduction “This book alone will not turn anyone into a successful value investor.
Value investing requires a great deal of hard work, unusually strict discipline
and a long-term investment horizon.”
“This book is a blueprint that, if carefully followed, offers a good possibility
of investment successes with limited risk.”
Understand why things work. Memorizing formulas give the appearance of
competence. Klarman describes the book as one about “thinking about
investing.”
I interpret much of the introduction of the book, as to not actively buy and
sell investments, but to demonstrate an “ability to make long-term
investment decisions based on business fundamentals.” As I completed the
book, I realize that Klarman does not embrace the long term approach in the
same fashion I do. Yet, the key is to always determine if value still exists.
Value is factored in with tax costs and other costs.
Fight the crowd. I think what Klarman is saying is that it is warm and fuzzy
in the middle of crowds. You do not need to be warm and fuzzy with
investing.
Stay unemotional in business and investing!
Study the behavior of investors and speculators. Their actions “often
inadvertently result in the creation of opportunities for value investors.”
“The most beneficial time to be a value investor is when the market is
falling.” “Value investors invest with a margin of safety that protects from
large losses in declining markets.” I have only begun the book, but am
curious as to how any value investor could have stayed out of the way of
1973 –1974 bear market. Some would argue that Buffett exited the business
during this period. Yet, it is my understanding, and I could be wrong, that
Berkshire shares took a big drop in that period. Also, Buffett referred his
investors who were leaving the partnership to Sequoia Fund. Sequoia Fund
is a long term value investment mutual fund. They also had a horrendous
time during the 1973 –1974 massacre.
“Mark Twain said that there are two times in a man’s life when he should
not speculate: when he can’t afford it and when he can.”
“Investors in a stock expect to profit in at least one of three possible ways:
a. From free cash flow generated by the underlying business, which
will eventually be reflected in a higher share price or distributed as
dividends.
b. From an increase in the multiple that investors are willing to pay
for the underlying business as reflected in a higher share price.
c. Or by narrowing of the gap between share price and underlying
business value.”
“Speculators are obsessed with predicting – guessing the direction of
prices.”
“Value investors pay attention to financial reality in making their investment
decisions.”
He discusses what could happen if investors lost favor with liquid treasuries,
and if indeed they became illiquid. All investors could run for the door at
once.
“Investing is serious business, not entertainment.”
Understand the difference between an investment and a collectible. An
investment is one, which will eventually be able to produce cash flow.
“Successful investors tend to be unemotional, allowing the greed of others to
play into their hands. By having confidence in their own analysis and
judgment, they respond to market forces not with blind emotion but with
calculated reason.”
He discusses Mr. Market. He mentions when a price of a stock declines
with no apparent reason, most investors become concerned. They worry that
there is information out there, which they are not privy to. Heck, I am going
through this now with a position that is thinly traded, and sometimes I think
I am the only purchaser out there. He describes how the investor begins to
second-guess him or herself. He mentions it is easy to panic and just sell.
He goes onto to write, “Yet, if the security were truly a bargain when it was
purchased, the rationale course of action would be to take advantage of this
even better bargain and buy more.”
Don’t confuse the company’s performance in the stock market with the real
performance of the underlying business.
“Think for yourself and don’t let the market direct you.”
“Security prices sometimes fluctuate, not based on any apparent changes in
reality, but on changes in investor perception.” This could be helpful in my
research of the 1973 – 1974 period. As I study that era, it looks as though
price earnings ratios contracted for no real apparent reason. Many think that
the price of oil and interest rates sky rocketed, but according to my research,
that was not until later in the decade.
He discusses the good and bad of Wall Street. He identifies how Wall Street
is slanted towards the bullish side. The reason being that bullishness
generates fees via offerings, 401k’s, floating of debt, etc. etc. One of the
sections is titled, “Financial Market Innovations Are Good for Wall Street
But Bad for Clients.” As I read this, I was wondering if the “pay option
mortgages,” which are being offered by many lenders, are one of these
products. These negative amortization and adjustable mortgages have been
around for 25 years. Yet, they have not proliferated the marketplace in the
past as much as they have the last several years. Lenders such as
Countrywide, GoldenWest Financial and First Federal Financial have been
using these riskier mortgages as a typical type of loan in 2005 and 2006.
“Investors must recognize that the early success of an innovation is not a
reliable indicator of its ultimate merit.” “Although the benefits are apparent
from the start, it takes longer for the problems to surface.” “What appears
to be new and improved today may prove to be flawed or even fallacious
tomorrow.”
“The eventual market saturation of Wall Street fads coincides with a cooling
of investor enthusiasm. When a particular sector is in vogue, success is a
self-fulfilling prophecy. As buyers bid up prices, they help to justify their
original enthusiasm. When prices peak and start to decline, however, the
downward movement can also become self-fulfilling. Not only do buyers
stop buying, they actually become sellers, aggravating the oversupply
problem that marks the peak of every fad.”
He later writes about investment fads. “All market fads come to an end.”
He clarifies, “It is only fair to note that it is not easy to distinguish an
investment fad from a real business trend.”
"You probably would not choose to dine at a restaurant whose chef always
ate elsewhere. You should be no more satisfied with a money manager who
does not eat his or her own cooking." Just to reiterate, I do eat my own
cooking, and I don’t “dine out” when it comes to investing.
“An investor’s time is required both to monitor the current holdings and to
investigate potential new investments. Since most money managers are
always looking for additional assets to manage, however, they spend
considerable time meeting with prospective clients in addition to
handholding current clientele. It is ironic that all clients, Present and
potential, would probably be financially better off if none of them spent time
with money managers, but a free-rider problem exists in that each client
feels justified in requesting periodic meetings. No single meeting places an
intolerable burden on a money manager’s time; cumulatively, however, the
hours diverted to marketing can take a toll on investment results.”
“The largest thrift owners of junk bonds – Columbia Savings and Loan,
CenTrust Savings, Imperial Savings and Loan, Lincoln Savings and Loan
and Far West Financial, were either insolvent of on the brink of insolvency
by the end of 1990. Most of these institutions had grown rapidly through
brokered deposits for the sole purpose of investing the proceeds in junk
bonds and other risky assets.”
I personally suspect that the same will be said of the aggressive mortgage
lenders of 2005 – 2006. I have looked back at my files of 1st quarter 1980
Value Line for a few of these companies mentioned above. Here are some
notes on one of the companies I found.
Far West Financial: Rated C++ for financial strength. In 1979 it was
selling for 5/% of book value. “The yield-cost spread is under pressure.”
“Lending is likely to decline sharply in 1980.” “Far West’s earnings are
likely to sink 30 – 35% in 1980. Reasons: The deteriorating margin between
yield on earning assets and the cost of money, less loan fee income…” Keep
in mind that the stock price rose around 400% from 1974 – 1979. From
1968 – 1972 the P/E ratio was in a range from 11 –17. From 1973 through
1979 the P/E ratio was in a range from 3.3 – 8.1. It would be interesting for
me to look at the 1990 – 1992 Value Lines of the same companies.
A Value Investment Philosophy: “One of the recurrent themes of this book is that the future is unpredictable.”
“The river may overflow its banks only once or twice in a century, but you
still buy flood insurance.” “Investors must be prepared for any eventuality.”
He describes that an investor looking for a specific return over time, does
not make that goal achievable. “Targeting investment returns leads investors
to focus on potential upside rather on downside risk.” “Rather than targeting
a desired rate of return, even an eminently reasonable one, investors should
target risk.”
Value Investing: The Importance of a Margin of Safety” “Value investing is the discipline of buying securities at a significant
discount from their current underlying values and holding them until more of
their value is realized. The element of the bargain is the key to the process.”
“The greatest challenge for value investors is maintaining the required
discipline. Being a value investor usually means standing apart from the
crowd, challenging conventional wisdom, and opposing the prevailing
investment winds. It can be a lonely undertaking. A value investor may
experience poor, even horrendous, performance compared with that of other
investors or the market as a whole during prolonged periods of market
overvaluation.”
“Value investors are students of the game; they learn from every pitch, those
at which they swing and those they let pass by. They are not influenced by
the way others are performing; they are motivated only by their own results.
He discusses that value investors have “infinite patience.”
He discusses that value investors will not invest in companies that they don’t
understand. He discusses how value investors typically will not own
technology companies for this reason. Warren Buffett has stated this as the
reason as to why he does not own any technology companies. As a side
note, I do believe that at some point, Berkshire will take a sizable position in
Microsoft ($24.31 5/1/06). Klarman mentions that many also shun
commercial banks and property and casualty companies. The reasons being
that they have unanalyzable assets. Keep in mind that Berkshire Hathaway
(Warren Buffett is the majority shareholder) is basically in the property and
casualty business.
“For a value investor a pitch must not only be in the strike zone, it must be
in his “sweet spot.”” “Above all, investors must always avoid swinging at
bad pitches.”
He goes onto discuss that determining value is not a science. A competent
investor cannot have all the facts, know all the answers or all the questions,
and most investments are dependent on outcomes that cannot be foreseen.
“Value investing can work very well in an inflationary environment.” I
wonder if the inverse is true? Are we in a soon to be deflationary
environment for real estate? I think so. Sure enough he discusses
deflationary environments. He explains how deflation is “a dagger to the
heart of value investing.” He explains that it is hardly fun for any type of
investor. He explains that value investors should worry about declining
business values. Yet, here is what he said value investors should do in this
environment.”
a. “Investors can not predict when business values will rise or fall,
valuation should always be performed conservatively, giving
considerable weight to worst-case liquidation value and other
methods.”
b. Investors fearing deflation could demand a greater discount than
usual. “Probably let more pitches go by.”
c. Deflation should give greater importance to the investment time
frame.
“A margin of safety is achieved when securities are purchased at prices
sufficiently below underlying value to allow for human error, bad luck, or
extreme volatility in a complex, unpredictable and rapidly changing world.”
“The problem with intangible assets, I believe, is that they hold little or no
margin of safety.” He describes how tangible assets might have alternate
uses, hence providing a margin of safety. He does explain how Buffett
recognizes the value of intangibles.
“Investors should pay attention not only to whether but also to why current
holdings are undervalued.” He explains to remember the reason you bought
the investment, and if that no longer holds true, then sell the investment.
He tells the reader to look for catalysts, which might assist in adding value.
He looks for companies with good management and insider ownership
(“personal financial stake in the business.”)
“Diversify your holdings and hedge when it is financially attractive to do
so.”
He explains that adversity and uncertainty create opportunity.
“A market downturn is the true test of an investment philosophy.”
“Value investing is, in effect, predicated on the proposition the efficientmarket (EMT) hypothesis is frequently wrong.” He explains that market
pricing is more efficient with larger capitalization companies.
“Beware of Value Pretenders”
This means, watch out for the misuse of value investing. He explains that
these pretenders came about via the successes of Michael Price, Buffett,
Max Heine and the Sequoia Fund. He labels these people as value
chameleons, and states that they are failing to achieve a margin of safety for
their clients. He claims these investors suffered substantial losses in 1990. I
find this section difficult. For one, the book was published in 1991,
certainly not a long enough time to comment on investments of 1990. Also,
he doesn’t mention the broad based declines of 1973 – 1974
“Value investing is simple to understand but difficult to implement.” “The
hard part is discipline, patience and judgment.” Wait for the fat pitch.
“At the Root of a Value Investment Philosophy”
Value investors look for absolute performance, not relative performance.
They look more long term. They are willing to hold cash reserves when no
bargains are available. Value investors focus on risk as well as returns. He
discusses that the greater the risk, does not necessarily mean the greater the
return. He feels that risk erodes returns because of losses. Price creates
return, not risk.
He defines risk as, “ both the probability and the potential of loss.” An
investor can counteract risk by diversification, hedging (when appropriate)
and invest with a margin of safety.
He eloquently discusses the following, “The trick of successful investors is
to sell when they want to, not when they have to. Investors who may need
to sell should not own marketable securities other than U.S. Treasury Bills.”
Warning, warning , warning. Eye opener next. “The most important
determinant of whether investors will incur opportunity cost is whether or
not part of their portfolios are held in cash.” “Maintaining moderate cash
balances or owning securities that periodically throw off appreciable cash is
likely to reduce the number of foregone opportunities.”
“The primary goal of value investors is to avoid losing money.” He
describes the 3 elements of a value-investment strategy.
a. A bottoms up approach, searching via fundamental analysis.
b. Absolute performance strategy.
c. Pay attention to risk.
“The Art of Business Valuation” He explains that NPV and IRR are great tools for summarizing data. He
explains they can be misleading unless the flows are contractually
determined, and when all payments are received when due. He talks about
the adage, “garbage in, garbage out.” As a side note, Milford Blonsky, CPA
during the 1970’s through the mid 1990’s, taught me that with frequency.
Klarman believes that investments have a range of values, and not a precise
value.
He discusses 3 tools of business valuation”
a. Net Present Value (NPV) analysis. “NPV is the discounted
value of all future cash flows that the business is expected to generate.
He describes the importance of avoiding market comparables, for
obvious reasons. Use this method when earnings are reasonably
predictable and a discount rate can be chosen. This is often a guessing
game. Things can go wrong, things change. Even management can’t
predict changes. “An irresolvable contradiction exists: to perform
present value analysis, you must predict the future, yet the future is
reliably predictable.” He explains that this should be dealt with using
“conservatism.”
He discusses choosing a discount rate. He states, “A discount rate is, in
effect, the rate of interest that would make man investor indifferent between
present and future dollars.” He mentions that there is no single correct
discount rate and there is no precise way to choose one. He explains that
some investors use a generic round number, like 10%. He claims it is an
easy round number, but not necessarily the best choice. He emphasizes to be
conservative when choosing the discount rate. The less the risk of the
investment, the less the time frame, the less the discount rate should be. He
explains, “Depending on the timing and magnitude of the cash flows, even
modest differences in the discount rate can have a considerable impact on
the present-value calculation.” Of course discount rates are changed by
changing interest rates. He discusses how investing when interest rates are
unusually low, could cause inflated share prices, and that one must be
careful in making long term investments.
Klarman discusses using various DCF and NPV scenarios. He also
emphasizes one should discount earnings or cash flows as opposed to
dividends, since not all companies pay dividends. Of course, one wants to
understand the quality of the earnings and their reoccurring nature.
b. Analyze liquidation value. You need to understand what would
be an orderly liquidation versus fire sale liquidation. Klarman
quotes Graham’s “net net working capital.” Net working capital =
Current Assets – Current Liabilities. Net Net working capital =
Net Working Capital – all long-term liabilities. Keep in mind that
operating losses deplete working capital. Klarman reminds us to
look at off balance sheet liabilities, such as under-funded pension
plans.
c. Estimate the price of the company, or its subsidiaries considered
separately, as it would trade on the stock market. This method is
less reliable than the other 2 and should be used as a yardstick.
Private Market Value (PMV) does give an analyzer some rules of
thumb. When using PMV one needs to understand the garbage in,
garbage out concept, as well as the use of relevant and
conservative assumptions. One has to be wary of certain periods
of excesses when using this method. Look at historic multiples. I
am reminded of some recent research I have been working on in
regards to 1973 – 1974. Utility companies were selling for over
18X earnings, when they typically sold for much lower multiples.
I believe this was the case in 1929 as well. Klarman mentioned
television companies, which historically sold for 10X pre-tax cash
flow, but in the late 80’s were selling for 13 to 15X pre-tax cash
flow. “Investors relying on conservative historical standards of
valuation in determining PMV will benefit from a true margin of
safety, while others’ margin of safety blows with the financial
winds.” He suggests when you use PMV to determine what you
would pay for the business, not what others would pay to own
them. “At most, PMV should be used as one of several inputs in
the valuation process and not the exclusive final arbiter of value.”
I think that Klarman mentions that all tools should be used, and not to give
to great a value to any one tool or procedure of valuation. NPV has the
greatest weight in typical situations. Yet an analyst has to know when to
apply each tool, and when a specific tool might not be relevant. He
mentions that a conglomerate when being valued might have a variety of
methods for the different business components. He suggests, “Err on the
side of conservatism.”
Klarman quotes Soros from “The Alchemy of Finance.” “Fundamental
analysis seeks to establish how underlying values are reflected in stock
prices, whereas the theory of reflexivity shows how stock prices can
influence underlying values. (Pg. 51 1987 ed)”
Klarman mentions that the theory of reflexivity makes the point that a stock
price can significantly influence the value of a business. Klarman states,
“Investors must not lose sight of this possibility.” I am reminded of Enron
when reading this. Their business fell apart because they no longer were
able to use their stock price as currency. Soon covenants were violated
because of falling stock prices. Mix that difficult ingredient with fraud, and
you have a fine recipe for disaster. How many companies today are reliant
on continual liquidity from the equity or bond markets?
He discussed a valuation from 1991 of Esco. He indicated that the “working
capital / Sales ratio” was worthwhile to look at. He included a discount rate
of 12% for first 5 years of valuation, followed by 15%. He mentioned that
these higher rates indicated “uncertainty” in themselves. He stressed that
investors should consider other valuation scenarios and not just NPV. This
was all outlined above, but it was cool to see in a real time approach. He
discussed that PMV was not useful, as there were no comparables. He
indicated that a spin-off approach was helpful, as Esco previously
purchased a competitor (Hazeltine). He mentioned that the Hazeltine
acquisition, although much smaller than Esco, showed Esco to be severely
undervalued. He indicated that liquidation value would not be useful,
because defense companies could not be easily liquidated. He did look at a
gradual liquidation, as ongoing contracts could be run to completion. He did
use Stock market valuation as a guide. He noticed that the company was
selling for a small fraction of tangible assets. He called this a very low level,
considering positive cash flow and a viable company. He couldn’t identify
the exact worth of Esco, but he could identify that it was selling for well
below intrinsic value. He looked at all worst-case scenarios, and still
couldn’t pierce the current market price. He claimed the price was based on
“disaster.” He also noticed insider purchasing in the open market.
Klarman discussed that management could manipulate earnings, and that
one had to be wary of using earnings in valuation. He mentioned that
managements are well aware that investors price companies based on growth
rates. He hinted that one needs to look at quality of earnings, and the need
to interpret cash costs versus non-cash costs. Basically, indicating a
normalization of earnings process. “…It is important to remember that the
numbers are not an end in themselves. Rather they are a means to
understanding what is really happening in a company.”
He discusses that book value is not very useful as a valuation yardstick.
Book Value provides limited information (like earnings) to investors. It
should only be considered as one component of thorough analysis.
“The Challenge of Finding Attractive Investments”
If you see a company selling for what you consider to be a very inexpensive
price, ask yourself, “What is wrong with this company?” This reminds me
of Charles Munger, who advises investors to “invert, always invert.”
Klarman mentions, “A bargain should be inspected and re-inspected for
possible flaws.” He indicates possible flaws might be the existence of
contingent liabilities or maybe the introduction of a superior product by a
competitor. Interestingly enough, in the late 90’s, we noticed that Lucent
products were being replaced by those of the competition. We can’t blame
the entire loss of wealth on Lucent inferiority at the time, as the entire sector
followed Lucent’s wipeout at a later date. There were both industry and
company specific issues that were haunting Lucent at the time.
Klarman advises to look for industry constraints in creating investment
opportunities. He cited that institutions frowned upon arbitrage plays, and
that certain companies within an industry were punished without merit. He
mentions that many institutions cannot hold low-priced securities, and that in
itself can create opportunity. He also cites year-end tax selling, which
creates opportunities for value investors.
“Value investing by its very nature is contrarian.” He explains how value
investors are typically initially wrong, since they go against the crowd, and
the crowd is the one pushing up the stock price. He discusses how the value
investor for a period of time (and sometimes a long time at that) will likely
suffer “paper losses.” He hinted that contrarian positions could work well in
over-valued situations, where the crowd has bid up prices. Profits can be
claimed from short positions.
He claims that no matter how extensive your research, no matter how
diligent and smart you are, the diligence has shortcomings. For one, “some
information is always elusive,” hence you need to live with incomplete
information. Knowing all the facts does not always lead to profit. He cites
the “80/20 rule.” This means that the first 80% of the research is gathered in
the first 20% of the time spent finding that research. He discusses that
business information is not always made available, and it is also
“perishable.” “High uncertainty is frequently accompanied by low prices.
By the time uncertainty is resolved, prices are likely to have risen.” He hints
that you can make decisions quicker, without all of the information, and take
advantage of the time others are looking and delving into the same
information. This extra time can cause the late and thorough investor to lose
their margin of safety.
Klarman discusses to watch what the insiders are doing. “The motivation of
company management can be a very important force in determining the
outcome of an investment.” He concludes the chapter with this quote:
“Investment research is the process of reducing large piles of information to
manageable ones, distilling the investment wheat from the chaff. There is,
needless to say, a lot of chaff and very little wheat. The research process
itself, like the factory of a manufacturing company, produces no profits. The
profits materialize later, often much later, when the undervaluation identified
during the research process is first translated into portfolio decisions and
then eventually recognized by the market.” He goes onto discuss that the
research today, will provide the fruits of tomorrow. He explains that an
investment program will not succeed if “high quality research is not
performed on a continuing basis.”
Klarman discussed investing in complex securities. His theme being, if the
security is hard to understand and time consuming, many of the analysts and
institutions will shy away from it. He identifies this as “fertile ground” for
research.
Spin-offs The goal of a spin-off, according to Klarman is for the former parent
company to create greater value as a whole by spinning off businesses that
aren’t necessarily in their strategic plans. Klarman finds opportunity
because of the complexity (see above) and the time lag of data flow. I don’t
know in 2006 if this is still the case, but Klarman mentions there is a 2 to 3
month lag of data flow to the computer databases. I have owned several
spin-offs and have ultimately sold them, as they were too small for the pie,
or just not followed by my research. As I think back, I think quite a few of
these spin-offs did fairly well. One example would be Freescale. As I look
at the Freescale chart, it looks like it went from around 18 two years ago, to
around 33 today. Ahh, this topic alone, enabled the book to provide
potential value to my future net worth.
Bankrupt Companies
Look for Net Operating Losses as a potential benefit. He describes the
beauty of investing in bankrupt companies is the complexity of the analysis.
This complexity, as described often in his book, leads to potential
opportunity, as many investors shy away from the complex analysis.
Pending a bankruptcy, costs get leaner and more focused, cash builds up and
compounds with interest. This cash buildup can simplify the process of
reorganization, because all agree on the value of cash.
Michael Price and his 3 stages of Bankruptcy:
a. Immediately after bankruptcy. This is the most uncertain stage,
but also one of the greatest opportunities. Liabilities are not
evident, there is turmoil, financial statements are late or
unavailable and the underlying business may not have stabilized.
The debtor’s securities are also in disarray. This is accompanied
by forced selling at any price.
b. The second stage is the negotiation of a reorganization plan.
Klarman mentions that by this time, many analysts have pored
over the financials and the company. Much more is known about
the debtor, uncertainty is not as acute, but certainly still exists.
Prices will reflect this available information.
c. The third stage is the finalization of the reorganization and the
debtor’s emergence from bankruptcy. He claims this stage takes 3
months to a year. Klarman mentions that this last stage most
closely resembles a risk-arbitrage investment.
“When properly implemented, troubled-company investing may entail less
risk than traditional investing, yet offer significantly higher returns. When
badly done, the results of investing can be disastrous…” He emphasizes that
the market is illiquid and traders take advantage of unsophisticated investors.
“Caution is the order of the day for the ordinary investor.”
Klarman mentions to use the same investment valuation techniques you
would use for a solvent company. He suggests that the analyst look to see if
the companies are intentionally “uglifying” their financial statements. He
cites the example of expensing rather than capitalizing certain expenses.
The analyst needs to look at off-balance sheet arrangements. He cites
examples as real estate and over-funded pension plans.
Klarman discusses the investor should typically shy away from investing in
common stock of bankrupt companies. He mentions there is an occasional
home run, but he states, “as a rule investors should avoid the common stock
of bankrupt entities at virtually any price; the risks are great and the returns
are very uncertain.” He discusses one ploy of buying the bonds and shorting
the stock. He used an example of Bank Of New England (BNE). He
mentioned that BNE bonds were selling at 10 from 70, whereas the stockstill carried a large market capitalization.
He concludes the bankruptcy section by stressing that this type of investing
is sophisticated and highly specialized. The competition in finding these
securities is savvy, experienced and hard-nosed. When this area becomes
popular, be extra careful, as most of the money made is based on the
uneconomic behavior of investors.
Portfolio Management and Trading
“All investors must come to terms with the relentless continuity of the
investment process.”
He mentions the need for liquidity in investments. A portfolio manager can
buy a stock and subsequently find out he or she made an error, or that a
competitor has a stronger product. With that said, the portfolio manager can
typically sell that situation. If the investment was in an annuity or limited
partnership, the liquidity is pierced and the change of strategy cannot be
economically deployed. “When investors do not demand compensation for
bearing illiquidity, they almost always come to regret it.”
He discusses that liquidity is not of great importance in managing a longterm oriented portfolio. Most portfolios should contain a balance of
liquidity, which can quickly be turned into cash. Unexpected liquidity needs
do occur. The longer the duration of illiquidity, should demand a greater
form of compensation for the liquidity sacrifice. The cost of illiquidity
should be very high. “Liquidity can be illusory.” Watch out for situations
that are liquid one day, and illiquid the next. He claims this can happen in
market panics.
“Investing is in some ways an endless process of managing liquidity.”
When a portfolio is in cash only, the risk of loss is non-existent. The same
goes for the lack of gain when fully invested in cash. Klarman mentions,
“The tension between earning a high return, on the one hand, and avoiding
risk, on the other, can run high. This is a difficult task.
“Portfolio management requires paying attention to the portfolio as a whole,
taking into account diversification, possible hedging strategies, and the
management of portfolio cash flow.” He discusses that portfolio
management is a further means of risk reduction for investors.
He suggests that, as few as ten to fifteen different holdings should be suffice
for diversification. He does mention, “My view is that an investor is better
off knowing a lot about a few investments than knowing only a little about
each of a great many holdings.” He mentions that diversification is
“potentially a Trojan horse.” “Diversification, after all, is not how many
different things you own, but how different the things you do own are in the
risks they entail.”
In regards to trading Klarman stated, “The single most crucial factor in
trading is the developing the appropriate reaction to price fluctuations.
Investors must learn to resist fear, the tendency to panic, when prices are
falling, and greed, the tendency to become overly enthusiastic when prices
are rising.
“Leverage is neither necessary nor appropriate for most investors.”
How do you evaluate a money manager? a. “Personal interviews are absolutely essential.”
b. “Do they eat their own cooking?” He feels this is the most
important question of an advisor. When an advisor does not invest
in his or her own preaching, Klarman refers to it as “eating out.”
You want the advisor to act in a “parallel” fashion to his or her
clients.
c. “Are all clients treated equally?”
d. Examine the investor’s track record during different periods of
varying amounts of assets managed. How has the advisor
performed as his or her assets have grown? If assets are shrinking,
try to examine the reason.
e. Examine the investment philosophy. Does the advisor worry
about absolute returns, about what can go wrong, or is the advisor
worried about relative performance?
f. Does advisor have constraining rules? Examples of this could be
the requirement to always be fully invested.
g. Thoroughly analyze the past investment performance. How long a
track record is there? Was it achieved in one or more market
cycles?
h. How did the clients do in falling markets?
i. Have the returns been steady over time, or have they been
volatile?
j. Was the track record from a steady pace, or just a couple of
successes?
k. Is the manager still using the same philosophy that he or she has
always used?
l. Has the manager produced good long-term results despite having
excess cash and cash equivalents in the portfolio allocation? This
could indicate a low risk approach.
m. Were the investments in the underlying portfolio themselves
particularly risky, such as shares of highly leveraged companies?
Conversely, did the portfolio manager reduce risk via hedging,
diversification and senior securities?
n. Make sure you are personally compatible with the advisor. Make
sure you are comfortable with the investment approach.
o. After you hire the manager, monitor them on an ongoing basis.
The issues that were addressed prior to hiring should be used after
hiring.
He finishes the book with these words. “I recommend that you adopt a
value-investment philosophy and either find an investment professional with
a record of value-investment success or commit the requisite time and
attention to investing on your own.”
Respectfully submitted,
Ronald R. Redfield CPA, PFS
May 3, 2006
Really interesting article from Barry Habib on MBS Highway breaking down the issues the mortgage market is seeing right now. Couldn't link it cause I doubt you guys have an account. Thought you might find it interesting...
The Coronavirus Meltdown
The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.
Here’s How The Mortgage Market Works
Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts.
The Servicer’s role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.
Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio.
Servicer Dilemma
As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio.
But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.
“I’m From The Government And I’m Here To Help”
In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility.
But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.
The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk.
Mark To Market
This week - Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.
Unintended Consequences
The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes.
If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.
Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.
But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls are staggering. They run in the tens of millions of Dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.
Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing.
It’s been said that the Stock market will do the most damage, to the most people, at the worst time.
Even Stephen King Could Not Have Scripted This
It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.
Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.
What Needs To Be Done Now
Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.
submitted by At the same time that I've been browsing this subreddit prolifically (because it's the only political subreddit I've found where
something like this thread I've linked gets upvoted), I've done a lot of reading, specifically Joseph Stiglitz's books
The Great Divide and
Rewriting the Rules of the American Economy. Apparently you guys
don't like Stiglitz, so I'm looking for whatever criticism you have to throw at the ideas presented in these two books. Stiglitz seems to agree with you all
a lot, so I'm kinda confused. I read these books thinking your ideas and his are one of the same.
The Great Divide
Despite being longer than
Rewriting the Rules of the American Economy, I took less notes on this one, since I didn't care as much about retaining my memories of what I read at the time. Anyways, here's everything you guys apparently don't agree with:
- The financial crisis was the result of extreme laissez-faire economics on the part of prior administrations. While the crisis cannot be pinned on any single action or person, if you had to, it’d be former chairman of the federal reserve Alan Greenspan, appointed by Ronald Reagan. He could have curbed predatory lending to low-income households, and even if he didn't have the tools to do so, he could have gone to congress to ask for them.
- The response to the crisis was terrible. Ben Bernanke, chairman of the federal reserve from 2006 to 2014, believed that the Great Depression was caused by the federal reserve tightening the money supply when it should have been loosening it, flooding the market with liquidity. So, that’s exactly what he did, through increased quantitative easing(a monetary policy where a central bank buys government bonds and other financial assets to increase the money supply). This was good, but it wasn’t enough.
- The Obama administration and congress failed to pass an adequate stimulus. The problem faced at the time was far greater than the Recovery Act of 2009 was built to deal with.
- Credit rating agencies have an incentive to provide unusually high, inaccurate grades to debtors because they're being paid by them.
- The probability of civil conflict in any typical country is 2.3% for any given year. In a country in the 95th percentile of horizontal asset inequality between ethnicities, the probability is 6.1%. In other words, if ethnicities have varying levels of wealth and it isn’t because of actual differences in merit, they’re more likely to get violent.
- Instead of taking innovative risks and investing in the economy, the rich tend to also use their wealth for rent seeking, where they expand their share of wealth in the economy without increasing the total amount. This is usually done through the government. For example, a company might lobby the government to get more subsidies or increase regulations on competitors. This has become increasingly common in the United States, and is a big reason why we have so much inequality.
- The Great Depression was caused by the widespread decline in agricultural prices and incomes, caused by greater productivity, which forced farmers to borrow heavily from the banks. They couldn’t pay back their debt, of course, so eventually they defaulted on their loans and brought the entire system down with them.
- Derivative: A security with a value dependant on the value of an underlying asset or group of assets such as stocks, bonds, commodities, currencies, interest rates, or market indices like the S&P 500. Stiglitz and other economists are highly critical of the trading of derivatives, often referring to them as financial weapons of mass destruction due to the risks they pose for their owners.
- Only 58% of Americans born into the bottom fifth of earners move out of that fifth. (In a perfectly mobile society where everyone has an equal chance of winding up at the top, the chance would be 80%. That would be hard to accomplish, but we’re still far from it, showing a significant lack of opportunity.)
- Only 6% of Americans born into the bottom fifth of earners move into the top fifth.
- Predatory lending: Lending that is unfair, deceptive, or fraudulent, intended to benefit the lending organization. Lending of this kind fed the housing bubble.
- Subsidizing crops allows farmers to undercut the prices of farmers in foreign countries, who tend to live in poor, undeveloped countries, making them especially vulnerable to the consequences of being outcompeted.
- Alternatives to intellectual property laws include government-financed research, foundations, and the prize system, where the government writes a check to people who contribute to society through innovation.
- Capital gains, meaning profits from the sale of property or investments(such as stocks), are taxed at a lower rate than salaries and wages. This encourages speculation, which can be harmful to the economy if done excessively.
- Attempts to restore confidence during a recession by lowering the deficit through austerity makes the recession worse by lowering aggregate demand.
- The US was pulled out of the Great Depression by the massive rise in government spending triggered by WWII.
- Extreme inequality lessens aggregate demand, slowing economic growth, because the rich tend to spend a smaller fraction of their income than those who are less well off.
- “The U.S. by itself could go a long way to moving reform along: any firm selling goods there could be obliged to pay a tax on its global profits, at say a rate of 30 percent, based on a consolidated balance sheet, but with a deduction for corporate profits taxes paid in other jurisdictions (up to some limit). In other words, the U.S. would set itself up as enforcing a global minimum-tax regime. Some might opt out of selling in the U.S., but I doubt that many would.”
Rewriting the Rules of the American Economy
The Current Rules:
- According to economists Michele Boldrin and David K. Levine, "there is no empirical evidence that [patents/intellectual property rights] serve to increase innovation and productivity"
- Countries like the US can avoid a race to the bottom by banning imports of products produced in countries that don't regulate the behavior of businesses in the same way they do.
- While the average stock was held for around seven years in 1940 and two years in 1987, by 2007 the average share was traded every seven months.
- In 2012 average compensation for the 500 highest-paid CEOs was $30.3 million, of which only 6.3 percent was salaries and bonuses. The rest is largely driven by gains from stock and stock options given to executives as a substitute for salary.
- In 1965, the ratio of the average annual income of CEOs to workers was 20 to 1. By 2013, it was 295 to 1.
- Higher pay for CEOs through stocks and stock options incentivizes the manipulation of stock prices and seeking increases in short-term profits, shifting attention away from actual performance.
- High marginal tax rates deter rent-seeking, meaning strongly progressive taxation can help enhance performance of the overall economy by deterring socially unproductive activities and directing more resources into real investment.
- Cutting dividend taxes only encourages higher dividends, not investment or wage growth.
- For every additional percentage point of unemployment, income declines by 2.2 percent for families at the 20th percentile of the distribution, by 1.4 percent for median-income families, and by just 0.7 percent for families at the 95th percentile; these different levels of exposure to unemployment risk are a product of increasing inequality.
- According to economist Alan Blinder, inequality rarely declines when unemployment is above 6%. Additionally, periods of below full employment do lasting damage to productivity, equity, and opportunity.
- The Fed's prioritization of inflation over employment has weakened the position of people who work for their living and strengthened those whose income relies on the return to capital.
- Union participation in the US fell from over 30% in 1960 to 20% in 1984 and 11.1% in 2014.
- Between 1973 and 2013, productivity grew 161% while the compensation of production/nonsupervisory workers rose only 19%.
- While workers cannot be fired for participating in a legal strike, they can be replaced indefinitely and reinstated only at the employer’s discretion.
- Between 1980 and 2007, despite a 50% increase in the workforce, the United States cut the number of minimum wage and overtime inspectors by 31%. A 2008 survey of 4,000 low-wage workers in three cities found that 26% received less than the federal minimum wage and 76% did not receive overtime pay to which they were legally entitled.
- Researchers estimated an average loss per low-wage worker of $2,634 in wage theft per year with a national total of up to $50 billion per year.
- An estimate shows that a 10% increase in the minimum wage would reduce poverty by 2.4%.
- Researchers at the University of California Berkeley Labor Center estimate that, because the jobs of workers at the bottom do not pay enough to meet a basic needs budget, the federal government along with taxpayers spent nearly $153 billion per year from 2009 to 2011 on Medicaid, the Children’s Health Insurance Program, food stamps, and Temporary Assistance for Needy Families.
- In 2013, economist Robert Lynch and immigration expert Patrick Oakford estimated that delivering comprehensive immigration reform would boost undocumented workers’ wages by 15-25 percent and U.S. economic output by $832 billion to $1.4 trillion over a 10-year period.
- Agricultural and domestic workers, who were overwhelmingly African-American, were originally excluded from the Social Security program.
- The lack of a path to citizenship for 11.2 million undocumented Americans relegates more than 5 percent of the workforce to the shadows, vulnerable to exploitation beyond the reach of labor laws.
- In a recent field study, researchers sent similar resumes with a variety of names that sound white, African-American, or Latino to apply for entry-level, low-wage jobs in New York City. Not only were African-* * American applicants half as likely to get a callback or job offer, but also whites with recent prison records actually fared as well as African-American and Latino applicants with clean backgrounds and similar credentials. (Note: Field study conducted in 2009.)
- Despite accounting for less than 16 percent of the overall student population, African-Americans make up 42.5 percent of students in high poverty elementary and secondary schools.
- While 32% of white children born into the bottom quartile stay there as an adult, 63% of African-American children stay there as an adult. While 14% of white children born into the bottom quartile move to the top quartile as an adult, 4% of African-American children born into the bottom quartile move to the top quartile as an adult.
- Regions of the US that are more equal and more integrated - across income, race, and place - are better able to sustain growth over time.
- Less than half of working mothers without paid leave who lose their job by staying home with a newborn found jobs again within a year. By contrast, 87.4 percent of mothers with paid family leave returned to work within a year.
- Women comprise two thirds of low-wage workers, even though they comprise less than half of all workers.
- Ninety-five percent of part-time and low-wage workers have no access to paid family leave.
- Women make, on average, 78 cents for every dollar a male counterpart makes. African-American and Latina women are paid 64 and 56 cents, respectively.
- Discrimination against women in the workforce lowers aggregate demand and thereby stymies economic performance.
Rewriting the rules:
These proposals aim to reduce inequality and improve economic performance by restructuring the rules shaping the economy. It’s a twofold approach: the first move is to tame rent-seeking behaviors that unduly reward those at the top while raising costs for the rest and reducing the efficiency and stability of the U.S. economy. The second part of our agenda seeks to restore the rules and institutions that ensure security and opportunity for the middle class.
Taming the top
Make markets competitive -We need a 21st century competition law that recognizes that we have moved from a manufacturing to a service and knowledge economy, where different principles of competition are relevant. Restore balance to global trade agreements -Trade agreements written behind closed doors with the active participation of firms but no other stakeholders are failing to deliver the rules we need to manage globalization in a way that benefits all. -Businesses wishing to trade with businesses in the US under the terms of an agreement should be audited and certified by a credible, independent third party such as the International Labor Organization; certification then buys the company a right to trade under the preferential treatment of a trade agreement.
Control health care costs by allowing government bargaining -Firms from across the health care industry have been allowed to consolidate and expand, reducing competition and raising prices. -By bargaining with drug companies for bulk purchases, the VA pays 40 percent lower prices for prescription drugs than typical market prices. -The federal government should establish a national prescription drug formulary, establishing the cost effectiveness for all prescription purchases covered under all public health insurance plans, not just those for veterans.
Rebalance the rules for bankruptcy by expanding coverage to homeowners and students -Removing the special protections for derivatives in bankruptcy, a feature that benefits Wall Street but actually makes firms more risky as they rely more on these exotic instruments, is essential in reducing the excessive financialization of the economy. -Removing some of the most burdensome elements designed to make filing for bankruptcy harder will help individuals move on from the misfortunes that can happen throughout life. -A homeowners’ chapter 11, analogous to corporate chapter 11, would keep families in homes and give a fresh start to families overburdened with debt.
Fix the Financial Sector -The financial sector isn’t doing what it’s supposed to: managing risk, allocating capital efficiently, intermediating between savers and investors, providing funds for investments and job creation, and running an efficient 21st century payments mechanism.
End “too big to fail” -Banks that are so big that their failure will cause the entire economy to contract don’t need to internalize the costs of their failures and can reap huge benefits from risky bets. They have a perverse incentive to take on excess risk, knowing that should a problem arise they will be bailed out, with losses being borne by others. -Even when banks aren’t too big to fail, they can be too interlinked to fail: with excessive linkages the failure of one institution can lead to a cascade of other failures - stoppable only with a government bailout. That is why interlinkages need to be transparent and regulated. -The Financial Stability Oversight Council should assess large, systemically risky financial firms with an additional capital surcharge above what regulators currently assess under the Basel Accords in order to make failure less likely and more manageable. A surcharge would force banks to internalize the true cost of their risks and improve economic efficiency, while insulating taxpayers from the costs of failed institutions.
Regulate the shadow banking sector and end offshore banking -Shadow banks are nonbank financial institutions that engage in lending by trading bonds and securities, often by bundling them through a process called securitization. -The SEC should reevaluate and expand on its recent ruling on money market mutual funds, whose vulnerabilities in the 2008 financial crisis sparked a panic. -The Federal Reserve must write clear rules outlining the government’s role in back-stopping the shadow banks. -There needs to be a re-examination of the extent to which shadow banks and offshore financial centers are used to end-run the regulations designed to ensure a safe and sound financial system.
Bring transparency to all financial markets -Congress should expand the SEC’s mission, and require private equity and hedge funds to disclose holdings, returns, and fee structures. The SEC should provide additional regulatory scrutiny and investor advice on these deals. This will formalize their regulation, making it similar to mutual fund regulations; the competition that will follow from this price transparency will help reduce financial rents.
Reduce credit and debit card fees -High consumer fees on credit and debit card transactions are one clear symptom of abuse of market power in the financial sector. -These fees are a monopoly rent on the country’s networked payments infrastructure.
Enforce rules with stricter penalties -In the past decade there’s been a shift away from strict criminal enforcement of financial regulation. Fewer, if any, cases go to court. Instead the SEC and the Justice Department settle with favorable conditions, such as deferred prosecution agreements. Under these agreements, the parties regularly don’t admit to any wrongdoing, or even pay penalties commensurate to their benefits. No individual is held directly accountable. The fines that are paid come from shareholders and are tax deductible; the perpetrators of the offenses aren’t necessarily punished or made to give back the compensation they received as a reward for the extra profits generated by their illegal activities. -Firms promise not to repeat their offenses, but they usually do. -The SEC and other regulatory agencies should instead focus on more strict enforcement, and Congress should hold the agencies accountable if no progress is made. No company should be able to enter into a deal like a deferred prosecution agreement if it is already operating under such an agreement. These agreements should face stricter judicial review and scrutiny, and compensation schemes should be designed so that perpetrators face significant consequences - for instance, a clawback of bonuses and a reduction in retirement benefits.
Incentivize long-term business growth -The rules governing corporations and taxes on capital and top incomes have changed to favor short-term shareholders and CEOs who chase short-term stock price gains above all else. -This has led to greater inequality and has undermined real investments that create long-term growth.
Restructure CEO pay -Adjust the tax code, which privileges compensation of executives through equity-heavy compensation, particularly stock options. -Eliminate or curtail the performance-pay loophole (by which stock options and other excessive CEO pay receives favorable treatment). This will both address executive pay being too high and discourage CEOs from behaving like financial speculators. -Maintain the $1 million cap on the deductibility of executive compensation reform, eliminate the exception for so-called performance pay, and expand these limits on deductibility to the highest paid executives in a company overall. -The SEC should require corporations to state the value of compensation in simple, easy to understand language. -There should be mandatory shareholder votes on executive compensation on an annual basis(footnote: our current Say-on-Pay rule is non-binding).
Enact a financial transactions tax -Short-term financial transactions can contribute to economic volatility without providing any larger benefit to the economy as a whole. -A variant of financial transaction taxes are currently employed without negative consequence in vibrant financial centers like London and Hong Kong. -Congress should pass a financial transaction tax designed to encourage productive investment.
Empower long-term stakeholders -There should be a surtax on short-term capital gains given the negative externality of the trading behavior incentivized. -To improve long-term management of corporations, workers must be given a say in corporate governance, specifically by including a representative of employees on the corporate board. -Those managing retirement accounts should be obligated to avoid all conflicts of interest and, especially in the case of worker pensions, ensure the corporations in which they invest act in a responsible way, with good corporate governance, an eye to long-term value, good labor policies, and sound environmental policies.
Rebalance the tax and transfer system -The United States ranks among the least redistributive countries in the OECD. -Taxes can improve incentives, encourage socially desirable economic behavior, and discourage undesirable behavior like short-termism. -Over the past 35 years, changes to the tax code have prioritized tax cuts and subsidies focused on those at the top, placing a greater tax burden on the rest and causing neglect of critical public investments.
Raise the top marginal rate -Lower marginal tax rates at the top distort the economy by actively encouraging rent seeking. -A 5 percent increase on the top 1 percent’s current income tax rate would raise between $1 trillion and $1.5 trillion of additional revenue over 10 years. -For an extra $50,000 taxed on every $1 million of a wealthy individual’s income, the United States could make all public college education free and fund universal pre-K.
Enact a “fair tax” -The preferential treatment of capital gains and dividends - income received almost entirely by the richest Americans - is one of the most important reasons that those at the top pay less than ordinary taxpayers. -Most Americans earn negligible capital income outside already tax-sheltered retirement savings accounts or on home sales - for which a large exemption exists. -Capital gains tax breaks do not spur investment. They reward speculation as opposed to work. -The US should tax capital gains income at the same rate as labor income. -Short-term capital gains should be taxed at an even higher rate to discourage volatile short investments. -The provision for step-up in basis at death needs to be eliminated. This provision allows all of the capital gains earned during an individual’s life to escape taxation when the asset is bequeathed, meaning a small number of wealthy families pass on wealth free from capital gains tax in perpetuity.
Encourage U.S. investment by taxing corporations on global income -The current tax code allows corporations to defer paying U.S. taxes on profits earned abroad until the profits are repatriated, which has the perverse effect of encouraging corporations to keep profits abroad as opposed to using the funds for U.S. investment. -One option is to replace the transfer price system with a formulaic approach that would tax firms on their global income in a fair and comprehensive way, apportioning those profits to the U.S. on the basis of the economic activity - including sales, production, and research - that occurs here.
Enact pro-growth, pro-equality tax policies -We should tax things that have an inelastic supply, like land, oil, or other natural resources. -We should tax pollution (including carbon emissions), a move that can raise revenue while improving economic efficiency. -Eliminating agricultural subsidies and noncompetitive bidding processes for the sale or lease of government-owned natural resources or for the purchase of armaments or prescription drugs under public programs would improve efficiency and reduce inequality.
Growing the middle
Make full employment the goal -The Fed should emphasize full employment as the goal of monetary policy, and Congress should enact a large infrastructure investment to stimulate growth.
Reform monetary policy to prioritize full employment -The Fed’s prioritization of price stability has caused labor markets to remain slack, kept wages growing slower than productivity, and has brought down workers’ share of economic output. -Contractionary monetary policy has much stronger unemployment effects for low-wage and often minority workers than for the highest earners. -The Fed should resist raising interest rates until wage growth makes up for the lost ground of the Great Recession, even if this means allowing inflation to temporarily overshoot the 2% target. -There is growing consensus that a higher inflation rate will lead to better economic performance, facilitating adjustments in our highly dynamic and ever-changing economy.
Reinvigorate public investment -Critical public investments today lay the foundation for long-term economic performance and job growth. -Public investments in education, technology, and infrastructure are complements to private investment, raising returns and thus “crowding in” such investments.
Invest in large-scale infrastructure renovation -America’s failure to keep up what infrastructure it has makes it more costly to do business and for people to go about their daily lives, and leads to more wasted time and more environmental degradation. -Public transit and broadband play a crucial role in connecting all Americans, regardless of income level, with the 21st century local and global job market. -Not only is infrastructure crumbling, it’s unevenly distributed, with distinct areas and communities segregated from the rest of society and without the opportunities that connecting affords. -A comprehensive plan would provide investments in air, rail, and road transportation; public transit; ports and inland waterways; water and energy; and telecommunications and the Internet. Some estimates put the cost of such a project on the order of $4 trillion - well beyond the small sums currently debated but within our means. The investment would yield dividends in the form of more productive businesses, millions of new jobs, and sustainable management of our energy and environmental resources. -Public infrastructure banks could be useful for financing large infrastructure projects.
Expand access to public transportation -Decades of disinvestment in U.S. infrastructure have resulted in high commuting costs that fall disproportionately on low- and middle-income families and decrease access to jobs. -Only a little over half of Americans have access to public transit. -If more people have better access to jobs, productivity will increase and lives will improve.
Empower workers
Strengthen the right to bargain -The National Labor Relations Act is flawed. -One flaw in the statute has allowed employers to delay workers’ votes to unionize by litigating each step of the process. Recent rule changes issued by the National Labor Relations Board have attempted to rebalance some of the power, and they provide a positive example of how the statutes can be updated to reflect current challenges. -Stricter penalties are needed to deter illegal intimidation tactics by employers. -Companies seeking to prevent unionization can retaliate by firing workers; if an NLRA violation is found, the employer merely has to reinstate the worker and pay back wages. A ruling like this can take more than three years. -The legal framework should be amended to adapt to the changing nature of the workplace. Today, few employers resemble the large manufacturers the creators of the NLRA had in mind. Corporations like Walmart employ people through outsourcing and subcontracting, bearing little responsibility for the employment relationship. Legal scholars have envisioned new models for defining the employer-employee relationship that would establish clear lines of responsibility within the modern fissured workplace.
Have government set the standards -State, local, and municipal governments should grant public contracts only to corporations that meet high labor standards and possess strong antidiscrimination/pro-inclusionary hiring practices.
Increase funding for enforcement and raise penalties for violating labor standards -Charged with enforcing the minimum wage and overtime protections, the Wage and Hour Division of the Department of Labor has seen a third of its inspectors disappear since 1980, despite a doubling of the country’s workforce. -Congress should increase the agency’s budget to reflect growth in the labor market, the low-wage workforce in particular, and recent evidence of systemic wage theft. -Penalties for minimum wage and overtime infractions are insufficient to deter bad behavior. -Minimum wage and overtime violation convictions should pose an existential threat to businesses so managers and owners will think twice before engaging in such behavior.
Raise the minimum wage -Raising the minimum wage is unlikely to hurt jobs, unless taken to an extreme. -Given the present weakness in aggregate demand, higher wages would stimulate the economy. -Raising the minimum wage could help reduce working poverty and particularly improve prospects for women, their families, and other disadvantaged groups that are disproportionately represented among minimum wage earners. -The minimum wage for tipped workers should be raised to the same floor that applies for all other workers.
Raise the income threshold for mandatory overtime -The New Deal’s Fair Labor Standards Act requires that workers who work more than 40 hours a week get overtime pay, at a rate of 150 percent of their regularly hourly wage. However, the act exempts some employers, executives, administration, and traveling salespeople, among others. To provide a base level of coverage, the Department of Labor has periodically issued a rule that establishes an income threshold under which any employee must be paid for overtime. -The current threshold of $455 a week, or $23,660 a year, was last updated in 2004, and covers just 11 percent of the salaried workforce. In 1975, 65 percent of salaried workers were covered by overtime rules; if the 1975 threshold had kept pace with inflation, 47 percent of workers in 2013, rather than just 11 percent, would have received overtime. -The Department of Labor should raise the threshold to restore this pillar of middle class income, ensuring that the majority of salaried workers are covered.
Expand access to labor markets and opportunities for advancement
Reform the criminal justice system to reduce incarceration rates -The United States has the highest incarceration rate in the world. -In addition to incurring direct costs, mass incarceration reduces employment opportunities and wages, and increases dependency on public assistance for a large share of the population. -The total public cost of incarceration was more than $31,000 per inmate in 2010, according to a study by the Vera institute. -Those who have been locked up end up facing lower hourly wages, annual employment, and annual earnings. This burden falls disproportionately on men of color. -In 2008 the US economy lost the equivalent of 1.5 to 1.7 million workers, or roughly a 0.8 to 0.9 percentage-point reduction in the overall employment rate. -Congress should reduce the burden ex-felons face when searching for jobs by expunging certain records after a set amount of time. -Mandatory minimum sentencing particularly targets people of color. -African-Americans and Latinos accounted for 69.8 percent of mandatory minimum sentences in 2010; tackling this issue will effectively reduce part of the inequality inherent in the nation’s sentencing rules. -Congress should allow judges the ability to waive mandatory minimums. -The DoJ should focus on encouraging alternatives to incarceration. -Inaccessibility to quality attorneys results in disproportionately harsh sentencing for the poorest. According to a report from the Brennan Center of Justice, a concerted effort to reclassify nonjailable offenses, increase public defense funding, and improve effectiveness through regular attorney and social worker training would ensure more equitable access to representation. -Onerous fees at every level of the criminal justice system generate severe financial burdens for the poor and create further points of entry back into the incarceration system.
Reform immigration law by providing a pathway to citizenship -More than 11 million undocumented immigrants live and work in the shadows of the U.S. economy, in every corner of the country and every sector of work. -The broken immigration system is costly to businesses, who face risks of an uncertain labor supply. -Exploitation of undocumented immigrants drives down wages and working conditions throughout the labor market. -The federal government must provide a pathway to citizenship for those already here and simplify the process by which new migrants can continue to come and contribute to America’s economic success. -We should cease the deportation and internment of all but violent criminals and to normalize the legal status of families working, learning, and serving in America. -We should better coordinate the efforts of different parts of government to enforce immigration laws in ways that don’t undermine the conditions for people working here. ICE should take a back seat to the Department of Labor to ensure that unscrupulous employers cannot easily threaten workers with the prospect of deportation by calling in worksite raids. -Congress should ensure that labor laws apply to everyone, regardless of their documentation status.
Expand economic security and opportunity
Invest in early childhood through child benefits, home visiting, and pre-K -The state run Maternal, Infant, and Early Childhood Home Visiting Program is one of the most effective investments of taxpayer dollars. -One proposal that should be considered is a universal child benefit, a monthly tax-free stipend paid to families with children under 18 to help offset part of the cost of raising kids. -The U.K. recently cut its child poverty rate by more than half through a package of anti-poverty measures, including a universal child benefit. -Congress could immediately expand funding to provide pre-K childcare subsidies to all currently eligible children, expanding access to 12 million children at a cost of $66.5 billion.
Increase access to higher education through more public financing, restructuring student loans, and increasing scrutiny of for-profit schools -The G.I. Bill helped create the middle-class society that we had aspired to partly by providing free education to returning soldiers. -It’s not true that we can’t afford similar programs, we cannot afford not to ensure that all young Americans get the best education for which they are qualified so they can live up to their potential. -The government should look to follow the lead of Australia and adopt universal income-based repayment, in which repayment consists of a set percentage of future income. Students could then repay their student debts more easily - at much lower transactions costs - through withholding. -Removing bankruptcy protection for those with student loans, particularly in the 2005 policy change under the Bankruptcy Abuse Prevention and Consumer Protection Act, has done nothing to reduce bankruptcy filings resulting in costly defaults. It has extracted money from poor students that goes into the coffers of the banks. The government should restore those protections. -One way to improve outcomes for graduates is to increase scrutiny of for-profit schools, which receive a large share of government-funded loans or government-guaranteed loans while failing to provide students with a quality education. Eighty-seven percent of revenues at for-profits come from federal or state sources, including student loans and Pell grants. Though they teach around 10 percent of students, they account for about 25 percent of total Department of Education student aid program funds. Studies show that those at for-profit schools do poorly compared to those at community colleges. Completion rates are poor, as is success in getting a job.
Make health care affordable and universal -The health care system is rife with the kinds of market failures that economists have studied extensively, including information asymmetries and imperfections in competition. -Hospitals, physician networks, and health care insurers increasingly operate in conditions approaching monopolies. -Patients largely have neither the medical expertise to perform the cost-benefit analyses necessary for making optimizing choices about the care they need, nor the access to price information for comparison shopping, leaving providers to determine both the demand and supply of health care. -Medicare, with its record of controlling costs and delivering better outcomes, should be opened to everyone. Competition from Medicare’s entry into the insurance exchange would lower premiums for everyone; one study found increased competition on exchanges could lower fees by an estimated 11 percent.
Increase retirement security by reducing transactions costs and the exploitation of retirees, and expanding Social Security -More people in America will face retirement with inadequate savings, driving down their consumption and/or diverting it from others, or relying more heavily on social transfers. -Expanding the Social Security system to include a “public option” for additional annuity benefits would enhance competition, driving down costs and increasing services. -Research shows that the average 401(k) participant could lose up to a third of future savings in fees. Requiring fund managers to adhere to a fiduciary standard would be an important move in the right direction. -We could require that any pension or retirement account eligible for preferential tax treatment not have excessive transactions costs. Fees on any account could not exceed those on the best-performing indexed funds, unless there were demonstrably higher risk-adjusted returns. -We should remove the payroll cap that limits the amount of revenue Social Security raises to help make Social Security self-sustaining, budget-wise.
Reform political inequality -Policies favored by the wealthy receive attention, while policy preferences of poor and middle-income Americans are ignored. -People with higher incomes vote more frequently than those with lower incomes and election campaign finance is dominated by a relatively small number of large donors who wield outsize influence. -Voting should be made easy: we should establish a federal system of universal voting that includes automatic voter registration, accepted throughout the country without the need to reregister and without burdensome voter identification requirements; the ability to vote by mail or early in-person on multiple days; the establishment of weekend Election Days or a national election holiday; and online voting when cyber-security concerns are met. -A constitutional amendment could go a long way toward allowing Congress greater leeway to reform campaign finance laws to increase political equality. -We could require shareholders to vote in support of any political contributions before they can be made.
This post is almost as long as Reddit allows, so nice job reading all of this if you have. Now, what's all the disagreement about? How is Stiglitz wrong?
Also check out: A Beginner’s Guide for Cryptocurrency Trading: How to Book Profit. Talking about “margin trading Exchanges allow giving loans to the investors due to the high transaction rewards to the exchange and lending market. Lenders give loan to the traders so they can use their trading skills and get a large amount back. Margin trading from A to Z by Michael T. Curley, 2008, Wiley & Sons, Incorporated, John edition, in English See what's new with book lending at the Internet Archive Margin Trading from a to Z Michael T. Curley Margin Trading from a to Z × Close. Not in Library Margin trading is the connection of this two "endpoints", one have a stash resting, the other needs to amplify his moves. So one part borrows the money and buy double amount of shares, now his initial stash will be affected 2x, if the stock goes up 5% his stash will grow 10% and vice-versa. Margin lending can also have tax benefits. For example, you may be able to claim the interest on your loan as a tax deduction. What are the risks of margin lending? There is additional risk in borrowing to invest. If the market or your investments drop in value, then you won’t only be dealing with that loss - you’ll also have to repay the loan. A margin or investment loan is a form of gearing that lets you borrow money to invest in approved shares or managed funds, using your existing cash, shares or managed funds as security. The amount that you can borrow is determined by the securities in your portfolio, their Loan to Value Ratio and a credit limit based on an assessment of your
One of the ways to use borrowed funds is called margin loan. Let's look at how it works. ... All about margin and leverage in forex trading - Duration: 23:38. Rob Booker Trading 256,393 views. This educational video will teach you about how margin lending works, benefits and risks of using margin. Capital CS Group, LLC is a Registered Investment Adviser. A Guide to the Basics of Day Trading on Margin: When a client opens an account with a broker, the client can choose a "margin account" or a "cash account." A margin is a loan that brokers provide ... During this webinar, we discuss how margin lending works along with the pros and cons of using leveraged funds within your share portfolio. * This video contains general advice only and does not ... What is margin trading? What is a margin? What is the difference between a cash account and a margin account? In episode #34 of Real World Finance we dive de...
