Executive Fraud Blog

That would make it $15 billion on the year and $27 billion over a two year period. All I can say is WOW...

“Capitalism without failure is like Christianity without hell,” Mr. Buffett said. He added that “lenders and investors who were dumb enough to deal in subprime mortgages should not receive any special help,” but if homeowners were deceived about the terms of an adjustable mortgage, they should be helped.

I completely agree, but I'm still curious what happened with his plan to start a financial guarantor company. Originally when AMBAC and MBIA were taking heat for their subprime exposure and writedowns there was talk of Buffett bailing one out or starting his own under the Berkshire Hathaway name. Guess we will have to wait and see.

Some view the moves by the Bush Administration to increase the limits of guarantees by the Federal Housing Administration as not enough. Sheila Blair from the Federal Deposit Insurance Corp. (FDIC) suggests that:

Congress should initiate a publicly funded loan program under which the Treasury Department would make loans to borrowers with unaffordable mortgages to pay down as much as 20 percent of their principal.

Although I feel for those who legitimately were fooled by their mortgage terms, I do not believe that a bailout should be available to all subprime borrowers with high loan values and falling home prices. I would be interested in the stipulations included in the proposed subprime bailout.

Falling home prices have made an increasing number of U.S. homeowners more vulnerable to default, they said. Nearly a third of subprime borrowers owed more than their home was worth at the end of last year, and that figure will double to 63 percent in 2009

It is interesting that borrowers facing these circumstances tend to walk away from their homes while continuing to make their credit card payments. Although falling home prices is one factor in this problem, many people forget most of these subprime loans were option ARMs. Most of the option ARM loans had low teaser rates that led not only to payment shock at the reset date but also allowed borrowers to defer payments that were added to the principle of the loan (negative amortization). The gamble made by most borrowers was that home prices would continue to increase by the same amount (or hopefully more) then the increasing principle of the loan. Since home prices fell and loan principles had been steadily increasing, the loan to property value (LTV) for most subprime borrowers has increased so significantly that the decision to walk away is becoming a legitimate option.

Here's another perspective on the Bear Stearns issue with the SEC. The primary focus on this is how the SEC had acknowledged Bear Stearns shady pricing methods for their CDOs but did nothing to stop them until the bail out.

On a personal note, I have large issue with the concept of a tax payer bail out. Whether the government admits it or not, when the Federal Reserve backs these deals it is you and me that foot the bill if things go sour. We as taxpayers should not have to pay for their indiscretions that made them a fortune over the boom of subprime lending but has now led to their demise.