This Perp Walk Needs Handcuffs


Do many of us truly understand the scale of one trillion dollars? The following executives have been called to Capitol Hill to explain what they did with their shares of the $750 billion bailout:

- Mr. Lloyd C. Blankfein, Chief Executive Officer and Chairman, Goldman Sachs & Co.
- Mr. James Dimon, Chief Executive Officer, JPMorgan Chase & Co.
- Mr. Robert P. Kelly, Chairman and Chief Executive Officer, Bank of New York Mellon
- Mr. Ken Lewis, Chairman and Chief Executive Officer, Bank of America
- Mr. Ronald E. Logue, Chairman and Chief Executive Officer, State Street Corporation
- Mr. John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley
- Mr. Vikram Pandit, Chief Executive Officer, Citigroup
- Mr. John Stumpf, President and Chief Executive Officer, Wells Fargo & Co.

The panel was called in by the house Committee on Finance. (You can watch it live at on February 11, 2009, 10:00 a.m. Eastern.) The House events are more exciting than the Senate, whose members take decorum too seriously to ask direct questions and raise their voices when they don’t get answers.

These guys (no women) are being called in to answer questions about what they did with the $750 billion bailout. Most people don’t really understand what a billion dollars is, let alone a number of billions that equals three-quarters of a trillion dollars. Let me try to bring it home.

Most people know what a million dollars is – it’s been popularized in TV programs like "Who Wants to be a Millionaire?" and "Joe Millionaire". Most state lotteries have minimum prizes of a few million dollars. Angelina Jolie and other very popular actors reportedly receive $20 million for making one movie. Blockbuster movies can have more than $100 million in ticket sales on a good opening weekend. There are about 130 million housing units (homes, condos, trailers, etc.) in the U.S. The population of the US is a little over 300 million. We’re working our way up to $1 billion if we think of $3 or $4 per person. $1 billion is about equal to the annual income of 16,555 Americans. The entire population of Nebraska earns about $120 billion in a year. The population of California would earn about $150 billion in a month.

The U.S. Treasury and Federal Reserve paid $150 billion for an 80-percent stake in American International Group (AIG) in a bailout announced on September 16, 2008. On September 22, just days after receiving this bailout, AIG spent $443,000 on a spa outing at the luxurious St. Regis Resort in Monarch Beach, California, including $23,000 in spa treatments. AIG visited the Hill on October 7, 2008 where its CEO defended the spending as “necessary to maintain business.”

When they left the Hill, they threw a second party for themselves at another luxury hotel, this time $86,000 at a New England hunting retreat. They canceled 160 events after Congress and the press complained, but they still went on to spend $343,000 on a three-day event at Arizona’s Pointe Hilton Squaw Peak Resort in November. This time they made sure there were no AIG signs on the premises – three months later I still can’t figure out why no one is in jail for fraud.

Treasury, so far, has refused to tell us where much of the money went, beyond paying for pricey canapés and comfy beds. Not surprisingly, Fox Business Network ran a half-page ad in USA Today on February 3 to announce that they “sued the Treasury and the Federal Reserve” to find out where the TARP and FRB-NY money went. The Senate is considering subpoenas to get Treasury to tell them where it all went. Talk about imperial government!

Let’s keep going, because the numbers get bigger. The Treasury passed out $750 billion in their bailout. Treasury Secretary Henry Paulson and Fed Chief Ben Bernanke said that “The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.” (Bloomberg, September 19, 2008.) There were about 3,000,000 homes in foreclosure at the end of 2008.

But who was really being bailed out? For $750 billion you could buy all of them outright and still have more than $100 billion left over to make car loans, student loans, small business loans – or pay bonuses to all the Wall Street and Bank executives in 2008. California had the most foreclosure of any state in 2008 – 523,624. $750 billion would have saved all of them – three times over.

For $750 billion you could buy 3,507,951 single-family homes in the US. That’s equivalent to every home built in the US in 2006 and 2007. You could buy about 3% of all the homes standing today in the US.

$750 billion would buy you 1,524,390 single-family homes in LA County, or 83% of the total. With $750 billion you could buy all the land in private hands in Los Angeles County (but not the buildings on it) and still have enough left over ($185 billion) to buy all the buildings and structures in Los Angeles city.

Now, Congress is working on a stimulus package that is approaching $1 trillion. Not to rush you through the math, but if you got this far, then you are already three-quarters of the way there. Apparently, Los Angeles is $1 trillion: That’s about the value of all the residential, commercial and industrial property in LA County. (Actually, $1.109 trillion, but what’s a hundred billion among friends?)

A stimulus package of $819 billion should give $6,306 to every household. It won’t, of course. But it should.

So what’s my conclusion? This bailout plan has little to do with addressing the root problems of the housing crisis, or helping hard-pressed Americans. It’s about bailing out the big banks and financial institutions from the consequences of their own miscalculations.

NOTE: calculations use median home prices and median incomes. Unless specified as “single-family homes” the housing numbers refer to all units which include condominiums, manufactured housing, apartments, etc.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

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Perp Walks

There is no "housing problem". There is a Worldwide credit crisis. Insofar as there are many borrowers who bit off more than they can chew, let the market work it's magic. Prices need to fall into their historic relationship to wages and rents. Any attempt by the government to intercede will only delay the inevitable. The plan mentioned by both sides of the aisle is to drop interest rates on 30-year mortgages to about 4%. Swell! Isn't that what go us into this mess? Don't prices rise to artificial and unsustainable levels when interest rates are too low? Next thing you know, someone on Wall Street will try to package them into collateralized debt obligations and sell them off to unsuspecting investors. This is nonsense.

No, the only housing problem we have is too many unqualified borrowers holding worthless contracts because they cannot continue to make their mortgages payments. Sure, there were fraudulent lenders and we should prosecute each and every one of them, but in general both sides of the contract believed they were making a calculated risk to riches.

Insofar as the credit markets are plugged up, let's have the federal government nationalize all of them, determine who is insolvent, close those banks and let private money establish new banks. Let's not waste a dollar supporting failed institutions. Hard decisions are needed right now and bankers themselves are least qualified to assess their own viability.

This is not a market

Some part of the problem started with mortgage lending. Lenders pushed dumb loans then went on to re-sell those loans 15 times over – yes, they sold the same loans over and over in different mortgage-backed securities. Then, they sold as much as 50 times that value in credit default swaps. That set up the incentive to keep writing really bad loans. If you have $50 million worth of insurance on a house worth $1 million the incentive is to burn down the house and collect the insurance. Once your "market" saw that this could work for home loans, they went on to do the same thing with other debt.

About 7 years ago broker-dealers figured out they could sell more stocks and bonds than were ever issued. In the case of Treasury Bonds alone, they sold $2.5 trillion worth of bonds that could not be delivered to the buyers. Look for "fails to deliver" on the SEC's website to get an idea of what they are doing in equities.

When sellers are allowed to create infinite supply by selling more than they can deliver, selling more assets than exist, this is not a market. That "magic" you are looking for isn't real: it's all been slight of hand.

Would this be a viable solution?

Your article made me think about how we could help people stay in their homes and still protect the taxpayer.

If state, local or even federal governments or bands of concerned citizens bought the land under the distressed mortgages, that land would be a hard asset that would not require insurance upkeep or suffer depreciation.

These essentially would be leaseholds, a common thing in other countries and sometimes in commercial real estate.

The house owner would still pay all the taxes as the "rent" on the leasehold would be just the taxes on that portion. The leaseholder would be able to benefit from the appreciation of the property and the whole property could not be transferred until the leaseholder was paid off. Any appreciation is either from increased demand or from inflation.

Before any money could go to the bondholders, the back taxes would have to be paid and the bondholders might be owed more than the paper they hold, but their exposure to risky loans would be reduced. The homeowner would be more likely to afford the remaining loan or could pay it off more quickly.

The homeowner would benefit by having lower payments and the government would benefit by a lower mortgage interest deduction.

The property could be sold whole or as a leasehold. Whole, it would pay back the treasury or leaseholder. Sold as a leasehold would allow more people into the market.

Transfers of leaseholds and real estate fees should only be based on the improvements and reduce transfer costs and mortgage fees making homeownership more affordable. Agents would benefit by more properties being sold.

There are many kinks that would have to be worked out as to how to get private investors or bonds to do this. If individuals wanted to buy bonds from the government to support this, they would have to be compensated in some way. Owning the land would be far less risky than an entire property where default and bankruptcy can halve the value of a property.

Getting people into the housing market would support the prices as demand for housing would increase. This is a subsidy to those in distress, but they could save up or pay off other debts which would help remove some of the debt that burdens the country. They would lose some of the deductions, but likely these people aren't able to use all their deductions anyway.

I would appreciate your feedback.

If all the houses that are mortgaged (I thought it was 155 million for a total of 12 trillion dollars) and half of the value were in the land, it would require 6 trillion dollars to halve everyone's mortgage if necessary. But the leasehold would be a hard asset which a home and a dubious payment record doesn't really match. This would save 360 billion in interest each year at 6% and would up tax payments considerably. 360 billion saved less the increased taxes would take about 20 years to save enough to buy out the leaseholds by individuals if inflation or deflation were not a factor.

Feedback to your solution

If I understand correctly, your suggestion is that the land be separated from the structures as different assets. Kind of like what was (and still is?) in place in HI, where you get a 99 year lease on the land when you buy a house? Well, in any event, land prices change just like home prices, so there wouldn't be a difference of one being a "hard asset" and the other not. While you wouldn't insure the land, you would still have depreciation/appreciation in the values and therefore sales prices. In other countries, similar to what happens in HI, a "landed class" of citizens are permitted to own land; everyone else gets a lease. In other words, you can inherit land but not sell it. Without a use (housing, farming, office buildings, etc.) land would only have value as parks, open space, etc.

Land is much less than 1/2 the value of a home, by the way. For example, in El Paso, TX it is about 15% of the appraised value for property tax purposes.

Your mortgage numbers are about right. At the end of 2008, households held $20 trillion in real estate with $11 trillion in mortgages. There were $3 trillion in commercial/multifamily mortgages. (According to the Federal Reserve Board Flow of Funds data.)

In my view, the problems in accounting for the value of homes, land and mortgages, compounded by bad accounting practices in creating mortgage bonds and derivatives, would work against your idea. Separating land from houses would require an additional level of complexity that, sadly, would not be managed in the existing environment.

Thank you Susanne Trimbath

Thank you Susanne Trimbath.

I hope non voters and voters will vote out of office many members of Congress in 2010.

If you spend more time thinking about the things you want your television to do than who to vote for, you should NOT be surprised at how members of Congress are acting.

People should NOT be surprised at what is taking place. Many members of Congress care more about campaign contributions from financial companies and other companies as well lucrative paying jobs after leaving office than about what is best for our Republic.

Many people who are very angry about what is going on may want to run for elective office. I ran for United States Senate in 2002. You probably will not win. You may get important issues discussed that may someday be adopted.

I discuss dealing with the financial crisis on my profile I added to it yesterday. I have links to several articles on it.

I recommend people read

Article 1, Section 8 of the United States Constitution

The Federalist Papers

George Washington's Farewell Address

John Locke

The Art of War by Sun Tzu

Machiavelli's Discourses which I like more than The Prince

Caesar: A Biography by Christian Meier.

My website is It has my picture.


Ken Stremsky