Debt imbalance core of financial problem

By DAVID MOON, Moon Capital Management, LLC
August 15, 2010


When Fannie Mae and Freddie Mac crawled back up to the bar last week and asked for another round of taxpayer cocktails, I had to chuckle. After crying proves worthless, there is little left to do but laugh.

After losing a combined $5.9 billion last quarter, these two entities took advantage of the Treasury’s implicit promise of limitless bailout funds and asked for an additional $3.3 billion to shore up their balance sheets. This brings the total direct funds provided to these agencies to $146 billion.

Do you think this was done to support homeowners? Is this about keeping your neighbors and their 2.5 kids from being kicked out on the streets?

No. If Fannie and Freddie had been allowed to fail, no one would have forced borrowers out of their homes. The bailout money pumped into Fannie and Freddie allows those agencies to continue making interest payments on the bonds they sold years ago.

In other words, taxpayers aren’t bailing out the home mortgage industry. We are bailing out the mortgage backed securities industry. We are making sure that the folks that own all these bonds don’t lose any money.

Who owns the bonds? They might be in your 401(k) or pension plan. You might own them personally. Big pension plans own them. So do Goldman Sachs and AIG. And so does the elephant sitting in the corner, the Chinese government.

The US just passed a massive reworking of the entire financial services industry, except for Fannie Mae and Freddie Mac. That’s a lot like saying the NCAA just passed harsh new penalties for rules violations, but exempted Lane Kiffin and Ed Orgeron.

The core of the financial problem in our country is a debt imbalance. People, companies and government entities have indiscriminately borrowed money with little understanding of the intermediate consequences and no understanding of the long-term consequences.

And almost nothing has changed.

Two weeks ago, a friend refinanced his home. He had no idea of the details of the new loan except that his rate was “3-point-something,” and he recalls the person at the bank saying something about his rate maybe going down in five years.

All he cared about was that his payment decreased $200 a month.

With all of the public and media outcries about people being snookered by unscrupulous home lenders, how could this happen?

Sadly, it’s because too many people are lazy or they think someone else will protect them.

Even after all of the councils and commissions and education poobahs are established by this new financial regulatory act, little will change.

David’s axiom: If we don’t force people to take responsibility for their own actions they won’t take responsibility for their own actions.

In an April 2010 speech, one government official summed up the dangers of overreliance on the federal government. “If the people do not feel the need to work for a living because they are covered by extremely paternalistic and irrational state regulations, we will never be able to stimulate love for work or resolve the chronic lack of construction, farming and industrial workers.”

Interestingly, the speaker was Raul Castro, President of Cuba. Things have certainly changed, haven’t they?

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Click here to subscribe to MCM commentary.

MCM website