Thursday, September 25, 2008

Why the Bail Out won't work

The Roman legions understood failure and the issues that the country currently faces. They understood overstaffing, undermotivation, and they had this fantastic system called decimation where one in ever 10 person in the legion (made up of 100 soilders) is decapitated. Whilst I do not propose death, certainly heads need to role and not just the CEO who everyone seems to be focusing on. The majority of the problem is that during good heady times, people are hired, departments are staffed and mediocrity becomes the norm, during tough rough hard time require departments staffed with exceptional people who look after the bottom line.

So I know that houses arent selling, the market is dead. I know that WAMU is looking for a buyer, they are in big trouble. I know that they own alot of properties now that they dont want that dont generate them any money so I figured they would be willing to sell me one, two, ten, or even a hundred or more properties at 30-40 cents on the dollar. This way they have cash that they so desparately need to pay their staff and I have properties at realistic prices, where rents cover the mortgage without the artificially inflated craziness Greenspans interest rate cutting has generated. 

Well the model is simple, It has been done before and is very effective, however this story went somewhat differently and explains why WAMU will be out of business very soon. The REO department is spread throughout the country, the main office is in Jacksonville, FL. However my quest to find a decision maker encompassed Texas, Newport Beach, CA, Los Angeles, Ca until i finally found the decision maker right back in Jacksonville, Fl. I did speak to her bosses enrouted and that gentleman was at least compentent. He probably could easily have done the entire job himself using the companies outsourcing technique but we will get to that. WAMU had used some smart outsourcing and hired REO World out of Newport beach and there team would make the ultimate decision of which offers were made to the bank, when and how long the property stayed on the market. They too had a manager with a team of staff under him, understandable considerin that they would have to deal with a multitude of brokers and accept offers, which they then assess and forward to the bank. Wow sounds like another guy who could do the job single handedly again.

They in turn had expertly hired a broker who they knew who was nowhere nearby over an hours drive from the property in fact, he had never visited it and in turned hired another broker to co list the property. This woman was actually a secretary who sold maybe one or two houses a year. The decision maker in Jacksonville unfortunately knew non of this....... Lets also think a little about fees, so WAMU pays the consolidation/ asset management house for there services, they also pay the broker about 5-6% which he has to split with his co listing agent - how much work would they be willing to do for what could end up being a few thousand dollars. Meanwhile WAMU has spent at least 10% or more to sell the property ontop of whatever they are loosing in the cents on the dollar deal and opportunity cost. 

So the house is sitting on the market, vacant for a decade now, slowly rotting and dying, depreciating constantly, its half finished, has a whole load of code violations the front door wont even open properly as the steps are too close. All the internal walls need to be torn down, the electric wiring has to be removed as it was never finished and doesnt match the plans, the radiant heating leaks and finding the leaks will be so costly its cheaper to redo the system. However, the decision maker has a valuation from the peak of the market, has never seen the property and as a caveate knows nothing about real estate. This is the kind of utterly pointless employee that has to be shed if the American economy is to recover. 

When will people learn that a proprty is worth what someone will pay fr it, that there is an opportunity cost to having cash tied up in dead assets and that ultimately this whole crash is about property, assets and commodities reestablishing true value rather than an artifically inflated value due to traders, speculators and of course the uninitiated who try to follow in the wake of those who make the real money.  

Altold it is almost irrelevant what I offered and paid for the property the bank looses so much money that when wages are thrown in ontop of losses, opportunity cost etc the assets are probably only worth between 20-30 cents in every dollar. Therefore the government would need around $3 trillion dollars in assets from banks to justify putting in the $800 million required to solve the current problem. Without that the US tax payer gets utterly exploited and will live with the consequences of the banks being able to keep employees they shouldnt employ and unloading their worst assets. This like reducing interest rates in august/ september 2007 will prolong the recession and actually serve to make things worse than letting things reach a natural free market bottom. 

This is why the bail out isnt going to work

Copyright Jonathan Rose 2008 - Creative Commons License

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