Just Climb on Your Sawhorse and Ride

[Daveparts]

Just Climb on Your Sawhorse and Ride
By David Glenn Cox



A buddy of mine used to work for a plastics company that made Lexan plastic pellets. Lexan, best known for making football helmets, is used in thousands of products almost everywhere.

Strong and durable when completed, it is delicate and fragile during its manufacture. A series of pipes running for miles combine chemical elements in just the right amounts and at just the right time and as the slurry begins to congeal it is fired by compressed air into a silo to cool raining down plastic pellets in whatever color the customer requires.

A bad mix of chemicals or poor timing and the compressed air fires out a plastic goop, which is totally worthless. Conversely, an opposite scenario where a bad mix and poor timing and voila’! Miles of plastic encrusted pipes. Each pipe must then be taken down and routed out by hand. The plant must be shut down for at least 24 hours as management performs a witch hunt to see who will be sacrificed to the gods of corporate greed for their failings.

Each batch has a value of half a million dollars and the company expects two batches per shift times three shifts a day. So a little screw up is big money. One night as they were running off the first batch testing showed that it would never pass quality control. The operator was struck with a great idea! He moved the bad batch to a holding tank and began his second batch, then when ready he combined the two. His hope was that by mixing the bad with the good that he could pass the bad through without notice.

Instead he got the opposite effect, two bad batches which congealed and hardened in the pipes. The plant was shut down for days as every aspect of the bad batches had to be cleaned from the system. The operator was fired, but management made it clear to him that he wasn’t fired for the first batch. He was fired for the second batch. Mistakes happen but the second batch wasn’t a mistake; it was an attempt at fraud, trying to pass off bad for good.

This story came back to me while thinking about the subprime real estate market. Republicans, including John McCain, point fingers at Freddie and Fannie as sole villains in this debacle. Republicans residing in the White House for the last eight years and controlling Congress for twelve of the last sixteen years ask, “Why are you looking at me like that? It was Fannie and Freddie! Why, in 2003 Barney Frank said that they were solvent!” The main reason he said that was because they were solvent in 2003. Why didn’t the Yankees win the American League Pennant this year? After all, they did in 2003.

The subprime mortgages were bundled together with prime mortgages and sold to banks and pension funds with an AAA rating. The mortgage bundlers and the ratings agencies knew what they were doing. They knew that those weren’t AAA, but as long as everyone made the payments, no one was the wiser. Imagine you and I each have a million dollars to make home mortgage loans with. You make ten loans at 100K to prime buyers and make fees plus 1% when you bundle the loans. I make ten loans subprime, I make double the fees but when I go to sell these loans they won’t give me 1% because they’re subprime. So I split them up and bundle them with other prime loans.

I make my 1% and my double fees and no one is the wiser. But these securities are long term, 30-year securities; their only real quality is in their safety. A yield of 4% on your ten loans is 40K per year; if one loan goes bad insurance can cover it. But my ten loans sprinkled throughout the good securities poisons the whole batch. Three or four of those loans going bad poisons the whole bundle for investors. The insurance companies take a bath covering bad the loans that were paying the same insurance rates as prime loans.

Suddenly the game is changed. What were supposed to be safe investments have become a game of liars poker. I’ll sell you this 25 million dollar bundle for 20 million! They answer; I’ll trade you for one of my 25 million dollar bundles! Abe Lincoln once made a deal with a man to trade horses on sight. The man appeared with a sickly nag and Lincoln appeared with a carpenter's sawhorse. The banks fear each other, it’s a game of who can cheat whom first, who will end up with the sawhorse?

So while the Republicans want to blame the loans and the people who took out the loans, they dodge the central issue. It was the second batch that poisoned the market. Not a mistake or an error in judgement but a fraud, no different than mixing the bad batch of plastic with the good. Thinking maybe we can slip this through and no one will be the wiser.

The subprime market materialized out of a lack of qualified buyers, which is a direct result of the falling purchasing power of the average American family. Artificially low interest rates made cheap money available for investors, builders, and developers. The President bragged in 2003, “Home ownership rate is at an all-time high in America. More minority families own their own home, and that's better for our country. (Applause.) Michigan farmers are making a living. The entrepreneurial spirit is strong. The small business sector is alive and well in America.”

So how can the party in power now claim innocence? Two wars of dubious necessity costing $10 billion a month, the Bush tax cuts have cost $960 billion, $69 billion in interest alone between 2001 and 2006. In every category economic growth has lagged between 2001 and 2006. Personal income grew at 1.8% while inflation averaged 3%; payroll jobs grew at an anemic .02%. Only residential investment escaped the curve growing at a remarkable 7.3%. And income in the investment class with the Bush tax cuts saved those with income of a million dollars a year $42,000 While those us in the middle class under $40K saved almost, but not quite, $20.00 per year.

Once the slurry is made you cannot say, “I’m only responsible for the good batch! It's those other guys, it’s Fannie and Freddie! Its Barney Frank!" Do you know what he said in 2003? Poor John McCain now runs for President with a sawhorse under one arm and the President under the other. “Obama is going to raise your taxes!” You mean those tax cuts that have cost the treasury a trillion dollars? “Obama is going to bring us defeat in Iraq!” You mean that war that’s costing the treasury $10 billion a month? That war we didn’t need to start in the first place! “Obama pals around with terrorists!” How about you just climb on your sawhorse, John, and ride!

[snappyturtle]

1. Excellent. Love your analogy. I wish the answer were as easy as

telling mcsame to climb on his sawhorse. I can't put into words my feeling (borders hatred) for mcsame. K&R