Subprime Bailout Here… But Will It Help the Stock Market?

This afternoon, President Bush will announce a “bailout” for subprime mortgages. Rumors circulating have the program freezing interest rates on specific loans for five years… giving homeowners with subprime mortgages some room to breathe.

Personally, I don’t like when the government comes to the aid of the private sector. And that’s exactly what is happening here. Homebuilders got rich developing land and building homes, mortgage companies and mortgage brokers got rich giving people mortgages they really could not afford. Where did all those profits go?

Now, the government is taking money from taxpayers who were conservative and did not overextend themselves and basically using the money to bail out people who made poor choices. This really is a remarkable country… you can speculate and the government will help you out if there is a problem. Let me ask this question: if the housing boom continued, aside from taxes, would homeowners be giving any of their profits to the government? Of course not.

Wall Street came out with two brilliant “make money” products: subprime mortgages (mortgages for people who are not credit worthy) and ARMs (mortgages that start at a ridiculously decreased interest rate and then reset to higher rates later). Billions of dollars worth of these instruments were sold, Wall Street got rich, consumers got screwed, and the government tries to clean up the mess… a story as old as Wall Street itself.


As a real estate man and novice historian, I can tell you that the government subprime bailout will do very little (except increase our deficit) to help the bust in the housing market. As for the stock market, President Bush’s subprime bailout program will do nothing for stocks. As the economy slows drastically in 2008, the damage done to housing and mortgage stocks will start to affect consumer stocks, as consumers feel the economic pinch and spend less. Special situation small-cap stocks can always do well because each is assessed on its own specific merit. But for the stock market in general, 2008 might be one of those years the market hopes never happened.

A final note on the subprime bailout: Did the government not create this mess in the first place by decreasing interest rates to a 46-year low, thus enticing consumers to borrow heavily to buy homes they could not really afford in the first place? I’m afraid that is the sad truth.

NEWFLASH — The shares of MBIA, Inc. (MBI/NYSE), the largest bond insurer in the United States, fell sharply on the NYSE yesterday, as Moody’s Investor Service said the insurer could face a capital shortfall that would affect its credit rating. MBIA shares are down 62% so far in 2007. Yesterday, they had their biggest one-day drop in 20 years. Now, let me see, wasn’t it Alan Greenspan who originally said that the slowdown in the housing market would not trickle into rest of the U.S. economy? No wonder he gets close to $100,000 for a speech.