A VC - Latest Comments in To Splurge Or Not To Splurge

Re: To Splurge Or Not To Splurge

Karen E — Tue, 30 Sep 2008 19:39:25 -0000

I agree most with this statement. If we are going to get stronger as a nation, we have to go through the pain.

Re: To Splurge Or Not To Splurge

jasonkolb — Sun, 28 Sep 2008 14:01:21 -0000

As someone who does understand it, I respectfully disagree.

Re: To Splurge Or Not To Splurge

guest — Sun, 28 Sep 2008 13:10:15 -0000

Well - even if there is a sizable upside, who will actually get it? The fundamental problem here is a form of corruption, that is, decision-makers who are not being held accountable for their decisions. If there is an upside under the control of a finance czar, it is likely that a large percentage of it will be distributed thru favors and cronies. The average taxpayer understands the system better than we are given credit for, and it does not require a degree in finance.

Re: To Splurge Or Not To Splurge

fredwilson — Sun, 28 Sep 2008 07:59:07 -0000

JLM you are the master of this issue on this blog

We are all hoping that people like you get involved in solving this mess
asap

Re: To Splurge Or Not To Splurge

fredwilson — Sun, 28 Sep 2008 07:50:08 -0000

David Karp (tumblr founder) says that this blog's comments are the exception
to the rule that all comments suck

I'm not sure about that, but I am sure that this blog's comments are
awesome, way better than the posts that generate them

Re: To Splurge Or Not To Splurge

JLM — Sun, 28 Sep 2008 00:35:13 -0000

Denmark does not guarantee the safety of Europe, North America and southeast asia. Denmark was overrun by the Nazis in about 30 hours in WWII.. Classic micro-macro error of logic.

Re: To Splurge Or Not To Splurge

JLM — Sun, 28 Sep 2008 00:25:22 -0000

I run a public company and own a substantial amount of its stock. I bought into it as a turn around opportunity. I am iintimately familiar with Nasdaq, OTC-BB, Boston (now defunct) exchanges. I speak only of common stock and simple preferred stock.

Any public company has its stock listed on stock exchanges subject to rules promulgated by the exchanges which have evolved based upon a very simple concept --- allowing the shareholders of the company to trade the company's shares among themselves and prospective shareholders in an efficient manner with full exposure of the bids and asks. This is simply an objective third party auction in which the company allows others to set the price of a trade and agrees to enter on its books the transfer of its stock among folks who have used the appropriate markets to buy and sell its stock. The company has made the decision to provide this service by deciding to be a "public" company.

No company is served by the selling of "naked" shorts --- which by their very nature are not even "shares" but some mythology created by traders. No company should be required to enter on its books the transfer of ownership of something which does not even exist.

The mangement of a public company has a fiduciary obligation to its shareholders to act in the best interest of its shareholders including in protecting the value of shares both through diligence in the management of the enterprise but also in the administration of its records. To facilitate the selling of shares which do not exist and which serve to dampen the price of the shareholders' shares is contrary to that obligation.

"Adding liquidy to markets" and "signaling truth" are not benefits which are conveyed upon investors by deciding to purchase shares in a company.

Re: To Splurge Or Not To Splurge

JLM — Sun, 28 Sep 2008 00:07:57 -0000

I think that the issue is really a notch more subtle than just looking at real estate values. It has to do with the value of "shelter" --- right up there with safety and sex in man's hierarchy of needs.

Even if the underlying value of the real estate securing a mortgage declines by 20%, a borrower still has a requirement for shelter.

If the bailout has a provision for lenders to renegotiate the payments with a borrower (which is exactly what a new investor will do if they come into possession of the mortgage at a discount), then the borrower will meet his need for "shelter" by staying in his home at a reduced payment rate even if he has to share the equity at some future date with the new lender.

Remember defaulting on a mortgage has consequences including the creation of a legally collectable deficiency judgment as well as a very negative impact on personal credit.

I suspect that many borrowers cannot afford $100 a month but can afford $75 per month. They will also be willing to share the upside in order to prevent the deficiency judgment against them while avoiding the necessity to move.

Re: To Splurge Or Not To Splurge

JLM — Sun, 28 Sep 2008 00:01:35 -0000

The hole in Lehman's balance sheet was caused, in part, by two different things:

The difference in value between the underlying mortgages and the sum of the securitized tranches. I would call this the "promote;" and,

The drop in value of the underlying mortgages compounded by the drop in the real estate which secures the mortgages.

The "promote" is gone forever while the drop in value of the underlying mortgages may eventually recover. Time wil ltell.

In any event, Lehman was lying to itself before it lied to the rest of the world.

It gets down to a simple truth: "One cannot make chicken salad out of chicken excrement even if you are a Master of the Universe."

Re: To Splurge Or Not To Splurge

JLM — Sat, 27 Sep 2008 23:41:55 -0000

I agree with you completely as it relates to Detroit. I was referring to market values in 2006. I suspect that the Detroit market was just as troubled in 2006 as it is today. I doubt any new mortgages were originated in Detroit's worst areas in 2006 so they are not really part of the current problem.

Even having said that I would opine that even the Detroit situation is not hopeless --- very, very difficult but not hopeless. They are not making any more land these days. It would take some extraordinary vision and leadership to make that happen and I suspect many would think it to be pragmatically worthless.

One of the encouraging things about the current problem is that many of the troubled mortgages are in great markets. I looked up foreclosed properties on the Fannie and Freddie websites the other day and I was very surprised to see so many in "hot" markets (e.g. Austin, TX). In these instances, there is a great market for the properties and the only challenge is pricing. I suspect that places like Las Vegas where both the price of the real estate and the core business of the market[;svr are under pressure may present more difficult problems.

Re: To Splurge Or Not To Splurge

qwang — Sat, 27 Sep 2008 21:17:35 -0000

Only the issuing of stock is about ownership and raising money and capitalization. Every trade post listing is partly (often mostly) speculative by nature, and naked shorts both adds liquidity to markets and validate markets as a powerful signaler of truth.

Re: To Splurge Or Not To Splurge

qwang — Sat, 27 Sep 2008 21:14:37 -0000

I wouldn't underestimate the complexity of these securities, especially as an outsider to the industry.. And congress is most certainly unable to understand the valuation mechanics, as are 99.99% of the population, so no, he could not have "easily" summarized anything.

Re: To Splurge Or Not To Splurge

CADbloke — Sat, 27 Sep 2008 19:58:45 -0000

I see 700 000 000 000 examples of how Wall St has pwnd Washington. If we prop this system up then these fat cats keep their power and your elected government retains its lack of control over then engine room of your country. This system of individual and corporate greed and exploitation needs to fall.

The world will still turn and the sun will still shine. It will be rough for a while no matter what is done at this stage. $700bn can buy all sorts of eventual outcomes - which one do you want?

Re: To Splurge Or Not To Splurge

jackson — Sat, 27 Sep 2008 18:14:18 -0000

Damn, where'd all these chickens come from? Full house at the roost these days.

Re: To Splurge Or Not To Splurge

fredwilson — Sat, 27 Sep 2008 17:58:10 -0000

Russia and India have a lot of cash too

Re: To Splurge Or Not To Splurge

@christinelu — Sat, 27 Sep 2008 17:53:38 -0000

This is an international crisis, why do we keep discussing this like it's a domestic issue. How many Americans are aware of the role China is going to play behind the scenes in bailing us out? After all, only two places in the world with liquidity right now Asia and the Middle East.

Re: To Splurge Or Not To Splurge

Peter Fleckenstein — Sat, 27 Sep 2008 15:18:56 -0000

JLM - Why don't you and Fred head down to DC. By the way I need to talk with you. petefleck@gmail.com

Re: To Splurge Or Not To Splurge

gpjudge — Sat, 27 Sep 2008 09:42:53 -0000

The Paulson plan will work, and it should produce a healthy profit for the public. The banks in this country can't sell these mortgage bundles to anyone for even 50 cents on the dollar, even when in most cases the "value" is probably 65 or 70 cents. As a result they can't lend money beyond drips. therefore, greatly fewer new mortgages, car loans, business loans, student loans, and the economy grinds to a halt. And most importantly the values of all homes continues to drop. And the banks can't raise new capital as a result of the uncertainty of the value of these assets. The solution is for the US gov't who can borrow at 3% to buy up these mortgage bundles at 50-65 cents on the dollar, the banks get the assets, that can't otherwise be sold, off the books and fresh cash on their balance sheets. then they can make good mortgage loans, car loans, small biz loans and the economy moves again. At the end of the day confidence in our banks rise, the govt most likely makes a profit, the economy picks up and tax dollars rise.

Do nothing and we likely sink into a depression.

Re: To Splurge Or Not To Splurge

dcostolo — Sat, 27 Sep 2008 00:08:46 -0000

agreed. JLM's two comments here are my favorite comments in a sea of great discussion. Paging JLM. ....JLM to the ER, please.

Re: To Splurge Or Not To Splurge

Mike Su — Fri, 26 Sep 2008 18:45:32 -0000

oh, and by the way, the IQ level in this discussion is WAAAAY too high and is skewing the numbers for the rest of the internet. i feel like it's my duty to throw in a "fred - you SUCK!" and "this post is gay". ahh...now it feels more like a normal blog discussion thread.

Re: To Splurge Or Not To Splurge

G-man — Fri, 26 Sep 2008 17:42:08 -0000

I realize that Ben and Hank are very smart guys, but I also know that there are some extremely smart, talented, and experienced guys in industry right now who could provide input to the process. Some are right here on this blog and many others. Why is the government and Treasury and no calling these guys and getting them on the phone or in a room together to brainstorm and cull together the best of the best ideas out there? They're the one's who are going to have to by into it in the end, so why not use them? Maybe they are and we just don't see it. But what I see is a bunch of politicians and somewhat removed government officials making decisions that will affect the rest of the country and possibly the rest of the world. That scare me a little.

Re: To Splurge Or Not To Splurge

Peter Fleckenstein — Fri, 26 Sep 2008 17:04:56 -0000

Fred,

FTW???!!!! Your blog here is incredibly fantastic! My biggest question is - Why can't I find one person with your thought patterns on the Hill? From either side!!!

So - my question to you - When can you be ready for DC to go teach these wonks how it is done properly?

Again - The best blog post I have seen on the web about this - bar none.

Thank you.

Re: To Splurge Or Not To Splurge

J.D. Falk — Fri, 26 Sep 2008 17:00:51 -0000

Sounds like a good idea to me. I've been wondering about something similar, though maybe not as good as your idea: if We the People are (via our government) buying all those mortgages for cheap, why not let the mortgage-holders pay off their loan at the same price that We the People paid to buy their debt?

In other words: Joe Dohn owes $100,000 on his mortgage. We the People bail out a big bank by buying his mortgage for $1,000 (I have no idea if that's the ratio; this is just an example.) Let Joe pay an extra $1,000 in taxes this year -- or more, maybe -- and forgive his debt.

The financial sector wins because they got bailed out. Joe wins because he gets to keep his house, and rather than spending the rest of his life under crushing debt he can be a productive member of society. We the People win because we get paid back, and the Government which represents us wins because they don't have to deal with the overhead of harassing Joe until he declares bankruptcy because he'll never be able to pay off the full $100,000 anyway (which is why it's a "bad" debt in the first place.)

I know why this won't happen. But why can't it happen? Is my math wrong?

http://www.cybernothing.org...

Re: To Splurge Or Not To Splurge

Brian — Fri, 26 Sep 2008 15:32:56 -0000

There is a good alternative suggested by another Paulson in today's Wall Street journal that I think matches Fred's approach.

http://online.wsj.com/artic...

I like the sound of this better than what I have heard about the Treasury's bailout proposal. I also believe we should start slow and stop once the markets start moving again.

Re: To Splurge Or Not To Splurge

vrikhter — Fri, 26 Sep 2008 15:30:20 -0000

cool, thanks!