As Originally Published and Authored - 

By Anthony Digiandomenico (MDB Capital)  •  February 26, 2009 10:00 AM

With what looks like imminent passage of the Mother of All Bailouts (following on the heels of a year’s worth of government-funded rescues of private homeowners, lenders, insurers, and the automakers), Washington has turned Aesop’s famous fable about prudence and hard work on its head.  The time is ripe for a revised 2008 edition of “The Saver and the Spendthrift” …

In a Suburb on a hot summer’s day, a Spendthrift was chirping and carousing his time away.  He watched scornfully as a Saver nearby struggled to save up money and food and build a secure home.  The Saver pulled overtime shifts to pay off his loans and accumulate retirement funds for the future.

“Give it a rest,” the Spendthrift said.  “Why bother saving and slaving and toiling and moiling? Let’s party!”  The Saver demurred: “I am planning ahead for winter and you should do the same.”  The Spendthrift blew off the Saver, squandered his supplies the rest of the season, and abandoned his home while on vacation (paid for by tapping every last cent of his home equity gain) instead of holding down a job.

When winter came, the Spendthrift’s pantry was empty and his shelter ruined from neglect.  The Saver, weary from working, saving, and stocking up for months, was dining comfortably in his nest.

Cold, hungry, jobless, facing foreclosure, and up to his two pairs of eyeballs in debt, the Spendthrift limped to the Association of Community of Lazy and Nearsighted  for Rescue Now (the ACLNRN) and demanded recourse.  The office was swamped with thousands just like him.  ACLNRN immediately put the Spendthrift to work registering dead Savers as new voters.

Funded with tax dollars from the rest of the suburb’s  residents,  ACLNRN organized mass protests at the Bank of Saveramerica, ambushed its top officials at their private homes, harassed their children, and demanded that the meadow’s politicians halt all foreclosures (”We must keep Spendthrifts in their houses!”) and outlaw discriminatory lending practices against starving, homeless Spendthrifts (”Well-stocked shelters are basic rights!”)

The banking industry capitulated; the HUD Lobby secured hundreds of millions of dollars in housing earmarks and grants and counseling subsidies to support the Spendthrifts with the shadiest credit and employment histories.  Saverie Mae, the meadow’s government-backed home lending giant, fueled the push for increased insect homeownership in the name of diversity.  Its executives cooked the books and headed for the hills.  Katie Fraudster and the Mainstream Suburban Media joined the grievance-for-profit circus, profiling Spendthrift sob stories and drumming up ratings as bewildered Savers wondered who was looking out for them.

The banks drowned in toxic debt. More Spendthrifts fell behind on their mortgage payments. Bailout mania and panic gripped the meadow.

Our little Saver, minding his own business, heard a knock on his door one late winter night a year later.  It was his old, sneering Spendthrift neighbor.  With ACLNRN presidential candidate, Barack Obama, now in office, the Spendthrift had been hired by the meadow as a tax collector.

“I’m here to take your provisions,” the Spendthrift cackled.

But it was the Saver who had the last laugh. “I’ve learned my lesson,” he told his shiftless friend.  “Why bother saving and slaving and toiling and moiling?  I’ve spent all my savings. I’m walking away from my mortgage. Thrift is for suckers,” the Saver said as he headed out the door, leaving the Spendthrift empty-handed.

I refuse to get off my soap box until we see concrete steps taken to end the ongoing economic and market malaise infecting all aspects of our society and world.

Step 1 - Courage.  Politicians need to gear down the rhetoric immediately, stop pointing the finger at others, take responsibility for their own actions, stop focusing on re-election, forget about who did what to create this mess over the last 2-3 decades and simply SOLVE THE PROBLEM by doing what needs to be done.  This is no longer a Republican or Democratic issue.  It is an American issue and nobody cares about the politics of any of this any more.  Period.  Have some courage and start doing what needs to be done instead of what needs to be done to get re-elected.  Doing the right thing may not be popular, but it’s always easy to do the right thing if you actually represent who elected you to do what you’re there for Mr. Politician.

Step 2 - Innovation.  Every politician needs to embrace the creators of jobs and wealth - entrepreneurs.  Why is it so hard for elected officials to understand that entrepreneurs create the ideas that create the companies that create the jobs that create the wealth.  I’m not talking about giving this idea “lip service”.  I’m talking about making this a national imperative as important to the fabric of the President and the government as JFK’s idea to put “a man on the moon”.  I want commitment, not talk.  I want an executive and legislative focus on this initiative that becomes the foundation of the United States government, the pillar of economic stability and the fabric of all legislative, policy and monetary initiatives going forward.  I want every politician talking about this every day of the week and the media to push this as a national priority in every broadcast everywhere.

Step 3 - Investment, *not* Stimulus.  Congressional officials and the President need to invest $5 BILLION in young companies, start-ups and entrepreneurs.  I have written about this before, but I want $100 MILLION put to work in each of 50 cities across the country.  This money will *not* be in the hands of elected officials.  Rather, it will be put in to each city in the form of a local start-up and young company growth capital fund and will be managed and run by a team of selected serial entrepreneurs, VCs, private equity investors and Angel investors so that a base level of scrutinty can go in to the selection of companies for investment.  This group will be investing on behalf of the American taxpayer and will receive a 0.5% management fee and 10% equity upside for success.  Why?  Because you need talent to make good investments and monitor and assess the investments until liquidity is achieved.  You get what you pay for and “free” doesn’t scale.  We want talent and we want investment discipline.  This structure achieves that.  Further, each $100 MILLION per city selected will be invested to the tune of $250K - $1M per company so that we can get stimulus rolling on new ideas and young company building for at least 150-250 companies per market.  This $5 BILLION investment from TARP will *always* result in more economic activity than giving it to Bank of America or Citigroup to backfill holes in their balance sheets.  And, it will result in investment returns to the American taxpayer both in the literal sense and the figurative sense as well.

Step 4 - Presidential Executive Order.  President Obama … immediately issue a Presidential Order to mandate that every *primary* residential mortgage in the United States be immediately and proactively refinanced to no worse than a 4.5% interest rate on a 30 year fixed interest mortgage.  No fees, no appraisals, no applications, no qualifications, no strings attached.  Advise all banks that they have until the end of February to make this happen through their entire portfolio of loans.  Advise any bank that refuses to comply with your Presidential directive, and that has taken even 1 penny of TARP money in the past, that they will be *nationalized* on March 1st unless they have performed under this Presidential directive.  This is not going to fix everything in the world of foreclosures, but this is going to allow *everyone* in the United States to get the same starting point whether they were responsible or irresponsible in their personal finances.  Since 92% of Americans have been responsible to date, they too will actually get a benefit for having been responsible just as those that have not currently are getting a benefit that they probably shouldn’t be getting at all.  Plus, it will put a real floor underneath the housing market and provide a foundation from which to move forward from for all of us.

Right now we need bold, bipartisan action with big thinking and new thinking.  We need leaders unafraid to lead, even if their actions are unpopular and even if that means that they are not re-elected to office.  We need people that can stand up and say “We screwed up.  It is all of our faults.  It is *my* fault and I intend to fix this.  Follow me.”  Note the last statement PLEASE … “Follow me.”

We are all tired of the noise.  We are also tired of the activity.  We want results and we want them now.  Stop confusing activity with results and lead, follow or get the hell out of the way already.  This is the greatest country in the world.  Let’s start proving that again and lead the world out of this once and for all.  If anyone lacks the commitment and conviction to make this happen, then do what needs to be done for the betterment of this great nation … RESIGN.

Young Chuck moved to Texas and bought a donkey from a farmer for $100.00.  The farmer agreed to deliver the donkey the next day.

Happy New Year everyone!  Glad that 2008 is *over* and hope to see 2009 to bring a lot more enjoyment and happiness than we experienced in the last 3 months of last year.  Other than the holiday break, it was all pretty much YUK out there!  At least I think that’s the official word for it.

In any event, with the new year comes some brand new challenges.  The macroeconomic and market backdrops remain ugly, and the underlying data and earnings continue to look bleak, but the changing of the guard in Washington D.C. is now less than 2 weeks away.  While the Santa Claus rally failed to materialize and the largely anticipated Obama pre-inaguration rally is looking “iffy”, it has been good to see that 30 year fixed interest rates have continued to drop towards 5% and may ultimately end up getting “forced” down by the new administration to 4.5% with or without points. 

As a result, we are beginning to see massive amounts of applications being submitted for residential refinancings.  At first blush, this would seem to be great for putting a floor under domestic housing and stabilizing the amount of late and delinquent mortgages out there that ultimately end up leading to more foreclosures.  Unfortunately, however, someone appears to have missed the e-mail and it’s not so obvious right now that the new low rates and huge surge of refinancing applications are going to have the desired effect that most people were expecting. 

Why?  Well, for some strange (and stupid) reason, many people attempting to refinance their option ARMs or higher fixed interest rate mortgage loans are getting turned away because they are somehow “not qualified” to pull off the refinancings.  Huh?  So let me get this straight.  Someone who has never missed a mortgage payment and is sitting in a 30 year mortgage at a fixed 6.5% interest rate cannot refinance to a new 30 year mortgage at a much lower fixed interest rate … say 5%?  Huh?  What? 

Well it appears that all of those same banks that took the TARP money over the past few months to the tune of $350 billion and also previously created the “ninja” liar loans in the first place to create this mess are now trying to deny many homeowners their right to refinance by saying that they “no longer qualify”.  Apparently they’ve finally decided to “enforce the integrity of the full doc loan process”.  For giggles, let’s take an example of someone currently paying (and successfully continuing to pay) $2,000 per month on their existing 30 year home mortgage.  Let’s say that with the new lower 5% interest rate on their 30 year fixed mortgage that they now would be paying just $1,800 per month to keep the math simple.

Well, in this “brave new world” we find that the same person currently qualified and successfully paying $2,000 per month on their exisitng mortgage is now *not* qualified to pay $1,800 per month on their new mortgage … even though that would cost them $200 per month *less* than they are already paying without incident.  Can you believe that?  CRAZY stupid is what that is!  It’s about as rational and logical as the good old Internet bubble days when Wall Street told retail investors that they could not participate in the next great technology IPO because they were neither accredited nor sophisticated and that they had to reserve their most “risky investments” for the institutional investors that could afford to stomach the losses should they occur.  But, we all know how that game worked now don’t we?

In the good old days, that was Wall Street code for “we’re going to enrich ourselves, those we want favors from and our institutional friends that will feed us more business and fees to pad our wallets and bonus checks from the post opening IPO *pop* that we all know is about to happen”.  What it also meant to the individual retail investor (the “bag holder” as we like to call them) was that they could not invest in that $20 per share technology IPO because of the “risk” … but that they were *welcome* to invest in the after market after the stock opened at $100 per share because clearly there must have been a *lot* less risk for the individual investor at 5 times the IPO price at $100 per share than an 80% discount at the $20 per share pricing.  Yeah, OK, right.  I get it.

So here we sit.  The country has a grand opportunity to let the little guy and girl out there … the common person … the American homeowner … get a do-over on their option ARM sins of the past, or simply a better fixed rate deal on the 30 year mortgage that they already have, and are SUCCESSFULLY paying every month WITHOUT INCIDENT … *but* we refuse to do it because they now “don’t qualify” for the refinancing.  Great, just great (and please insert sarcasm here).

I sure hope that someone wakes up to this, and wakes up soon, so the next $350 billion of TARP money doesn’t just get handed out again to all of those fine banks out there that are happily taking the money … and then doing nothing at all with it to lend out to businesses or consumers alike.  Oh yeah, the other bank party line right now is that loan applications are down right now in other traditional loan areas outside of mortgages because they “just aren’t getting enough applications submitted”.  Yeah, sure.  And what have we been smoking today Mr. “Too Big Too Fail” Bank CEO Man (insert Bud Light Real Men of Genius music here for effect)?

Hell, at least a few bank CEOs opted out of their bonuses “after careful thought and much deliberation”.  Nice way to kick off the year now isn’t it!?!?  More to come and be on the look out for my 2009 predictions … coming soon … or at least before this time next year.  Seriously! 

Since my original post suggesting solutions to the ongoing nationwide mortgage crisis, I thought I’d provide a few updates and also another new (and what I believe to be critically important) suggestion for the use of TARP funds to stimulate the U.S. economy.

First, the mortgage crisis updates.  While all housing, real estate and financial data remains horrendous, there are rumors floating around that the federal government may, in fact, be considering a version of one of my previous suggestions.  Namely, in addition to the recent Treasury announcement to purchase up to $500 billion worth of Fannie Mae and Freddie Mac mortgage paper, the feds are now contemplating a blanket move to drive 30 year fixed mortgage rates to 4.5%. 

This, to me, is a *great* idea and is even better than the 5% rate that I had originally proposed.  While nothing is going to solve the mortgage crisis overnight, federal intervention to get mortgage rates down to a level that provides sound refinancing options for existing homeowners and great initial financing options for new homeowners will make a material difference from coast to coast.  Additionally, this approach would remove the moral hazard of only rewarding those individuals that were irresponsible in setting up their original loans and/or biting off more economically than they could legitimately afford.

You may ask yourself, why was 4.5% the magic number selected by Treasury?  I don’t claim to know the specific answer to this, but I think that I can reasonable come up with the math that would have allowed them to arrive at this number.  Namely, if 3 month LIBOR rates are at roughly 2.20%, and if the 10 year historic spread between LIBOR and mortgage rates is roughly 1.68%, then that would put 30 year fixed mortgage rates at about 3.88%, or 2.20% + 1.68%.  Right now the historic spread is far higher than the underlying 10 year average of 1.68%, so the difference between the historic average and today’s reality is probably closer to 0.62% (or 62 basis points) higher.  As a result, 1.68% + 0.62% equals 2.30% … and thus 2.20% + 2.30% equals our magic 4.5% mortgage rate number.  Simple enough? 

Now, let’s move on the second topic regarding new economic stimulus.  This one is much more straight forward and is one that embraces the creators of new businesses and new jobs: entrepreneurs.  As a serial entrepreneur myself, I have always believed that entrepreneurs come up with ideas that create new companies.  These new companies, in turn, create new jobs, which then create wealth that then gets consumed, reinvested or saved.  However, independent of which item of these is ultimately selected, the process stimulates economic activity and growth and the overall aggregate U.S. economy benefits immensely.

So, what’s my plan?  My plan is to take $4 billion from the TARP program and split it in to 20 batches of $200 million.  What we will do is transfer $200 million to each of 20 cities to be used exclusively for investment in early stage companies.  15 cities will be selected based on their ties to start-up building and would include cities already known for their ability to successfully create Internet, technology, biotechnology, software, hardware, financial and health care companies, with the remaining 5 cities being selected based on their severe economic challenges alone.  For the 15 cities, my chosen list includes, Seattle, San Diego, Los Angeles, Denver, Phoenix, Austin, Dallas-Ft.Worth, Atlanta, Raleigh-Durham, Richmond, Boston, Chicago, New York, Miami and the Bay Area (which I will treat as one city composed of San Francisco, San Jose and Oakland).  For the 5 cities, my chosen list includes New Orleans, Detroit, Minneapolis-St. Paul, Nashville and Cleveland.

Now that we have the money and the initial cities identified, we will have fund managers with start-up, venture capital and/or private equity experience locally selected to deploy the investment dollars.  Then, we will have local companies, either newly created or in “early stage” mode, be showered with $500 thousand to $1 million investments each on behalf of the U.S. Treasury and the American taxpayer.  These investments will be in the form of equity and will provide for roughly 300 investments in local start-up companies to the cities selected before all of the $200 million fund money is expended in each local market.  And, if you’ll allow me to use experience as my guide, I will posit that for a material percentage of these companies invested in by the American taxpayer, others will provide matching or follow on private investment in the form of high net worth individuals, Angel funds, venture funds, private equity funds and/or corporate strategic funds.

So what does this do?  This direct stimulus addresses the heart of the problem accompanying the current ongoing crisis relative to unemployment and job creation.  I will be the first to admit that some of these investments will ultimately not pay off at all, and also that many of these companies underlying the investments will not survive.  However, for the U.S. taxpayer to make a good return on their investment, all we will need is a handful of successes in each individual market, or a few major successes anywhere throughout the country.  That’s all.  Simple, easy, straight forward and the best economic stimulus in the world … empowering ideas to spawn creativity to solve real problems to create real businesses to create real jobs that create real wealth to create real returns in spades.

Doubt that this is possible?  I sure don’t.  Way back in the late 1990s, Ron Conway, Casey McGlynn and Bob Bozeman took this exact approach in managing a $100 million Angel fund in the Bay Area called SV Angels LP (SV = Silicon Valley).  Ultimately they invested roughly $300 thousand per start-up company in a shot gun type of approach and as a result, were able to cover about 300 companies with the money raised.  Some of these investments, such as GirlGeeks.com and others, turned out to be spectacular failures during the Internet bubble and lost every penny invested in them.  However, some of their other start-ups turned out to have had liquidity events that ranged from modest wins to enormous successes.  These included companies like the one that I ran called Vovida Networks that was purchased by Cisco Systems for more than $100 million, and other companies that many of you would know well … from Napster to Plaxo to Google.  That’s right, Google, which as I understand it delivered more money back to the fund than the entire $100 million invested all by itself.

I know, I know, you’re saying that this is an unusual example that can’t be repeated again.  From my perspective I would suggest that not only are you wrong in this conclusion based on history, but also that even if you were right, this $4 billion in TARP money would have exponentially more valuable benefits to the entrepreneurs, companies, employees, governments and communities in which the money was put to work than the tens of billions of dollars already deployed through TARP to banks that are not putting virtually any of that money to work for the businesses and consumers that need it right now.

More specifically, out of a $700 billion TARP program, $4 billion put to work in this way wouldn’t even represent 0.6% of the entire TARP program.  Think about that.  Are you willing to invest up to 1% of TARP in a program like this across the country, or throw another $50 billion at Citigroup or AIG?  Exactly.  And, if anyone is upset about my choice of cities, let’s increase this commitment from $4 billion to $7 billion, take the full 1 percent of TARP as suggested and add another $200 million fund in each of another 15 cities across the country.

Trust me.  There would be no greater use of money than this modest investment in the great ideas of entrepreneurs to create the next wave of great American companies.  Period.  And, the return on investment to the American taxpayer will go way, way beyond the ultimate end state value of the equity purchased through all of these deals.

Mr. Obama, Mr. Paulson, Anyone in Government that Can Make Things Happen - please contact me and I would be happy to serve our country as the National Director for this program!