R.C. Lim, Attorney and Counselor at Law

Markets Rise, But the Fed Might Be Out of Options

Although Bernanke proposed three possible tricks that he as the central banker still has up his sleeve, the bottom line is that he is nearing in on being out of possible options to address the slumping/nonexistent recovery.

SBA Loan Program Is a Failure

Demonstrating yet again that those in Congress have been bumbling over the appropriate response to the economic crisis, the SBA loan program “America’s Loan Recovery” created to offer emergency loans of up to $35,000 to “viable” businesses in need of cash is set to expire in the coming months having made at least one thousand fewer than the 10,000 allotted loans.

Although banks are able to capture 200 risk-free basis points for simply providing their underwriting services for the loans, banks have claimed that it’s not been worth their trouble. Since the 10,000 loans were already a meager offering by the government from the start, the fact that the 10,000 loan allotment has not been met strikes me as a singular failure and further proof that the Obama administration seems not to have its eye on the economy. As a Democrat worried about the criticism around the corner for the mid-term elections, I fear that the criticism simply rings true. To state the obvious again, someone somewhere needs to start lending to small businesses again if we are to expect the economy ever to turn around again.

And who can blame the banks for not wanting to work for their money. Compared to the other hand-outs that many banks are now getting right now from the Fed — primary dealers are essentially arbitraging the difference between the borrow at the discount window of 0.25% and short-term treasuries paying 2% — why would they want to be working so hard for measly $400 or so per loan.  (Note that the $700 must be discounted back to its present value.)  On this nearly identical spread, these large institutions are capturing the same risk-free profits in much, much larger sums without having to do any actual work.

Strange But True

In survey conducted by Experian, Los Angeles has the lowest consumer debt among the cities in their survey. Seattle is the winner of the “most debt burdened city” at $26,646. The national mean is $24,775. Los Angeles is on the bottom at $24,009. The eight percent swing is not a huge difference either way.

Public Key Encryption Hacked

This post is perhaps a bit off-topic. But given that it’s potential connection to the possibility that millions will have their credit destroyed perhaps not.

Background:

This may be a little bit mathy. If so, my advance apologies. Encryption has long been one of my interests.

Public-key encryption, the one most commonly used in commerce is called RSA encryption, works by having two keys — one to encode and one to decode. Essentially, you have part of the cipher — the public key that you give to the public at large.  Then anyone can encode a message and send it to you. The neat thing is that no one can take your public key and then decrypt any of your messages. For that, they would need the private key, which you keep to yourself.  This kind of encryption is at work any time you look at your browser and see that little lock in the bottom right corner. It is used in nearly all Internet transactions.

The big idea behind this kind of encryption is that factoring, or breaking a number down into its prime divisors is difficult and time-consuming. While there are a few shortcuts, mostly the method to determine prime divisors is simply to try them one by one. Because its so time-consuming, to crack the encryption on your web browser would take modern computers longer than the life of the universe and certainly longer than any human life.

There has always been two big potential monkey wrenches here. One is the possibility that some crazy mathematicians figures a way around the supposedly hard problem of prime factorization. (There is no theorem that it’s got to stay a hard problem.) Two is that the computer power surges past the computations that would be necessary to crunch the numbers in a reasonable amount of time. Something of a hybrid of the two seems to have gotten it done.

Why You Might Not Want To Send Private Information Online For The Next Year Or More:

A couple of electrical engineers working on an entirely other problem have figured out that if you vary the voltage on the machine sending or receiving the encrypted message there will be errors, then if you examine the kind of errors that has occurred, you can figure out the private key in far less time. In this case, they were able to crack the RSA cypher in 10 days.

This should be huge news! Personally, I’d advise that you be cautious until the remedies can be implemented. The proposed remedies — that errors be purposefully included in all encrypted messages might work. (It’s still unclear if that doesn’t simply create a new much easier problem than the problem of factoring.) Until then, every rogue hacker has a blueprint of how to get into your private information over the Internet. There are a lot of people who have the skills to capitalize on this development before an effective remedy can be developed.

FreeCreditReport.Com Is Not FREE!

Don’t be duped. How do you think they pay for those awful commercials?

The actual free site that facilitates your requests from Equifax, Experian, and TransUnion. None will give you your FICO score, but you can gain access to each entry to review it for accuracy.

The Basis Step-Up Conundrum

Check out BusinessWeek on the “Estate Tax Gap” or the problem that the basis step-up has gone away for the year. This can really, really hurt family businesses for which the basis is actually zero.

Next year, the estate tax will tax estates valued over $1 million at tax rates between 37% to 55%.

The Future Direction of Housing Prices

When Robert Shiller speaks about market bubbles and prices, you’d be wise to listen.  Shiller is a Yale Econ professor who studies market bubbles. Shiller famously published the bestseller, Irrational Exhuberance, predicting the demise of the dot.com bubble months only a few months before it collapsed.

Mind you, Shiller is sharp. One distinction he draws is knowledge of the existence of a bubble from knowledge of when exactly that bubble is going to pop. As if calling and then watching the housing bubble in slow-motion, Shiller re-issued Irrational Exhuberance with a special new chapter on housing in 2005. There he pretty much laid out the narrative about housing and interest rates that it took most folks another four years to figure out. He also invented a brand-new index so as to make his point, the Case-Shiller Index, which measures the relative expensiveness of housing prices in a manner similar to the price-earnings ratio for a stock.

In today’s New York Times, Shiller penned an article, “Don’t Bet the Farm on Housing Recovery” where he sheepishly predicts that housing prices are set to move down again.  I personally am ready to listen to what he has to say.

Today’s BK Article in Time Magazine

Time Magazine runs a feature piece that profiles a bankruptcy filing in the Southern District of California. It does a good job of capturing the large phenomena. Most of the those hardest hit are in housing related industries. Some of what I have seen — furniture manufacturing and sales, house painting, construction, construction, construction. Moreover, the expert quoted in the story, Katherine Porter, states that most do so after struggling with debt for two years or more. This is also true in my experience and a shame. Although there are certainly many subtle timing issues, most would be helped by filing earlier rather than waiting. It is this lag in filing that is also the reason that the story predicts that these record high rates will likely rise even higher.

Although we are in the Central District of California, the story is the same. Chapter 13s, as a percentage of all consumer bankruptcies, have gone down since the passage of the 2005 law from 35% to 25%, indicating that more folks are simply walking away from upside down mortgages and filing Chapter 7 to discharge their consumer unsecured debt. This is so because, although there are limited abilities to manipulate mortgage payments in Chapter 13 — to either strip a second mortgage and treat it as unsecured debt or to cure an arrearage or property tax debt — there are no such tools in Chapter 7.

Consumer Bankruptcies Surge Again

March filings were 34% higher than February. This figure again set a record high since the passage of the 2005 reform of the bankruptcy code. The year over year figure is more like 50%.

Student Loan Reform in the Health Care Bill: A Lowdown Shame

The larger narrative of deregulation that has been largely accepted by large sections of Democrats and might have become the uncontested political force had there not been an intervening recession lives to fight another day.

Obama had promised a lot with respect to loan forgiveness, but he delivered very little. By funneling all government loans through the government Obama has raised the specter of creating another fat bureaucracy full of incompetent folks who cannot tie their own shoes. Yet Obama has also guaranteed, at least for a little while, that the students of the future wont need to pay the tax in the form of corporate profits to lenders that will evaporate into thin air the moment the economy slows down. (Here I am thinking of TERI, which was used as a sweetener to insure pooled student loan bonds, or the unfortunately named - MyRichUncle - a bank that focused exclusively on student loans.)

The Obama plan also creates a much needed modification of limiting repayments to 10% of income and to a term of 20 years on loans made after 2014. To fully grasp the significance of this last piece, you’d probably be best served sitting next to me in my office while I do client intake interviews and patiently explain the law as it relates to student debt and bankruptcy. The law’s super grim in this area. The number of people in financial trouble who cannot discharge their debt is large. Personally, I think that the Brunner test must be unconstitutional since bankruptcy is a right guaranteed by the Constitution. More significantly, folks who find themselves in this situation have done it all right. They stayed in school. Kept their noses in books.

The measures in the Health Care bill are certainly a start, but quite clearly: Obama has not done enough. Yet again, he has split the baby to no particularly good effect. Moreover, he has avoided the issue of resolving the real people who suffer under the yoke of burdensome student loans by simply postponing his remedy. By setting a time four years in the future, Obama has avoided certain challenges, but he has also failed a deserving constituency — the hard-working, educated class — even while he randomly distributes government largess to corporate undeserving and those - many who were quite irresponsible - who believed the real estate agent’s lies.