I generally hate reprinting old articles as it takes time and space away from my current rants - but this one is very, very important.

Back in November we started talking about how to solve the housing crisis and, by January, I had a formal proposal to put housing back on track as well as to bring down the price of oil from the then-shocking $85 a barrel.  While some of my ideas have found their way into some of the housing legislation that is being kicked around, what’s coming out of Congress is a bunch of dilluted trash that has the stench of compromise on it when what we need in this time of crisis is determination - not dillution!

My housing program will accomplish the following and can be enacted with a penstroke TOMORROW at an annual cost of 1/2 of what the governent has already spent in the 6 months bailing out BSC ($30Bn) and "stimulating" the economy ($160Bn).  My program is non-inflationary, will restore the value of the dollar, stop home foreclosures, restore AAA ratings for the morrgage insurers and other lenders.  I have a plan that will pay for itself after the first year at an initial monthly cost of less than what this country is spending on oil every 3 days. 

Read this over and, if this makes sense to you, send it to your friends AND Congresspeople.  If you are the friend and this makes sense to you, send it to your friends and Congresspeople.  Let them know if you are a Republican or Democrat and let them know you want action.  This is an election year, it’s our best chance as "THE PEOPLE" to actually have our voices heard.  Let them know we are mad as hell and we’re not going to take it anymore BEFORE our government spends another $100Bn bailing out the banks while ignoring the actual families in crisis who are at the root of this problem.

If this idea makes sense to you, go to the Free Site, where I’ve backdated it to Friday for immediate availability and feel free to send it to others but please also use the Digg or StumbleUpon or Delicious buttons in order to put it into wider circulation.  There are so many ways to "fix" our problems, what we are suffering from in this country is a crisis of leadership, which is causing a crisis of confidence - let’s do something about it:

Original article of 4/16/08:

200 years ago, Thomas Jefferson warned us: "If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless."

Well, 7,000 families a day are now losing their homes to foreclosures, that’s roughly 21,000 men, women and children each day being forced out of their homes, being stripped of their assets and often their life savings.  This isn’t a one-day problem for these people, it can take many years to recover from losing a home, if ever!

Back on January 21st, when the market was crashing, I rolled out my emergency econonic measures to fix this country and our readers put it into the hands of various people and some of my points have even found their way into policy (or at least rhetoric) but not enough is being done NOW, when we need it.

You can reread my original article, which includes a way to drop oil back to $60, that was written when oil was "only" $85, way back in January, but I don’t want to get sidetracked because we can solve the mortgage crisis tomorrow and right the global economy, curb inflation and put people back in their homes tomorrow by doing one simple thing:

We’re going to give every homeowner $100,000!

Not in the George Bush crazy "let’s borrow more money and create more inflation" sort of way.  My plan is simple and effective:  The US Government issues a simple one-page form to every US homeowner that allows them to transfer $100,000 of their home loan to the United States in exchange for $125,000 of the home’s equity (up to 50%).

• This would effectively halve the average person’s mortgage, putting roughly $600 PER MONTH back into the hands of homeowners.
• This would halve the risk taken by the banks and release as much as $2.7Tn in liquidity for other types of loans.
• This would stabilize housing prices (people are not forced to sell).
• This would stop the banks from having to "write down" an estimated $450Bn in assets (meaning they can now pay taxes like they are supposed to).
• This would keep families in their homes and in their communities as productive taxpayers.

How much would this cost us?  Well, there are 100M homes in this country and if every single one of them took us up on the offer (and remember you are giving the government a 25% bonus) then it would cost the US government $10Tn, a pretty hefty sum!  The reality is that only 10% of the homes in the US have mortgages in excess of $250,000 (it only seems like everyone in your neighborhood) and 30% of the homes in this country have no mortgage at all.

So, of a population of 70M homes with mortgages, let’s assume 1/2 take us up on the offer to go partners on their home, that’s 35M families who feel they need relief badly enough to give up half of their home’s value.  Since 90% of the homes have mortgages of less than $250,000, with a median debt of $150,000, that’s $100,000 times the first 3.5M homes ($350Bn) and $75,000 times 31.5M homes ($2.362Tn) giving us a conservative need for $2.7Tn in relief.

Sounds like a very big number doesn’t it?  Don’t forget though, this is not a giveaway, this is the United States government investing in United States real estate, putting the money back to work in the economy.  As these homes do get sold (average housing turnover is 6 years) we get 15% of that money back each year, even assuming it did all get used in year one.

Since the the government borrows money at 4.4% for 30 years (the price of the 30-year treasury bond), our "mortgage payment" on $2.7Tn is $13.5Bn a month.  That’s right, just $13.5Bn a month to IMMEDIATELY reverse the housing crisis, IMMEDIATELY stop 7,000 families a day from losing their homes, IMMEDIATELY stabilize the financial community (we just gave JPM $30Bn last month to bail out BSC), IMMEDIATELY stabilize the $26Tn housing market, IMMEDIATELY revalue the dollar and IMMEDIATELY inject $17.5Bn PER MONTH back into the economy.

How can we inject more money into the economy than we spend?  Because the average homeowner pays more than 6% on their mortgage and the government can borrow money at 4.4%, very simple!

Not only that but by rescuing the value of the sub-prime home loans and CDOs, we allow our lending institutions to "write-back" the $450Bn they are taking off the books and pay the proper taxes on them.  At 35% that’s $157Bn right there - enough to fund our first year of payments!

As the homes get sold, the government gets back 125% of what they invested (plus the interest of course) but even keeping the simple 125% return and stretching the turnover to 10 years that’s still a return of $330Bn a year on our $2.7Tn investment that would, of course, lower our "mortgage payment" by 10% a year, even if we don’t reinvest the profits.

So improved tax collection funds this plan in year one and by year two we’re running at a profit and we save 4M homes from foreclosure, save the economy from disaster and even bail out the evil bankers.  Sounds like a win-win solution doesn’t it?

If you like this idea, please send this to your Congresspeople.  They can debate me or they can steal this idea and pretend it’s their own - I don’t care as long as something gets done in this country.  Send it to action committees and people who vote and tell them it’s possible to have real dialog and perhaps SOLVE some of our nation’s problems, rather than blame the other guy or brush it under the table. 

You can find your Congresspeople’s EMail HERE!

Today’s tickers: FRE, FNM, VIX, LEH, WB, AIG, XLF

FRE- The market tumbled out of bed this morning to speculation of a possible government “conservatorship” of mortgage financers Freddie Mac and Fannie Mae, which own or guarantee nearly half of all U.S. home loans, bringing to mind the worst possible images of not only the impotence of the two chartered companies in their present form, but also the auxiliary effects through the broader financial sector if the companies were declared unfit to carry on. Remarks from U.S. Treasury Secretary Henry Paulson (who indicated today that the Feds’ current mission was to support the financers as they are presently structured) – seemed to rule out an imminent government takeover. This did little to assuage traders, who feel that a bailout would essentially value these shares at nothing and set in motion potentially very negative auxiliary effects in the larger financial space. Fannie Mae options are trading at nearly 4 times the normal level against a 22% drop in share price value to $10.39 – paring some of the pre-Paulson cataclysmic losses earlier in the session. Implied volatility has risen another 47% on the session to 267%, and comparing this shoulder-to-shoulder with the 123% degree of volatility shown by Fannie Mae shares historically tells us that the option market is pricing in about 117% more potential price risk to its shares over the next 30 days. In other words, the cost of insuring against price swings is rising appreciably as speculation over the future of the mortgage financers broadens. Puts at the July 5 strike have already traded at some 4 times the normal level, attracting buyers as well as sellers as the 45-cent premium on this contract reflects about an 11% probability of Fannie Mae shares halving in value again by next Friday.

VIX- Concern about the aftershocks of a possible forced socialization of Fannie Mae and Freddie Mac sent the S&P dramatically lower, leading the CBOE Volatility Index 10% higher by midday to 28.16. Intimations of “the other shoe to drop” in the broader market caused a rush among option traders to buy calls at the July 27.50 strike, where the $1.90 premium implies a move to at least 29.40 between now and next Tuesday. While the clear bias was to buyers at the 27.50 strike, calls at strikes 30 and 32.50 attracted buyers and sellers, and we wonder if selling pressure in August calls at strikes 27.50 and 30 may be evidence of traders cashing out of those positions to fund the purchase of front-month protection. The cost of protecting S&P-exposed portfolios against volatile price movement over the next 3 days is up more than 100% at most strikes in the July contract. In this environment, it would be no surprise to see traders resort to VIX call and calendar spreads, selling higher-strike positions to keep trade costs under control.

LEH- Brokerage names traded broadly lower on concern that a toppling of the mortgage financers would put a definitive kibosh on securitization; this despite observations from Sanford Bernstein analyst Brad Hintz that brokerage shares had already discounted an effective halt in securitization activities. But the bearish band plays on in Lehman rumor. Barron’s reported a Thursday regulatory filing that Lehman has some $21 billion in “mortgage and other asset-backed securities on its books,” the company doesn’t originate mortgages – sharply delimiting its exposure to a Fannie-Freddie crash as opposed to the regional or super-regional banks. Furthermore, yesterday’s assurances from Pimco and SAC Capital Advisors that they had no plans to revise their trading exposures to Lehman Brothers appears to have had no sedative effect on the barrage of malignant momentum surrounding Lehman, which is proving as hard to contain as a California wildfire. Implied volatility – the risk barometer used in the pricing of options – bounded 50% higher to 119.8%, more than 40 percentage points above the March 17, 2008 reading when the prevailing fear was that Lehman would actually suffer a Bear Stearns-like run on the bank. What’s certain is that option traders feel the risk to Lehman shares is especially acute over the next week, and we can extrapolate the implied volatility reading to the price of the front-month, at-the-money straddle ($15.00), which at $5.00 this morning suggests that option traders see the potential for at least a $5 up-or-down move (one-third of Lehman’s value as of this morning) from now to next Friday. Twice as many puts are trading as calls, with fresh volume at strikes of 15 and below, attracting bumper traffic from buyers as well as sellers as the value of these positions has more than doubled overnight.

Elsewhere, a cursory scan of the names in our top-50 list of top implied volatility gainers offers some indication of the companies option traders feel are most in the line of fire from a Fannie-Freddie failure.

WB- Wachovia shares have long been fingered by option traders as particularly vulnerable in light of its mortgage exposures, exacerbated by a disastrous takeover of California mortgage lender Golden West Financial. So it follows that a collapse of the country’s primary source for mortgage financing would raise Wachovia’s regional problems exponentially. We saw the redoubled risk outlook reflected immediately in a 46.5% increase to 158.8% today, dwarfing the already elevated 88.6% reading on the stock. Here as elsewhere in the financial space, there is a strong gravitation toward defensive put positions, which are already outranking calls by a factor of 2.3 in terms of volume. Front-month action shows these puts mainly being bought at strikes of 10 and 12.50 – the same strikes attracting buyers in the August contract.

AIG - Today’s move lower in AIG comes in swift succession to an 8% loss on concerns of a rating cut at its mortgage insurance unit, and real uncertainty about the company’s new management apparatus. Today its option implied volatility rose by another one-third today to read 119.7%, some two and half times the historic reading on AIG stock, as shares slid 8% to $22.09, distancing AIG even further from that freshly hatched 52-week low. It remains to be seen whether we’ll experience another six-figure put volume day in AIG options, but for now it looks like July 20 puts are trading heavily and on an implied volatility reading far higher than the reading for all AIG options (implying greater demand for protection at this strike). Interest has extended into the $20 strike in August and November as well.

SLM- Options in SLM Corp., the somewhat “incognito” initials of the student loan servicer Sallie Mae, are trading at triple the normal level today against a 5% decline for shares below the $15.00 mark. With shares hovering right around the 52 week low, the fact that 3 times as many puts are trading as calls suggests that traders are seeking protection for further erosion below these lows. In the front-month, July 15 strike puts have traded 9,000 times – amounting to more than half the open interest at that strike – at 95 cents per contract. Around midday we saw a 10,000-lot position bought on the offer at the July 10 strike, apparently reflecting a trader who expects Sallie Mae shares to surrender another one-third of their value between now and next Friday.

MER- Merrill Lynch’s implied volatility rose 22.5% to 109.5% as put volume eclipsed calls by 3-to-1 amid a 6% decline below the $27.00 mark for Merrill Lynch shares. Again , we can attribute this move to poor securitization prospects for brokerages on back of a larger failure in Fannie Mae and Freddie Mae – the Securities Broker/Dealer Index (XBD) has seen a 15% spike in implied volatility on that fear alone today. With puts outmoving calls by 4-to-1, most of the front-month action is occurring in puts at strikes 25 and 27.50, trading to buyers and sellers on sharply higher premiums. In general, Merrill Lynch puts at strikes 30 and below are seeing two-way traffic as the price of the 27.50 straddle suggests as much as a $4.79 up-or-down move priced into the options between now and next Friday. That’s more than 17% of Merrill Lynch’s current share price – a huge move.

XLF- Shares in the Financial Select Sector SPDR, meanwhile, are trading 3.7% lower at $18.50 on back of the Fannie/Freddie brouhaha. Earlier today we noted a heavy degree of buying pressure in July 20 calls, which have traded in excess of 30,000 lots, and wondered whether it might be protective hedge positions by traders shorting the financials even at current levels. At 29 cents apiece the $20 call seems an extraordinary bargain, and indeed it’s been stripped of more than a third of its premium value since yesterday.The buying here may also be indicative of traders positioning long of volatility via strangles with puts at lower strikes. A look at the price of the 18/20 XLF strangle indicates that traders can buy this position for a combined premium of 88 cents and obtain protection in the event of a break above $20.88 or a probe of even lower lows below 17.12. That $1.35 move below current price levels is less than the decline we’ve seen in the XLF since Tuesday.

Market death or another bottom test?

FRE and FNM are once again being used to spook the markets but thank goodness for Piper Jaffray, the lone voice of reason in this insanity, who went out on a limb this morning to point out "There has not been one significant piece of macroeconomic or company-specific news on either company to drive the decline," in Piper’s view.  "They believe FNM will likely not need new capital unless credit losses rise to over 40 bps, which would be about triple current levels."

The drop began on a bullish competitor’s speculative note on capital and proposed FASB accounting changes (dispelled by the regulator). FNM/FRE’s regulator, OFHEO, put out a press release last night saying "they are adequately capitalized with capital well in excess of OFHEO-directed requirements, have large liquidity portfolios, access to the debt market and over $1.5 trillion of unpledged assets."   Piper also warns that this is irrelevant as market fear is so high fundamentals don’t matter and, as I pointed out in Wednesday’s Wrap-Up, these institutions are under attack by GS, Cramer and the usual pack of hyenas so facts don’t really matter when the big boys line up to get you.

And, of course, oil is back to $145, up $8 in just 2 hours of NYMEX trading on what I am sure are legitimate demand issues.  GE turned in a report that was in-line, without any of the severe financial losses that were being predicted and Q3 is being guided in-line as is the year.  This is a $275Bn company with $200Bn in annual sales and $22Bn in profits telling you that things look fine across their finanical, service and manufacturing divisions - QUICK, PANIC! 

What’s even crazier than the herd mentality that is driving investors out of anything financial is the fact that the MSM refuses to talk about the elephant in the room, which is $146 oil (8 am).  Of course $145 oil is causing consumer confidence to slip and causing consumer spending to slow and driving up costs for corporate America and deflating the dollar and destroying our balance of trade and damaging the travel industry and killing the Transports and Restaurants….  It’s ALL about OIL, that’s why it’s usually called an oil crisis but where is the concern?  Where is the call to action?  What is being done about it?  The media glosses over the issue and the people feel there is nothing they can do but accept their lot in life while the country collapses - When did we let this happen to America?

At least BUD gets to escape this nightmare, InBev raised their offer to $70 a share and I think they should take the money ($50Bn) and run before Americans have to start walking to the liquor store to be able to afford a 6-pack.  We covered up into yesterday’s close as we didn’t hit our market goals for the day but I can’t at the moment imagine what’s going to happen that’s going to make us want to go into the weekend bullish when, based on this morning’s now $9 price move from yesterday, Americans are being asked to come up with an extra $540M for gas this weekend (20Mbd x 9 x 3).  That’s an annual pocket-picking of $65Bn thanks to those stimulus checks, close to 1/2 of which went to gas money last month and allowed Americans to cut back on their driving by "just" 4%.

Over in Asia, the new IPhones rolled out today and immediately sold out.  That won’t stop AAPL from selling off today along with the rest of the market even though reports from store after store around the world are that entire 1,500-phone allocations are gone as fast as they can be sold.  Its arrival in Japan marks a significant foreign entry in a market dominated by local brands.  According to the WSJ:  Japanese media are talking about "iPhone shock," alluding to Commodore Matthew Perry’s black ships that forced Japan to open to Western influence in the mid-1800s.

Have you ever seen a company that makes a $500 phone that well over 1M people are waiting on line for around the World trade down in pre-markets?  That’s INCREDIBLE!  I like the AAPL $170s as a momentum play, hopefully for about $7.50, looking for a quick $9 as the sales numbers start coming through.   I also like the Aug $180s for $9 that were $12 on Thursday for a weekend play.  $500M is 2% of Apples total ‘07 sales in just one day, in just one hour really at the rate these things are selling.

Asian markets were mixed, with India dropping another 456 points, the Nikkei down slightly thanks to an after-lunch pump and the Hang Seng was up 362 points even though the Shanghai pulled back to 315.  Financials were down but export companies picked up a bit along with oil and commodity companies.

Europe is following our markets down significantly, dropping 2% off what started out as a good open.  As with the US, the rise in oil sent Airline and Auto stocks sharply lower.  InBev shares ROSE 3.9% as investors there are very excited about snapping up American companies at what looks to them to be bargain prices (see BUD in Euros chart).

I don’t know if we’re going to hold 11,000 or not but I’ll be taking out my FNM callers and doubling down at the open (looks like $4.20) and selling the $5s on a bounce, but this is a very dangerous trade and will be catastrophic if the rumors are right but I’m just not buying it.  We went through the same thing with BSC and none of it turned out to be true but, unfortunately, lack of confidence in a financail can become a self-fulfilling prophesy so we’re going to have to play this one by ear.