Bad TARP/Good TARP

Fred Glick—quoted at right, under In the News—came into our lives 15 years ago when he arranged a mortgage for me and my wife, Peggy. Good guy. Straight arrow. Easy to do business with. Did everything asked of him. He was an absolute, dead opposite of the shyster real estate people and bankers who recently threw their customers under the bus and busted this country. The main business of business is acquiring customers and then doing your very best to continually delight them. Customers are the lifeblood of every business. If you don’t have customers, you don’t have a business. Period. The Basic Rule of BusinessLegendary direct marketer Bob Hemmings, now in his 90s and still going strong, once worked for a jeweler in New York's West 47th St. diamond district. There, merchants rent counters and window space in a kind of giant co-op. Every evening, all the jewelers would dutifully take their diamonds out of the windows and showcases and lock them in the safe until the next morning. All the jewelers, that is, except for Hemmings's boss, who’d leave his diamonds out all night and put his customer list in the safe. "If I lose the diamonds, the insurance company will pay," he told Hemmings. "If I lose my customer list, I’m out of business." Acquiring customers costs money. If I run an ad for $10,000 and get 100 responses, I have paid $100 to acquire each customer. ($100 x 100 customers = $10,000.) For my business to flourish, it’s up to me to sell enough goods and services to not only make back the $100 I paid, but also create a profitable relationship over the coming months and years. Each new customer represents an increase in my share of market. Once I have a new customer in my fold, the next challenge is to increase my “share of wallet”—to make wonderful offers so that more and more money is spent with me and not with the competition. A basic rule of business: It costs five to 10 times more to acquire a new customer than it does to sell products and services to an existing customer. The Real Meaning of TARPThe new definition of TARP: “Troubled Assets Relief Program.” The definition of TARP I grew up with: “Total Annual Renewal Premiums.” Old TARP is an insurance term that measures the individual worth of a single customer—the total premium dollars the insured will pay over his or her lifetime as a customer. Let’s say that customer bought a homeowner policy. The major benefit of that is being able to sleep at night knowing this most valuable asset is protected in case of fire or a plane crashing into it. This happy, well-rested homeowner is now a likely candidate for an automobile policy; a health care policy; a policy for the RV and the boat; as well as perhaps whole life, term life, an annuity and children’s life. With each additional policy, the lifetime value of that customer goes up. When a business is sold, the lion’s share of the price is for its customer list. The 5 Steps Traditional to Building a BusinessEverybody out there is a suspect.Do research to triage the suspects and come up with a list of bona fide prospects.Turn those prospects into customers.Continually delight those customers so they become repeat customers.Woo repeat customers and make them so happy they become advocates—folks who’ll proclaim their satisfaction to the world and drive traffic to you (and away from your competition). How Bankers Fouled the Great American Business ModelMany years ago, early in our marriage, Peggy and I went to our local bank in Stamford, Conn., where we had our checking and savings accounts. We gave the banker a 20% down payment, and in return got a mortgage on a ground-floor condominium overlooking a creek that housed a colony of ducks. The monthly mortgage payments were paid in full and on time. When we started our small business—the newsletter WHO’S MAILING WHAT! for junk mailers about junk mail—we went back to that bank and took out a $15,000 loan to buy desktop computers, so we could produce the newsletter and keep track of our customers. Several years later, after the newsletter was profitable and the computer loan paid off, we needed more room for the home office. Finding a house we liked, we went back to our trusty banker for a mortgage and a bridge loan that allowed us to buy the house and remain solvent until the condo was sold a few weeks later. For a number of years, we dutifully paid the bank our monthly mortgage and patronized its checking and savings services. Enter Fred GlickWhen our newsletter—along with ourselves—was acquired and we had to move to Philadelphia, we sold the house and paid off the mortgage. After a year of renting in Philly, we found a house we liked. Our real estate broker recommended a mortgage broker named Fred Glick, who showed up one Saturday afternoon for a chicken sandwich and iced coffee. He asked a lot of questions, asked for financial records and filled out a bunch of papers that we signed. I think we gave him a check for 20% down. Two weeks or so later, we had a 15-year mortgage. When we moved into the house, Peggy, who handles family finances, started making monthly mortgage payments—never a day late or a dollar short. In fact, some months she overpaid, working off some principle when we had extra cash in the bank. We gutted the house and put a ton of money into fixing it up. We assumed we’d never get the money out of it that we put into it, but it was and is home—our only home—not an investment. We love it and feel it’s worth to us every penny we spent, no matter what the real estate market thinks. Smelling a RatOne day Peggy opened an envelope that contained a payment booklet and an unwelcoming letter from a company that said it now owned our mortgage and we should pay it. Neither of us understood this, but every month she wrote checks for the same amount and sent them to this new address. A year or two later, we received another mailing saying we should pay some other mortgage company. “The most essential gift for a good writer is a built-in, shockproof shit detector,” Ernest Hemingway wrote. “This is the writer’s radar and all great writers have had it.” When this second mortgage-switch letter arrived, the red flag of my detector waved feebly in my brain. Something seemed amiss. I was uncomfortable sending hundreds of dollars a month to a company I’d never heard of, who in turn had no idea who we were. Intuitively I felt something queer was going on in the home lending business. Two more such letters arrived over the course of the next few years, forcing us to switch payments. The last one was from GMAC. Peggy paid off the mortgage in 12 years, and I didn’t think any more about it. Then in the summer of 2008, I heard that the older brother of an 80-year-old widow we know put all her money in a Countrywide subprime mortgage fund and lost her entire $300,000 inheritance. It was clear there was something rotten in the state of the housing market. The 'Pump-'n-Dump' Business ModelSlick bankers were conning gullible consumers into accepting pumped-up ARMs—adjustable-rate mortgages—that they couldn’t possibly afford, and taking fat fees for generating the sale. The ARM was then immediately sold off to some sucker buyer—dumped—before the original lender got stiffed. Out of the chute, the most valuable asset a marketer could have—a paying customer—was thrown under the bus. Nobody understood what was going on—not the homebuyer, nor mortgage bankers, nor the investment bankers, nor investors, nor the financial salesmen and brokers who pushed this stuff, nor Alan Greenspan, nor Ben Bernanke. I now think I understand why my mortgage was being footballed around the financial services world. My mortgage was probably sold to a company that lumped it in with a bunch of other mortgages—some good, some toxic—and created a fund of derivatives or CDOs (collateralized debt obligations). These were sold by the slice all over the world as bets that I would pay my mortgage, and the investors would each get a little piece of my monthly payment. If the deal soured, the funds were supposedly protected by toxic ersatz insurance polices—derivatives of derivatives called credit default swaps. These credit default swaps are the $30 trillion [sic!] elephant in the room. Once these funds of derivatives were assembled and sold, the mortgage holder sold my mortgage to somebody new. My bet is that the process was repeated. Suddenly, around the world there were two funds where investors were betting that they’d get a little bit of my monthly mortgage payment. Then three funds, and finally four—all betting on me. There was no new money from us. We paid the same every month. What was going on was a series of bets, just like roulette. If anybody had thought through the scenario to its logical conclusion, it would’ve been obvious the business model was fatally flawed: When I buy stock, I own a piece of a company.When I buy a bond, I’ve loaned money to a company (or the government) that will pay me interest on the principle for a set period of time, whereupon it agrees to pay back the principle.With mortgage derivatives, only two outcomes are possible: I pay off the mortgage and I own the home, or I default and the bank is the owner. The suckers who gambled on the derivatives ended up owning diddly-squat. The financial services industry created a giant Ponzi-like scheme in the grand tradition of Bernie Madoff and the U.S. government (e.g., Social Security, tax cuts and Medicare). The beginning of the end of the housing crisis should be a declaration that all derivatives—and derivatives of derivatives—have zero value. Sorry, folks, double-zero came up on the roulette wheel. Only without the clutter and whining about CDOs and credit default swaps can some kind of solution be worked out regarding homes, toxic homebuyers and their toxic mortgages.

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Bad TARP/Good TARP

Denny Hatch

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Denny Hatch