I Had it Right Five Years Ago!

OK, I know that beating a dead horse is really a waste of time. However, I want to stress, that the US congress really does not have a clue about what is happening around it. You can surmise as you will, but congress (not the fun kind) is populated by very average power hungry people that really do not understand how complicated the world is at the moment. Further, thanks to that lovable exterminator from Texas, the Hammer himself, Tom Delay, the staffs of both houses as well as the committees, have been seriously diminished - both intellectually as well as physically. One would hope therefore, that when outside experts offer their opinions about impending disaster, the members of congress might listen ... or maybe think a bit.

So, here is an e-mail that I sent to my house representative on 8/28/03. Kennedy was a CFO at a decent sized company prior to going to Washington. As such, I thought that he may have some comprehension of the risks associated with the lack of disclosure both in company's financial statements as well as in the SEC documents related to the sale of securities ... like that crap that we are now being asked to buy ... all $700 billion of it.

----- Original Message -----
From: Harry Forsyth
To: mark.kennedy@mail.house.gov
Sent: Thursday, August 28, 2003 9:02 AM
Subject: Musings on economic cycles

Dear Congressman Kennedy,

I recently moved to Sartell.

I was happy to learn that our congressional representative is a member of the Financial Services Committee - an interesting assignment in the midst of a very interesting economic cycle.

I'd be extremely interested in knowing your views on:
1. the possible impact of an erosion in the value of single family property on the ability of Ginnie, Fannie and Freddie to stand up to a default rate greater than 10%.
2. the extremely liberal interpretation of the recent FASB FI 46 - that the accounting profession has taken as it relates to continuing to allow sponsors of SPEs to finance hundreds of billions in assets off of their books.

I've been suffering under the naive assumption that Sarbanes/Oxley and new SEC disclosure rules were going to force the accountants to actually disclose the real risks associated with off balance sheet vehicles.

I know that these are loaded questions. However, I also know, that the extreme amount of liquidity in the capital markets today is contributing to what could become a worse economic disaster than that of the 1930's. The exact same set of circumstances that inflated the Japanese bubble, e.g., the leveraging of the value of single family housing, is subtly doing the same thing here in the US. Ask yourself this, how could the capital markets possibly fund in excess of three trillion (what's that as a percentage of GDP?) in new mortgages this year. Where does that much capital come from and why do investors put up that much money? Does it make sound economic sense for the agencies to allow LTVs to exceed 95%? Who establishes that value and what kind footing does it really rest on. How much debt does the average consumer actually have, and what is their ability to repay it in a down cycle?

Next time you're in the district, drive around and count the number of for sale signs. Note too, the number of cars on the road - where has the money to pay for all of these assets come from?

It won't be long before prices start their inevitable decline.

Best regards,

Harry Forsyth