“FROM EACH ACCORDING TO HIS ABILITY; TO EACH ACCORDING TO HIS NEED.”
September 25, 2008
Sound familiar? In just a moment I’ll remind you of who said it. But first, let’s consider one relatively obscure, yet possibly single most significant provision of today’s proposed federal bailout legislation.
According to Congressman Barney Frank, the bailout should include a provision allowing bankruptcy judges to rewrite the amount owed on a mortgage during a bankruptcy proceeding. For example, say Mary Smith, a sympathetic and sweet single mom, borrowed $500,000 to buy a modest tract home at the height of the real estate boom for $600,000. With the plunge in housing prices, it’s now worth $400,000 and Mary has lost her job. The judge realizes that Mary is barely getting by on child support and unemployment insurance and kindly sets her new loan at $300,000 with interest deferred for three years. Moreover, he stipulates that the bank cannot seize her home.
Later that day, this same judge sees Frank Brown who is represented by an arrogant and dislikeable lawyer. Mr. Brown, an out-of-work teamster, also borrowed $500,000 to buy a $600,000 McMansion now worth $400,000. The judge isn’t as moved and offers only a marginal loan reduction from $500,000 to $475,000. And the bank can seize the house.
The unintended consequence of this arrangement? Bank terms will quickly reflect the increased risk associated with lending in an environment where contracts are routinely and subjectively rewritten. Mortgage rates will begin to resemble credit card rates (where borrowers more routinely default) and 30 year loans will be gone. Moreover, borrowers might be evaluated on the basis of how well a court might protect them. The next teamster might be granted a bank loan for $500,000, while the next single mom, being deemed far too sympathetic, may be considered too risky from a legal standpoint, and not get a loan at all.
Many will begin to hoard cash in anticipation of staying in homes they cannot afford while unloading their primary debt. Prices will plunge to offset the new credit risk of not getting your money back. Instead of bailing us all out, this new provision could very well bury us.
Congressman Frank says this provision is on the table. If it becomes law, we will all be under the bus. And the slogan above? It was used by Karl Marx in 1875 as the core summary of communism.
This is an outstanding example of why it makes sense to be out of the market while Congress is in session and even contemplating such horrible ideas. The cures, invariably in the name of “helping the little guy”, are almost always worse than the disease itself.
Eric T. Singer
Congressional Effect Management
420 Lexington Avenue
New York, NY 10170
The Congressional Effect Fund seeks to avoid market destabilizing uncertainty and the effects of news of potentially wealth damaging legislation by investing in the market (via the S&P 500 Index) only when Congress is on recess, and primarly US Treasuries all year long.
The Congressional Effect Fund is the culmination of my many years of frustration with government folly, and I am delighted to have launched and be managing a vehicle I hope will reward investors and, in so doing, also highlight the deleterious effects of poor Congressional action. It is my sincerest hope that strong investor support of this endeavor will promote and further freedom in America as our founding fathers intended.
If you need assistance completing the investment application, or have additional questions about the Fund, please do not hesitate to contact me directly. Or, you may contact the Fund's distributor, Matrix Capital Group at 1.888.553-4233.
Investments in mutual funds involve risks. Read the prospectus and consider the Fund’s investment objectives, risks, charges and expenses carefully before investing or sending money. The Congressional Effect Fund is a newly-formed entity, and although the Advisor's portfolio manager, Eric T. Singer, has been a portfolio manager for private investment vehicles in the past, he does not have previous experience running a registered investment adviser or managing a mutual fund. Accordingly, investors in the Fund bear the risk that the Fund may not be successful in implementing its investment strategy and investors in the Fund bear the risk that the Advisor's inexperience managing a firm may limit its effectiveness. There is no assurance the Fund’s investment objectives will be achieved. Past performance does not guarantee future results. Investment return and value will fluctuate so that when redeemed, shares may be worth more or less than the original cost.