Rick Santelli is a Lesson for our Children
So, by now you’ve heard of the rant of some guy I’d never heard of before (not to be confused with Barron’s Michael Santoli). Does anyone else find it amusing that Mr. Santelli was ranting on the floor of an “open outcry” trading pit? That’s right, he was ranting about wasteful spending to help homeowners while standing on a monument to the past of finance and inefficient execution.
Mr. Santelli, while I completely accept the fact that you are most likely compensated based on how many viewers you reel in and your entertainment value, and certainly not based on the quality of your journalism (this is CNBC after all, the house of Cramer), analysis, or even grasp of reality, you should still, every now and again, try reading something. From the details of the plan one could learn some simple things:
1. The plan is available only to those people whose mortgages are owned by Fannie or Freddie or those whose mortgages were backed by Fannie and Freddie and put into securities by them. Fannie and Freddie have strict limits on whose mortgages can go into those pools. They have to have high FICO scores, relatively low LTVs, and there is a maximum size allowed. Please note that this restriction, in and of itself, totally disqualifies sub-prime mortgage loans. Let me repeat: sub-prime mortgages and agency-backed mortgages are a totally disjoint set of mortgage loans–there is no overlap.
2. The program does not reduce principal owed. So, in essence, there is no forgiveness of debt, but only a reduction in interest rates and, perhaps, an extending of the term of the loan to reduce monthly payments. People still owe the same amount as before. Sounds like a welfare state to me…
3. The program doesn’t allow refinancing of second homes or investment properties. So all the speculators that own 3 houses on that were supposed to be flipped cannot refinance any mortgages except for the single first mortgage on the house they currently reside in.
4. Second mortgages aren’t covered under the plan. All the people who took out HELOCs to borrow money to buy stocks aren’t going to be bailed out either.
5. There is about $75 billion being used to help stabilize the multi-trillion dollar mortgage market. This number alone implied that there is some selection process to weed out unworthy people from being given government funds.
Look, I want the economy to improve as much as the next guy, but I think swelling the unemployment rolls by one idiotic reporter might be the kind of change I can believe in. Oh, and let’s finally close down the value-destroying open-outcry trading pits. Maybe removing that friction in our economy can help us save a few dollars.
I was going to stop here, but I’ll be honest… the complete and total stupidity of Santelli and those knuckle dragging dinosaurs who still use hand motions to make money, add trnsaction costs, and keep the computers at bay (not all of them, but most of them, I’m sure) on the floor of the C.M.E. are the reason middle America hates everyone in finance. Further, it’s the reason we need a bailout. How often did I hear “not my problem” or “because that’s where the market is” or any number of other, totally tone-deaf incantations from the mouths of people making seven-digit bonuses? Often. And, to be honest, do we have even single piece of tape with Mr. Santelli yelling about taxpayers paying for Citi? Bank of America? How about AIG? No? Well, we gave Merrill Lynch $15 billion and around $4 billion of that was immediately blown through to mint 696 seven-digit bonuses.
At least I can take comfort in knowing that Mr. Santelli will be forgotten in 100 years and that his rant likely has no lasting impact on our society–it showcases the worst, most base and uninformed stupididty. Children, pay attention in school or you’ll wind up working on the CME trading floor for CNBC.
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Dear John Thain 
February 22, 2009 at 10:20 am
Apparently you missed this in the White House fact sheet “Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principle reduction, up to the amount the lender would have received for an interest rate reduction”. Gee, that sounds like principle reduction to me. Regarding second mortgages, the government will be leaning heavily on lenders who specialized in these loans (Wachovia and Washington Mutual, now owned by Wells Fargo and J.P. Morgan Chase, respectively) who received bailout funds. Does anyone think that they don’t understand what they’ll have to do?
And anyone who claims that they follow markets and the economy, who doesn’t know Rick Santelli is either lying or is not as clued in as they pretend.
February 22, 2009 at 3:51 pm
From the Whitehouse website (http://www.whitehouse.gov/blog/09/02/18/Help-for-homeowners/):
* Will refinancing reduce the amount that I owe on my loan?
No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.
Can a lender reduce the principal amount? If they own the loan, sure. Does this legislation do anything to affect that right? Or compel them to do so? No.
February 22, 2009 at 4:29 pm
Oh, and let me reproduce my comments on Santelli and being well informed, from Seeking Alpha, here:
As for knowing about Rick Santelli and CNBC, let me be unequivocal and unambiguous about this: The reporting on CNBC is completely surface. Having sat on a bulge bracket institution’s trading floor for years I pity anyone who defines knowing Rick Santelli as either necessary or sufficient for being informed. The only thing CNBC is good for is hearing rumors about corporate actions such as mergers, layoffs, management changes, etc.
If you rely on CNBC for trading, being informed about the market, or understanding the real issues in finance, then I can’t help you. One needs to read primary documents, do their own research, and get a breadth of opinions before they can be considered informed. As a matter of fact, if you consider watching CNBC informed, then please call me when you want to do a trade–I’ll take the other side gladly.
February 23, 2009 at 11:08 am
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February 26, 2009 at 3:36 am
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February 26, 2009 at 6:15 am
Great post. I don’t watch cnbc, but I share your sentiment.
March 6, 2009 at 8:33 pm
this is the first im reading of your blog. im not impressed.
you first say that you have never heard of santelli. then you turn around and effectively say that he has not said anything against the bank bailouts. how would you know that to be true? you have already claimed ignorance of the man.
second, you clearly are ignorant of the trading floor. you intermingle floor traders and bank traders without understanding how these people get paid. at least some of the floor traders have their own personal capital at risk and only earn money on their net profits. this is NOT the same as a bank trader earning 8-12% of their revenues plus a six figure salary.
most importantly, you should understand what you are looking at and how it operates before you criticize. those guys are option traders and there are few even of them left. those options trade electronically and customers can choose either venue for their executions. the bulk of the volume goes open outcry. the reason is simple — better and faster execution for large size and complex orders.
my advice to you is to follow your own advice. check primary sources. dont listen to cnbc. heck, even ask a question. you have come across as an ignoramus and hypocrite regardless of whatever fine qualities you may or may not have.
note i have not voice an opinion on either santelli’s or your view. it is irrelevent. most of the time when i go to blogs recommended by well written blogs i am impressed. not this time.
March 9, 2009 at 9:44 am
Bob,
My point was that I’ve never seen anything reported about Mr. Santelli making nearly as big a deal over bailouts. Also, I did some research on him, once I saw this rant everywhere, and couldn’t find anything on the topics I mentioned. That said, CNBC’s site is atrocious.
As to your point on pit traders and their value, I realize there are very few of them and that’s for a reason. There’s a reason that NASDAQ and equity options exchanges like ICE are totally electronic and have provably narrower bid/offer spreads.
I never said they make 8-12% of revenue (this, by the way is inaccurate, it’s really 8-12% of revenue after netting out the costs of running that trading book, including support staff, salespeople, etc.–a huge difference), but that they are still bad for people that trade. Further, unlike the less liquid option products, Eurodollars and Treasury futures still trade in pits. Why? There is no good reason.
I think the misunderstandings in your reading of my post might have lead you to see some incorrect reasoning–hopefully I’ve set the record straight. I hope you’ll come back and frequent the site.
-DJT
March 9, 2009 at 7:02 pm
well, i was curious whether you would reply.
i’ll accede your point on the 8-12% of revenue vs. net profit; and i am only too well aware of the difference between the two (unfortunately).
the exchanges, including the equity option exchanges, are not entirely electronic. there still exists open outcry and voice brokered trading. and the treasury and eurodollar option markets were exactly what i was thinking of (and should have explicitly mentioned). i also was not clear in what i was trying to say regarding the volumes in each medium. the “screens” print the most trades — but the average trade is much, much smaller. the trades in the ring are the large volume and multi-legged spreads. plus, as it turns out, the markets are tighter on the floor (at least for the 10 year note options). the truth is that it really is more efficient and easier to execute complex option orders in a ring (or voice brokered). if you have ever tried to do it both ways, you would understand. you only need to execute one of these backwards to never want to look at it on the screen again.
it seems that the market does better when there is both open outcry and electronic. the electronic markets in europe (according to what i have heard) are shown wide on the screen and then get crossed by voice brokers. this benefits big customers and the biggest market makers but makes entry tough (unlike the equity option markets here) and doesnt help retail customers.
as for santelli, i actually agree with him. but i also agree that we shouldnt be bailing out the banks. we are obviously tremendously over-banked with banks that are far too big. you shouldnt bail out the rich and screw the poor. but as Anna Schwartz said, whatever the right answer is, it is NOT rewarding bad behaviour.
i think that we should be working toward a solution that minimizes disruptions as the economy de-leverages but should not discourage the de-leveraging. we need to get to a total debt to gdp ratio in the sanity range — probably about 1-1.5X. instead of focusing on the abusive sectors (banks & homes), we should be pumping money at a real issue: energy independence. we could be 1) encouraging education in science & engineering through scholarships and research grants, 2) encouraging job creation through various exploration, drilling and alternative energy initiatives and this will 3) work toward infrastructure and (inter-)national security and geopolitical improvement.
but i’m as jaded as the next guy and only see money being moved around at the behest of lobbyists. and don’t get me wrong, i mean that in a completely bi-partisan way. all of washington is doing it.
best of luck.