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Tax Breaks for Bubble Heads
Homebuilders argue that they need relief because their sector, which provides a great deal of domestic employment, is on the ropes, and they're finding it more difficult to raise capital. Which is as it should be. After bubbles pop, those who screwed up really badly fail and get taken over by creditors or opportunistic investors. Those who have sound underlying franchises but merely got a little carried away can survive if they take painful restructuring moves. This is what is known as market capitalism. For all the talk of a credit crunch, capital is still available—it's just not available on the easy terms managers had come to expect during the late Greenspan years. Citigroup, Merrill Lynch and plenty of other firms tied to the mortgage-finance complex have taken steps to shore up their balance sheets and replenish lost capital. But investors, having been burned, demand more downside protection and better guaranteed returns. Thornburg Mortgage was forced to pay 18 percent interest for an emergency round of capital raising that allowed it to stave off bankruptcy. This is also what is known as market capitalism.
Homebuilders should look to the capital markets first, rather than to the government, especially when their financial situation is serious but not critical. The stocks of potential beneficiaries of the expanded carrybacks—big homebuilders like Lennar, Pulte and KB Home—have plummeted. But they're nowhere near bankrupt. KB Home is losing money, but it still has a market value of more than $2 billion. And it's still paying a decent dividend.
Finally, in many instances, the largest shareholders—and hence the biggest beneficiaries—are the managers who made the decisions that caused the losses. Toll Brothers, which is now racking up losses after years of profits, is valued at close to $4 billion. Founder Robert Toll has 17.5 million shares of Toll, worth about $440 million at current prices, which works out to about 11 percent of the company. At Hovnanian (first-quarter loss $131 million), members of the Hovnanian family own at least 15 percent of the outstanding stock, according to Yahoo Finance. These companies—and their extraordinarily wealthy managers—still possess the financial heft to finance the recoveries from their self-inflicted wounds.
The proposal to give new tax breaks to homebuilders and banks is yet another example of the pernicious trend of privatizing profit and socializing losses, which is gnawing away at faith in the system. Dilute the shareholders, not the taxpayers.
© 2008
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Member Comments
Posted By: Gen_This!!! @ 04/12/2008 12:22:33 AM
Comment: Or here's an idea: If Washington's going to force tax payers to foot these bills, why not do it on a finance basis? Maybe I'm talking crazy here, but is it entirely unfair to thorw up a system where so long as we're bailing them out, each and every tax-paying citizen is considered a stock holder in the company? It's simple really, we just take whatever the portion of the total assets prior to the loss we're giving them, compute that into a portion of the company and force a split among 300 million mew share holders with mandated dividends on top of their yearly IRS obligations. Then to be fair we toss on some malarky about how they can buy us all out immediately the moment they're back on their feet. Of course, I can't imagine the classist sentiments of our dedicated representatives on the Hill would go for such a plan, but if they did, I can promise you more than a few bubbleheads would be a little more careful about how they waste other peoples' money.
Posted By: summer4077 @ 04/10/2008 8:49:39 AM
Comment: The government shouldn't be rewarding irresponsible behavior by both lenders and borrowers, but as usual, it will. Unfortunately this will only punish RESPONSIBLE borrowers who borrowed within their limits and made their payments on time...now their taxes will be used to bailout others. Life is not always easy, and sometimes the school of hard knocks is the best education one can have. If a person agreed to an ARM, no money down, or balloon payment, they must live with the consequences. I've been saving for the past year and have at least another year to save for a downpayment on a house. That's what EVERYONE should have to do...have a downpayment and only buy a house they can afford. There's a difference betweening NEEDING and WANTING.
Also, this will allow inflated home prices to stay afloat. Houses are way overpriced and they need to come down.
Posted By: summer4077 @ 04/10/2008 8:20:44 AM
Comment: Ok, in Southern California it's "not that much". But California is just one state, the west coast is just one area. In the vast majority of America, a $300k house really IS a lot. In most midwestern states, the average home value is $150k. A $300k house would be HUGE. Same goes for the plains states and many in the southeast. Also, you must consider that the average American salary is less than $40,000.
Please consider ALL of America before making such dismissive statements.