Market Update – March 29, 2010

Last week was not the best week for interest rates (including mortgage rates). Overall a combination of the increasing US Government budget deficit, continued problems with Greece and European debt were the primary culprits, along with some signs that our economy is picking up a little steam (stocks are hitting 18-month highs). Two out of the three auctions did not go well, and gee, what will the Fed do with the $1+ trillion of agency Fannie/Freddie product it has purchased? This week brings the end of the Fed’s buying program – and who is going to buy mortgages? Smart money is betting that the same institutions that invested in mortgages prior to the Fed will take up the slack: pension funds, insurance companies, hedge funds, money managers, and banks. Besides, origination is supposed to drop, right? And if rates go up too high, our housing market will get smacked – something that the Federal Government doesn’t want to see happen.

Unfortunately departments within the Treasury Department (OCC and OTS) said the percentage of current and performing mortgages fell to 86.4% at the end of the fourth quarter of 2009, falling for the seventh consecutive period. This means that serious delinquencies rose: a 21.1% increase in mortgages 90 or more days past due to 4.7% of all mortgages in the portfolio at the end of 2009. The increase in seriously delinquent mortgages was most pronounced among prime borrowers, which account for 68% of all mortgages. To continue the “good news”, home sales are slumping, with New Home Sales falling to an all-time low and Existing Home Sales dropping for the third consecutive month, and homebuilder sentiment has dropped.

What do we have to look forward to this week? Besides Easter coming up next Sunday, today we have Personal Income & Consumption and the PCE Price Index, Tuesday the S&P/Case-Shiller Home Price Index & Consumer Confidence, Wednesday the Chicago Purchasing Managers Index, Thursday we have Initial Jobless Claims, Construction Spending, and the ISM Manufacturing data, and then on Friday we’ll see the employment data – expected to show a pickup in jobs.

Personal Income was expected +.2% but came out as unchanged for February. Personal consumption expenditures were expected to rise, and did, coming out at +.3%. After the data, bonds and stocks didn’t do much. The 10-yr seems happy for the moment around 3.87%, and mortgage prices are about unchanged from Friday’s closing levels.

Conventional 30-year fixed mortgages are available at 4.75% today for well-qualified consumers paying a standard .07 to 1 point  

Today’s 15-yr fixed rate is 4.125%, and the 5/1 ARM rate 3.625.FHA mortgage rates continue to mirror those of conventional loans. While FHA loans do offer similar rates, the closing cost associated with those rates is significantly higher. That cost is set increase when MI, a premium charged at closing to borrowers obtaining FHA financing, is boosted from 1.75 to 2.25% of the amount borrowed on April, 05.30-year fixed jumbo loans are available at 5.625% with slightly better rates (5.5) for borrowers with an extremely low LTV. Mortgage-backed securities prices, which drive mortgage rates in the opposite direction, have been flat in the month of March. As a result, mortgage rates have been stable, unchanged since dipping slightly at the end of February.Just one week now until the much anticipated end of government MBS purchasing. The Fed says ideally the end of buying, set for March 31st, will cause only a slight rise in mortgage rates.Current Mortgage Rates

• 30-yr fixed rate – 4.750%  
• 15-yr fixed rate – 4.125%  
• 5/1 ARM rate – 3.625%  
• FHA 30-yr fixed rate – 4.750%  
• FHA 15-yr fixed rate – 4.500%  
• FHA 5/1 ARM rate – 3.625%  
• VA 30-yr fixed rate – 4.875%  
• Jumbo 30-yr fixed rate – 5.625%  
• Jumbo Conforming 30-yr fixed rate – 4.875%

 

This 118-year-old technology is about to bring Microsoft
to its knees…

And when it does, well-positioned investors are going to make countless millions. You can join them — but you must act now. Read on to get all the details…

In this issue… The two words that spooked Bill Gates into an early retirement Why Google is a screaming buy — despite what the financial media is telling you Two breakout stocks already up 94% and 136% — and just getting started

Dear Opportunistic Investor,

On October 30, 2005, something incredible happened…

In Redmond, Washington, one of the world’s richest — and most powerful — businessmen sent an urgent memo to his top engineers and most-trusted managers.

It sounded the alarm that a very disruptive “wave” was about to wash over the entire world — forever changing the way we get information and do business.

It also warned this would wipe out the $200 billion business empire he’d spent his life building.

Meanwhile, a few hundred miles south, on the banks of the Columbia River, a mysterious outfit known only as “Design LLC” quietly constructed two massive, windowless warehouses.

This mammoth undertaking was code-named “Project 2,” and the International Herald Tribune described the towering monolithic structures as “looming like an information-age nuclear plant.”

I realize this may sound like something out of a Tom Clancy novel, but I think you’ll want to bear with me, because…

Analysts estimate this “wave” has grown into a $160 billion tsunami

And experts say it’s going to upend a $1 trillion industry. Yet very few investors understand just how huge it’s going to be.

That’s why I urge you to take the next few minutes to read this report in its entirety.

At the very least, you’ll get the full story so you can decide for yourself if you’ll be front and center when the big money starts rolling in.

But I warn you, the smart money is already on the move…

A handful of investors are already quietly positioning themselves to cash in on this incredible economic shift. Soon, tens of thousands will be rushing to join them.

One of the most lucrative investment opportunities
we’ll ever encounter

This story is so big that we have to step clear back to February 28, 1881, to put it into perspective.

On that chilly winter night, a 21-year-old British stenographer named Samuel Insull arrived in the port of New York aboard the City of Chester.

Thomas Edison’s chief engineer had lured him to America to serve as Edison’s private secretary.

11 years later, Insull oversaw the merger that created General Electric, and shortly thereafter was offered the presidency of the Chicago Edison Company.

Little did anyone know, the world of electricity was about to drastically change.

At the time, cities like Chicago had dozens of small, privately owned power stations transmitting direct current (DC) electricity to neighborhoods within a small radius.

With due respect to Edison, Insull knew that the model Edison had created was flawed.

So he set out to transform Edison’s legacy into something far greater and more efficient than its creator had ever imagined.

In doing so, he forever changed the world

Insull realized if he could create a “utility” by building giant central power stations that would transmit alternating current (AC) electricity over great distances…

These power stations could be linked to form a giant grid that would serve homes, businesses, and industries in even the most remote locations.

Once electricity was readily available everywhere, more and more electric-powered devices would come to market — creating more and more demand for the electricity that the utilities produced.

And here’s the kicker…

Because these utilities could match supply with demand, realize superior economies of scale, and use their generating capacity much more efficiently, they could deliver electricity for a fraction of what it cost people to produce it on their own.

And Insull was right on the money!

By 1907, utilities produced 40% of the power in the U.S. In 1920, that number stood at 70%, and a decade later, it was over 90%.

What was once unimaginable had suddenly become reality.

Now history is repeating itself

118 years after Insull came up with the idea for a “utility,” this breakthrough technology has morphed and been reapplied to the world of computers — and now the next great technological revolution is under way…

Which is exactly why I’m writing you today.

You see, one of the most successful investors I’ve ever met is convinced that this technological shift will dump millions of dollars into the portfolios of investors just like you.

But in order to claim your fair share of the wealth, you have to know who the dominant players are — and you have to get invested now.

That’s why I want to introduce you to this legendary investor and tell you about three companies he’s identified as “top dogs” and “first movers” in this breakout industry.

These are the companies he believes will dominate their industries over the next 5 to 10 years and hand investors life-changing wealth along the way.

I’ll also reveal the six traits he looks for in a growth stock — and explain how they have led him to companies that have soared 215%, 232%, 275%, 411%, and even 644% in just the past five years.

But first, let me tell you a little bit more about this amazing technology and why, once again…

The unimaginable is fast becoming a reality

You probably remember when computers took up entire rooms and were used only by companies that needed to do intense mathematical calculations.

That all changed when Intel unveiled the microprocessor and a geeky college dropout started writing software with his former high school pal.

Thanks to the virtual desktop they developed, the PC quickly replaced the mainframe as the center of corporate computing and began showing up in homes across America.

Before long, companies began building intraoffice networks so that their employees could run programs like Microsoft Word and Excel on their PCs, and also access programs, files, and printers from a central server.

But, like Edison’s, this model was far from perfect.

Due to a lack of standards in computing hardware and software, competing products were rarely compatible — making PC networks far more inefficient than their mainframe predecessors.

In fact, most servers ended up being used as single-purpose machines that ran a single software application or database.

And every time a company needed to add a new application, it was forced to expand its data centers, replace or reprogram old systems, and hire IT technicians to keep everything running.

As a result, global IT spending jumped from under $100 billion a year in the early 1970s to over $1 trillion a year by the turn of the century.

Here’s the dirty secret behind this mind-boggling growth — and the two words that will put an end to the party

IT-consulting firm IDC reports that every dollar a company spends on a Microsoft product results in an additional $8 of IT expenses.

And one IT expert admits, “Trillions of dollars that companies have invested into information technology have gone to waste.”

Yet, companies have had no choice but to run these obscenely expensive and highly inefficient networks.

But that’s all about to change…

And that’s precisely why the two words “cloud computing” scare the hell out of Bill Gates.

You see, he realizes that thanks to the thousands of miles of fiber-optic cable laid during the late 1990s, the speed of computer networks has finally caught up to the speed of computer processors.

As IT expert Nicholas Carr explains, “What the fiber-optic Internet does for computing is exactly what the alternating-current network did for electricity.”

Suddenly, computers that were once incompatible and isolated are now linked in a giant network, or “cloud.”

As a result, computing is fast becoming a utility in much the same way that electricity did…

“The next sea change is upon us.” — Bill Gates

Think back a few years — any time you wanted to type a letter, create a spreadsheet, edit a photo, or play a game, you had to go to the store, buy the software, and install it on your computer.

But nowadays, if you want to look at pictures on Facebook… find directions on MapQuest… watch a video on YouTube…  or sell furniture on Craigslist… all you really need is an Internet connection.

Because although these activities require you to use your PC, none of the content you are accessing or the applications you are running are actually stored on your computer — instead they’re stored at a giant data center somewhere in the “cloud.”

And you don’t give any of it a second thought… just like you don’t think twice about where the electricity is coming from when you plug an appliance into the wall.

But cloud computing isn’t going to be just a modern convenience — it’s going to be an enormous industry.

You see, everyone from individuals to multinational corporations can now simply tap into the “cloud” to get all the things they used to have to supply and maintain themselves. This will save some companies millions and make others billions.

“Is cloud computing the next big thing?”

That’s the title of an article in PC Magazine.

The answer was an overwhelming yes. And PC Magazine isn’t the only one taking note of this sweeping trend…

The Economist claims, “As computing moves online, the sources of power and money will increasingly be enormous ‘computing clouds.'”

David Hamilton of the Financial Post says this technology “has the potential to shower billions in revenues on companies that embrace it.”

And Nicholas Carr, former executive editor of the Harvard Business Review, has even written an entire book on the subject, titled The Big Switch. In it, he asserts: “The PC age is giving way to a new era: the utility age.”

He goes on to make this prediction: “Rendered obsolete, the traditional PC is replaced by a simple terminal — a “thin client” that’s little more than a monitor hooked up to the Internet.”

While that may sound far-fetched, in the corporate market, sales of these “thin clients” have been growing at over 20% per year  — far outpacing that of PCs.

According to market-research firm IDC, the U.S. is now home to more than 7,000 data centers just like the one constructed on the banks of the Columbia River in 2005.

And the number of servers operating within these massive data centers is expected to grow to nearly 16 million by the end of 2010 — that’s three times as many as a decade ago.

“Data centers have become as vital to the functioning of society as power stations.” — The Economist 

The simple truth is that cloud computing is becoming as big a part of our everyday lives as cell phones or cable television.

That’s why I’m so eager to tell you all about the three companies that are leading the charge and look poised to rule the post-Microsoft world.

One is the undisputed leader of the cloud computing pack.

You may already know who I’m talking about… and you may have even guessed that it is the real face behind Design LLC.

But what you may not realize is that right now is the perfect time to get invested — despite what many so-called “experts” in the financial media might be telling you.

Buying this tech juggernaut today is like buying Microsoft in 1990

Don’t forget, even after the dot-com collapse and the recent market sell-off, every $10,000 invested in Microsoft would now be worth over $483,000.

Even a modest $3,000 investment would have grown into more than $144,000!

Just imagine what you could do with that kind of money…

Now imagine being given a second chance to secure that kind of profit.

Well, look here… this is your second chance.

You see, like Microsoft in the early 1990s, Google is just getting started.

They’ve already won the search engine war, set the standard for online advertising, and turned the company’s name into a word tens of millions of people use daily.

And now they’re fast becoming synonymous with the future of computing…

Over 500,000 companies — including GE and Procter & Gamble — have already signed up for Google Apps.

This grab bag of business applications can be purchased and run over the Web for just $50 per year and is just one of many Google products now giving Microsoft a run for its money.

Considering that Google Apps costs just 1/10th of what a traditional business software suite does, it’s no surprise that more than 3,000 businesses are signing up per day.

No wonder the Financial Post says, “The cost savings in offering scaled-down versions of large enterprise software is making cloud computing a huge business.”

But at just $50 a pop, you might be wondering how big this business can really get.

Industry research firm Gartner Inc. says the market for Internet-based software recently hit $5.1 billion and conservatively estimates it will more than double to $11.5 billion by 2011.

But don’t forget, this is just one small part of the giant and highly profitable cloud computing world.

Given its dominance over the online world, massive network of strategic partnerships, and unmatched ability to innovate, you can bet the great majority of the fortunes generated by cloud computing will flow through Google’s coffers.

Even so, you may be wondering…

Isn’t it too late to buy Google?

Not at all!

In fact, as I mentioned, one of America’s most trusted stock pickers is convinced that right now is the perfect time to get invested in the future of cloud computing — and especially in Google.

But why should you trust him?

Well, let’s just say this isn’t the first time this maverick investor has recommended a stock after the hotshots on Wall Street declared it was “too late”…

Back in 2005, he recommended robotic surgery specialist Intuitive Surgical to a small group of opportunistic investors.

At the time, shares were selling for $44.17. One year prior, shares had sold for $17.46, and a year before that they were selling for just $8.68.

You read that right… Intuitive Surgical had risen 500% in the two years before he recommended it — and that scared lesser investors off.

But this visionary investor recognized that Intuitive Surgical was both “top dog” and “first mover” in its industry and still had plenty of room to run…

Shares recently traded as high as $367 — meaning investors who followed David’s lead have been able to rake in some truly meaningful profits.

And this wasn’t just some sort of lucky break or fluke, either.

You see, this world-famous investor first caught the financial media’s attention when he recommended AOL in the summer of 1994 — after it had quadrupled in just 12 short months.

Of course, the story is the same with AOL — he recognized it as both a top dog and a first mover in an important emerging industry and knew it was only getting started.

Six years later, AOL was a 100-bagger, turning every $10,000 invested into a whopping $1 million — and this growth investor into a living legend.

Here are just a few more of the top dogs and first movers he’s uncovered recently:

• Myriad Genetics — Locked in 252% gains
• Baidu.com — Up 411%
• Vertex Pharmaceuticals — Up 275%
• Green Mountain Coffee Roasters — Up 215%
• MercadoLibre — Up 164%

By now, I imagine you’re ready to meet this legendary investor and find out exactly what I mean by “top dog” and “first mover.”  But first…

Allow me a proper introduction

My name is Mark Brooks, and I publish an award-winning financial newsletter that carries the same name as the small community of investors I mentioned a moment ago…

It’s called Motley Fool Rule Breakers, and it’s headed up by the extremely successful stock picker I’ve been telling you about…

You may have already guessed that I’m talking about David Gardner — co-founder of The Motley Fool. After all, he’s pretty well-known…

You’ve probably seen David on CNBC discussing his favorite growth stocks with some of the nation’s other top-tier equity analysts…

Or perhaps you’ve read one of his many best-selling investment books…

Or maybe you’re just familiar with some of his remarkable stock recommendations… eBay in 1999… Starbucks in 1998… AOL in 1994… Amgen in 1998… Amazon in 1997.

Regardless, it’s not hard to see why Money.com says he’s “among the most widely followed stock pickers in the world.”

And I’m sure you can understand why any time David gets excited about an investment opportunity, I stand up and take notice…

Well, let me tell you, right now David is extremely excited about what he calls…

“The 3 Kings of Cloud Computing”

These are 3 exceptionally well-run companies that David and his team of cutting-edge equity analysts have identified as both top dogs and first movers in their respective industries.

You’ve already heard a little bit about the first of these three, and I imagine you’re beginning to see why David thinks any serious investor should get it in his portfolio right this minute.

But as I mentioned before, you deserve to get the full story so you can decide for yourself whether or not to take advantage of this incredible opportunity.

That’s why I want to send you a complimentary copy of our brand-new special report: “The 3 Kings of Cloud Computing.”

This valuable report is jam-packed with patented in-depth analysis and investment insights and is available only to a select few individual investors.

Not only does it spell out exactly why Google could be your next monster winner in plain, easy-to-understand English, it also reveals 2 lesser-known companies that are poised to dominate the world of cloud computing and hand investors incredible returns.

Just ahead, I’ll tell you how to claim a complimentary copy of this report, plus I’ll give you a chance to join the Rule Breakers community at a limited-time discount rate, but first let me tell you a little more about the other two incredible companies that David’s so excited about…

First things first… what’s a “top dog” and a “first mover”?

It’s quite simple really.

A “top dog” is a company that dominates its industry… and a “first mover” is a company with a technology or product so revolutionary that it disrupts an existing industry and creates an entirely new one. 

On the rare occasion that you find a company that is both a top dog and a first mover, the chances are pretty good that you’ve found your next big winner…

Just think of eBay in the online auction market… Amazon in the online retail market… or Netflix in the DVD-rental market (David led investors to big gains on all three).

These companies redefined the way business was done, launched entirely new industries, and continue to dominate those industries to this day. And you don’t need me to tell you how handsomely they’ve rewarded shareholders along the way.

So you can see why David and his Rule Breakers team work around the clock to find companies that are both top dogs and first movers.

But they don’t stop there… You see, David discovered long ago that in order to find companies that will deliver truly life-changing investment returns, you have to break the rules and go against much of what passes for “wisdom” on Wall Street.

That’s why he searches for companies with…

• a sustainable competitive advantage that can be exploited for years to come
• strong past price appreciation
• excellent management
• strong consumer appeal

And here’s the big one…

• documented proof that the financial media thinks it’s “overvalued”

Remember, many of David’s biggest winners were recommended after all the fast-talking experts on Wall Street already declared you’d missed your chance to buy.

It’s the exact same story with the second company I’m going to tell you about today…

The company that makes the Internet fly

When David first recommended it to the Rule Breakers community back in 2005, he admitted it wasn’t “cheap.”

With the arrival of cloud computing, he’s more excited than ever about its potential to make investors rich. 

You see, this company works behind the scenes to make sure you can access everything the Web has to offer at lightning-fast speeds.

And thanks to the ever-growing number of people now using the Internet to do everything from watch movies to buy houses, this once-flailing refugee of the dot-com meltdown is now one of the most important tech companies in the world.

Apple, Microsoft, Best Buy, and Nintendo are among its top clients — and they’re all more than happy to pay up for the quality this company consistently delivers.

While this usually runs somewhere in the neighborhood of $275,000 per year, more and more complex applications are coming online all the time — giving this company greater pricing power.

At last count, it had more than 100 clients paying $1 million or more per year. So it’s no wonder that cash from operations has more than tripled from $83 million in 2005 to over $420 million today… Or that the cash on its balance sheet has grown from just $92 million to a whopping $566 million.

And you can bet that this growth will only accelerate as cloud computing becomes an even more vital part of our personal and professional lives.

You see, because this company is both a top dog and a first mover, it has been able to gain an almost insurmountable lead in market share, allowing it to sport superb operating margins.

The gross margin currently sits at an incredible 74%; meanwhile, the net margin has climbed to 17% — and continues to grow.

All things considered, I think you can understand why David thinks this will be one of the dominant players in the cloud computing world for years to come.

And it’s the exact same story with the third company he reveals in The 3 Kings of Cloud Computing…

A bona fide Rule Breaker with very real profits

Not only does this rising tech superstar meet all 6 of David’s criteria for a classic Rule Breaker, but it also has a stranglehold on a niche market that’s absolutely essential to the future of cloud computing.

Whereas the last company I mentioned keeps the massive amounts of Web traffic flowing smoothly and efficiently, this company designs extremely complex software that allows central servers to function in the first place.

The market for this software is estimated to soar to $5 billion by 2011.

And thanks to various patents, a considerable head start, and immense technical know-how, there is very little chance competitors will be able to wrestle the lion’s share of that $5 billion away from this company.

Governor Schwarzenegger Signs $10,000 Homebuyer Tax Credit Legislation

March 24, 2010

Although Sen. Chris Dodd’s financial reform package would create an alphabet soup of new regulatory bodies, much of the responsibility of identifying and defusing the next big threat to the financial system will fall to the Federal Reserve. I don’t doubt that there are plenty of sharp, talented people working at the Fed, but the way things stand right now, the cards are going to be stacked heavily against them.

With last week’s release of Tony Valukas’ report on the Lehman Brothers’ bankruptcy, some problems with the reform bill have become all too clear.

The cost of clarity
First and foremost, we have to wonder whether the folks at the Fed can even keep up with the complex, fast-paced financial firms that they’re supposed to oversee.

To pick apart the Lehman situation, it took Valukas and his army of lawyers and other skilled pros a year of diligent effort. Over that time period, the team waded through “a patchwork of over 2,600 software systems and applications” and collected 5 million documents comprising 40 million pages — 34 million of which were reviewed by the Valukas and his team. As the Chicago Tribune points out, that’s like reading Tolstoy’s War and Peace more than 27,000 times.

In the end, the effort led to $38 million in billings to Valukas’ firm, Jenner & Block, and another $30 million in fees to Valukas’ financial advisor, Duff & Phelps.

Granted, a bankruptcy investigation and ongoing regulatory review are hardly the same thing. But it took the relentless digging of the Valukas team to figure out that Lehman was duping creditors, investors, rating agencies, and regulators with its “repo 105” transactions. And in many ways it was actually easier for Valukas, since he was no longer facing a moving target — or at least it wasn’t moving as much as before.

And this was all for just Lehman Brothers, which had around $640 billion in assets at the time of its bankruptcy. What do you think the process might look like for Goldman Sachs (NYSE: GS) and its $850 billion in assets? Or how about Citigroup (NYSE: C) and its $1.9 trillion in assets?

A broken business model
We can probably point to plenty of regulatory failures in the lead-up to the financial crisis. But I hardly think that they’re regulatory failures stemming from lack of regulators. As Valukas noted in his report, regulators were swarming on Lehman well before its collapse: “In mid-March 2008, after the Bear Stearns near collapse, teams of Government monitors from the Securities and Exchange Commission (“SEC”) and the Federal Reserve Bank of New York (“FRBNY”) were dispatched to and took up residence at Lehman, to monitor Lehman’s financial condition with particular focus on liquidity.”

It seems to me that the issue never was whether there were people trying to address the problem, but rather that they were trying to regulate on a fuzzy mandate of not letting something bad happen within the bounds of a very permissive system. For the same reason that we have speed limit signs posted in our residential neighborhoods, we need to give regulators a clearer, tougher set of standards that they can impose on financial companies.

First and foremost, those standards need to address the lunatic business model that Lehman Brothers — and, really, most of the big financial companies — was operating on at the time of its demise.

Specifically, Lehman was increasingly building up large, illiquid, proprietary investments while primarily financing itself through very short-term agreements. What it became was a massive, teetering Jenga game right smack in the middle of our financial system that could be toppled in the blink of an eye if it lost the confidence of major counterparties such as JPMorgan Chase (NYSE: JPM), Citigroup, HSBC (NYSE: HBC), and Bank of America (NYSE: BAC).

Not such a good start
There’s been a lot of hype about the fact that Dodd’s bill includes the so-called “Volcker Rule,” which would prohibit banking institutions from taking part in activities such as proprietary trading.

However, I’d say that the bill includes the Volcker Rule the way Cocoa Puffs include well-balanced nutrition. Little actually gets implemented in the text of the bill. Rather, specific regulations are supposed to come from a study on the rule’s potential impact. Not only is this likely to maximize the squishiness of the eventual rules, but it also gives lobbyists plenty of time to work their magic.

In the end, I don’t see the Fed folks as a bunch of incompetent bumblers. But when it comes to smothering the next Lehman, Fannie Mae (NYSE: FNM), or AIG (NYSE: AIG), I do think they’ll fail miserably because they’re being given a butter knife to regulate with when what they need is a buzzsaw.

Do you think the Fed will be able to keep our financial system safe and secure? Scroll down to the comments section and share your thoughts.

The U.S. is hardly the only place where fiscal fitness is an issue. Check out why the situation in Greece matters to smart investors.

How to Legally Rob a Bank

March 26, 2010

In the newest installment of Infinite Moral Hazard Theatre, Bank of America (NYSE: BAC) recently more or less asked people to rob it. The bank announced that it’s now forgiving part of the mortgage balances of some of its borrowers.

To qualify, it appears all you have to do is owe about 20% more than the house is worth, and be in some sort of financial distress. The bank will then take the amount you owe above and beyond the current value of the house, put it in a special account, and over time, forgive that amount of your debt.

Isn’t that theft?
Interpreted charitably, this is yet another program that encourages risky behavior, not to mention the sort of speculative gambling that got us into the housing bubble in the first place. With a more cynical view, it appears more like Bank of America’s executives may have just conspired with the company’s customers to rob its shareholders. No matter how you slice it, offering free money to deadbeats is like handing crack to addicts — a bad idea that will ultimately backfire.

The obvious problem with the plan is the simple question of why anybody would continue to pay their mortgage if defaulting meant free money. From the looks of it, here’s the chain of events needed to qualify for this cash:

• Buy a house you can’t really afford with too small a down payment.
• Stop paying on the mortgage (thereby demonstrating “financial distress”).
• Agree to pay a smaller mortgage amount.
• Wait for the bank to forgive your debt.
• Keep your house, and any appreciation that you might get when the market recovers.

And with that program, deadbeats are allowed to buy and keep houses they can’t afford, and simultaneously punish savers and investors. And yes, people who are responsible with their money will pay (and are paying) for the bank’s largesse. After all, that ‘free money’ has to come from somewhere, and that “somewhere” will likely be depositors, investors, and perhaps even taxpayers (again), who could wind up stuck with yet another bank bailout.

As this chart shows, Bank of America depositors are already paying for the bank’s generosity, through lower interest rates on deposits than at other FDIC insured institutions:

Bank

1-Year CD rate
as of (3/25/2010)

Bank of America

0.80%

Banco Popular (Nasdaq: BPOP), via E-LOAN

0.90%

ING (NYSE: ING)

0.99%

Allstate (NYSE: ALL) Bank

1.15%

AIG   (NYSE: AIG) Bank

1.49%

American Express (NYSE: AXP) Bank

1.50%

Discover (NYSE: DFS) Bank

1.59%

Of course, to be fair, Bank of America’s rates are closer to its large, money-center bank competitors such as Citigroup (NYSE: C) and PNC (NYSE: PNC). From a saver’s perspective, however, an FDIC-insured account is an FDIC-insured account. Why would you voluntarily lock your money up for lower interest rates at a bank that’s actively handing out your cash to people who don’t pay their debts?

The way things are going, it may only be a matter of time before savers need to pay Bank of America for the privilege of watching the bank throw their money away on gifts to deadbeats.

Charity is a wonderful concept. But when a bank shortchanges depositors and investors to give away tens of thousands of dollars to irresponsible borrowers, that’s not charity — it’s theft. Why anyone with a chance of qualifying for this free money would continue to pay on their Bank of America mortgage at this point is beyond me.

As a shareholder (for now, at least), I fear this will turn out to be yet another way this bank is proving itself an incompetent steward of my money. If the delinquencies increase in response to this offer of tens of thousands worth of free cash for not paying the loan back, the bank will only have itself to blame. It’s a pity, however, that as a shareholder when this atrocity was announced, I’ve already been forced to number among those footing the bill.

Those are my thoughts. Share yours in the comments section below.