I walked into a South Florida real estate office yesterday and had the opportunity to talk briefly with the office manager. He seemed very upbeat as if business was going well, when I expected the exact opposite from him. After talking to him for a bit, he explained to me that all his business nowadays comes from short sales, REO’s, and foreclosures, and that every buyer that walks through his door is looking for a bargain. That begged me to ask the question, is the housing market starting to turn around? These bargain basement prices must surely be starting to attract buyers.

This week saw the release of data for both new and existing home sales for the month of February. New home sales staged their largest increase in over a year, increasing 4.7% MoM to an annual rate of 337,000. This was primarily due to both median single-family home prices and average single-family home prices being down by record amounts in February. Existing home sales nationwide jumped a seasonally adjusted 5.1% in February, the biggest one-month gain since late 2003. Buying activity was strongest in places such as Southern California and Las Vegas, which have a glut of foreclosures.

In California, existing home sales were up 83% MoM in February as home prices had fallen 40.8% to $247,590 from a year ago.

Even though these are monthly numbers, and home sales and prices are still down on a YoY basis, it is clear that the pace of decline in housing demand is abating. The average 30 year mortgage rate is hovering around 5% and is likely to head lower, making home purchases affordable to many Americans.

If you want even more statistics, though I believe this one is likely to be a statistical anomaly, the Federal Housing Finance Agency in this report, says that home prices, on a seasonally adjusted basis, rose 1.7% from December to January.

There are an increasing number of data points that are indicating that there are signs of life in this nation’s housing market, and I’m looking for a bottom in home prices in the second half of this year. Personally, I’m looking to acquire properties in South Florida because I think they will better withstand a potential devaluation of the US dollar.

Today Secretary Geithner and Chairman Bernanke were busy testifying before the House Financial Services Committee regarding the AIG bonuses.  They really didn’t say anything new, and the most interesting part of the testimony is below:

Check Out The Protesters in the Back

On another note, it looks like 15 of the top 20 AIG execs have agreed to return the bonuses in full.  However, it looks like they were strongly coerced by the New York Attorney General who made the following statement:

“My intention today is if a person returns the money, I don’t believe there’s a public interest in releasing the names. People who do return the money, they would no longer be on our list”

-Andrew Cuomo, New York Attorney General

This almost seems like a form of blackmail — give back the bonus or we will release your name to the public.  No one wants to be handed up to the public given that they are currently an angry mob armed with pitchforks and torches.  CNBC is reporting something similar with an internal memo being circulated stating that names of bonus recipients will not be released if certain “performance targets” are met.

Not much else happening in the market as it seems tired after yesterday’s gains.

Alas!, the details of the long awaited Public-Private Partnership Investment Program aka “Geithner bank bailout plan” were released today by the Treasury. Compared with the debacle a couple weeks back when Geithner first introduced the plan, but failed to provide any concrete details, the markets responded very well to this latest announcement with the major averages trading to their highest levels in more than a month. The Dow closed up almost 500 points!

The plan targets two types of impaired assets sitting on bank balance sheets: Legacy Loans and Legacy Securities. Through the use of FDIC debt guarantees, TARP money, and the Fed’s TALF program, the government intends to provide financing to private investors wishing to purchase these impaired assets from the banks. By allowing private investors to make use of leverage, the plan is likely to create higher prices for the assets. Assets would be sold to the highest bidder with the government and the private investor taking equal equity stakes and sharing in the returns.

The public-private partnership solves two pressing issues. First, it sets a “market price” for the assets through the auction mechanism. Second, as opposed to an RTC like entity, the taxpayer is not responsible for all the potential losses from the asset purchase.

In my mind, the plan faces two major hurdles. One is the willingness of Congress to go along with it. As we witnessed last week, Congress seems unwilling to support any actions where it feels taxpayers are bearing an undue share of the risk when compared with the potential upside. In this plan, the taxpayer only has 50% of the upside, but through FDIC debt guarantees, TARP funds, and the TALF, the taxpayer could be on the hook for a disproportionate share of the potential losses.

The second hurdle is the question of whether the banks will actually sell these impaired assets at the “market price”. Presumably investors will try to bid as low as possible to guarantee attractive returns, whereas many banks have not been very aggressive in writing down the value of these legacy assets. Selling the assets would lead to large realized losses and many banks may choose to hold onto the assets and sell them at higher prices in a few years. No one wants to be selling these assets at fire-sale prices if they can avoid it.

Regardless of the potential hurdles, the plan is unquestionably a good sign for the markets. The problem facing our banks is that there was no market for these toxic assets, and this plan creates one. Already some of this country’s largest bond managers Pimco and Blackrock have indicated their willingness to participate in the program. If everything moves forward smoothly, the auctions are likely to start in a couple of weeks. This is another important step on the road to economic recovery.

As I sit here watching some very exciting NCAA tournament games, a fire still burns in my belly regarding the recent outrage over Wall St bonuses and this 90% tax introduced by the House. I think an overwhelming majority of Americans will agree that the compensation system on Wall Street needs a long overdue overhaul, and I agree with this point, but the House legislation goes too far.

On Wall St, the incentives of individual employees were not aligned with the firms they work for nor with the financial system as a whole. Traders at these firms were encouraged to “swing for the fcnces” due to lavish bonus payments and inadequate risk controls. Essentially, your employment at the firm was like an option with the maximum downside being the loss of your job and the upside being almost unlimited in terms of the amount of dollars you could be paid. Look at Brian Hunter, the Ex-Amaranth trader, who lost almost $7 billion for his firm. Do you think he loses sleep at night over the $7 billion he lost when he can sit and count his millions and drive around in his Bentley Arnage and Ferrari F430 Spider? This is exactly the type of behavior that needs to be changed. Wall St firms are already taking the steps to do so and I am hopeful that reasonable legislation and oversight will come from the government as well.

The nation’s financial system is in shambles and it will take a massive effort by the government along with the private sector to fix it and get it back on track. We can’t afford to waste energy quibbling about relatively small bonus payments when the amount of money committed by the government and the potential economic loss is in the TRILLIONS. Unfortunately, it will be hard to stabilize this nation’s financial system and revamp the compensation system on Wall St at the same time. If I could choose on issue to focus on, it would be the economy. Financial institutions cannot afford to lose its best people because the government now decides they are making too much money. The poor performance of financial shares today illustrates this point.

For President Obama, this will be a defining moment. No one is saying to not revamp the compensation system on Wall St, he needs to take this bull by the horns, reign in the anger expressed by the public and channel it in a more effective direction — fixing this nations economy. The bill passed by the house doesn’t do this.

I’m real tired of the political posturing and rhetoric we are all subjected to day after day about bonuses being paid at Wall Street firms. The recent outrage over retention bonuses at AIG was the last straw. The House just passed a bill proposed by Charles Rangel that would tax at 90% those bonuses paid by firms that received over $5bn in TARP money. The bonus tax would only apply to those who received over $250,000 in total compensation during the 2009 calendar year. All of the recent debate makes for good theater and politics but does nothing to address the core issue that we still don’t know what the banks have done with the majority of the TARP money.

Most bonuses for 2008 were paid after 12/31/08, which would make them TAXABLE AT 90% under the house plan, making it in effect a retroactive tax.

I think what just happened was completely done out of fear and anger and might be the most ridiculous thing to come out of Washington in recent memory. The people in Washington are fearing for their political lives as their offices field angry calls from constituents who view a “bonus” as something that should be paid to someone as a reward, not to someone who has run their firm into the ground. If we changed the compensation on Wall St so that people were paid significantly higher base salaries, would that make things ok?

Wall St for a very long time has not had a bonus structure that is typical by the standards held by many Americans. On Wall St, an individuals salary is only a small token of total compensation, with the majority of the reward coming in the form of a bonus.

Just think about this, lets say you were making $1 million a year in total compensation for the last 5 years, and now someone comes along and says you will only make $100,000 this year because you will not be getting a bonus. What would you do? You’d probably quit if you were financially secure. That is exactly what these senior executives will do at the exact time we need them to help to return their firms to profitability and help steer us out of this economic mess. These firms don’t run themselves and can’t afford to lose its best people.

This bill still has a long way to go, and the Senate is considering a version that would tax bonuses at 70% with half to be borne by the company and the other half by the individual. The government is trying to navigate down a very slippery slope by attempting to set compensation for private companies. I just hope Washington comes to its senses and doesn’t cause a massive Wall St “Brain Drain” that makes it impossible get ourselves out of this economic mess.