Dodd/Frank, Barack Obama, and Judgement

Last month, Barack Obama made another in a series of speeches in Las Vegas on the mortgage crisis. Buried within the speech was a line that was of little importance at the time however should become quite relevant in the campaign given what we have recently found out.

To stabilize our housing market and to bring this crisis to an end, I’m a strong supporter of Chris Dodd and Barney Frank’s proposal to create a new FHA Housing Security Program. This will provide meaningful incentives for lenders to buy or refinance existing mortgages, and to convert them into stable 30-year fixed mortgages. This is not a windfall for borrowers – as they have to share any capital gain. It’s not a bailout for lenders or investors who gambled recklessly – as they will take losses. It asks both sides to sacrifice. It offers a responsible and fair way to help Americans who are facing foreclosure to keep their homes at rates they can afford.

Now,what he is talking about is the Dodd/Frank bill that has recently run into controversy because of corruption uncovered between Dodd, Countrywide and Bank of America. Now, more prominent in Obama's speech was this line.

Here, in Nevada, we see how so many people are fighting for their American Dream. Because in so many ways, Felicitas and Francisco have lived the American Dream. Their story is not one of great wealth or privilege. Instead, it embodies the steady pursuit of simple dreams that has built this country from the bottom up....

Yet a predatory loan has turned this source of stability into an anchor of insecurity. Because a lender went for the easy buck, they are left struggling with ballooning interest rates and monthly mortgage payments. Because Washington has failed working people in this country, they are facing foreclosure, and the American Dream they sought for decades risks slipping away.

Dodd/Frank is a boondoggle and bailout for irresponsible and well connected banks masquerading as a compassionate piece of legislation supposed to help the most vulnerable and unfortunate among us. It is also the centerpiece of Barack Obama's plan to reinvigorate the mortgage market. Lost among the shocking details of what we have learned about the cozy relationship between Chris Dodd, Countrywide and Bank of America is the fact that Barack Obama gave this bill his seal of approval.

In his defense of the bill, Barack Obama makes two misleading statements. First, he proclaims that this isn't a bailout of borrowers because they would now share in "any capital gain". While this is true, it is also beside the point. Right now, most of these borrowers have no capital gain. They currently owe more than their properties are worth. This bill would artificially lower their mortgage below the value of the property. In my opinion half of say $25k is better than zero. Furthermore, the banks would in fact take losses but far smaller than they would without the bailout. These banks need to sell these loans and they need cash. That's exactly what this bill provides. Furthermore, the only other option for these banks vis a vis these loans is foreclosure. In that case, not only would they get less than they would with this bill but only after months of legal haggling and headaches. Of course, this bill is a bailout for all involved, and it is obvious to anyone that analyzed the bill from the beginning.

Dodd/Frank would provide roughly $300 billion in funds to bail out troubled borrowers. Many times this would include not only giving these borrowers rates they would never qualify for on the open market, but it would include artificially lowering their loan amounts as well. For banks, the federal government, through FHA, would buy up many of their most troubled mortgages. Banks are facing a "liquidity crisis" because they are holding onto mortgages they intended on selling to other parties. Since the open market is unwilling to buy them, it is quite a boon to get the government to do what the open market wouldn't. Furthermore, Bank of America received quite a great deal in buying Countrywide. The only caveat was that Countrywide was holding onto an enormous amount of these bad mortgages. As such, this bill would turn this buyout into quite the boondoggle for Bank of America. That is the nefarious undercurrent behind this bill that is now coming to the surface. That said, nothing in the bill was hidden from the public. Anyone who analyzed the bill from the beginning, like myself, would have come to the conclusion that the bill was a nightmare waiting to happen.

The Washington Examiner story found one other interesting piece of information.

Only Barack Obama and Hillary Clinton have received more Bank of America money than Dodd during the current election cycle. Republican nominee John McCain slightly trails Dodd, with $64,000 in reported Bank of America contributions.

From the beginning this bill was nothing more than packaging. It was billed as help for struggling homeowners. Of course, it turns out it is much more than that. This bill is really a bailout to irresponsible and greedy lenders. What it really is is a bill to make the buyout of Countrywide by Bank of America a financial boon. Of course, this is the bill that Barack Obama vouched for.

There is of course nothing more than rumor and innuendo that Obama was directly involved in any corruption. That is frankly besides the point. What he did was vouch for a corrupt bill. If someone vouched for Ishtar their movie recommendations would no longer be trusted. The same would be true if someone recommended an incompetent or corrupt lawyer, doctor, or mechanic. So, what do we make of a politician that vouches for a bill that later turns out to be corrupt? In fact, they probably didn't realize that the bill was corrupt, however all corrupt bills are bad bills. If a politician recommends a corrupt bill, no matter the reason, their judgement must come into question.

That's what this bill always was. That's how I described it from the beginning. I don't see that it was corrupt, however I did know right away that it was a bad bill. Why didn't Barack Obama make the same judgement? If he didn't what are we to make of his famous judgement? He has made judgement the centerpiece of his election theme. Yet, he vouched for a bill that has now been exposed as corrupt in the worst sort of a way. That is the message that I would be hammering if I am John McCain. If Barack Obama is going to make judgement an issue, then he needs to account for his support for this corrupt bill.

For an updated summary of this entire fiasco including backstory, context and a detailed history of events please go to this link.