Politicians are now paying lip service to reforming Fannie/Freddie. I wouldn't expect anything to actually get done but be prepared for all sorts of hair brained ideas. The first is by Congressman Barney Frank.
The more things change, the more they stay the same. Take the case of Barney Frank, Chairman of House Financial Services Committee. In an interview with FOX Business’ Neil Cavuto, he called for Fannie Mae and Freddie Mac to be abolished. “The only question is what do you put in their place,” he said.
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What would he propose? He said, “I’ve worked closely with the Financial Services Roundtable… They are talking about the following: first of all, you separate it out, so there’s no more hybrid public-private. So, Fannie and Freddie and anything like them go out. You have a purely public FHA [Federal Housing Administration]… [that is] fully self-financing.”
Frank added, “If we want to subsidize housing then we could do it upfront and let the budget be clear about that.”
Clearly, Barney Frank hasn't been paying attention to me. Beyond that, Frank clearly doesn't understand why Fannie/Freddie are such a problem. It's as though the problem is the names. They've become too toxic and so if we change them and have another mechanism that does the exact same thing everything will be fine.
Let's start at the beginning. Mortgage securitization is a very complicated process but, in my opinion, it's a necessary one. It provides liquidity in the market and it transfers risk from banks to speculators. All of that is good. That means more people get loans and rates will be lower.
The problem is that in loan securitization there's only two games in town, Fannie Mae and Freddie Mac. That's duopoly and those never work. The second problem is that both are extensions of the government. So, what we had was a government run monopoly on securitization. Fix both problems and you fix Fannie/Freddie.
Instead, Barney Frank wants to go the other way. He wants to stop simply having an implicit government guarantee and just have an explicit government guarantee. Of course, that perpetuates the problem.
An Obama administration proposal to create a government watchdog for financial consumers inched forward in Congress Wednesday, with House Financial Services Chairman Barney Frank calling for "death panels" to close down troubled financial firms.
Treasury Secretary Timothy Geithner, at a hearing chaired by Frank, urged lawmakers to approve the proposed Consumer Financial Protection Agency.
This, I believe, is a microcosm of both the administration's and it's allies' fundamental misreading of both the politics and policy of the entire domestic agenda. The Democrats believe that there wasn't enough government control of business and so they want to create more government control. On a policy level that's totally wrong. Furthermore, the public isn't comfortable with the government controlling business even more than it already is.
The problem wasn't that there wasn't enough control. That's the fallacious argument that there was too much deregulation. The problem was that the control was ineffective. Look at the Bernie Madoff case as an example. Was the problem a lack of regulations, or was the problem a total breakdown in enforcing the regulations we had? Of course, it's the second. Ponzi schemes aren't legal. So, we need no new regulations or regulatory bodies to fix the problem. The SEC was totally asleep at the wheel. They failed to regulate basic regulations even though eventually there was overwhelming evidence of a problem. So, would President Obama want to create another regulator as a result of the Bernie Madoff fiasco?
AIG is another great example. AIG acted as both an agent and as the exchange in credit default swaps. It's sort of like the Chicago Board of Options Exchange itself selling you an AT&T option. That's not how it works, and that's because that would be a clear conflict of interest. Yet, AIG effectively made the exchange for credit default swaps and was the main market maker for most of the specific credit default swaps. So, where were the regulators to put an end to it? Yet, President Obama's answer is to create another regulator.
The main problem with most of the problem mortgages was fraud. People lied about income, assets, and even occupancy. They did this systematically. None of this was at all legal. In fact, laws specifically forbade such an action. Where were the regulators to put an end to the mass fraud? They were asleep at the wheel.
What's President Obama's answer to the problem? He wants to create a Consumer Financial Protection Agency to regulate financial products. Never mind that we already have an alphabet soup of regulators for financial products. He wants to create yet another one. We had incompetent regulators and his answer is another regulator. Instead of fixing the incompetence, he creates another one. There's no evidence that the new one will be anything but incompetent.
As for Frank, he wants to create a regulator to shut down failing too big to fail financial institutions. The problem of course wasn't that too big to fail institutions failed. The problem was that they were too big to fail in the first place. This happened because of an explosion of mergers and acquisitions that created financial superstores that we now know were too big. Yet, all mergers and acquisitions must be approved by regulators in part to make sure the new company isn't too big to fail. Where were all these regulators? They were asleep as well. The answer according to Barney Frank is to create yet another regulator.
That's the reason that the public is rejecting much of these proposals. They inherently understand that more government isn't the answer. They also inherently understand that creating another regulator isn't the answer. They are looking for a government that functions better not a bigger government.
If you've been to any tea party, then you've probably seen someone that supports H.R. 1207. That's a bill sponsored by Ron Paul that would mandate a full and complete audit. Now, if you're unfamiliar with the matter, you might be shocked. You'd probably assume that the finances and balance sheets of our own Central Bank would already be a matter of public record. Not so. The public doesn't know exactly what the central bank owes and owns. That appears to be coming to an end. H.R. 1207 is favored overwhelmingly. More than that, it gets support from a cross section of the population. It has bi partisan co sponsorship including the likes of ultra liberals like Brian Baird and minority leader John Boehner. Even the Green Party is in favor of this plan. Libertarians are overwhelmingly in favor of it. It simply makes sense. Now, it's gained a very important supporter.
Rep. Barney Frank, the chairman of the House Financial Services Committee, has endorsed a bill calling for an audit of the Federal Reserve.
The support from the powerful Massachusetts Democrat comes after the measure, introduced in late February by Rep. Ron Paul, has won hundreds of co-sponsors on both sides of the aisle.
Frank's office had previously declined to comment on the bill, which had been idling in his committee for months, but the congressman publicly backed it when pressed on the issue at a recent town hall meeting held during Congress' month-long summer recess.
The reason that Barney Frank's support is important has everything to do with the dynamics of our legislative bodies. Power is held in large part in the hands of committee chairs. They decide which bill get voted on and which never see the light of day.
H.R. 1207 had overwhelming support, but until Barney Frank, head of the finance committee, gave it his vote of confidence it wasn't going to get voted on. Now, it will see the light of day and a very important hurdle is crossed.
With this latest news, I have an excuse to play my favorite Fed related video.
Now, the larger point is what will we find inside the books of the Fed. Some say that we'll find the Fed is near insolvency.
Yet, has the Fed really “run out of ammunition”? First of all: what is the Fed shooting at? It is trying to artificially stimulate the economy with its monetary policy, thereby it is also unwittingly shooting at the value of the currency. Through its monetary policy, the Fed is trying to bail out an insolvent and illiquid banking system to maintain an unsustainable structure of production. As long as the currency is not totally destroyed, the Fed will never run out of ammunition. In order to assess the ammunition left, one should have a look at the balance sheet of the Federal Reserve — especially at the assets the Fed can still obtain. The Fed’s balance sheet also gives insights on the condition or quality of the dollar.
Since the crisis broke out, the Fed has continuously weakened the quality of the dollar by weakening its balance sheet. In fact, the assets the Federal Reserve holds have deteriorated tremendously. These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar. The assets of the Fed, thereby, hold up the value of the dollar. At the end of the day, it is these assets that the Fed can use to defend the dollar’s value externally and internally. Thus, for example, it could sell its foreign exchange reserves to buy back dollars, reducing the amount of dollars outstanding. From the point of view of the buyer of the foreign exchange reserves, this transaction is a de facto redemption.
We'll see. What I have no doubt about is that a full and complete audit of the Federal Reserve will be the single most important economic event in this country since the Sherman Anti Trust Bill. Once the public understands exactly what this shadowy and all too powerful organization does, nothing in domestic policy and economics will ever be the same.
The Democrats have continuously defended their idea for a public option of health insurance by proclaiming that insurance companies take advantage of the system and a public option is necessary to provide competition. This has always been a totally illogical and absurd claim. There are over 1000 different companies that provide health insurance in this country. Yet, they are convinced that one more is what is necessary to create real competition.
At the same time, Republicans like Senator Jim DeMint and Congressman John Shadegg have gotten behind ideas to allow health insurance to cross state lines. Right now, health insurance works as regional monopolies. This is something I have spoken of on more than one occasion. One reasonis that insurance companies long ago were able to carve out an exemption in Sherman Anti Trust that would allow for such regional monopolies. Furthermore, it is now illegal for health insurance to cross state lines. As such, a health insurance company located in Pennsylvania can't provide insurance to a patient in New York.
If Democrats were honest about what was providing a lack of competition in health insurance, they would start and end there. If health insurance companies competed in all fifty states, that would immediately create all sorts of new competition and bring costs down.
Yet, the Democrats don't want any of that type of reform to health insurance. They claim that state laws and regulations keep such competition from being possible. Yet, somehow car, home, fire, and life insurance can all cross state lines. In fact, I know of no other insurance but health insurance that doesn't cross state lines. Remarkably, the only health insurance that is so expensive that its causing a crisis is health insurance.
Instead, Democrats want to create one health insurance company, and one only, that will be able to cross statelines. That's the new health insurance provided by the federal government. The only health insuranceprovided by the federal government. It will still need the help of medical billingemployees to run properly. The only health insuranceproviderthat will be able to compete with every health insurance company in every state will be the new health insurance provider that will be created by the federal government. (that's along with Medicare, Medicaid, and VA which are also government run)
Now, if Democrats are so keen on creating competition, one must ask why they are so resistent to allowing health insurance to cross state lines. This week Barney Frank admitted to Single Payer Network that a strong public option would lead to single payer.
The same happens in this Jan Schakowski clip.
The drive toward "competition" is nothing more than a trojan horse. If competition was their main priority, then the plan would allow for insurance to cross state lines along with the public option. It isn't. Instead, the only thing that will provide "competition" is the public option. Remember, it is the far left wing of the Democratic party that is most in favor of the public option. They were the ones that revolted when the Blue Dogs weakened the public option last week.
Any robust public option, like the one favored by Schakowsky and Frank, would eventually lead to single payer whether its supporters know it or admit it or not. That's because the public option has the benefit of the unlimited power of the Treasury and taxes. Their costs will always be lower than a private insurance company's costs. Though, often that cost is made up in printing money and in higher taxes. Competition can be created by opening up the market to interstate competition. The public option is nothing more than a trojan horse toward single payer.
The House passed the most sweeping regulatory bill on limitations of executive pay today.
The House approved a measure Friday that would put new constraints on executive pay, capitalizing on outrage over multimillion-dollar bonuses to Wall Street executives whose firms were bailed out by taxpayers.
The measure, which applies to any firm with more than $1 billion in assets, passed 237 to 185, with most lawmakers voting along party lines. The Senate will not take up a similar measure until after it returns from its August recess in September.
The bill, introduced by Representative Barney Frank, Democrat of Massachusetts, would let regulators ban risky incentive-based pay that could have an adverse effect on the financial system.
This bill would give the Congress all sorts of new power to regulate salaries, bonuses, and other benefits packages (like the hated golden parachutes) of any individual deemed an "executive". The good news is that this bill has a slim to no chance of becoming law. The bad news is that our legislators are so drunk on power that they think that this is part of their job description.
It's important to note that Frank's bill wouldn't merely regulate the executive pay of those companies that have $1 billion and more in assets. There is so much troubling in this bill. First, Frank is trying to use class warfare by attacking a class of people that have little sympathy anywhere, executives. By attacking executives, a class no one likes, the Congress can do something that is entirely not their business.
There is absolutely nothing in the Constitution that could reasonably give Congress the power to tell a private company how much to pay any of their employees, executives included. Yet, that's what Congressman Frank has purported to do and he found 236 other lawmakers that agree with him. There's no doubt that many executives are over paid and often paid handsomely for incompetence. There's also no doubt that fixing this is entirely up to the private market and not the federal government.
The negative unintended consequences are numerous. This will no doubt drive executive talent to foreign firms not under this regulation. American companies will simply not be able to compete in the word market place for executive talent. If you were an executive would you work at a firm in which Barney Frank could dictate how much money you can make, when another firm of equivalent credentials doesn't have the same restrictions?
Of course, once the Congress gets its meathooks into executives that definition will continue to expand. If Congress is given any power to regulate executive pay it's not long before executive are defined to include more and more private employees. Of course, power is like a drug. Give Congress this power and it only feeds their monster and their thirst for more.
This is yet another example of why I see class warfare as such a corrosive tactic. Frank capitalizes on the natural disgust and envy for executives and he uses that to give him and his colleagues power none of the founding fathers intended. He uses this envy to craft legislation that will make firms less competitive, give government even more power, and opens the door to give it even more power. We can all only hope that this dies a fast death in the Senate
Bill O'Reilly had an eerily cordial interview with Barney Frank last night.
They went over a series of topics but I want to focus on Congressman Frank's directive to Fannie/Freddie to loosen their restrictions on condominiums. Many in the media, like the Wall Street Journal, are characterizing this as a repeat of mistakes that caused the crisis.
Back when the housing mania was taking off, Massachusetts Congressman Barney Frank famously said he wanted Fannie Mae and Freddie Mac to "roll the dice" in the name of affordable housing. That didn't turn out so well, but Mr. Frank has since only accumulated more power. And now he is returning to the scene of the calamity -- with your money. He and New York Representative Anthony Weiner have sent a letter to the heads of Fannie and Freddie exhorting them to lower lending standards for condo buyers.
You read that right. After two years of telling us how lax lending standards drove up the market and led to loans that should never have been made, Mr. Frank wants Fannie and Freddie to take more risk in condo developments with high percentages of unsold units, high delinquency rates or high concentrations of ownership within the development.
I am very torn about this. On the one hand, I really don't want to defend Barney Frank. On the other hand, Fannie/Freddie have really restricted condominium guidelines to the point where loans over 75% are extremely difficult to get done. Still, the last thing we need is for legislators to dictate to Fannie/Freddie what their underwriting standards should be.
Within the last month, both have made condominium financing even more restrictive. Now, they won't finance any condo in which the building is less than 70% sold. (it used to be 50.1%) Furthermore, they won't finance any condo in which more than 15% of the units are behind on their assessments. Finally, any condominium project in which any one owner owns more than ten percent of the entire lot is one they won't do.
In my opinion, Frank makes some legitimate points. This new rule makes it nearly impossible to finance any new condominium project. If Fannie/Freddie won't finance any project less than 70% sold, how is any new condominium supposed to get to 70%? The second part of the rule makes perfect sense. Any condominium with too much delinquency on assessments can't function because they don't have money. The third rule makes sense in theory, but in practice, it has all sorts of unintended consequences.
For instance, technically, this rule would disqualify any building that's less than ten units. After all, every owner would own more than ten percent. Fannie/Freddie make exceptions to this rule in such a situation, but the rule itself makes it very difficult to finance small condominium projects. It's nearly impossible for any one owner to own ten percent or more of a four hundred unit project, but fifteen units is a different story. If one person happens to own two units of a 15 unit project, is that necessarily a sign that this project is on the brink of financial collapse? Yet, it would no longer qualify for a Fannie/Freddie loan.
There are three problems with this story. The first is that the media, almost in unison, attacked Frank merely because he's an easy target. Since he is linked to to prior loose guidelines, almost everyone reflexively attacked his idea as more of the same. Most of these folks don't have nearly the type of sophistication necessary to make a judgement, but they attacked him regardless.
The second problem is much more serious. We now live in a mortgage world where it's Fannie/Freddie and FHA. That's it. If we had more loan choices, it wouldn't make that much of a difference that Fannie/Freddie tightened their guidelines on condos. We'd still be able to go elsewhere. Since they are basically the only game in town, this becomes a market moving phenomenon. It's further exaserbated by the fact that FHA has also moved to make condo financing more difficult. When there was also Sub Prime and Alt A available, this sort of a thing wouldn't be so devastating. That's because the entire market wasn't dependent on these two. Now, it is. What all of this should reveal is that we need serious reform to Fannie/Freddie. Their duopoly on the mortgage market has perverted real estate itself. What this reveals is that both wield far too much power in the market.
Third, Fannie/Freddie are far too close to Congress. Whether the idea has merit or not, we can't have Congress suggesting financing guidelines to mortgage securitizers. Yet, we've moved to making Fannie/Freddie closer to Congress not further away. They used to be an extension of the government which was bad enough. Now, they are a wholly owned subsidiary of the government. That makes it much easier for folks like Barney Frank to dictate terms.
A few days back, I made the point that President Obama's policies will soon encourage folks to fall behind on their mortgages. That's because he is so determined to do everything to stem the tide of foreclosures that soon enough he will make the foreclosure process attractive to borrowers. Soon enough, borrowers will find that many will get the best deal through the process of foreclosures. To get a glimpse at just how far these policies will go all you need to do is look at some of the things Barney Frank is proposing.
Wrapping up a week of efforts by legislators and businesses to stake claims on the Troubled Asset Relief Program and the proposed stimulus package, Mr. Frank said he plans to lay out a series of restrictions on the remaining $350 billion in TARP in a bill the House could vote on as soon as next week.
Meanwhile, an industry coalition is lobbying for a tax break that would allow companies to renegotiate troubled debt without incurring corporate income taxes, a potential windfall for many companies, including private-equity firms.
Mr. Frank said his plan would prevent banks from using government money to buy healthy banks and impose tougher executive-compensation restrictions for new recipients of TARP funds. He is also proposing a permanent increase in the Federal Deposit Insurance Corp.'s insurance limit on deposit accounts to $250,000.
This past summer, Barney Frank made a similar proposal in which FHA would guarantee about $350 billion worth of troubled loans. By guaranteeing these loans, FHA would underwrite better rates and terms with troubled borrowers. This particular law went over like a lead zeppelin. That's because Frank couldn't figure out how to make it attractive to the bank holding the current loan. He thought that hundreds of thousands of loans would be guaranteed and less than one hundred were actually done so far.
In this case, Frank wants to use TARP funds to make it easier for banks and borrowers to commit to the process of loan modifications. In this process, a borrower struggling to pay back their mortgage is rewarded with a loan that they can afford. Frank wants to use some of the TARP funds to give tax breaks to any bank that creates a loan modification.
There are a few things to keep in mind. If your only goal is to stop foreclosures, loan modifications are a much better way than encouraging new loans. In loan modifications, the very bank looking to foreclose is the one that does the loan modification. As such, the most motivated entity is the one in a position to act. With his bill last year, a new bank had to take on the loan. Certainly, a new bank isn't nearly as motivated to take on a borrower they know has already been in trouble. Second, this plan is for the TARP funds only. Certainly, no one should believe that Frank will stop with the TARP funds.
I have said over and over that once folks understand the process of loan modifications many will realize that it it in their benefit not to pay their mortgage. Loan modifications start only when someone is behind. Normally, a borrower needs to be two months behind. The deals that borrowers get are better than any market rate they would get. The normal rate for a loan modification is five percent. One loan modification I have seen received a rate of 4% for five years 6% for the next two years and 6.75% for the remaining 23 years. In another case, a borrower received a loan modification with a rate of 1%.
Clearly, for most borrowers, a loan modification is the best option. So, once borrowers find out it is an option they will do everything they can to qualify. Of course, borrowers must be in trouble of paying their mortgages. So, the first thing they need to do is fall behind. The more folks like Frank encourage loan modifications the more they encourage folks to fall behind on their own mortgages in order to take advantage of the process. The TARP funds are only the beginning. Soon the entire federal government, with Frank leading the way, will be doing everything they can to encourage loan modifications. Since you can only be considered for one when you are behind on your own mortgages, folks like Frank will also be encouraging that folks fall behind on their mortgage as well.
This past summer I wrote often about mortgage bailout of troubled borrowers championed by Chris Dodd. The bill that passed this past July was in my opinion one of the most corrupt pieces of legislation that I had ever seen. Here is a quick summary of the corruption as I saw it. Chris Dodd received two sweetheart loans from Countrywide. For about a year and a half, Dodd received campaign contributions from Bank of America that averaged to about a $1000 weekly. In the winter last year, Bank of America bought Countrywide. The deal was a potential boondoggle for Bank of America however they also bought all of Countrywide's toxic mortgage debt. Then, we find out that Bank of America helped write this bill, which would transfer most of this toxic debt to mortgages that would now be guaranteed by the federal government. Such a bill would help remove much of this debt from the books of the newly minted company and as such, it would also make the merger a financial boondoggle for Bank of America.
Since October 1st, HUD reports barely 150 applications from lenders. Yep, that’s just applications. Apparently the lenders weren’t too keen on that principal write-down. So HUD announced new regulations, telling lenders that they only have to write down to 96.5 percent of the current value, and homeowners would not have to spend more than 31 percent of their monthly incomes on the mortgage. The loan could be extended to 40 years.
The reason that the bill has failed to produce much activity is that it has asked banks to take far too large a markdown on their loans. What this means is that banks would be asked to reduce the balance on loans to a balance far lower than the value of the home. In other words, if a troubled borrower owed $250k, the feds would buy the loan but only if the balance were say $200k. In the summer, I didn't see this as a problem for the banks because they would likely get a lot less on their money in the open market than what the feds would offer. At the time the bill passed, Merrill Lynch had just accepted 22 cents on the Dollar for billions in toxic mortgage debt. If banks had to only write down to 60-65%, I thought they would see this as a boon.
Apparently, I was wrong. Banks, so far, have seen the write down stipulations as far too much. As such, the feds are now requiring that loans only be marked down to just under 97% of the value of the property.
The problem with this program is that the more successful it is initially, the more destructive it will be eventually. 97% is the maximum allowed on an FHA loan, the government program that will underwrite these new loans. Furthermore, FHA has strict requirements about prior mortgage history. Most borrowers with any prior mortgage lates are immediately rejected by FHA. This new program will forgive a massive amount of mortgage lates. They will do this because they will also require borrowers to stay within strict debt to income limits of 38%. Strict debt to income limits is another bedrock underwriting guideline of FHA.
The problem is that folks that have been late in the past are significantly more likely to be late in the future. That's why it is one of the standard underwriting guidelines. Furthermore, these borrowers, with mass mortgage lates, are being given loans where the loan to value is maximized. This makes such loans far riskier than FHA ever intended them to be. The math on this isn't very difficult to figure. This means that loans under this program will have far higher default rates than anything that FHA ever intended. There is no other outcome when basic underwriting guidelines are ignored. That's how we got into this mess.
The biggest problem is of course that the federal government will now be the debtor on these new loans. When these loans finally begin to default at ratios far more than what is allowed to make the program viable, it will ultimately be the tax payer, not the banks, that will foot that bill. That's because under this program the Federal government, or the tax payers, will guarantee any loans that will go into default. By moving the risk from the banks themselves to the Federal government, they are inviting exactly the sort of irresponsible behavior that lead us here.
I have felt from the beginning that this bill would eventually take our economic malaise to a place no one can imagine. So far, the banks have resisted allowing my theory to be tested. The government appears determined to make the terms attractive enough so that soon enough we will all see if I am right.
Following the 2006 election, Dick Morris pointed out that the Democrat's new majority was largely ceremonial, and that ultimately, the Democratic caucus would wind up in total disarray. That's because the Democratic Party is much less one unified organ and much more series of competing factions each with their own agenda. Among the factions, it includes: The Blue Dogs, The Congressional Black Caucus, The Congressional Hispanic Caucus, and the group allied with Soros and the Nutroot. Each of these factions have enough members that a revolt, on its own, would cause the Democratic majority to be a minority as long as the Republicans stuck together. Morris turned out to be absolutely correct and the Democratic Congress was a total nightmare. At this point, the Democratic Congress barely polls in double digits in terms in terms of approval. Nancy Pelosi swooped into Congress with a bold agenda and ultimately only showed a modest increase to the minimum wage (something she added to an Iraq War funding bill) as her "major" accomplishment.
Blue Dog Democrats Friday called on the Democratic Caucus to support “moderate voices” in the slew of leadership decisions the party will be making this month.
The release did not name any of the races or contenders, but Blue Dog sources say it can be seen as preliminary support for Rep. Joe Crowley (D-N.Y.) in a brewing bid for vice chairman of the caucus and Rep. John Dingell (D-Mich.) in his fight to stave off a committee chairmanship challenge from Rep. Henry Waxman (D-Calif.).
“As the moderate faction of our caucus has grown and contributed to our large majority, our leadership must have more moderate voices at the table if we want to continue to be successful, strong, and effective as a caucus,” said Blue Dog leader Rep. Allen Boyd (D-Fla.).
Leadership posts are going to be the least of the problems of this tension. The real problem will be in crafting policy that can get a majority. The Democratic Soros types in the Caucus are folks like Dennis Kucinich, Barney Frank, and the House Speaker herself, Nancy Pelosi. Their agenda can best be summed up by this Frank interview.
Folks like Barney Frank make up a good quarter to one third of the caucus. They are also, CURRENTLY, most of its leadership.
Then, on the other hand, there are the Blue Dog Democrats. This is a coalition of about 40 "moderates" in the House and about 10 in the Senate. I say they are "moderate" because in reality they are usually a lot more Conservative these days than the Republicans themselves. While Barney Frank is calling massive new spending and dismisses any worries about deficits, the Blue Dogs are calling for PAYGO spending policies.
The PAYGO or pay-as-you-go rule compels new spending or tax changes to not add to the federal deficit. New proposals must either be "budget neutral" or offset with savings derived from existing funds. [1] The goal of this is to require those in control of the budget to engage in the diligence of prioritizing expenses and exercising fiscal restraint.
So, on the one hand, we have Barney Frank and his cohorts ready to spend with reckless abandon. On the other hand, we have the Blue Dogs who demand that any spending increase be offset by spending cuts somewhere else. Somewhere in the middle lies a policy that can turn into law.
It's important to understand the stakes. For someone like Barney Frank, spending is a matter of ideology. He believes in big government and he believes in big spending. Now that his ideological bent has power he intends to implement it. For the Blue Dogs, this is a matter of survival. They are not merely conservative philosophically. They also come from conservative areas. Many of them swept into victory in 2006 promising essentially to be more conservative than their Republican counterparts. Because the Republicans failed to hold the line on spending when in power, there was an opening. If Nancy Pelosi's Congress goes wild though, there WILL be a Republican opponent waiting to use the spending spree as a bludgeon.
Spending is only one area where this tension occurs. Most of these Blue Dogs are also socially conservative. Barack Obama has indicated that he wants all sorts of extreme abortion policies like federal funding for abortions, eliminating parental notifications, etc. The Blue Dogs would be taking huge risks in voting for these policies as well. The folks in their districts are as socially conservative as they are fiscally conservative. Having their Congress person rubber stamp any sort of radical abortion policy is not something they are likely to forget come 2011. Of course, without the Blue Dogs, there is no majority for any such radical measure.
On immigration, the Blue Dogs again act even more conservative than the Republicans. It was in fact Blue Dog Democrat Congressman and former Quarterback Heath Shuler that introduced the toughest border security bill, the SAVE Act. Anything that sniffs of amnesty will also be furiously opposed by the Blue Dogs. On the issue of immigration, illegal and otherwise, the Blue Dogs will face tension with not only the Soros types but the Congressional Hispanic Caucus. While President elect Obama is quite sympathetic to the open borders crowd, he will have a hard time passing things like the DREAM ACT, driver's licenses for illegals, etc. At best, what we will have is a stalled agenda.
Finally, there is the Congressional Black Caucus. For obvious reason, they will likely feel as though they should have more power. Here, the tension will likely be between the President himself and the Caucus. If it looks as though he is governing as an African American, that would be the worst thing that could happen to his Presidency. If legislation even sniffs of "Afro centricity" that would face an overwhelming rejection by the public at large. As such, whatever power they have, it will have to be tempered by the President himself.
The reality is that in such cases it is up to the leadership to bring all sides to the table and compromise. It is one thing not to be able to reach out to the other party. It is something quite different not to be able to reach out to the many factions of your own party. The fact that the last Congress was totally impotent in dealing with its many factions can be laid squarely on two people, Harry Reid and Nancy Pelosi. Their grades in their first terms were both F's. In order to govern all factions need to come together and compromises reached. There is a middle ground between Barney Frank's total lack of fiscal responsibility and the Blue Dog's rigid PAYGO ideas. It is the job of the Speaker and the Senate leader to get there. That they couldn't reflected badly on them. Whether they can or not in the next Congress remains to be seen, however the Democrat's governance problems remain the same as they were in 2006.
One of the biggest problems for me about this bailout is that most of the same folks on the so called front lines of ignoring and creating this crisis are now in charge of trying to get us out of this crisis. Everyone agrees that many in the Federal government were asleep at the wheel while this happened, and yet, we are now giving them the power to get us out of this. Let's take a look at the players.
1) President George Bush
How long did President Bush tout the all time highs in new home ownership during his Presidency? Well, now we have all seen that this was created on the backs of bad loans, fraudulent loans, and loans to people that should never have been approved. Did he know? Did he care? When Alan Greenspan dropped the Fed Funds Rate below one percent where was President Bush to explain how dangerous this was? When fraudulent loans literally explode where was President Bush to provide oversight? His peformance, or lack thereof, in combating this crisis has been atrocious. Yet, now it will be his administration in charge of creating and rolling out this multi hundred billion dollar bailout plan.
2) Ben Bernanke
Last September he began to furiously drop rates. At the time, the Dollar was already weak. What this furious drop in rates did was weaken an already weak Dollar. This contributed to ballooning oil and commodities prices, and this exploded gas and food prices. His furious reduction in rates did ABSOLUTELY NOTHING to combat the weakening economy, failing banks, or growing financial crisis. Then, he stepped in and wore the multi hats of investment banker, rainmaker, and Fed Chairman in making sure that Bear Stearns was bought out in a weekend when normally such a deal would be done in about half a year. This massive usurption of power was supposed to be done because it was necessary. We were supposed to avert crisis as a result of this move. Then, he picked and he chose which financial institutions would die and which would be saved. Then, he suddenly reversed course and said we need a massive bailout. Does this sound like someone who competently knows how to deal with the crisis?
Treasury Secretary Henry Paulson said Wednesday the worst of the credit crisis may have passed but acknowledged that rising gas prices will blunt the effect of 130 million economic stimulus checks.
He ruled out a second stimulus package for now....trio of crisis — housing, credit and financial — have pushed the economy to the edge of a recession. To help cushion the blow, the Bush administration and Congress speedily enacted a $168 billion stimulus package of tax rebates for people and tax breaks for businesses.
So, five months ago, the worst of the crisis, in his opinion, was over. Where has he been for the last five months? What exactly has happened in the interim? We are about to hand $700 billion to buy bad loans to someone who five months earlier didn't see these very loans as creating any further problems. Does this sound like someone who we can trust to do this properly.
4) Chris Dodd and Barney Frank
Both of these guys were in charge of overseeing Fannie Mae and Freddie Mac. They allowed both to not only make their own loans far too aggressive but to stake aggressive positions in even more aggressive Mortgage Backed Securities of sub prime loans. Furthermore, last fall, Barney Frank wasted everyone's time for a month with H.R. 3915. He attempted to remove Yield Spread Premium, a tool of a mortgage broker to make money, and that would have ended the mortgage broker industry. Chris Dodd was the front man on a recently atrocious and corrupt bailout of troubled borrowers. These borrowers would get brand new FHA backed loan at below market rates and even reduced mortgage balances. In other words, borrowers that couldn't pay their loans on time would be rewarded with loans that good borrowers couldn't qualify for. Furthermore, both of them are among the biggest recipients of campaign money from both Fannie and Freddie. Do these two sound like the sort of point men to make sure that this plan is executed properly?
Any sort of massive government plan as this one needs competent leadership. I think we can all see that the leadership on this bill is totally incompetent.
Hopefully, there was no one out there that actually thought our politicians would put politics aside and try and do what's best for the country only and disregard how things would work out for their party. It appears the political positioning is in full force.
Ed Morrissey has figured something out. The Democrats don't need the Republican leadership to pass this bailout. The President would be more than happy to sign it, and the Democratic leadership can withstand any filibuster threat in the Senate. So, what's the problem? Let's let Mr. Morrissey explain.
If Pelosi has her entire caucus in line to support the Paulson plan, then she has the vote to pass it. Some estimates have as many as 50 Republicans ready to support the plan in defiance of Boehner. If that’s true, Pelosi could lose all of her Blue-Dog Democrats and still pass the bill.
So why not just call a vote? Pelosi doesn’t want to get married to George Bush, that’s why. She wants to spread the political risk and get consensus on a bailout plan so that the responsibility for any failure doesn’t rest solely on her shoulders, at least in the House. Both Pelosi and Harry Reid wanted John McCain to deliver both GOP caucuses to cover their own butts on the bailout bill, and McCain — at least thus far — hasn’t convinced Boehner to do so.
President Bush scrambled Friday to bring rebellious members of his own party behind a multibillion-dollar government bailout of the financial system amid bitter political recriminations from both Democrats and Republicans over collapsed negotiations.
Bush delivered a terse statement from outside the Oval Office of the White House, acknowledging that lawmakers have a right to express their doubts and work through disagreements, but declaring they must "rise to the occasion" and approve a plan to avert an economic meltdown.
"There are disagreements over aspects of the rescue plan," he said, "but there is no disagreement that something substantial must be done. We are going to get a package passed."
Given that only yesterday afternoon there was an agreement in principle, what exactly is the problem? It isn't the entire Republican caucus that is against this bill just most of its leadership. This brings up another interesting observation. Why was the agreement hammered out on this bill minus all remnants of any Republican leadership? Folks like Richard Shelby and Jim DeMint came out afterwards to say that they were not in favor of the agreement. Why weren't they merely included in the original negotiations? Of course, only the powers that be know why Robert Bennett of Utah became the front man for the Republicans in the original negotiations. I suspect that some thought that if they got enough Republicans on board the leadership wouldn't dare go against it. If that was their thought, they were wrong.
Fox News is reporting that the House Republican leaders are planning on meeting at noon Eastern Time. Expect the leadership to come out of that meeting with a radically altered proposal. Expect this proposal not to allow a bailout, but either a loan or insurance on these bonds. Expect this package to be full of stimulating tax cuts, an end to marked to market, along with an alternative mechanism to a bailout.
After the hour-long White House meeting, [Dodd] said: ‘What has happened here is that we have spent seven straight days to find a rescue plan for the economy.
'What this looked like was a rescue plan for John McCain. To be distracted for two to three hours by political theatre doesn’t help.’
Democrats said the Republicans were on board with the deal until Mr McCain intervened an injected presidential politics into the situation.
There are two serious problems with going all in on this position. First, the public doesn't like the bailout. Second, the very unpopular President proposed it. You want to know what a bad position is. It's when you agree with the unpopular President (who will never again be on the ballot) of the opposite party on an equally unpopular bill, and the other party proposes something the public at large will like even better.
What will the Democrats do? It isn't as though they have an idea of their own. Will they force a vote down everyone's throats and announce to the world that it was they that forced American taxpayers to bailout out greedy and irresponsible bankers with tax payer money and in so doing socialize mortgage securitization? Talk about bad politics. That's the poster child for bad politics. No, instead they will stall and huff and puff looking for an alternative. They'll likely demand a conference to try and hammer out an agreement. They'll likely even get the Republicans to capitulate on things like CEO pay limits and even a small stimulus pay out "to the middle class". I don't mind. I can use a $600 check.
Ultimately though, it will be the Republicans that will look like the party that saved the country from an obscene bailout. It will be the Democrats that looked as though they agreed with the unpopular President from the other party. It will be John McCain in the middle of all of it. This will be the game changer we will be talking about for decades.
Let's see if I understand this correctly. The Democrats, ready to increase their advantages in both Houses of the legislature, are now in a position where they are in agreement with an unpopular President about a very unpopular and massive tax payer funded bailout. At the same time, the Republican side of the legislature has decided to totally oppose the President on the same issue.
Let's review what has happened so far today. At about noon, it appeared that the President had come to an agreement largely in principle with the legislature on the $700 billion bailout. Yet, if you looked at the details of the agreement, it was brokered by the likes of Chris Dodd and Barney Frank on the Democrat side. On the Republican side, the so called leadership was Bob Bennett of Utah. In other words, the leadership of the Democrats on financial issues were with the President on this. Meanwhile, some back benchers of the Republican Party spoke for their side.
Later in the day, the real leadership of the Republicans, folks like Richard Shelby, John Boehner, Eric Cantor, and Jim DeMint, came out totally opposed to this plan. One Republican went so far as to say if Nancy Pelosi wanted to pass this thing she should do it herself.
Keep in mind, that a significant economic package must be passed and soon. On the other hand, it need not be a bailout. In fact, the Republicans laid the ground work for an alternative a couple of days ago.Eric Cantor added another idea to this today.
Meanwhile a group of House Republican lawmakers circulated an alternative that would put much less focus on a government takeover of failing institutions' sour assets. This proposal would have the government provide insurance to companies that agree to hold frozen assets, rather than have the U.S. purchase the assets.
So, watch for the Republicans to push a counter proposal that is diametrically different from the bailout. It will focus on pro growth ideas, ending the so called marked to market (Newt Gingrich suggests a three year rolling average), and give distressed companies loans or insurance but force those companies to hold the distressed assets they bought.
This plan will be much more well received by the public because it doesn't put the tax payer on the hook for all these bad loans. Furthermore, in a stroke of political genius (one that will likely be taught in advanced political science classes for decades) they will be in a position to disagree with the unpopular President of their own party while their opponents are already on record largely in agreement with the same unpopular President. Finally, while the Democrats will likely attempt to stall this plan, they will, in the end, have no choice but to pass it because a package needs to be passed or the financial market will face a crisis of confidence.
As such, not only will the Republicans show real leadership, but the Democrats will also be on record as supporting a tax payer funded bailout that the public hates. On top of it, the Republican Presidential candidate will be in the middle of all of this while his Democratic opponent will be watching from the sideline. This bill is a game changer. Not only does it make McCain the new front runner for President, but it puts the Republicans in strong position to make serious gains in the legislature as well.
Back in 2006, the Democrats effectively used the issue of Jack Abramoff as a bludgeon against Republicans. The truth is that Abramoff had no problem committing corruption by reaching out to Democrats, but Abramoff worked with corrupt Republicans in significantly larger numbers. Democrats used Abramoff as a symbol of the corruption that had engulfed Washington and since the Republicans were in charge, they put the blame on the Republican party.
The dynamic of Fannie/Freddie can work out much the same way. The current financial meltdown is a mortgage meltdown that has spread into a financial services meltdown that threatens to be an economic meltdown. Fannie/Freddie are both at the center of this meltdown and a symbol for it. Make no mistake, both these giants were not only obscenely corrupt, but they had no trouble reaching out to members of both parties to look the other way while they committed their corruption.
In an inverse way though, much like Abramoff himself, Fannie Mae/Freddie Mac worked predominantly with the Democrats. There is plenty of opportunity for the Republican Party, and John McCain specifically, to take advantage of this. Much like Abramoff became a symbol for the corruption that engulfed D.C., both Fannie Mae and Freddie Mac can become a symbol for the corruption and excess that has engulfed Wall Street and threatens our economy. If the Republicans can get on the other side of these two, demonize them, and link their corruption to the Democrats (much like the Democrats did with Abramoff), they can turn the entire election.
There are opportunities on three levels. Three of the biggest beneficiaries of Fannie and Freddie money are Chris Dodd, Barney Frank, and Barack Obama. One is running for President and the other two head their houses respective committee that has oversight of these two giants. How can we have reform if the entire leadership of the party is in the pockets of the corruptors themselves? In less than four years, Barack Obama has received just over $126,000 from these two. Furthermore, former Fannie Mae CEO's Jim Johnson and Franklin Raines are both part of his campaign. He is second only to who has received $165,000 over a much longer period. John McCain has received just over $22,000 in over twenty years on Capitol Hill.
Barney Frank, on the other hand, has his own mess to answer for. In 2003 and for years later, the issue of reforming both came up and here is how he responded.
I do not regard Fannie Mae and Freddie Mac as problems," he said in response to another reform push. And then: "I regard them as great assets."
Great or not, we'll give Mr. Frank this: Their assets are now Uncle Sam's assets, even if those come along with $5.4 trillion in debt and other liabilities.
Again in June 2003, the favorite of the Beltway press corps assured the public that "there is no federal guarantee" of Fan and Fred obligations.
A month later, Freddie Mac's multibillion-dollar accounting scandal broke into the open. But Mr. Frank was sanguine. "I do not think we are facing any kind of a crisis," he said at the time.
Three months later he repeated the claim that Fannie and Freddie posed no "threat to the Treasury." Even suggesting that heresy, he added, could become "a self-fulfilling prophecy."
In April 2004, Fannie announced a multibillion-dollar financial "misstatement" of its own. Mr. Frank was back for the defense. Fannie and Freddie posed no risk to taxpayers, he said, adding that "I think Wall Street will get over it" if the two collapsed. Yes, they're certainly "over it" on the Street now that Uncle Sam is guaranteeing their Fannie paper, and even Fannie's subordinated debt.
Re electing the Democrats means having Frank in charge of Fannie/Freddie oversight. Re electing the Democrats means that the same folks that became far too cozy with these two giants will continue to be in charge of overseeing them. Of course, I can't say it. The Republicans must say it.
Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation
It's important for McCain to point out that anyone can call for reform after there is a problem. It's something wholly different to identify a problem before it happened. Barack Obama is blaming the last eight years of Republican rule for causing this crisis. Yet, he was in the Senate for four of those years, and he never proposed anything to resolve the crisis that is now occurring. McCain's has a track record of anticipating problems. Again, this isn't merely something I can point, but something that McCain needs to pound over and over.
All of these points must be hammered home over and over in campaign ads, speeches and in debates. Some have complained that Sarah Palin has been making her convention speech over and over on the campaign trail. Well, it's time for her speech to pivot. Now, it's time for Sarah Palin to pound over and over the Democrats, and Barack Obama especially, cozy relationship with Fannie and Freddie, their unwillingness to act in oversight, and also John McCain's record of anticipating this crisis.
This can't be it though. The Republicans must also offer some real solutions. Merely mentioning reform, restructuring, and oversight over and over aren't going to be enough. The reform can't merely be a series of new regulatory bodies that will likely only add to the bureaucracy. The Republicans, and McCain specifically, must present a series of specific reforms that changes these two giants structurally.
First, these two giants are the brainchild of FDR. (actually Freddie Mac was created later but the concept of mortgage securitization being a brainchild of FDR is correct) Democrats have paid allegiance to FDR's big government philosophy for more than half a decade. Fannie/Freddie are the clearest example that in fact the philosophy is inaccurate. The problems with Fannie/Freddie are two fold. First because they are Government Sponsored Entities, they are quasi private and quasi public. That makes their profits private and their losses socialized. This must stop and so these companies must be full privatized and cut loose. Second, because there are two of them, they are essentially monopolies. They must be broken up. They can be broken up according to the standards of Sherman Anti Trust Act. If McCain wants a real bold populist message, how about dusting off that nearly one hundred year old law? If McCain and the Republicans offered these two clear and specific solutions, they would put the Democrats on their heels.
If the economy continues to be the single most important issue, then the Republicans must turn Fannie/Freddie into not only the symbol of everything that is wrong but its nexus, both of which are mostly entirely accurate thoughts. They have the opportunity. They must drill it home in ads, speeches, debates, and in talking points. If the Republicans handles the Fannie/Freddie issue correctly, they will not only elect McCain President but maybe even with one or more of the legislature along with him.
Senator Obama talks a tough game on the financial markets but the facts tell a different story. He took more money from Fannie and Freddie than any Senator but the Democratic chairman of the committee that regulates them. He put Fannie Mae’s CEO who helped create this disaster in charge of finding his Vice President. Fannie’s former General Counsel is a senior advisor to his campaign. Whose side do you think he is on? When I pushed legislation to reform Fannie Mae and Freddie Mac, Senator Obama was silent. He didn’t lift a hand to avert this crisis. While the leaders of Fannie and Freddie were lining the pockets of his campaign, they were sowing the seeds of the financial crisis we see today and enriching themselves with millions of dollars in payments. That’s not change, that’s what’s broken in Washington
UPDATE:
Right on cue, McCain is following my advice. Here are two new ads that call for exactly what I asked for.
Now if this is a story, McCain is laying it out well but it is only at the beginning. First, he is laying out that Barack Obama is very cozy with the problem. Next, he needs to point out his own record in trying to confront the problem. Yet, he still needs to define why Fannie/Freddie are such a problem. Finally, he needs to offer specific solutions. Expect more ads to accomplish the rest of the goals.
For the last day and a half, the financial press, politicians, and ordinary citizens are for the most part wringing their hands condemning the bailout of AIG by the Federal Reserve. Often, you will find statements like this.
Then came Mr Paulson’s retreat, executed with gritted teeth, as the government and the Fed reluctantly decided that the risks of letting AIG founder in the same way as Lehman were too great.
That frightened me.
There would be no justification for rescuing AIG under other circumstances. The chances of the average homeowner not getting an insurance claim paid if AIG’s holding company had been allowed to go under were slim, since its local property and casualty operations are sturdy and well-run.
Propping it up also creates moral hazard. Although its shareholders will lose most of their money, it encourages the idea that institutions can run amok in markets and will be bailed out. Indeed, the bigger they are and the worse they have behaved, the more likely it is to happen.
If you took what the conventional wisdom said at face value, you would think that business would continue as usual at AIG and all their irresponsible behavior would go unpunished. Furthermore, you would think that what the Fed did is unprecedented and way outside their scope. In fact, one of the Fed's primary function is to be the lender of last resort.
What's more the actual terms of the deal aren't exactly a bailout. AIG will receive a credit line for LIBOR + 8.5%. Furthermore, this credit line will last 24 months. This credit line is meant mostly to give AIG enough financial backing so that it can then sell itself off until their balance sheet is manageable. According to the last Fortune 500 list, AIG was 13th. It will likely be past my lifetime before the company ever sniffs the entire list again once this firesale is over. That isn't a bailout, but a lifeline.
About a month and a half ago, the Dodd/Frank bill became law. This law was supposed to address distressed borrowers. This bill is worth roughly $350 billion. The details of this bill haven't totally been worked out and it is set to roll out in the early part of October. Yet, the bill will give a "lifeline" to borrowers that are or have been behind on their mortgages. This bill will forgive these mortgage lates. They will qualify for FHA loans, a loan they would never qualify on their own with these lates. Furthermore, if these borrowers owe more than their property is worth, a likely scenario, their mortgage balances will artficially be drawn down below to value of their property. In other words, these borrowers, who borrowed irresponsibly, would not only get a rate they don't deserve but also possible have their entire balance lowered. Now, that is a bailout.
Yet, there is all sorts of handwringing over the so called bailout of AIG, and when the Dodd/Frank bill passed (a bill that is wholly corrupt in my opinion), we heard almost nothing from the media, the politicians, and the citizenry at large. The Dodd/Frank bill will backed by $350 billion in tax payer funds. AIG gets a credit line of $85 billion. AIG's interest rate is a moving rate in double digits. These irresponsible borrowers will get FIXED rates somewhere between 6 and 7 percent. That doesn't even account for the artificially lower mortgage balances that borrowers will get.The main problem with bailouts is the concept of moral hazard.
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his or her car, because the negative consequences of automobile theft are (partially) borne by the insurance company.
AIG will now be forced to liquidate its assets until the company is a shell of its former self. Irresponsible borrowers will be rewarded with not only a better rate but likely a better mortgage balance. Which of these two actions sounds like it creates a moral hazard? Yet, it is the so called bailout of AIG that has everyone up in arms. The passage of Dodd/Frank barely registered with any media, politicians, or citizens. That's too bad because it is the Dodd/Frank bill that everyone should be outraged about.
I have written much about the Dodd/Frank Bill. I have pointed out its corruption. I pointed out its corrosive effect on the economy. Now, I would like to look at what, conceptually, makes this bill so flawed. Now, everyone agrees that the mortgage crisis was caused because underwriting standards were loosened far too much. This bill does the same thing on a smaller scale. What this bill asks FHA to do is loosen their standards in order to include borrowers that would never qualify on their own.
Here is how it would work. The borrowers that would qualify would be those that are currently in adjustable rate mortgages. The borrowers that would qualify are those that were on time when their mortgages were their initial rates but fell behind after their mortgages adjusted. The logic behind this is that most of these folks didn't realize what they got themselves into, and they will be on time as soon as they are put into a fixed and manageable rate. The problem is multi layered. First, the folks that are behind are not monolithic. There are many reasons why these folks fell behind and being duped is only one of them. In my opinion (from six plus years in the business) most of these folks couldn't qualify for the property they wanted with a fixed rate and they bet on the variable rate.
Ultimately though, the reason is not necessarily all that relevant. FHA looks at mortgage history for a reason. There is a reason why FHA so frowns upon mortgage lates. Prior mortgage history is an excellent indicator of future mortgage repayment. FHA frowns upon prior mortgage lates because those with prior mortgage lates are significantly more likely to be late on their mortgage in the future. By ignoring mortgage lates, en masse, FHA is accepting borrowers with a significantly higher chance of being late in the future than the borrowers they normally approve.
In fact, this is what sub prime was meant for. It was sub prime that was meant for those with prior mortgage lates. In fact, the system is supposed to work with a certain amount of logic. If you fall behind on your bills, you are punished with higher rates on your loans in the future. Someone that became late on their mortgage then would go into sub prime. They would pay their sub prime loan on time for a number of years and they hopefully they would again qualify for a prime or FHA loan. This bill is working in the exact opposite direction. Most of these folks are now in sub prime loans for whatever reason. They have fallen behind on their loans, and now, they are being rewarded with brand new loans that are better than the ones they are currently in.
What Dodd/Frank does is bet trillions of tax payer dollars on borrowers that have already proven to be irresponsible. This bill purports to hypothesize that they have learned their lesson and now will be responsible. The reason irresponsible people become responsibe is that their irresponsibility is punished. Someone falls behind on their bills and they pay for it with higher rates. Then they manage those higher rates for several years and then hopefully qualify for better rates again. These borrowers are having their irresponsible behavior with a better loan. What lesson have they learned? In other words, irresponsible borrowers are rewarded. Furthermore, these borrowers are getting loans they aren't supposed to qualify for in the first place. Like I said, this is a recipe for disaster.
I sensed back as far as October of last year that the worst was yet to come of the mortgage crisis. Whatever problems were caused by the crisis itself, I felt the solutions would be worse, much worse. So far, the jury is still out on that assertion but I believe soon enough I will be proven right. That said, as I have watched this crisis unfold, I have seen one pseudo expert after another step in to offer their opinion or solution, one worse than the other. So, I think its time to identify all the villains that have used this crisis for their own agenda, gain, or imcompetence all the while hurting our country.
1) Chris Dodd and anyone that supported the corrupt Dodd/Frank bill. I predict that this bill will wind up sharing historical space along with Smoot/Hawley as among the most misguided and counter productived laws in history. Only Smoot Hawley was simply misguided whereas Dodd/Frank is simply corrupt. This bill will, in my opinion, bankrupt FHA and force yet another bailout. (for the full analysis go to the corrupt link) Once that happens we will likely see this country go into a full depression. We will have a total economic meltdown because one corrupt politician, Chris Dodd, entered into a quid pro quo with two corrupt banks, Bank of America and Countrywide, and he got a couple of nice loans and some campaign cash while the two banks got rid of billions of bad loans. For all of this, the country is about to run head first into an economic nightmare. I hope that history will expose Dodd for the villain that he is much better than anyone in the media has tried.
The result is a bill that will reward irresponsible borrowers with loans they would never get in the market. Furthermore, it allows irresponsible banks to unload bad loans at well above what the market would pay. What will result is FHA holding onto far too many loans that are far too risky for what FHA should be holding. Ultimately, there will be far too many defaults and thus FHA will go bankrupt unless it is bailed out. All of this will occur in order to satisfy a sophisticated quid pro quo.
2)MSM
While they have stayed largely silent about the corrupt practices of Chris Dodd, the MSM was quite vocal about who was at fault in this crisis, mortgage brokers and banks. At the same time, the MSM also presents a narrative of borrowers being helpless victims being taken advantage of by predatory professionals. The truth is of course significantly more complicated but I doubt very much that most folks within the confines of the MSM cared much about the truth. Much more likely, the saw an opportunity to present a pre determined ideological narrative. As such, the public saw heroes and villains in this mess and saw one side needing punishment and the other side needing help. As such, this created an atmosphere for this corrupt bill to pass.
3) The Conservative media mostly Michelle Malkin
Just like those in the MSM wanted to present one side of this issue, Michelle Malkin was just as determined to present one side. Only her side was that it was all the borrower's fault. Story after story about irresponsible borrowers could be found on Michelle's site. If the only news one got they got from Michelle and the right blogosphere, they would come out with the equally unfair impression that this was all the borrower's fault. Just as it is terribly unfair and misleading to blame everything on the mortgage professional, it is equally unfair to blame it all on the borrower. Furthermore, Michelle painted everything as a bailout. It all came to a head when Michelle published this piece about the Fannie Mae bailout.
Oh, triple-crikey. God save us from bipartisanship again. Washington is in a tizzy over the Fannie Mae/Freddie Mac financial crisis. The stocks plunged yesterday and a former Fed governor declared them “insolvent.” Keep an eye on the markets this morning for more freefall. Panicked Republicans and Democrats have joined clammy hands to declare their fealty to these behemoth government-sponsored enterprises because they are “too big to fail.” The Drudge headline and descriptions in the MSM of a “takeover” are misleading. The long-troubled, corrupt institutions are already federally chartered, exempt from normal securities regulations, and enjoy multi-billion-dollar lines of credit from the US Treasury. This won’t be a “takeover,” but a massive, ginormous, Mother of All Bailouts:
Now, clearly Ms. Malkin hasn't the first clue how the mortgage market functions. The problem isn't that we are going to bail them out but rather that they are both too big to fail. If she had analyzed that portion of it, she would have done her readers a service. Rather than analyzing the situation as it is, she simply engaged in more partisan rhetoric about government's quasi socialist bailouts. As such, she contributed to coloring the situation even more.
4) ACORN, La Raza and every other quasi civil rights group that demanded all foreclosures be ceased and mortgages be re arranged. ACORN engaged in practices of extortion in which they would picket banks until those banks agreed to halt foreclosures and rearrange bank terms. This is a rather dangerous practice. If private companies can be bullied into changing their business practices because outside groups force them by bullying practices, business as we know it ceases to exist. Furthermore, all these groups contributed to the distorted narrative that all the fault lied in the mortgage professionals.
Chanting, “Sharks bite, ACORN fights – predatory lenders, you’re not right,” dozens of ACORN members on Sept. 26 stormed the offices of Ocwen Financial, demanding that one of the nation’s largest servicers of subprime mortgages modify those loans to keep families from losing their homes. Ocwen CEO William Erbey had ignored a July letter from Florida ACORN requesting a meeting, so members paid him a visit at work. Among the ACORN members were Olga and Paul Gant of Broward County, who told the Palm Beach Post they are facing foreclosure after their monthly mortgage payments jumped from $2,200 to $3,000 per month.
ACORN is demanding that Ocwen enact a moratorium on foreclosures, modify loans according to borrowers’ ability to repay and lock in interest rates at pre-adjustment levels.Similar demands were made in San Jose, Calif., at the offices ofCountrywide Financial, where scores of ACORN members gathered to protest thatcompany’s failure to work out loan modifications with homeowners. ACORNestimates 1.8 million adjustable rate mortgages worth $900 billion will reset athigher, unaffordable interest rates over the next two years. As many as 2 million families nationwide are in danger of losing their homes.
By doing so, they also contributed to the atmosphere that passed such a horrendous law as Dodd/Frank.
5) The Federal Reserve
If anyone thought the Fed would add calm and reason to the situation, they would be wrong. First, Ben Bernanke simply flipped out as the mortgage crisis hit. As such, he furiously cut rates in a desperate attempt to create liquidity in the market. He did no such thing. All he did was make the dollar weaker and thus contribute to exploding gas and food prices. Meanwhile there is no more liquidity in the market. Then, just recently, the fed passes all sorts of regulations so mindless that everyone should be scared that they are in charge of regulating the industry.
Finally, if you are looking for heroes, the only ones are those attempting buy or procure loans in this horrendous market. They are the footsoldiers that will attempt to bring this market back from the brink of disaster. The biggest heroes are those borrowers that continue to make their mortgage payments on time, and those mortgage professionals that attempt to give good honest loans to those borrowers.
Those that support the $300 billion bailout created by the Dodd/Frank have justified the bill using two faulty premises. Supporters of the bill refuse to call it a bailout for two reasons.
1) They claim that while borrowers will get new more affordable loans, these borrowers will now have to share their equity with FHA. While this is true, it is also misleading. That's because these borrowers almost always have no equity currently. Let's take an example. Let's say we have a borrower that owes $300,000 on a property worth $250,000. This bill will lower their balance to somewhere in the neighborhood of $225,000. Now, they will have $25,000 in equity but when they sell they will have to split that equity with FHA itself. Of course, this is nothing short of a boondoggle for any borrower that has been irresponsible. Sure, they now only own fifty percent of their equity, but fifty percent of something is still more than one hundred percent of nothing.
2) Banks will have to take a write down on their mortgages. That's true. In this same example, a bank would have to sell their $300,000 mortgage and only get $225,000 back. This may at first appear to be punitive. Yet, let's look what is happening to Merril Lynch's mortgage portfolio.
Yet the investment bank posted a $4.9 billion loss just two weeks ago, in a quarter in which it revealed $9 billion in writedowns.
Merrill has agreed to sell $30.6 billion of its repackaged debt, known as collateralized debt obligations — generally suspect and subprime mortgages — for 22 cents on the dollar. Private equity fund Lone Star Funds is the buyer.
Now, it should be pointed out that Merrill's case is extreme and so other banks would likely get more in the open market. That said, the difference between what they will get from FHA and what Merrill got from the market is quite significant and thus there is no doubt that FHA will offer all these banks, Countrywide and BofA included, a deal they would never get on their own.
As I have often pointed out, Bank of America received a very depressed price when they bought out Countrywide. That's because Countrywide was also holding on to a large portfolio of loans. These loans would also likely get a similar price on the open market to that of the Merrill Lynch backed mortgages. Now that Dodd/Frank has passed, the new entity will likely receive somewhere in the neighborhood of 3 times for these loans over what they would have received in the open market.
This is the sum total of this corrupt bill. Both the borrowers and the banks are receiving treatment we are NOT supposed to give to folks that act irresponsibly.
I have been pointing out just how corrupt the Dodd/Frank bill is. That said, when corruption is used in the abstract, it usually doesn't hit home as much. So, let's see just exactly what this corrupt bill will do to an already troubled market.
Now, here is what the mortgage market looks like right now. As most people already know, about this time last year, the sub prime portion of the market crashed. This popped the real estate bubble. It also destroyed the sub prime niche of the market indefinitely if not forever. After sub prime tanked, Alt A was next. This niche of the market tanked several months later but it disintegrated just as quickly. After this, jumbo loans took their turn in the guantlet. Jumbo loans haven't disappeared. They are now simply priced so badly that their rates are totally unattractive as a result of holding onto too many loans in default.
In other words, there is currently no niche of the residential mortgage market is not going through some turmoil.
This is the backdrop for the CORRUPT Dodd/Frank bill. What this bill will attempt to do is bail out some of the most troubled borrowers and back those borrowers with $300 billion in new FHA loans. Now, as I mentioned already, FHA is beginning to experience defaults at an alarming rate.
As a result of Dodd/Frank, $300 billion in new loans to troubled borrowers are about to be guaranteed. Despite the politically correct spin, most of these borrowers are irresponsible and they would never qualify for an FHA loan without this bill. What this bill will attempt to do is to provide much needed liquidity to the market. Now, because at their current mortgage balance these borrowers wouldn't have any equity or qualify, these new loans will be artificially reduced to 85% of the current value.
As such, not only will borrowers get much needed relief, but banks will get many of their most troubled loans off their books. This is the portion of the bill that Countrywide and Bank of America wanted badly. Of course, in a sense, all that will really happen is that these bad loans will simply be turned into new and unblemished FHA loans. In other words, most of the same irresponsible borrowers will hook up again with most of the very same irresponsible banks to create a whole new set of transactions. Only these transactions will be insured by the Federal government through FHA. In other words, FHA, now on the brink of disaster, is about to take on all sorts of credit risk it really shouldn't be taking on.
Furthermore, two very irresponsible entities just got a bailout with no consequences. In fact, the borrower will receive even better terms. As a result, all sorts of moral hazards are created. Looming behind all of this moral hazard is the prospect of a trillion dollars and more in Adjustable Rate Mortgages that still need to adjust. The bulk of so called option arms will adjust in the next two years. These loans allowed for negative amortization payments for the first five years, and once they re adjust to a normal payment, the borrower will face an enormous payment shock, (when the monthly mortgage payment shoots up)
All of these folks will now see others get bailed out and likely many of them will expect their own bailout once their rate and payment adjusts. That's one of the problems with creating a moral hazard. Keep in mind, it isn't as though Dodd/Frank will create an liquidity so that these folks can be saved. Dodd/Frank is supposed to save those already in trouble.
The worst part maybe that for a few months this bill may even create the appearance of settling things down. After all, one troubled borrower after another will simply be able to trade in their bad loan for a brand new one. Keep in mind that when a loan subset like FHA begins to take on too many loans that will go into default, as this clearly will end up doing, either the loan's interest rates go up, or they tighten their guidelines for future borrowers. In other words, soon enough either FHA will see its rates go up, or it will simply make it more difficult for future borrowers to qualify. Either way, in the not so long term, this will tighten the market even more and create even less liquidity.
So, now we have a mortgage market already on the brink of disaster. We combine that with a bill that will make it appear to be better only it will make it worse. There is no question that Dodd/Frank WILL bankrupt FHA. The only question is when and how badly.
Keep in mind that in order for this to work, the federal government will need to maintain strict oversight and FHA will need to maintain strict discipline and make sure not to expand their guidelines so that they take on too much risk. Since the creator of this bill did it only for a quid pro quo, and the recipients are all irresponsible, what are the chances of that? In other words, we are lighting a match to a lit flame.
Please note. I welcome any and all comments from any political perspective. I will not stand or approve any swearing, and personal attacks will likely also not be approved.
