Out of the Past

This is also linked from the CFL website (c/o CNN): Commentary: Bankruptcy, not bailout, is the right answer By Jeffrey A. Miron CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown. This bailout was a terrible idea. Here's why. The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk. Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared. This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle. Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets. The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government. The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company. Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable. In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources. Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time. Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen. Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents. The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion. If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth. The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients. Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets. So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending. The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer. I agree with the writer in that government policies played a starring role in creating the mess and because of that I think the government should help out in the clean up.

Even the Dems only voted 140-95 in favor... About 3-to-2 for. So doesn't look like they were unified either. When Barney Franks and Chris Dodd put back all the special interest provisions that were removed after the House Republicans got involved then the Democrats will jump en masse behind the reworked bill.

Hooray for sensible Congressmen. This deal needs to be massively reworked so that it is a bailout not a buyout. Sure it'll get reworked but it'll be for the worse.

where do we go from here? The Democrats will pass their own bill stuffed with special interests goodies. The Republicans screwed-up here.

I hope both of you are right. I'm a glass is half-empty guy so I usually view things in a negative light. If the GOP becomes more inclusive my guess is the Democrats will become even more inclusive themselves negating any potential gains by the GOP's shift so you'll end up with an overall shift to the left with no gains for the GOP. This has being happening for years. It's also about Democrats moving into small red states like Nevada, Colorado and New Mexico.

I read somewhere it was about 50 million last night but not sure.

If Obama wins my guess is he would get reelected no matter what happens. With the population shifts and the changes in demographics I doubt a Republican will ever get elected again.

The $10 billion is capital they're raising by selling stock but it's not included in the purchase price. The purchase price was only the $1.9 billion.

This board is filled with socialists.

http://corner.nationalreview.com/post/?q=M...YzcwMTFjZmVmZjY= The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don't understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed. Here's the key point: Any loan package bought by the Treasury will be 100 percent taxpayer owned. Period. Let's walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount ? say $100 billion ? of loans that banks will sell. The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive. In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (e.g., an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers. In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers. I don't think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt. Actually, for taxpayers, it's a win-win-win-win. Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit. I have been in conversation with leading House Republicans all day. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson a few days ago. But now the actual reality is sinking in. Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable. Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets. Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt ? 100 percent. Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary's request for $700 billion is regarded as way too high. Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor's mortgage-bond insurance program. I think it's a good package that would be great news for stock and bond markets that are now ailing badly. It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers, and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.

She's an idiot and doesn't know what the hell she believes. She's no Ron Paul. Democrats need to be careful trying out the tired old idiot charge on Palin, whatever she is, she is not an idiot. And calling her an idiot is going to ruin Biden when she fillets him like a fish during the debate. I like her a lot and hope you're right but I doubt it. I think it's idiotic to call her an idiot but I don't think she's well versed on many of the issues. I'm pretty sure if she had being running for two years, as Obama has, she would be fine but she hasn't. Watching her interviews is a painful experience.

JP is brilliant. 1.9 billion to purchase. Over 310 billion in assets. wait til the market regulates. JP is going to have to break up for being too big. They also acquired Bears They also purchased the liabilities that go along with the assets so it's not as if they paid $2 billion for a net $310 billion.

Even if everything fell into place perfectly, what makes him think that the government is going to spend/give the money right back to us? I don't see that happening. As I understand it 20% of the proceeds would have to be funneled to low income housing and shaving the mortgage debt of delinquent borrowers and other spending programs of that ilk. Not sure about the other 80%.

I am at work, so if there is a press conference etc I am not able to hear it but everything I have read suggests that the bailout is going to be passed . Is there now something going on that suggest it isnt? The more I hear about the bailout the less likely I think it will work , it seems like a short term stop gap after a few months we will still have a weak economy and probably will for a prolonged peroid of time from the talk out of the WH, apparently the Republicans from Cong and Senate are not on board with the plan. And is not over minor details thanks for the info Here is Shelby after the meeting: http://www.necn.com/Boston/Business/Sen-Sh...1222377221.html

reports from Barnie Franks --- > McCain opposing the Paulson plan ........... Wow... it is going to be a crazy afternoon The house Republicans are not on board and Pelosi wont pass her own bill unless the Republicans get behind it. Politics first for Pelosi. Great leadership. And it's not politics first for Republicans? lol You're such a hack. The House Republicans oppose it on principle. The Democrats support it but wont vote on it for the obvious reasons.

1999 NYT article anticipating the meltdown. http://query.nytimes.com/gst/fullpage.html...agewanted=print September 30, 1999 Fannie Mae Eases Credit To Aid Mortgage Lending By STEVEN A. HOLMES In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring. Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans. ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's. ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.'' Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped. Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings. Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites. Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent. In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent. Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings. In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups. The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

reports from Barnie Franks --- > McCain opposing the Paulson plan ........... Wow... it is going to be a crazy afternoon The house Republicans are not on board and Pelosi wont pass her own bill unless the Republicans get behind it. Politics first for Pelosi. Great leadership.

What are the interest rates on the loans?

I think the debate will go on and it would not be canceled due to McCain, I think he was non committal....It was more of a request. now...lets wait to the events tomorrow and Friday. If W comes out tonight with a doom and gloom scenario if Wash doesn't act now, and the Dow drops 500+ tomorrow...Barack would be looking like a fool, for basically saying..."if you need me, call me and I'll show up" I think McCain realize he is in a dire situation, and he is playing a desperate move. However, it could work He's between 3 and 4 points down with 40 some days to go. Obviously it would be better if he was a couple of points up as he was a week ago but he's not in a dire situation right now.

This is a good political move but is also the right thing to do. Some kind of bailout is needed ASAP and without GOP support it's not going to happen as the Democrats are playing politics with it (Country 2nd). This morning only 4 house Republicans supported the bailout and Reid has said without Republican support they wont pass it. I agree that it's a good political move, but I don't think it is the right thing to do. (Is anything ever the right thing to do in politics? lol) There are plenty of people who can take care of the economy, they don't need McCains help. It's quite obvious that he's using it to get votes... He wants people to say "Hey, look at this John McCain guy. He cares so much about the economy that he's willing to halt his entire campaign just to focus his attention on it". It looks to me like McCain and Obama are not having any input in what the package will be. I think they should. For that to happen, they need to be there.

This is a good political move but is also the right thing to do. Some kind of bailout is needed ASAP and without GOP support it's not going to happen as the Democrats are playing politics with it (Country 2nd). This morning only 4 house Republicans supported the bailout and Reid has said without Republican support they wont pass it.

Don't think this is because he's got such a great heart. It's a campaign tactic. He's trying to even up the polls on the economy. He's getting slaughtered right now. Yeah, desperation move by McCain. Latest polls have him down 9 points, and experts are saying it is because of the economy One poll has him down 9 points and Obama's camp actually discredited this poll because it has been so inconsistent and from week to week it swings about 15-20 points. He has an average lead of still 3.5 or so points. A political move most likely, but this is politics, no? Oh, incredibly smart campaign move. Politically, it's good for McCain. Btw, there are a couple of other polls that show a relatively similar margin - there are a few at around 6. The gold standard in polling is the NBC News/WSJ Poll, which is coming out tonight. I'd trust whatever that poll shows. Interested in the results as well..Why do you think it is the gold std? One of their employees, Chuck Todd is his name, I think, calls their poll the gold standard. It doesn't make it so. I don;t think he would say their poll stinks.

HOUSE OF CARDS LIBERALS FUELED WALL ST. WOES By STAN LIEBOWITZ September 24, 2008 HOW did America wind up in its worst financial crisis in decades? Sen. Barack Obama explained it this way last week: "When sub-prime-mortgage lending took a reckless and unsustainable turn, a patchwork of regulators systematically and deliberately eliminated the regulations protecting the American people." That's exactly backward. Mortgage lending took that "reckless and unsustainable turn" because of regulation - regulation driven by liberals and progressives, not free-market "deregulators." Pushed hard by politicians and community activists, the regulators systematically and deliberately altered financially sound lending practices. The mortgage market was humming along just fine when, in the late 1980s, progressives decided that it needed to be "fixed." Their complaint: Some ethnic groups got approved for mortgages at lower rates than others. In reality, mortgage lenders were simply being prudent - taking care to provide mortgages to those who could best afford to make the payments. The shift began in 1989, when Congress amended the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants. By 1991, critics were using that data to paint lenders as racist by showing that minority applicants were approved at far lower rates. Banks were "Shamed By Publicity," as one 1993 New York Times headline put it. In fact, they found a racial disparity only by ignoring relevant data on applicants' ability to make mortgage payments - such as their assets and credit history. But the political pressure was intense - with few in politics or media eager to speak the truth. And then, in 1992, came a study from four researchers at the Boston Fed, which seemed to bear out the critics' contentions. That study was, in fact, based on quite flawed data - but the authors' political, media and academic protectors stifled most serious criticism, smearing the reputation of one whistleblower and allowing the Boston authors to avoid answering serious academic challenges (mine included) to their work. Other studies with different conclusions were ignored. The very next year, the Boston Fed announced new requirements for banks - rules that have now turned out to be monumentally catastrophic: Adopt "relaxed lending standards" or risk being labeled as racists, and face serious penalties under the federal Community Reinvestment Act. Gone (as "arbitrary" and "outdated") were traditional lending requirements such as requiring a down payment or limiting mortgage payments to 28 percent of income. (Of course, the loosened lending standards weren't limited to poor and minority applicants - that would be discriminatory.) The new standards performed as intended: Home- ownership rates, stagnant for 25 years, began a rapid 10-year ascent in 1995, with many new homeowners being lower-income and/or minority families. The large rise in demand for houses, however, fed a run-up in prices starting in 1997 - the infamous housing bubble. And rising prices hid the great vulnerability of these loans to defaults and foreclosures, because refinancing or selling at a profit was the easy alternative. Soon, these loans began to be sold in the secondary market. Fannie Mae and Freddie Mac were enthusiastic proponents of relaxed lending standards and purchased large swaths of these loans. Time after time, Fannie and Freddie trumped criticism by pointing to how they were helping broaden homeownership. Because of the subject's racial overtones, they beat back calls for reform even after financial irregularities were found. Rating agencies such as Standard & Poor's had no experience with such loans - and imprudently used the misleading bubble-induced performance to incorrectly judge the likely performance of financial instruments based on such loans. In 2002, the "reformers" declared victory. In a Fannie report, four academic supporters of relaxed standards crowed how these changes were "fundamentally altering the terms upon which mortgage credit had been offered in the United States from the 1960s through the 1980s . . . These changes in lending herald what we refer to as mortgage innovation." Lucky us. Now that the popped bubble has left us swimming in foreclosures, the supporters of loosened credit standards seem shy about taking credit for their "mortgage innovations." Instead, they blame subprime lenders for becoming "predatory" - when they were simply taking the Boston Fed rules to their logical conclusion while broadening the mortgage market. Investors holding mortgage-based assets now want out. Perhaps they deserve a $700 billion refund - since they were sold a bill of goods by "progressive" politicians, academics and government officials who, in the hope of remaking society, insisted that loans based on relaxed underwriting standards were sound. Stan Liebowitz is the Ashbel Smith professor of economics at the Business School at the University of Texas at Dallas. http://www.nypost.com/seven/09242008/posto...0479.htm?page=0

The I-4 is turning purple - recent polls show a dead heat there. Yes, living in Jacksonville will cloud your mind, just like living in South Florida will. Among the people I know down here, it is probably about 75-25 for Obama. South Florida will probably go 65-35 for Obama (slightly better than Kerry in 2004). I don't think Kerry got 65% of the South Florida vote. If I recall correctly, Kerry got about 66% in Broward, about 60% in Palm Beach and about 52% in Miami-dade. The average of the three counties was in the high 50s.

Please substantiate your claim. Subprime loans are not part of the CRA. Also, please explain why it took over 30 years for the CRA to take down the financial system. I do agree that bad loans caused this problem. But, honestly, from the evidence I've seen, this mess was caused more by speculators and the banks giving out bad loans to people. I would have qualified for a top loan (low interest, great overall) because of my income and credit, and all these mortgage brokers were pushing these "only pay 2 percent interest for 5 years and then the principal balloons and you have those big payments, but you can flip the house/apt so you'll be okay" mortgages on me. I said absolutely not and stayed put, mostly because I knew those loans were bad. But if you don't think many of the mortgage brokers tried everything in their power to push these bad loans (not just to people with bad credit) you are sadly naive. People in my own family were doing it, and I called them out on it. As an attorney, I've seen these sharks doing this to people. There are also people who are responsible for their own mess. If you think it is the government pushing these loans on people,you are sadly mistaken. However, if you provide me the evidence, I will agree with you. I just want to resolve this mess, because I am fearful of the future, so I want to make an informed choice. Enlighten me. The subprime loan connection to the CRA was already discussed. I think everyone in the loan process from the 3rd party mortgage broker to the bank loan officer to the 3rd party appraiser to the bank executive were pushing these loans to get their commission / bonus and they all deserve some blame but the most blame goes to the borrower who signed for a loan he couldn't afford.