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$700 Billion Bailout

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QUOTE (jackie hayes @ Sep 23, 2008 -> 11:47 AM)
You made a claim, I asked you to back it up, pointing out that the only examples of early action on subprime mortgages came from Dems. You didn't back it up, you simply repeated the claim. As for the Dem action on subprimes, you claimed it came too late. Now, I was talking about things that happened in 2001-2003. Then, you made the claim that McCain was trying valiantly to avert disaster by signing up for a Fannie and Freddie regulation bill in 2006, but was thwarted by the evil Dems. That, I pointed out, is wrong on many levels. Not to mention the fact that you apparently believe this was some example of foresight, when those Dem actions years earlier were way too late. And then, to back up your claims, you cite Kevin Hassett, a GOP shill who makes the same claims, but also doesn't back them up at all. Way to go!

 

You don't want to back up what you say, fine, don't. But I'm not going to go spouting off just to maintain parity in the area of baseless claims.

 

And yet you still haven't backed up ANYTHING you have posted, as usual.

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In all it's wisdom, the poll on CNN.com is asking who is to blame for the financial crisis: Republicans or Democrats.

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QUOTE (Heads22 @ Sep 23, 2008 -> 11:55 AM)
In all it's wisdom, the poll on CNN.com is asking who is to blame for the financial crisis: Republicans or Democrats.

 

the correct answer of "Republicans and Democrats" isn't even an option.

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QUOTE (mr_genius @ Sep 23, 2008 -> 11:57 AM)
the correct answer of "Republicans and Democrats" isn't even an option.

 

Stan: Somebody's gonna help the people off their rooftops, right?

Randy: That's not important right now, son. What's important is figuring out whose fault this is.

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QUOTE (mr_genius @ Sep 23, 2008 -> 10:42 AM)
no i'm saying if a corporation makes bad decisions and goes bust they don't get to dip into taxpayers funds to get a bailout. if they want to take a risk and fail they aren't getting a massive tax payer bailout.

 

big tax increases aren't the solution to this mess

There's a big flaw in your argument, and it's the flaw that has caused this bailout...that we let these banks get so leveraged and so interconnected and so big that if any of them truly go down then basically it winds up being a gigantic disaster.

 

Thanks to the bank deregulations of the late 90's, these banks were able to borrow enormous sums of money from each other, vastly more than they had assets they were able to cover in the event that their debts were called in. By doing so they were able to push up their profits enormously in the short term, but that left them over-leveraged in the event that the housing market turned, and now they simply don't have the money to cover the debts they wrote...and if they go down, they take every other one with them because they all owe a piece of themselves to each other. That's why Lehman went down right after the FNMA nationalization, that's why AIG was bought by the government right after Lehman went down.

 

There are really only 2 options here. Either we be prepared to bail out these "Too big to fail companies" if we don't regulate them well enough, or we expand antitrust activities so that these banks and investment firms never get too big to fail, which would mean breaking up a hell of a lot of companies right now.

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QUOTE (Balta1701 @ Sep 23, 2008 -> 01:07 PM)
There's a big flaw in your argument, and it's the flaw that has caused this bailout...that we let these banks get so leveraged and so interconnected and so big that if any of them truly go down then basically it winds up being a gigantic disaster.

 

Thanks to the bank deregulations of the late 90's, these banks were able to borrow enormous sums of money from each other, vastly more than they had assets they were able to cover in the event that their debts were called in. By doing so they were able to push up their profits enormously in the short term, but that left them over-leveraged in the event that the housing market turned, and now they simply don't have the money to cover the debts they wrote...and if they go down, they take every other one with them because they all owe a piece of themselves to each other. That's why Lehman went down right after the FNMA nationalization, that's why AIG was bought by the government right after Lehman went down.

 

There are really only 2 options here. Either we be prepared to bail out these "Too big to fail companies" if we don't regulate them well enough, or we expand antitrust activities so that these banks and investment firms never get too big to fail, which would mean breaking up a hell of a lot of companies right now.

 

 

I may have missed it, but can someone name a large commercial bank that has failed.

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QUOTE (mr_genius @ Sep 23, 2008 -> 01:57 PM)
the correct answer of "Republicans and Democrats" isn't even an option.

+1

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QUOTE (Balta1701 @ Sep 23, 2008 -> 01:07 PM)
There's a big flaw in your argument, and it's the flaw that has caused this bailout...that we let these banks get so leveraged and so interconnected and so big that if any of them truly go down then basically it winds up being a gigantic disaster.

 

Thanks to the bank deregulations of the late 90's, these banks were able to borrow enormous sums of money from each other, vastly more than they had assets they were able to cover in the event that their debts were called in. By doing so they were able to push up their profits enormously in the short term, but that left them over-leveraged in the event that the housing market turned, and now they simply don't have the money to cover the debts they wrote...and if they go down, they take every other one with them because they all owe a piece of themselves to each other. That's why Lehman went down right after the FNMA nationalization, that's why AIG was bought by the government right after Lehman went down.

 

There are really only 2 options here. Either we be prepared to bail out these "Too big to fail companies" if we don't regulate them well enough, or we expand antitrust activities so that these banks and investment firms never get too big to fail, which would mean breaking up a hell of a lot of companies right now.

 

No, the argument is not flawed. My assertion that the fact that these banks knew they could make huge risks because they would get bailed out did add to their risky lending behavior. You can ignore this fact, and that is fine with me.

 

Now before I continue with this argument, what exactly are you getting at? What is your argument? Do you have a point?

 

Is your point that more regulation of banks, which are insured by the US public, is the way to go? If so, we agree and this argument is pointless. If the tax payers are on the hook for these banks then we sure as hell have the right to protect our financial interests as our tax dollars are basically the banks back up financial reserves. What exactly is your solution? Better government insight when it comes to controlling our risk as it is involved with the banking industry? Sounds good to me.

Edited by mr_genius

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QUOTE (mr_genius @ Sep 23, 2008 -> 03:14 PM)
My assertion that the fact that these banks knew they could make huge risks because they would get bailed out did add to their risky lending behavior. You can ignore this fact, and that is fine with me.

 

I guess I am missing something in this, how did these banks know they would be bailed out? At best the knew there was a possibility of getting bailed out, but I fail to see where it was a fact they would be bailed out.

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QUOTE (Texsox @ Sep 23, 2008 -> 02:20 PM)
I guess I am missing something in this, how did these banks know they would be bailed out? At best the knew there was a possibility of getting bailed out, but I fail to see where it was a fact they would be bailed out.

 

There is a precedent, an example would be the S&L bailout. They know the government is going to bail them out. If they don't want government regulation, then they shouldn't be coming to the government open palmed (gimme gimme 700 billion) when they fail.

 

I am going to ask you the same question I asked Balta. What are you getting at? Is this an argument over whether or not bailouts encourage risky business practices? Is this an argument over if the bailout is warranted? Is this an argument about what the correct course of action is? Is this an argument just for arguments sake ?

 

I think we probably agree that these banks need more regulation, especially seeing that we are on the hook for their actions.

Edited by mr_genius

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QUOTE (mr_genius @ Sep 23, 2008 -> 03:26 PM)
There is a precedent, an example would be the S&L bailout.

ahhh the Keating Five. interesting ;)

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QUOTE (Athomeboy_2000 @ Sep 23, 2008 -> 02:51 PM)
ahhh the Keating Five. interesting ;)

 

ah yes, 4 Democrats and McCain. In which Alan Cranston (D), Dennis DeConcini (D), and Donald Riegle(D) were found to have improperly interfered with investigation of Lincoln Savings and McCain was cleared.

 

not so sure you, a hardcore Democrat, want to get into the blame game on this one :lol:

 

again, do you think the bailout is good? was the SL bailout a good move? did it set a bad precedent? do you want more government oversight? what exactly are you trying to say?

Edited by mr_genius

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So...for anyone else looking for other reasons to wonder about this bailout...here's Secretary Paulson lying to Congress this morning.

We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That’s the role of Congress, that’s something we’re going to work on together. So if any of you felt that I didn’t believe that we needed oversight: I believe we need oversight. We need oversight.
Video here.

 

Actual text of his proposed document, which says in not as many words "We don't need no stinkin' oversight".

Section 8. Review: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

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QUOTE (mr_genius @ Sep 23, 2008 -> 04:01 PM)
ah yes, 4 Democrats and McCain. In which Alan Cranston (D), Dennis DeConcini (D), and Donald Riegle(D) were found to have improperly interfered with investigation of Lincoln Savings and McCain was cleared.

 

not so sure you, a hardcore Democrat, want to get into the blame game on this one :lol:

ahhh but none of them are running for president right now. What all 5 did was wrong.

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So, here's a White House aid letting slip that we're planning on letting the whole financial industry have their shot at this money, whether they're in trouble or not. Which is presumably why they want no restrictions on anything like executive pay associated with the money, because otherwise the healthy banks wouldn't get their fair share of the bailout.

With respect to executive pay, again, I'm not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make [it] more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them.
So, we're not just bailing out the firms that got in trouble with those securities...we're buying them from anyone and everyone.

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QUOTE (mr_genius @ Sep 23, 2008 -> 03:01 PM)
again, do you think the bailout is good? was the SL bailout a good move? did it set a bad precedent? do you want more government oversight? what exactly are you trying to say?

Go back and read my post a few pages back. That's pretty much it in a nutshell. $700 Billion is too much and we need LOT more regulation.

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QUOTE (Athomeboy_2000 @ Sep 23, 2008 -> 05:01 PM)
ahhh but none of them are running for president right now. What all 5 did was wrong.

 

True. Thats one advantage for having very little national experience and not much of a voting record on national issues. Obama hasn't been around long enough to have been much of a factor in this mess.

Edited by mr_genius

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QUOTE (southsider2k5 @ Sep 23, 2008 -> 12:55 PM)
And yet you still haven't backed up ANYTHING you have posted, as usual.

Yeah, I realize posting counterexamples isn't as persuasive as, Iz all Fannie & Freddie, blame Demz, Hassett sez so!, but I'll stick with my way. Thanks.

 

Btw, is the Dow up 25,000 points today, too?

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QUOTE (mr_genius @ Sep 23, 2008 -> 03:26 PM)
There is a precedent, an example would be the S&L bailout. They know the government is going to bail them out. If they don't want government regulation, then they shouldn't be coming to the government open palmed (gimme gimme 700 billion) when they fail.

 

I am going to ask you the same question I asked Balta. What are you getting at? Is this an argument over whether or not bailouts encourage risky business practices? Is this an argument over if the bailout is warranted? Is this an argument about what the correct course of action is? Is this an argument just for arguments sake ?

 

I think we probably agree that these banks need more regulation, especially seeing that we are on the hook for their actions.

 

I was trying to follow your points. I was not aware that these loans were guaranteed and it seemed as if that was what you were implying.

 

I'm going to go back and reread your post based on the premise that based on previous bailouts the banks knew they would be bailed out, and therefor that every bank should be expecting a bailout when they make massive mistakes.

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QUOTE (jackie hayes @ Sep 23, 2008 -> 02:34 PM)
Btw, is the Dow up 25,000 points today, too?

Heads up: Pushing the snark line there even for the filibuster.

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QUOTE (jackie hayes @ Sep 23, 2008 -> 04:34 PM)
Yeah, I realize posting counterexamples isn't as persuasive as, Iz all Fannie & Freddie, blame Demz, Hassett sez so!, but I'll stick with my way. Thanks.

 

Btw, is the Dow up 25,000 points today, too?

 

Answering my opinions with your opinions is doing the exact same thing that I am doing. All I did was ask for the same proof that you did. The lack of that pretty much tells me what I need to know. If all conjecture and nothing backing it up is your way, you are awful good at it.

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Really just had to post this one.

Dear American:

 

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

 

I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

 

I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

 

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

 

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.

 

Yours Faithfully Minister of Treasury Paulson

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QUOTE (southsider2k5 @ Sep 23, 2008 -> 07:06 PM)
Answering my opinions with your opinions is doing the exact same thing that I am doing. All I did was ask for the same proof that you did. The lack of that pretty much tells me what I need to know. If all conjecture and nothing backing it up is your way, you are awful good at it.

 

I'll tell you what, I will even spot you a couple of articles. For once I want to see you post something other than your opinion. I want to see you actually get off your butt and do a little research.

 

http://www.washingtonpost.com/wp-dyn/conte...8060902626.html

 

How HUD Mortgage Policy Fed The Crisis

Subprime Loans Labeled 'Affordable'

 

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

 

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

 

Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

 

The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.

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Today, 3 million to 4 million families are expected to lose their homes to foreclosure because they cannot afford their high-interest subprime loans. Lower-income and minority home buyers -- those who were supposed to benefit from HUD's actions -- are falling into default at a rate at least three times that of other borrowers.

 

"For HUD to be indifferent as to whether these loans were hurting people or helping them is really an abject failure to regulate," said Michael Barr, a University of Michigan law professor who is advising Congress. "It was just irresponsible."

 

Congress is expected to vote before its Fourth of July recess on legislation that would strip HUD of its regulatory authority over Fannie and Freddie and give it to a stronger regulator.

 

Fannie and Freddie finance about 40 percent of all U.S. mortgages, with $5.3 trillion in outstanding debt. Owned by private shareholders but chartered by Congress, they are exempt from state and local taxes and receive an estimated $6.5 billion-a-year federal subsidy because they can borrow money more cheaply than other investors. In return, they are expected to serve "public purposes," including helping to make home buying more affordable.

 

HUD officials dispute allegations that the agency encouraged abusive lending and sloppy underwriting standards that became the hallmark of the subprime industry. Spokesman Brian Sullivan said the agency and Congress wanted to increase homeownership among underserved families and could not have predicted that subprime lending would dominate the market so quickly.

 

"Congress and HUD policy folks were trying to do a good thing," he said, "and it worked."

 

Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of "affordable" mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.

 

In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders.

 

Banks typically back prime loans with customers' deposits. But subprime lenders often rely on money from Wall Street investors , who buy packages of loans as investments called mortgage-backed securities.

 

In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low "teaser" interest rates and ignoring borrowers' qualifications.

 

HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower's ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

 

That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.

 

In 2001, HUD researchers warned of high foreclosure rates among subprime loans.

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"Given the very high concentration of these loans in low-income and African American neighborhoods, the growth in subprime lending and resulting very high levels of foreclosure is a real cause for concern," an agency report said.

 

But by 2004, when HUD next revised the goals, Freddie and Fannie's purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

 

That year, President Bush's HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more."

 

For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.

 

"That was a huge, huge mistake," said Patricia McCoy, who teaches securities law at the University of Connecticut. "That just pumped more capital into a very unregulated market that has turned out to be a disaster."

 

In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.

 

"The market knew we needed those loans," said Sharon McHale, a spokeswoman for Freddie Mac. The higher goals "forced us to go into that market to serve the targeted populations that HUD wanted us to serve," she said.

 

But because Fannie and Freddie were buying mortgage-backed securities rather than the actual subprime loans, their involvement came too late to require stiffer standards from lenders.

 

Fannie and Freddie "made no progress in civilizing the market," said Sandra Fostek, a senior regulator at HUD.

 

William C. Apgar Jr., who was an assistant HUD secretary under Clinton, said he regrets allowing the companies to count subprime securities as affordable.

 

"It was a mistake," he said. "In hindsight, I would have done it differently."

 

Allen Fishbein, who was Apgar's adviser at HUD and is now at the Consumer Federation of America, said the agency failed to use its regulatory power by refusing to credit Fannie and Freddie for loans that were "contrary to good lending practices."

 

"They chose not to put the brakes on this dangerous lending when they could have," Fishbein said.

 

Fostek said the agency had no practical way to comb through the tens of millions of individual loans contained in the subprime securities.

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She said that Fannie and Freddie did not overwhelmingly rely on securities to meet the goals but added that she would not disclose the amount counted because it is considered proprietary.

 

Fannie and Freddie spokespeople say their partners had agreed not to sell them loans with several prohibited characteristics, including credit insurance, excessively high costs and prepayment penalties that lasted longer than three years. But experts say the volume of subprime foreclosures proves they were toxic to borrowers.

 

Judith Kennedy, president of the National Association of Affordable Housing Lenders, said that while Fannie and Freddie nurtured unregulated subprime lenders, an estimated 30 percent of subprime borrowers could have qualified for safe, lower-cost prime loans.

 

"The damage to homeowners, to neighborhoods, to state and local governments as the tax base erodes, and now to all American taxpayers, is almost incalculable," she said.

 

Sen. Jack Reed (D-R.I.), a member of the Senate banking committee who brokered some of the regulatory reform in the pending bill, said HUD's homeownership push ignored reality.

 

"We need to focus on putting families in homes they can truly afford, not just on getting a sale, packaging the loan into a sophisticated financial security and walking away to the next closing," he said. "Today, people are wondering, 'Why weren't the regulators and the industry probing these [loans] more deeply?' "

 

Staff researcher Julie Tate contributed to this report.

 

http://www.ibdeditorials.com/IBDArticles.a...306632135350949

 

Congress Lies Low To Avoid Bailout Blame

 

By TERRY JONES

INVESTOR'S BUSINESS DAILY | Posted Thursday, September 18, 2008 4:30 PM PT

 

Congress says it likely will adjourn this month having done nothing on the most important issue in America right now: the financial meltdown from the subprime lending crisis.

 

IBD Ongoing Series: Uncommon Knowledge

 

Can Congress just walk away from a problem it helped create? Maybe, maybe not.

 

There's now some talk of a grand deal between the Treasury, the Fed and Congress for a "permanent" solution: creating a government agency to buy up all the bad subprime debt, just like the Resolution Trust Corp. did with bad real estate in the 1980s and 1990s.

 

Already, the U.S. Treasury and Federal Reserve are spending hundreds of billions of dollars to keep the subprime crisis from crashing the world economy. The collapse of twin mortgage giants Fannie Mae and Freddie Mac, along with the failures of Lehman Bros., Bear Stearns and insurer AIG, expose taxpayers to more than $1 trillion in liabilities.

 

Until now, Congress has been surprisingly passive. As Sen. Majority Leader Harry Reid put it, "no one knows what to do" right now.

 

Funny, since it was a Democrat-led Congress that helped cause the problems in the first place.

 

When House Speaker Nancy Pelosi recently barked "no" at reporters for daring to ask if Democrats deserved any blame for the meltdown, you saw denial in action.

 

Pelosi and her followers would have you believe this all happened because of President Bush and his loyal Senate lapdog, John McCain. Or that big, bad predatory Wall Street banks deserve all the blame.

 

"The American people are not protected from the risk-taking and the greed of these financial institutions," Pelosi said recently, as she vowed congressional hearings.

 

Only one problem: It's untrue.

 

Yes, banks did overleverage and take risks they shouldn't have.

 

But the fact is, President Bush in 2003 tried desperately to stop Fannie Mae and Freddie Mac from metastasizing into the problem they have since become.

 

Here's the lead of a New York Times story on Sept. 11, 2003: "The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."

 

Bush tried to act. Who stopped him? Congress, especially Democrats with their deep financial and patronage ties to the two government-sponsored enterprises, Fannie and Freddie.

 

"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Rep. Barney Frank, then ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

 

It's pretty clear who was on the right side of that debate.

 

As for presidential contender John McCain, just two years after Bush's plan, McCain also called for badly needed reforms to prevent a crisis like the one we're now in.

 

"If Congress does not act," McCain said in 2005, "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."

 

Sounds like McCain was spot on.

 

But his warnings, too, were ignored by Congress.

 

To hear today's Democrats, you'd think all this started in the last couple years. But the crisis began much earlier. The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas.

 

Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.

 

These well-intended rules were supercharged in the early 1990s by President Clinton. Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans.

 

Lenders who refused would find themselves castigated publicly as racists. As noted this week in an IBD editorial, no fewer than four federal bank regulators scrutinized financial firms' books to make sure they were in compliance.

 

Failure to comply meant your bank might not be allowed to expand lending, add new branches or merge with other companies. Banks were given a so-called "CRA rating" that graded how diverse their lending portfolio was.

 

It was economic hardball.

 

"We have to use every means at our disposal to end discrimination and to end it as quickly as possible," Clinton's comptroller of the currency, Eugene Ludwig, told the Senate Banking Committee in 1993.

 

And they meant it.

 

In the name of diversity, banks began making huge numbers of loans that they previously would not have. They opened branches in poor areas to lift their CRA ratings.

 

Meanwhile, Congress gave Fannie and Freddie the go-ahead to finance it all by buying loans from banks, then repackaging and securitizing them for resale on the open market.

 

That's how the contagion began.

 

With those changes, the subprime market took off. From a mere $35 billion in loans in 1994, it soared to $1 trillion by 2008.

 

Wall Street eagerly sold the new mortgage-backed securities. Not only were they pooled investments, mixing good and bad, but they were backed with the implicit guarantee of government.

 

Fannie Mae and Freddie Mac grew to become monsters, accounting for nearly half of all U.S. mortgage loans. At the time of their bailouts this month, they held $5.4 trillion in loans on their books. About $1.4 trillion of those were subprime.

 

As they grew, Fannie and Freddie grew heavily involved in "community development," giving money to local housing rights groups and "empowering" the groups, such as ACORN, for whom Barack Obama once worked in Chicago.

 

Warning signals were everywhere. Yet at every turn, Democrats in Congress halted attempts to stop the madness. It happened in 1992, again in 2000, in 2003 and in 2005. It may happen this year, too.

 

Since 1989, Fannie and Freddie have spent an estimated $140 million on lobbying Washington. They contributed millions to politicians, mostly Democrats, including Senator Chris Dodd (No. 1 recipient) and Barack Obama (No. 3 recipient, despite only three years in office).

 

The Clinton White House used Fannie and Freddie as a patronage job bank. Former executives and board members read like a who's who of the Clinton-era Democratic Party, including Franklin Raines, Jamie Gorelick, Jim Johnson and current Rep. Rahm Emanuel.

 

Collectively, they and others made well more than $100 million from Fannie and Freddie, whose books were cooked Enron-style during the late 1990s and early 2000s to ensure executives got their massive bonuses.

 

They got the bonuses. You get the bill.

 

general01091908.gif

 

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

 

Clinton Administration Changes of 1995

 

In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions[1] with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision.[citation needed]

 

Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. [2] The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.

 

http://www.lewrockwell.com/dilorenzo/dilorenzo125.html

 

The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria.

 

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various "neighborhood organizations," as they like to call themselves, such as "ACORN" (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.

 

So-called "community groups" like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a "community group." This can cost banks great sums of money, and the "community groups" understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

 

A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He once boasted to the New York Times that he had "won" loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one "community group" operating in one city – Boston.

 

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they donâ€t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

 

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as "subprime" loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.

 

But this is discriminatory!, complained the "community organizations." Thus, if one browses the ACORN web site, one can read of their boasts of having "predatory lending laws" passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to "subprime" borrowers.

 

These are price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws therefore force the banks to "eat" the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.

 

Then of course there is the issue of the Fedâ€s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.

 

The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fedâ€s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the "subprime" mortgage meltdown.

 

Donâ€t expect to read about this in the "mainstream media," however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover many of the bad "subprime" loans. This will create what economists call a "moral hazard" by encouraging even more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA effectively guaranteeing the loan.

 

September 6, 2007

 

Thomas J. DiLorenzo [send him mail] professor of economics at Loyola College in Maryland and the author of The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War, (Three Rivers Press/Random House). His latest book is Lincoln Unmasked: What Youâ€re Not Supposed To Know about Dishonest Abe (Crown Forum/Random House).

 

Copyright © 2007 LewRockwell.com

 

http://online.wsj.com/article/SB1214002750...ew_and_outlooks

 

Well, this certainly is embarrassing. The Federal Housing Administration – the very agency the Bush Administration and Congress trumpet as the solution to the mortgage crisis – has announced that it suffered a $4.6 billion loss last year. This is one of the worst financial performances ever for the government's multibillion-dollar mortgage insurer.

 

We'd hope this news might cause Congress to reconsider its plans to turn over some $300 billion of troubled loans to an agency already in financial distress. No such luck. A bill passed by the House and now being debated on the Senate floor would expand the FHA portfolio to about 1.5 million mostly high-risk subprime mortgages. So at the very time private lenders and investors are fleeing subprime markets, Congress wants taxpayers to dive in.

[The FHA Time Bomb]

 

The Senate has also folded into its housing bill a separate FHA "modernization" that would more than double the agency's loan limits while lowering downpayment requirements. Together these maneuvers could put taxpayers on the hook for tens of billions of dollars of additional mortgage losses.

 

One reason the FHA lost so much money was financial mismanagement. In 2000 in the final days of the Clinton Administration, HUD Secretary Andrew Cuomo tried to expand FHA's share of the mortgage insurance market by lowering its premiums by one-third, to 1.5% from 2.25%. The Bush Administration never reinstated the more prudent premiums. If it had, FHA's losses would have been zero or close to it.

 

The biggest reason the FHA lost so much money was a scam called the "downpayment assistance program." Under this program, builders or mortgage originators make a loan to low-income homebuyers, and then arrange for a third party to pay the downpayment, so the loan qualifies for FHA insurance. This means borrowers have no skin in the game, and in many cases have negative equity because the value of the homes are often inflated.

 

Borrowers could bet on the upside of the market at no cost to them. And thanks to the 100% FHA insurance against default, lenders were guaranteed full repayment whether or not the loan is ever repaid. Until recently, lenders even got a tax write-off for their "charitable contribution." Everyone won – except the taxpayer. Now even the FHA finally agrees that this program invites widespread fraud and wants to end it. But Barney Frank, who heads the House Financial Services Committee, is insisting that it continue.

 

One lesson from the debacle is what happens with low or zero downpayment FHA loans: They go bust. The Government Accountability Office finds that default rates are about three times higher than on conventional loans. So why in the world is Congress promoting a new FHA bill to lower downpayments to 3% and in some cases even to zero?

 

Here's another brain twister: Median home prices have fallen to $202,300 from $219,900 with more declines on the way. So why is Congress raising FHA mortgage limits to as high as $729,000 in some high-income areas? Mr. Frank's House bill would allow the FHA to guarantee a loan up to 125% of the average home price in any area. The FHA's mission is to help low- and moderate-income households become homeowners. Encouraging moderate-income families to buy $700,000 homes is how the subprime crisis began.

 

The most reckless provision now on the Senate floor would allow the FHA to take over risky subprime loans from private banks. When FHA Commissioner Brian Montgomery announced the agency's losses last week, he warned that Congress's subprime loan bailout could plunge FHA deeper into the red. Senate Banking staffers tell us that lenders have all but admitted that, if the bailout becomes law, they will dump their worst loans onto the FHA.

 

Among the likely dumpers: Countrywide Financial, which gave Senate Banking Chairman Chris Dodd a bargain mortgage. The Congressional Budget Office predicted this month that 35% of these loans could go sour.

 

Yet Congress is putting the political imperative of "doing something" about housing above the risks of tens of billions of dollars in taxpayer losses. The White House has waxed and waned in its support for this exercise, and late last week issued a statement saying President Bush might veto it. He could do worse than heed Kentucky Senator Jim Bunning, who warns: "As soon as we finish this bailout for banks and borrowers, the next taxpayer bailout will be of the FHA."

 

Corrections & Amplifications

 

The housing bill now being considered by the Senate raises the Federal Housing Administration downpayment requirement to 3.5% from 3%. This editorial misreported the Senate bill's terms.

 

See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.

 

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