Bailout or slush fund?

From Rupert in Springfield,

Congress is right now debating a $700B bill for buying up what are considered bad assets in an effort to shore up the financial industry. The fact that Chris Dodd, head of the senate banking committee, and number one receiver of payola from Fmac/Fmae, did not recuse himself from negotiations of the bill should give everyone pause about the bill in general.

I worry when Washington gets involved in bailouts. They tend to very quickly become slush funds and this bill looks like it is being written under conditions tailor made for such a fund.

Congress and the White House are insistent this get done quickly and get the money out there as fast as possible. At a mere three pages long, one can be quite sure there are few specifics and very few oversight provisions in this legislation.

I would think that most of us old enough to buy beer would recognize those conditions as the perfect set up for another taxpayer fleecing. That said, it is impossible to deny that Congress and the White House don’t recognize this. Sadly, a version of economic dementia seems to plague all those who enter Washington’s hallowed halls. Any common sense about economics in general, and the stock market in particular seems to vaporize within the small craniums of those inhabiting elected office.

Success in the stock market, or finance in general, can be guaranteed by adherence to one simple principle outlined by Rudyard Kipling in his poem “If”.

If you can keep your head when all about you
Are losing theirs and blaming it on you,

Oddly, the human mind has a hard time with this and this is almost always the reason for failure financially. It is easier to panic and join the flock than it is to be a contrarian. This explains why Warren Buffet sees current conditions as an incredible buying opportunity and is following through on that. That’s fine for Warren Buffet, he uses some methodology for his investments. With this bill in Congress we can be assured that a different methodology will be present. Investments will be based upon friendships or payments to campaigns, not any sort of economic analysis. Chris Dodd has already demonstrated this with Fmae/Fmac, and since he sits at the head of the table, we can be assured of further adherence to the same insanity that got us into this position. Stand by, you are about to be robbed.

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  • Crawdude

    A sham, a bailout for billionaires! If this passes, it will be the biggest crime ever perpetrated on this country by the 2 parties in charge.

    Greed for the last 20 years is what caused this fiasco, both parties had the ability to fix this and chose not to, numerous times.

    When the S & L’s failed, it was stated that the bank were in almost as bad a shape. It took 18 years to get here but here it is and both parties knew it!

    The FDIC insures $100,000 pay it to those people and let the rest of these hogs fail!!!!!!!

    • David from Eugene

      There are two problems with letting them all fail, they are likely to take the rest of us with them, First, remember foreclosures negatively affect the value of non-foreclosed properties in the same neighborhood, enough foreclosures and you could find yourself in an upside-down mortgage.

      Second, a long term credit freeze would cost a lot of jobs. Consider the auto industry; not many people can buy a new car for cash, if there is no credit, the market for cars will dry up. When this happens the automakers stop making cars. They will lay off workers, and stop buying parts and raw materials. The parts and raw materials suppliers will also lay off employees and buying raw materials. All those laid off workers will stop making unnecessary purchases, triggering another ripple of cutbacks and layoffs. Now consider how many other industries depend on credit financing to function. Things like appliances, clothing, furniture, computers, new homes, airlines, and the tourist industry to name but a few. Now add in the business failures caused by businesses with an unsellable inventory and unpaid bills to their suppliers. And as many of the companies engaged in these industries are publicly held, their stock value will drop affecting mutual funds, IRAs and pension funds.

      Not doing something to advert this crisis is not a sensible option. The question is how to intervene in a manner that is fast, effective and limits taxpayer liability. And that is a very big question. I do not believe that giving a 700 billion dollar blank check to the Treasury Secretary without any oversight is the way to go. I also see the need for greater regulation of those segments of the financial market place those failure would jeopardize the entire financial system, BUT that can wait till after the crisis is dealt with.

      • CRAWDUDE

        They have no idea whether this plan will even work, if it doesn’t they have that much less to use in the event of a worse scenerio.

        When we spent 300 billion bailing out Fannie Mae and Freddie, they said that would fix the problem, it didn’t. In fact, they even want to add mortgage bailout to this new bailout, so that was 300 billion that we don’t have……….flushed down the drain.

        They said the 85 billion used to bailout AIG would fix the problem, that didn’t either.

        They are currently working on a bailout for the big 3 to the tune of 25 billion, which if you include the 25 billion ( in the form of relaxed regulations, etc..) they got during last years stimulus package will bring their totaol to 50 billion.

        These bailouts don’t fix the problem John, we need to quit artifically propping up this economy. It may not be comfortable but we need to allow it to run its course, relief the pressure that has built up and use this money that we don’t have to begin with to start it up when it buttoms out.

        All this new package does is raise our debt to 11.3 trillion dollars, we have no money left to waste on anything but the necessities if we want this economy to survive.

        Everyone seems to just ignore the debt, its the results of the propping up and over spending that has got us into this situation.

        The definition of insanity is doing the same thing over and over again and expecting different results”. Think about this quote for a second and ask yourself, does this quote apply to the way OUR COUNTRY IS BEING RUN? Does it not apply to way we always try to spend our way out of problems instead of finding solutions to them?

        This is a bailout for Billionaires and nothing more, it only pre-empts and makes the inevitable worse! Its insanity be definition!

        • David from Eugene


          The world runs on credit. As currently configured, without credit it will not function. The current crisis is a potential credit freeze, caused by the fact that the banks, insurance companies and other financial institutions are holding a large amount of financial paper of unknown value. Until they have a value for that paper they do not know what their institution is worth and whether or not it can borrow or lend money. The risk of doing nothing is a total break down of our credit based economic system.

          • CRAWDUDE

            The American tax payer was not the ones who made the bad investments. The American taxpayer was not the ones who made themselve rich off the interest they were charged.

            If these banks want public money for a bailout, the banks can dilute their stocks and give the American people enough shares to recoup the bailout cost. The banks don’t want to do this, they caused all this, now they want to be bailed out, free and clear. I say NO DICE!

            We pay the Federal Rserve ( the banks) to mamage our cyurrency and they blew it. Give us back the money we paid, since they defaulted on the contract. ( The Fed. receives 1% of each dollar printed to manage our money, it is not a government entity).

            No bail out without a pay back! If running on credit is caused this, maybe its time to show some fiscal restraint and quit.

            You also ignored the 10 trillion dollar debt this country is in, any ideas how we get that taken care of by increasing it to 11.3 trillion?

  • John in Oregon

    In the last few days I have railed against the corrupt inner circle of Fannie, Freddie, and Congress.

    Left unsaid was why I have felt so strongly, the last thing needed now is panic. Those in positions of responsibility have been have been very careful about what they said. The story is just now starting to come out.

    Last Wednesday was a turning point. I’m not an analyst and I don’t have inside information but I do pay attention. Some background is in order. I am going to way oversimplify this so please give me some latitude.

    Fannie and Freddie has issued a lot of bad sub-prime paper. Risky loans bundled as derivatives. Fannie and Freddie are not the only source of bad paper but, urged on by an agenda driven faction in Congress, they are far and away the largest.

    As recently as May of this year Chuck Schemer, Nancy Pelosi, and Barney Frank were pushing to raise the Fannie and Freddie loan cap. Frank was outraged that anyone would question that Fannie and Freddie were sound. Well we know how that worked out don’t we Barniy?

    If you own some of that paper I bet you wonder what its worth. Well on that score, join the club. Banks have the same problem. The value obviously isnt zero, most Americans will do what it takes to pay the mortgage, even if it takes working three jobs. But no one knows how much its worth. Ten cents on the dollar, ninety cents?

    Banks and financial institutions found themselves holding pieces of paper whose value was impossible to determine. They cannot be bought or sold because nobody knows how much to offer for them. The assets are illiquid, they are frozen.

    And the other shoe.

    Banks are required to maintain minimum reserves. Real assets and without them the bank cant lend money. No business loans, no lines of credit, nothing.

    Last Wednesday those two collided. Unknown value assets took reserves below the lending threshold. The banking system stopped.

    That is the reason for the announcement of the bad assets buy out. It reset and established some value for the assets.

    The task at hand is to identify the problem, the socialist manipulation forcing the industry to make bad loans. The liberal wing sees this as their opportunity to promote every awful, failed, thoroughly discredited, socialist-populist scheme they have tried, or always wanted to try, over the past century.

    We don’t need a new deal solution

    • David from Eugene

      A couple of small quibbles, Fannie and Freddie did not make the bad loans. Those loans were made by mortgage brokers working with mortgage companies who were making the loans, packaging them and selling them. Fannie and Freddie as buyers of last resort bought a lot of them, but at the time they did so they had no way of knowing if a particular loan package was sound or not. It appears that most were, but enough are not to create a major lack of trust.

      As to raising the loan cap, in parts of the country, like California, the basic middle class house cost more then the existing loan cap. If the cap was not raised those homes would have become much harder to buy or sell.

      But you are correct about the root of the current problem being banks and other financial institutions holding assets of unknown value. Until some value, that the financial market place trusts, is established for the mortgage backed securities, we are going to have an ever growing problem. The question is how to establish that value.

      • Rupert in Springfield

        Ok – I am not at all privy to the inner workings of Fmae and Fmac. However some basic points.

        When you get a mortgage, you pay an interest rate according to risk.

        I have a very hard time believing mortgages are bundled willy nilly and sold or guaranteed by Fmae and Fmac with some sort of averaged rate. In other words, it makes logical sense that when these loans are bundled they would be bundled with others of like interest rates and risks.

        It’s simply does not make sense to me that Fmae and Fmac were buying guaranteeing loans totally unaware of the risk level of the loans in any given loan bundle. Are we to believe a loan bundles are comprised of people making 100k a year, with 200k mortgages and stellar credit ratings are sold in the same manner as those comprised of people making 40k who bought 200k houses and 1% down? I think not.

        Therefore it is simply impossible to believe that Fmae and Fmac had no way of knowing what they were getting into.

        • CRAWDUDE

          Honestly Rupert, this shouldn’t even be a part of the discussion. Freddie and Frannie were bailed out to the tune of 300 billion a month and a half ago. That was supposed to fix the problem, it didn’t. The AIG bail out for 85 billion didn’t either.

          This new bail out is designed after the other two unsuccessful attempts and has the same odds of succeeding……not good considering the track record.

          Paulson wants 700 billion for this bail out………….50 billion a year but he wants it all up front and be able to do want he wants with it.

          How about we give him the 50 billion for this year and he can come back and explain what he’s going to do with the 50 billion each year.

          He will buy the junk paper, wait for it to start increasing in worth and sell it back to those same banks at a loss,,,,,,,,,,,,,while they reap a hefty profit on the backs of the American tax payer.

          This is one time that the cure is worse than the disease.

  • Don

    For once, I agree with you folks. STOP THE BIG GOVERNMENT GIVEAWAY!

  • dean

    Fascinating times we all live unhappily together in. Bottom line, private lenders made desicions to loan money to poor credit risks based on the notion that prices would go ever up, then bundled those poor risks with good ones and re-sold that packages to other investors. When interest rates went up, the poor credit risks walked, home prices stalled, then tanked, Fannie and Freddie as secondary mortgage holders were stuck with declining assets, and the entire credit system appears to be breaking down. As David’s post suggests, if we decide to wait for a “market correction” we could easily descend into a serious depression, not just a recession. We are in a serious pickle. I have no freaking idea what should be done, but I hope a few people smarter about these things than I get somethign worked out and right quick.

    Banking deregulation and lack of enforcement of what few rules there are clearly led to this. Thank you Phil Grahm and the Bush Administration, and thank you to the Democrats in Congress the past 2 years who failed to do their oversight work.

    • Crawdude

      Now we all know why the rush was on to get this passed. It was just announced that the FBI is investigating Fannie, Freddie, AIG and Lehman for Fraud and Racketeering. It would seem that every entity that we are bailing out is involved in potentially criminal enterprises.

      With the track record that 3 out of 3 bailout recipients have demonstrated potential fraud, do we really want to go into debt 700 billion more to bail out other potentially fraudulent businesses?

      Is this 700 billion just a bailout or is it a CYA for the billion and millionaires in charge of them?

      The plot is starting to thicken, if lw in the post beneath this one is correct, than the financials do not need to be bailed out……..unless that is just a disguise for covering criminal activity.

      Like I said in an above post, the 300 billion dollar bail out was supposed to cover those in mortgage problems………..what happened to that money, why didn’t it work?

      Lucy, I tink you got some splaining to do…..

    • Rupert in Springfield

      Dean, I hate to say it, but when you have Robert B. Reich, Clintons lead economic advisor putting more than enough blame on the Clinton administration in a Sept 15th MSNBC interview, it hardly is all “those evil nasty Republicans” fault or lack of regulations. In fact the very regulations that lead to this are quite well known, starting with the Carter era community reinvestment act.

      Many things are to blame, and as Reich said, and all of us know, the Clintons obsession with multiculturalism forced tough regulations onto lenders to lend in sub prime areas. I remember Janet Reno dredging up the old “Red Lining” scam at the time, to help intimidate banks.

      I even recounted here, on this blog, probably more than six months ago how on my last mortgage there was no income verification, only a credit check. When asked the mortgage officer told me this was so they would not be exposed to any liability for “Red Lining” or discrimination.

      There is plenty of blame to go around and the fact that Chris Dodd, who took more bribe money from Fmac and Fmae than anyone else is sitting at the head of the table hardly removes the Democrats from the spotlight on this one.

      Who was number two on the bribe money list?

      Wait wait don’t tell me, why Mr. Obama himself.

      Trying to put this squarely on the Republicans shoulders is going to be real hard to do considering how in bed the Dems were with Fmae and Fmac. On the stock and insurance companies maybe you will have better luck. The real test will be a few years down the road, when we see how the administration of the slush fund has gone. If McCain is elected we can be assured the stories of ceo’s and speculators reaping a rich harvest will be reported promptly. If Obama is elected, considering how the press seems to have somehow missed his involvement in Fmac/Fmae bribes and the Clintons regulations leading to a significant part of this, I would expect reporting to take some time.

      Hmm, who else was there? Oh thats right, good old ex Janet Reno hack Ms. Gorelick.

      Basically, after her contributions to 9/11, when anyone sees Jamie Gorelicks name in connection with something, alarm bells should go off. No single government official had more of a hand in contributing to the 9/11 events than her so to see her willing to sacrifice some part of the countries financial security for her own gain is not surprising in the least. Sure enough, there she was, getting a cool $75million thanks to the last act of Mr. Clinton, lifting the Bush 1 ban on former White House aids lobbying government.

      You want to blame this all one Phil Gram and the Republicans and the Democrats for just two short years? Try climbing Everest as a training mission first.

      • dean

        Sorry man…I just don’t buy it. Carter Administration? And it took what….28 years for that to have effect? No…it was much more recent deregulation combined with the Bush administration’s unwillingness to regulate anyway. “Many things” may be to blame, but responsibility rests with those who run the show.

        I had the same expereince as you when we applied for a home equity line of credit 2 years ago. No appraisal, no checking on our income statements, and no sweat. I knew this country was headed for a fall, particularly when a friend of mine, with zero investment savvy, told me he was going to buy and “flip” a house. I thought…”oh boy. Just like the J.P. Morgan story about his shoe shine boy telling him he had multiple thousands in stock options. Morgan immediately sold and avoided the crash that came a few weeks later. or so the story goes.

        Market economies create bubbles. Read about tulips in the 16th century sometime. And those bubbles inevitably burst. Regulations are intended to prevent bubbles from getting to large and taking the economy down with them. They work when they are enforced. The rest is just noise.

        Trying to put this on Republican shoulders is easy. They have promoted deregulation for decades, and enacted much of it. Then, with their hands on the admnistration that oversees the markets, they looked the other way. And to top it off they fiddled after the damn burst until it got to the sorry point where the entire lending system is locking up.

        Yes…Democrats in Congress could have resisted harder and dealt with the socialist accusations by flipping the bird. That they did not is our shame and our part in the debacle.

        • Rupert in Springfield

          >Sorry man…I just don’t buy it. Carter Administration? And it took what….28 years for that to have effect? No…it was much more recent deregulation combined with the Bush administration’s unwillingness to regulate anyway. “Many things” may be to blame, but responsibility rests with those who run the show.

          Well, obviously if you are unaware of the community reinvestment acts role in all of this you are not very familiar with the issue at hand. That combined with your statement about deregulation when the exact opposite is true and members of the Clinton administration have said as much indicates to me you simply do not have a good grasp of the situation.

          Your reasoning of blaming those who “run the show” is really a little silly. I would suggest that if you believe it, then you might want to think a little about it, because in a few months Obama might very well be in office. Using your method, he will then be to blame.

          I mean unless you would then say he inherited the situation.

          Um, but you couldn’t really do that because you seem unwilling to consider this in Bush’s case. He is in office he is to blame. Hmm.

          Oops, I forgot, Bush is a republican, Obama a democrat so of course you would do this.

  • lw

    97% of all loans are presently being paid. That doesn’t mean if we let hysteria control that it will be less. But we have to keep things in perspective. We also shouldn’t let the remaining 3% of bad loans let congress take the American taxpayers for a ride. This is simplified, but if hysteria prevails it becomes more complex whether you follow David’s or Crawdude’s thinking..

  • John in Oregon

    In the news just out is an article that lays out the chapter and verse of the to the current financial crisis.

    *How the Democrats Created the Financial Crisis*
    Sept. 22 (Bloomberg) —

    The article begins by saying things look complicated, then continues;

    – “But really, it isn’t. Enough cards on this table have been turned
    – over that the story is now clear. The economic history books will
    – describe this episode in simple and understandable terms: *Fannie
    – Mae and Freddie Mac exploded,* and many bystanders were
    – injured in the blast, some fatally.”

    – “Fannie and Freddie did this by becoming a key enabler of the
    – mortgage crisis.”

    – “In the times that Fannie and Freddie couldn’t make the market,
    – they became the market.”

    The article now moves to a tipping point in 2005;

    – “Back in 2005, Fannie and Freddie were, after years of dominating
    – Washington, on the ropes. *They were enmeshed in accounting
    – scandals that led to turnover at the top.* At one telling moment in
    – late 2004 … the Securities and Exchange Comiission’s chief
    – accountant told disgraced Fannie Mae chief Franklin Raines that
    – *Fannie’s position on the relevant accounting issue was not even
    – “on the page” of allowable interpretations.”*

    – “Then legislative momentum emerged for an attempt to create a
    – “world-class regulator” that would oversee the pair… Politicians who
    – previously had associated themselves proudly with the two
    – accounting miscreants were less eager to be associated with them.
    – The time was ripe.”

    – “The clear gravity of the situation pushed the legislation forward.
    – Some might say the current mess couldn’t be foreseen, yet in 2005
    – Alan Greenspan told Congress how urgent it was for it to act in the
    – clearest possible terms,,, Greenspan said. *”We are placing the
    – total financial system of the future at a substantial risk.”*

    – “What happened next was extraordinary. For the first time in
    – history, a serious Fannie and Freddie reform bill was passed by the
    – Senate Banking Committee.”

    – “But the bill didn’t become law, for a simple reason: Democrats
    – opposed it on a party-line vote in the committee, signaling that
    – this would be a partisan issue. Republicans, tied in knots by the
    – tight Democratic opposition, couldn’t even get the Senate to vote
    – on the matter.”

    And there you have the bottom line. As a mater of Democrat party policy the choice was made to ignore the Securities and Exchange Commission’s chief accountant, ignore Greenspan, and ignore all reason and logic. And I suspect ignored for reasons of political power and corruption.

    Bold is mine. Read the complete article at

  • John in Oregon

    A number of very important points have been raised.

    > *It’s simply does not make sense to me that Fmae and Fmac were buying guaranteeing loans totally unaware of the risk level of the loans in any given loan bundle.*

    *O* You hit the nail on the head Rupert. You and I think about things logically, when it stinks we say it makes no sense. Just the same that is exactly what Fannie and Freddie did. It’s not that Fannie and Freddie didn’t know.

    The fact is for political reasons they didn’t care. To a group of people in the House and Senate, its about how it feels to give home ownership to low income. With it came political power so mores the better.

    > *Are we to believe loan bundles are comprised of people … making 40k who bought 200k houses and 1% down? I think not.*

    *O* Effectively that’s exactly what happened. Sub-prime loans bundled and re-branded into A grade paper. The silver lining is that many of those risky loans are performing and can be paid off. That’s a major testament to ordinary Americans.

    *O* What damage Fannie and Freddie didn’t do was made up by the Community Reinvestment Act. 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.

    Crawdude I understand when you say > *Freddie and Frannie were bailed out to the tune of 300 billion a month and a half ago. That was supposed to fix the problem, it didn’t. The AIG bail out for 85 billion didn’t either.*

    You are not the only one that had hope that the fix would work. I would make two points.

    *O* First we need to understand what caused the problem if we are to correct it properly.

    *O* Second, and more importantly, before Fannie and Freddie were shut down they had already put a blizzard of risky paper on the market. I have seen numbers between 1 and 10 trillion worth. I’m not sure anyone knows exactly. Toxic paper that is still out there, and that is the problem.

    > *As to raising the loan cap, in parts of the country, like California, the basic middle class house cost more then the existing loan cap. If the cap was not raised those homes would have become much harder to buy or sell.*

    I understand what you are saying David. My point was that in May of this year Barney Frank wanted to raise the cap to nearly 3/4 of a million dollars. Frank absolutely guaranteed that Fannie / Freddie were sound.

    BTW David, I really appreciate your insight.

    > *He [the Resolution Trust?] will buy the junk paper, wait for it to start increasing in worth and sell it back to those same banks.*

    Currently banks can’t sell the junk paper because no one knows what its worth. As I understand the proposal, the idea is for RTC to buy the bad paper.. The RTC would then sort out the bad from the good, sell the good and close out the bad. Hopefully for 700 billion or less.

    > *97% of all loans are presently being paid… But we have to keep things in perspective. We also shouldn’t let the remaining 3% of bad loans let congress take the American taxpayers for a ride. This is simplified, but if hysteria prevails it becomes more complex whether you follow David’s or Crawdude’s thinking.*

    In my thinking, precisely correct Lw. Single digit failures is a major silver lining. The problem is not knowing which of the less than 10% is bad makes 100% of the paper suspect.

    Let me illustrate why this is important. Lets say I own the JOR import export company. Monday JOR received $5 million in wheat. The wheat will ship out Thursday to China. JOR has to pay for it Monday and JOR will get paid Thursday, and JOR doesn’t keep $5 million in spare cash. The answer is a line of credit or a short term loan.

    Because of the bad paper, last Wednesday the banking system shut down. No line of credit, no loans, banks unable to do business. Had that continued, Thursday business would have started to close and the Dow falling 50% would not be unimaginable. Treasury and the Fed steeping in with the buyout proposal stopped the melt down, for now.

    Thursday Senator Dodd’s and Congressman Frank’s face had the look of Deer in the headlights. Back at the office both cranked up the excuse machine.

    What I am saying here, and believe me this does not make me happy, what I am saying is does anyone see an alternative solution to stop the shutdown of business?

    It took reckless, agenda driven, government manipulation to create this. I don’t see an alternative to the few adults that remain in Washington DC government trying to clean up the mess.

    Among the various descriptions of the proposal I have seen is that the FED would set the rules. The reason for doing this is in my mind also the reason not to do it. Argument for; The FED is immune from Congressional meddling. Barney Frank and the others can’t drive the agenda. Argument against, The FED is immune from Congressional oversight.

    My concern now is the horde of Washington Hogs is circling planing to impose their agenda. That should not be allowed.

    *O* Some of the Hogs want the Government to make a profit from the deal.

    *O* Already some Democrat party leaders are talking about slow walking the process until after the election.

    *O* Others want to be able to set corporate pay.

    *O* Obama is proposing what amounts a Get out of mortgage free card, and do pass GO. (A borrower bailout was already done.)

    *O* Senator Dodd would like the Government to acquire stock.

    This and all the other silly, stupid political stuff needs to stop. And stop NOW.

    Dean you said > *Bottom line, private lenders made decisions (sic) to loan money to poor credit risks based on the notion that prices would go ever up*

    Fact. The Community Reinvestment Act of 1995 which requires banks and mortgage companies to make risky 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.” It’s posted by law in your Bank Lobby, go read it!

    > *Fannie and Freddie as secondary mortgage holders were stuck with declining assets*

    Fact, Fannie and Freddie were the cause and not the victim.

    < *Thank you Phil Grahm and the Bush Administration, and thank you to the Democrats in Congress the past 2 years who failed to do their oversight work.* Dean, no one gives a flying fig about your Obama talking point! Fact, Senator Grahm's bill contained regulation of Fannie and Freddie. Upon Democrat opposition and Clinton's veto threat that was removed. The bill, without Fannie and Freddie oversight passed something like 90 to 8. But you are correct that the Democrats in Congress failed to do their oversight work. In 1995, 1999, 2002, 2003, 2005, and 2006. In each of these years the Democrats opposed regulation. And Republicans let it happen.

  • Crawdude

    I will have to say that the entire government Legislative and the Executive branches, under either parties control, turned a blind eye on these issues for 20 years. Not 2 years, not 8 years not GOP not DNC, our entire government is to blame.

    This was predicted right after the S & L bailout, which was the time I started investing. Dean, now you may understand why I’m so hard on McCain because of his Keating 5 involvement, he saw what happened to the S & L’s and allowed it to happen again. At the same time, that hair lipped Barney Frank struts around, yet 6 months ago he chastised reporters for suggesting Fannie and Freddie were over extended or in any financial trouble ” Very Stable” I believe the direct quote is………..his hand was dead on the throttle too. Don’t get me started on Bush or Dodd!

    Since Obama hasn’t actually done anything meaningful while in the senate for this short time, he may be the only one in DC without blame for this. Not that thats a good thing.

    • dean

      CD…what about the private, unregulated investment banks and hedge funds who were most responsible for the unsound investments and the packaging of these to gullible others? Government did not make these loans, it was all private capital. Its true that politicians and regulators failed to do due dilligence, but what about the private sector here? Is the answer that we want THEM in charge of our financial future absent oversight from our feckless government?

      • Crawdude

        Dean, being a free marketeer, I would generally not be for increased regulation for these institutions………unfortunately they have proven that they cannot be trusted. Yes, the people who caused this mess are the 1st level of guilt. Whether this bailout goes through or not, they will get their huge golden parachutes, maybe spend a few years at the Eglin , AFB Federal country club ( they had the best base softball team around) and retire rich. They only did what they were allowed to do.

        They purposely bundled their bad debt with other questionable derivatives, fully knowing that if a collapse came, the government would have to bail them out. This was evident to every financial expert out there, our government officials and well, even me. They government should have stepped in the minute it was obvious what they were doing but they didn’t, so yes they are to blame as much as the personal greed of the financial market employees.

        I donb’t care who is in charge, with the correct checks and balances the market will always perform well. If the country has to bail them out, then the country deserves to have stock in these banks and should recieve dividends from them like every other stock holder.

        That being said, congress just snuck a 25 billion dollar bailout for the big 3 in the current budget……………….did you hear about that one?

        These are in the form of low interest loans…………propping up 3 poorly run and practically insolvent companies and leaving the current golden parachute policy in place.

        11.3 trillion dollars in debt, think about it.

        • dean

          Dude…I’ll admit that this whole debacle is beyond my limited knowledge of banking and finance. I don’t share your faith in the free market. I see it as a necessary and useful thing but not sufficient. And I don’t share your hostility to government oversight. I see government as flawed but better at looking out for the wider public interest than capitalists. We need both in the right proportions.

          My view on the situation from what I read is that many, but not all bankers hopped on an unsustainable residential real estate bubble that was fueled by artificially low interest rates made necessary to finance 2 wars, uneeded tax cuts, hurricanes, and a boost in Medicare funding for geezers in order to help win Bush’s re-election. Combine this with lax oversight and loosened up regulations (thank you Phil Graham) and we had a disaster waiting to happen. It was a question of when and how big, never if. And yes…the taxpayer is left holding the bag. But the taxpayer…meaning us I suppose, is not an innocent here. Many of us were willing participants. Many (including me) borrowed heavily on our increasing home equity. Some bought houses that were bigger and more expensive than they needed or could afford, with amenities that would make Sadam Hussein jealous. We spent more than we saved. And we elected and re-elected the folks who made hay with the lobbiests and raided the cookie jar.

          A day of recknoing has arrived. I don’t know what the best way forward is. But I think that we are in for a number of years of having to pay the piper.

          Yes, I heard about the auto company loans. We are increasingly looking like Britain after the collapse of their empire after WW2. We are way overextended and have become essentially uncompetative internationally. The Europeans and Chinese are going to keep kicking our butts around for a while until we figure out what game we are playing. And it is not “free market.” At least that is not the game the others are playing. It is a somewhat free market substantially directed by governments. Ayn Rand is dead. Reagan is dead. What comes next has yet to take shape, but it won’t be more of what we just had (deregulation and government bashing) no matter who gets elected in 40 days.

          The debt itself is not that scary. Its a lot of money, but we are a filthy rich nation with a lot of productive capacity. Look at the debt we had after WW2. It was astronomical, but we got busy, paid it off, and were much richer at the end of the day. The scary part is the lack of political leadership that would be willing to level with us and point to what we need to do together to dig our way out. Neither McCain nor Obama is offering much here, and who can blame them? If either told us the naked truth we would elect the other guy.

          • Crawdude

            Loved the last sentence! Ain’t that the truth brother, lol!

  • John in Oregon

    David from Eugene said something that I think needs to be repeated. It’s the most succinct, common sense statement of where we are and the immediate task at hand I have seen.

    *”Not doing something to advert this crisis is not a sensible option. The question is how to intervene in a manner that is fast, effective and limits taxpayer liability. And that is a very big question. I do not believe that giving a 700 billion dollar blank check to the Treasury Secretary without any oversight is the way to go. I also see the need for greater regulation of those segments of the financial market place those failure would jeopardize the entire financial system, BUT that can wait till after the crisis is dealt with.”*

    Crawdude, I would like to emphasize a point you have made several different times. This isnt a situation of All Democrats bad, All Republicans good.

    As a rule World Changing events don’t happen instantaneously for no reason. These kinds of things begin with decisions which start a path of events. Along that path are turning points where decisions can change the path. As the path continues conditions build and accumulate until the EVENT is possible. The event will itself create new problems. Knowing the cause of the EVENT helps deal with the problems, although one must be prepared that problems can morph to something different. Still knowing the past is a key to understanding the future.

    This chain of events begins in 1995 with two decisions. The strengthening of the Community Reinvestment Act coupled with aggressive enforcement. The second, an outgrowth of the first, was the formalization of the sub-prime class of loans.

    A decision point, but not a turning point, came in 1999 when Senator Graham presented a modernization of financial rules. One component, removing the Glass steagall act which placed a wall of separation between conventional banking and investment banks has been discussed in the news. The second component was regulation and oversight of Fannie Mae and Freddie Mac.

    That second component was bitterly opposed by the Democratic party with a threat of Clinton’s veto. Once the Fannie / Freddie regulation was removed, repeal of Glass steagall was widely supported by Democrats.

    This was a decision point where the Democratic party formally adopted the policy of an unfettered Fannie and Freddie. It was not a turning point.

    The German language has a word, zeitgeist. Loosely translated, Spirit of the Times. Quite frankly, the spirit of the times was not in favor of regulating Fannie or Freddie. And yes, the Republican majority did not fight for it. Had they done so the results would have been the same.

    Its unlikely that Glass steagall repeal had much to do with the present problem. Modern communication allowed quick movement in the financial market, banks were finding ways around the limitation and the restriction was found nowhere else in the world financial market.

    By 2002 concern about Fannie and Freddie continued to grow. Senator John McCain and the House Democratic leader Dick Gephardt introduced legislation to create a Corporate Subsidy Reform Commission aimed at Fannie and Freddie. The thinking was an at arms length commission would allow some progress. That also failed, again, the spirit of the times.

    I brought this example up showing an ongoing concern by both Republicans and Democrats.

    Which brings us to 2005, which was truly a potential turning point. Read the Bloomberg article which lays this out nicely.

    Another happenstance also pushed the present situation. One that Rupert and Crawdude have spot lighted. An outgrowth of the Enron crash was a new Mark to Market rule. This rule requires that when an asset is sold on the market all similar assets on the books must be marked down. That is how a 5% failure can mark down 100% of an asset class.

    Dean you have raised some important points. > *What about the private, unregulated … hedge funds?*

    You are correct the hedge funds are unregulated. They have been on my list and, for sake of brevity, I just hadn’t gone down that path. Investment Banks are regulated, just differently than commercial banks.

    I don’t normally consider speculators a problem. Speculators can make a market more volatile, but as a rule they long term can not drive the market either up or down.

    Hedge funds operators, hedgers, are a speculator of a different stripe. Tho there are a very few number of true hedgers they have huge pools of money to play in the markets. 30 billion dollar buys and sells are not unheard of.

    They can short sell with a huge position, an incentive to drive the market down and the leverage to do so. One of them nearly broke the Bank of England and did break Asian currencies in 1997.

    So you are spot on to highlight the Hedge Funds.

    > *investment banks and hedge funds who were most responsible for the unsound investments and the packaging of these to gullible others*

    Partly right I think. Hdgers didn’t bundle. There was some commercial bundling, no doubt about that. However as the Bloomberg article points out “In the times that Fannie and Freddie couldn’t make the market, they became the market. Over the years, it added up to an enormous obligation.”

    > *Government did not make these loans, it was all private capital. Its true that politicians and regulators failed to do due dilligence (sic).*

    Partly true. The Community Reinvestment Act compelled lenders to make the risky loans. Fannie and Freddie picked up and bundled. You are correct that politicians didn’t regulate Fannie and Freddie, not ever in 2005 after the Fannie accounting scandal which was as bad or worse than Enron.

    > *but what about the private sector here? Is the answer that we want THEM in charge of our financial future absent oversight from our feckless government?*

    My answer is yes, with caveats. 1) Eliminate the CRA. 2) Get the Government out of the housing market. 3) Enforceable accounting standards. 4) Enforce criminal violations.

    David from Eugene do you have any comments or thoughts?

    • dean

      John….at least since the end of WW2 and the GI bill, nay…all the way back to the various Homestead Acts, this nation’s policy has been to make home and land ownership widely available. The housing bubble was primarily due to a rush of investment capital out of high tech (which busted) and artificially low interest rates. Sub prime loans, as you say were available way before the bubble blew up. Policies to expand home ownership certainly played a role in investment going in that direction as opposed to some other.

      It seems to me that regardless of which came first in all this, and which contributed to what, the clear fact is that capitalism periodically creates bubbles because investors behave like sheep and follow the leaders to the greener pastures. Eventually those pastures are over grazed by the expanding flock. The first ones in are fat and happy, the last ones in are hungry and left holding or bcoming the Haggis so to speak.

      Some bubbles get so big that when they go bust they threaten the larger economy. This appears to be one of those. For ordinary Americans, their home is their largest asset, and when that asset rapidly deflates that is a big problem. It ripples across everything.

      Government regulation of financial institutions is primarily intended to prevent fraud, but probbaly more importantly to act as ballast to prevent dangerous bubbles from forming, and to backstop the economy should they burst. *Government regulation is a check on out of control capitalism*. I’ve argued on this site for many months that a “mixed economy,” that is part capitalism and part socialism, is the rational way to live in the modern world. I have been ridiculed for this, called a communist, socialist, idiot, fool, tool, troll, extremist, and any number of less flattering things.

      Deregulation, in all its manifestations, is and has been a mantra of the Republican party and conservatives. Its not just about financial institutions. its about health care, environment, energy…you name it. There is a deep, core conviction that goverment should go away and the free market will sort it all out, teh Devil take the hindmost. Many Democratic politicians have gone along with this, some enthusiastically and others not so much. To the extent that deregulation is what allowed the housing bubble to get so big that its bust threatens all of us, what we really need is a reconsideration of the idea that deregulation and more unfettered capitalism is always good and carries no costs. Some fettering is indeed needed. In my view, we are witnessing the limits of Reaganomics, and need to start re-reading and learning our Keynes.

      That’s my story and I’m sticking to it.

      • CRAWDUDE

        News Flash………The FDIC is predicting that it will need 400 billion dollars by the end of FY09 from the taxpayers to cover the losses not coverED by the current 700 billion dollar bail out.

        Lol, and the hits just keep on coming!

    • David from Eugene

      Because the world economy depends on corporations and individuals having the ability to borrow money at reasonable interest rates to function, we cannot afford the risk of having the credit market frozen. The current crisis has the real potential of doing just that, freezing the credit market. That freeze will adversely affect all of us. It is absolutely clear that we must deal with the crisis. The question as I have stated earlier is how we can best deal with it.

      If I understand the current situation; banks and other large financial institutions are currently holding hundreds of billions of dollars worth of financial paper in many forms that are based on mortgages on American homes. A decline in the value of housing in America and an increase in the number of foreclosures have created a lack of confidence in that financial paper and questions as to its actual value. At the same time the holders of that paper also realize that most of the mortgages at the root of this financial paper are good and will be repaid, making it clear that the paper has some value. But the form and structure of the financial paper makes it difficult to impossible to reliably to determine if the mortgages at the root of a particular financial instrument are good or not, making it very difficult to determine a value for that instrument. As a result these instruments are not being actively bought and sold, which means there is also no market price for them either. This lack of a market price has made accurately determining the total current value of a particular financial institution’s holdings impossible. With out this value most cannot do business, and these institutions feel the need to hold cash rather then lending it out.

      It appears that the plan behind the proposed 700 Billion dollar Bailout proposal is for the federal government to buy these financial instruments and thus clear the books of the banks and financial institutions that hold them. The big question with this plan is what price will the Feds pay for the paper.

      It strikes me that there is another solution, for the federal government to guarantee all the mortgages that are the basis of the questionable paper. The guarantee to be in the form of a statement by the federal government that it will buy any home mortgage in foreclosure at 85 cents on the dollar. This would set a floor value of 85% of face value and assuming a 3% foreclosure rate an approximant value of 99.5% of face value. That should stabilize the financial market. As to the now government owned mortgages in foreclosure, the current home owners would be given a opportunity to refinance in to a 30 or 40 year fixed rate mortgage based on the current market value of their home. A lien would be placed on the property in the amount of the difference between the old and current value for the house. If the house is sold or refinanced with in two years the government gets any profit up to the lien amount, after two years any profit is split between the home owner and the government. Normal increases in home value (1-2% annually) would mean over time that the government would recover the money it put in to the program. Clearly there are refinements that would be needed but this is a rough frame work of a solution.

      This is not a full and complete solution to the situation. As I see it the complete solution has 4 parts. First, take the immediate actions necessary to keep the world financial system functioning. Second. Carefully analyze the crisis and its roots in an effort to determine what were all the factors that created the situation. Third, prosecute any violations of law or regulation discovered during the second step. Fourth, make the changes to our regulatory structure that is necessary to prevent a reoccurrence. For a variety of reasons it is best if we do not attempt all four parts at once. As it is the first step that is time sensitive it is the only one I have addressed at this time.

  • Rupert in Springfield


    >Deregulation, in all its manifestations, is and has been a mantra of the Republican party and conservatives.


    You will not find a Republican in office who has ever seriously advocated deregulating everything. That is what advocating deregulation in all its manifestations means so dont try and do a Dean weasel on this one.

    You are simply trying Dean rule number one – set up a straw man and argue against it. In this case you are doing the usual tactic of assuming being against some regulation means one is against all.

    Its silly, when we now have more than a few Clinton officials, including Clinton himself ( while trying to get Obama the “cracker vote” in Florida, his words not mine ) saying that Democrats bear a large amount of responsibility for opposing alot of the regulations.

    Barney Frank himself led the charge against further regulation of Fmae and Fmac.

    You are so up a creek its not funny if you are seriously trying to argue your partisan position with anyone outside the clergy Dean.

    • dean

      Rupert…I did not state they wanted to deregulate everything down to zero. But deregulation was their mantra…like “tax relief.” Republicans never advocated getting taxes down to zero either, but they have run every campaign for 28 years on lowering taxes and on deregulating. What is McCain’s health care proposal? Deregulation. What is the conservative answer to land use regulations? Deregulate them. To zero? No. Just until they are happy. When will that be? Who knows?

      So own the problem. Republicans, with some assistance from Democrats, did deregulate. The Fed under Greenspan eroded Glass-Steagal, even against the advice of Paul Volcker, not exactly a liberal Democrat. And eventually they gutted it altogether with the Graham bill. And the consequence was an unregulated investment structure that rushed into the housing business, inflated home values, and then crashed as every capitalist Ponzi scheme has to do. Blaming Fannie and Freddie is ridiculous. They had at most a secondary or terriary role. It was private capital that built this, and it is private capital that now needs a bailout.

      It is you who is setting up Fannie, Freddie, and low income home buyers as the straw man here.

      • Crawdude

        In 1998 the GOP congress passed a bill and Bill Clinton signed it. The bill “REQUIRED” banks to develop ways to get low income / faulty credit citizens qualified for home loans.

        It wasn’t deregulation that caused much of this problem but regulation designed to look like deregulation. Its all double speak both parties are to blame for all of this.

        That being said, Bloomberg was reporting last night that the banks are saying, that even if the 700 billion doallar bail out is passed, they will need an additional 500 billion halfway through FY09.

        Adding it all up, this bail out will cost at least 2 trillion dollars,,,,,,,,,and no one knows if it will work. If it does, its a band aid for this generation and will be left for the next one to suffer through.

        • dean

          Or we could not do it and deal with the mess (credit lockdown) that is predicted.

          Dude….no matter how you slice and dice, it was private capital looking for an easy buck that became like lemmings over a cliff. Blaming government for all the private decisions that overbuilt housing, sold it to speculators or those who could not afford it, and then repackaged and sold bad loans all over the place to act like time bombs is fruitless. Adults are supposed to take responsibility for their actions, and I’m not seeing much of that, either on Wall street, Main street, or within those controlling government.

          What I do find interesting is that we the people are acting as if we had nothing to do with this. We are shocked…shocked to find out that gambling has been going on here, even as we pocket our own winnings in the form of inflated home equity and cheap loans.

          • Crawdude

            Oh Dean, don’t get me wrong. I agree that all of us, them ( Gov) and the financial managers are responsible. Raesponsibility is now a Red Herring ( which being Swedish / Icelandic, I like pickled, lol)

            My question is : Do we try this bail out, if it works we multiply the same problem and send it on to the next generation. If it doesn’t we are that much more in debt. Much like the S&L bailout only temporariy cured a symptom but the disease is what we are now experiencing.

            Our choice is to take the brunt of the pain now or try to protect ourselves and push it off on those in front of us. Thats the naked truth……………….better elect the other guy.

          • dean

            Here is my confusion over this. If we borrow this obsene amount of money now, buy up the lousy paper, and then over time cash it back in for something less than we paid, and in so doing we prevent a serious and very long recession-depression, is that better not only for now but also for the future? Or is taking our medicine now better for the long term?

            As Keynes said, in the long run we are all dead. So I tend to think we are better off avoiding the serious recession/depression now. That is the role of government.

            Yes…elect the other guy. Absolutely.

          • Crawdude

            Ahhh, but we don’t profit from the paper trash. Its given to various brokers who sell it pennies on the dollar to Hedge funds andshort sellers who turn the profit, we the people get nothing.

            If it was just the current bad paper than it might, might work but its not, its the paper, the 11 trillion dollar debt (the gorilla in the room no one wants to point out) the 10 trillion dollar SS deficit starting ing in 2017, the 10n trillion dollar medicare deficit starting in 2013 and the massive debts the states, counties, cities etc…… have racked up. I’ve seen estimates of 20 trillion on that.

            Lets also not forget the crumbling infrastructure……….just today the NW pols. said a new I5 bridge was a non-starter………….many other states face similar probs.

            No Dean, if it was easy as you hope, it wouldn’t be scaring DC so bad.

            The question still remain about biting the bullet: If not now, when? If not us, who?

            Do we leave collapse to our kids as our legacy or do we tighten our belts and spend the next 20 years fixing our screw ups? It’ll mean that many of our current ” Entitlements” go bye-bye, will this country allow it?

            I know what I think their answer will be. Luckily, I was smart enough to cover myself enough to survive financially for a few years in the event of the worse. I’m not so sure about the average Joe though.

            To tell you the truth partner, I don’t think this bail out is going to work anyhow ( neither do the people proposing it, its a hail mary pass to a gimpy receiver). We may have no choice in the matter.


          • David from Eugene

            I hope your holdings are in gold or precious stones in your possession as a major world wide depression is very likely to wipe everything else out. Other wise you may not be as secure as you believe. Do not forget that the value of gold has effectively wiped out in the past by mandating the sale of personally held gold to the government at a price fixed by the government. Then there is the question of whether or not there will be food, fuel and other necessities to purchase with the gold and you can defend your holdings from the mobs of ordinary Joes.

            While there may be some debate as whether or not the current crisis could trigger a world wide credit freeze. There is no doubt that such a freeze would trigger a major world wide depression. I for one do not believe that the satisfaction of watching so many “financial geniuses” being hoist by their own petard is worth that risk.

            As I have said several times in this discussion, we need to find a solution which is fast, effective and limits taxpayer liability. It need not be the solution that the Treasury Secretary has proposed, but we need a workable solution and soon.

          • Crawdude

            I agree in principle with you David. After extensively researching the financials, editorials and various other periodicals, I don’t believe there is a painless fix.

            The best that can be done, is a band aid that might hold for a decade or 2 but create even more havoc once it unravels. That’s fine with me, if the people of this country chose to push it off until later.

            At the time the government outlawed possession of gold currency, all of our currency was backed by gold. In order to give the Federal Reserve complete control of our currency markets FDR had to take us off that standard by confiscating the above currency and changing out the paper currency it backed. On a historical note, FDR’s actions could almost be considered the 2nd ranking action on the road to our current financial chaos. The unratified 16th Amendment, being the law on which he based his actions would be the 1st.

            All the above being said, confiscation of gold in today’s market doesn’t benefit the government since it no longer has an effect on currency rates. Its just another commodity in a financial since of the word.

            My investment into gold though self serving is purely financial. If the current plan does somehow accomplish it goal, then my stocks, mutual funds and 401-K will increase and gold / silver prices will fall. If it doesn’t work, gold and silver etc… prices will increase. Its just a hedge against market fluctuations or failures. You never want to have all your eggs in one basket.

            As for a worldwide depression, that is quite possible……….even if this bail out succeeds. We are 15% of China’s GDP, through their exports. If we can no longer afford to buy their products, their economy will tank and the domino effect will start in Asia and eventual spread globally. As much as people hate to admit it, we are and will continue to be the worlds engine.

            I’m not too worried about the ” roving hoards of people” most Americans have become to sedentary and lack the work ethic to roam around and cause too much havoc. Their entitlement mentality precludes them from for the forming the intent anyhow, or at least in this area. Also, I doubt many people in Portland own very many firearms, due to the overpowering liberal thought process here. I feel safe enough if your scenario were to come to pass, though I think that would be a definite ” worst case “scenario , that I hope wouldn’t occur.

          • dean

            Dude…they don’t need firearms. Just numbers plus enough desperation. The Hutus used Machetes and tire necklaces on the Tutsis. Portland liberals would disable your eyes with steaming 2% milk and then wrap bicycle chains around your conservative neck. Better stash that gold someplace deep and dark.

            But seriously….biting the bullet. Its not a matter of putting it off. We will be biting the bullet by “borrowing” an additional $700 billion to buy maybe, if we are lucky $350 billion worth of unsold desert McMansions and moldering Miami condos, some of which could be rentable. That extra debt means foregone bridges among many other things, which means we stay stuck in traffic, assuming we can even afford to put gas in the car.

            Most of us are in for 10 years of reduced consumption, probably higher taxes and stagnating wages. But I think that would have been the case even without the Wall Street bailout because we, meaning most of us, are too individually leveraged against our real estate.

            But at the end of the day we will still be relatively rich, hopefully sobered, and we will focus on the good things in life that cost little. A nice bike ride thorough the valley, nordic skiing (cheaper than downhill,) a kayak paddle down the Columbia, camping on the free, publicly owned beaches, eating fresh tomatoes from the garden, fresh apples off the trees, and fish from our cleaned up rivers. And of course, an intermitent internet powered by home made solar collectors. Don’t worry my friend, be happy.

          • Crawdude

            I think I have reached my 3 post rule and maybe even broken it. Nothing good in today’s catalyst so we’ll see ya on the next interesting article.

            Burn my eyes out with steamy 2% milk,lmfao! Thanks for the laugh Dean!

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