The ABC’s of the Bailout

America, the Bailout and the Cost

Before the Senate votes on the bailout potentially saddling your children and their children with 700 billion in debt I urge you to read Diamond and Kashyap on the Recent Financial Upheavals.

Here is my simpleminded understanding of the crisis. Freddie, Fannie, Lehman and AIG couldn’t get financing so we scuttle Lehman and bail out the others to avoid worldwide financial collapse.

The Players

Fannie Mae and Freddie Mac- the ones we could not afford to fail

The Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known Freddie Mac, are government sponsored enterprises or GSE’sGSE’s are government created, but privately owned financial service entities* created to ease the flow of credit (read make cheaper credit available) to agricultural and home finance sectors.  In the words of Diamond and Kashyap Fannie and Freddie were

set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners …

Pretty much everyone agrees they failed; instead of honoring their mission they used their position to cash out huge profits. As the crisis deepened and Fannie and Freddie couldn’t get financing, they were nationalized (September 8th) but the Treasury could have done so any time after they got authority from Congress in July.

Lehman – lost cause

Lehman operated on borrowed money – lots of it ( $100 billion a month). Their continued well being was contingent upon being able to borrow enormous sums to finance their portfolio of real estate, bonds, stocks and other financial investments.  Because it is easy for investment institutions like Lehman’s to change/mask their risk they could manipulate their data to look like a good risk for awhile.  As the mortgage crisis deepened, lenders were less than confident in Lehman’s ability to service the debt.  The cost of borrowing went up and they could not keep up with the debt. Bankruptcy was the solution.

AIG – insuring mortgages and in turn being insured

Some parts of AIG, the mega insurance company, are healthy, some are not. AIG got a huge bridge loan from the government to cover insurance contracts guaranteeing losses on mortgages.  It is pretty easy to see why they are in trouble with the number of mortgages failing.  They had to prove they could cover these contracts, if they couldn’t, their bonds which were insured by other financial entity’s contracts would cause a domino effect worldwide.  That is why AIG got the loan.

The Tentative Deal – “No one is smiling” (Barney Frank)**

The New York Times reports a breakthrough in bailout negotiations and that congressional staff will work through the night on the agreement and draft of the bill for vote on Monday.  The compromise bill apparently

includes pay limits for some executives whose firms seek help, aides said. And it requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures.

In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the months and years ahead.

The White House also agreed to strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.

The centerpiece of the rescue effort remains the plan for the government to buy up to $700 billion in troubled assets from financial firms as a way to free their balance sheets of bad debts and to help restore a healthy flow of credit through the economy.

The money will disbursed in parts, with an initial $250 billion to get the rescue effort under way, followed by another $100 billion upon a report by Mr. Bush to Congress.

The president could then request the balance of $350 billion at any time. If Congress disapproved, it would have to act within 15 days to deny the Treasury the money.

via New York Times

Why the bailout makes it more important than ever to elect Obama

The money will disbursed in parts, with an initial $250 billion to get the rescue effort under way, followed by another $100 billion upon a report by Mr. Bush to Congress.

The president could then request the balance of $350 billion at any time. If Congress disapproved, it would have to act within 15 days to deny the Treasury the money.

via New York Times

The President, Bush or his successor, will have the ability to request further disbursement. Obama is not surrounded by old boy lobbyists tied to the abuses of the past.  McCain is.

Read on.

Who is responsible for this mess – or why I am glad Fussypants opened a dialog***

Fussypants posted two YouTube Videos – the first placing blame for the current crises on democratic shoulders, the second of a 2004 hearing on Freddie and Fannie wrongdoing, again, placing blame, this time for lack of regulation on, guess who, the democrats.

I am not sure that blame is placed correctly.  A close look would most likely demonstrate that there is plenty to go around, both democrat and republican, but this point must be made: the Republicans were in power in 2004 – the democrats did not take a majority until 2006.  So one must ask – why did the republicans fail to enact/provide more stringent oversight of Freddie/Fannie.

In a word – lobbyists.  And the troubling thing is that the same lobbyist’s who undermined more stringent regulation of the financial industry are now John McCain’s advisors.  These are the poeple who made money blocking regulation.  Now, in a McCain presidency, those same lobbyists stand to profit from a taxpayer bailout of Wall Street.

McCain’s lobbyists/advisers

Rick Davis, McCain campaign manager, is an owner currently on leave from his lobbying firm Davis, Manafort & Freedman.  According the New York Times Davis received payments from Freddie Mac from the end of 2005 through last month although he had lobbied on on behalf Fannie and Freddie, specifically for LESS regulation, for years.

For years McCain campaign manager Rick Davis was head of a lobbying association that included Fannie Mae, Freddie Mac, real estate agents, homebuilders, and non-profits. According to Politico, the organization opposed congressional attempts at regulation of Fannie and Freddie, along the lines of what John McCain is currently proposing. In his capacity of president of the group, Davis went on record in 2003 and insisted that no further reform of the lenders was necessary, in contradiction to his current boss’s sentiments. “[Fannie and Freddie] are subject to an innovative and stringent risk-based capital stress test,” Davis wrote. “The toughest in the financial services industry.” via MotherJones

Wayne Berman, McCain campaign’s vice-chair, and congressional liaison John Green reportedly made over 1.4 million from Fannie Mae while working for Ogilvy Government Relations; Green made an additional 180K from Freddie Mac.

Arther B. Culvahouse Jr., an attorney who helped McCain pick Sarah Palin, earned 80K from Fannie Mae in 2003-2004.

Aquiles Suarez, the head of Fannie Mae’s lobbying from 2003 through 2006, “oversaw the lending giant’s $47,510,000 lobbying campaign from 2003 to 2006” was identified as an economic adviser to McCain in a 2007 press release.

Politico reports that at least 20 McCain fundraisers have lobbied for Fannie Mae and Freddie Mac, pocketing at least $12.3 million over the last nine years. via MotherJones

Kurt Pfotenhauer, husband of McCain adviser Nancy Pfotenhauer,was formerly employed as a lobbyist by the Mortgage Bankers Association, who have been lobbying front and center during the current crisis on a particularly important point.

MBA, has been at the center of lobbying efforts — successful it appears — to oppose a provision, sought by Democrats, that would allow bankruptcy judges to modify mortgages on primary residents. The lending industry has long fought such measures, arguing that it would force lenders to increase mortgage rates. In a statement issued yesterday, the MBA asserted that the provision “would throw into question the value of the collateral that backs every mortgage made in this country — the home.” According to one Democratic lobbyist, MBA’s current top lobbyist, Francis Creighton, has lately been “living in the halls” of Congress in an effort to influence lawmakers on the bill. via TPM, McCain Aide’s Husband Headed Trade Group Lobbying on Bailout

In short if you want change vote Obama.

UPDATED:

The 3 A.M. Call, Paul Krugman, New York Times

* If you find the relationship between the government and Fannie/Freddie hard to understand you are not alone, the Federal Reserve agrees the relationship is ambiguous.

** Particularly contentious passages were dropped: “both sides appeared to have given up a number of contentious proposals, including a change in the bankruptcy laws sought by some Democrats to give judges the authority to modify the terms of first mortgages.” The failure of Dems to achieve this is particularly bitter to me.

*** My full comment on Fussypants on the post “Fussy gets political & loses half her subscribers

The video is catchy and the screen clips play into easy finger pointing but it is a disservice to the extreme crisis we find ourselves to think that a 1980’s rock song can summarize what went wrong. The sub-prime crisis is only part of the picture.

The failure of federal oversight, the failure of Freddie/Fannie to stick to the core mission (which has always been, since their beginnings generations before Jimmy Carter) to provide lower cost financing to the agricultural and home finance sector. No one is talking about it but there is a huge portion of foreclosures that have nothing to do with sub-prime financing. They have to do with otherwise long term good credit risks losing jobs, losing income and going into foreclosure.

Any serious discussion about the current financial situation must include the impact of globalization. The job market, people’s earnings and their ability to pay the bills have been affected by significant and unforeseen forces over the past 20 years. When the Berlin Wall fell and the eastern bloc opened up to the west the job market was affected. When the internet and broadband capabilities opened up off shoring tech, customer service, medical and legal jobs the job market was affected. When the lure of cheap labor and non-existent environmental standards took Wal-mart and other manufacturing jobs to China the job market was affected.

People who have jobs pay their bills – even the ones with outrageous interest charges. One huge impact of globalization has been the loss of the middle working class, black, white and brown.

This is a different world we live in; for me Obama’s intellect, age and education is important in determining his fitness to lead. We cannot make the world into an us and them anymore, it just won’t work. All our children are going to pay for this bailout. All our children will be affected if McCain/Palin lead us into a war in Iran or Russia. The world has changed and we owe it to our children to take it more seriously than sound bites and You Tube videos.

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1 Comment (+add yours?)

  1. Lola
    Oct 03, 2008 @ 15:06:50

    Good job, girl! The whole thing makes my head spin and my stomach turn.

    Reply

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