Monday, September 29, 2008

The Treasury Dept - America's Newest Subprime Mortgage Broker

You can find the draft legislation of the subprime bailout bill here. I just paroused it. It could not be any worse and still stand a chance of passing. It will be voted on today in the House. This is my analysis of the bill.

This legislation is far more than a stop gap to the financial system. It is a massive give-away to those who borrowed too much and are now in trouble. This legislation does not give a bankruptcy judge the power to change the terms of the contract and devalue assets. It's worse. It requires the Treasury Dept. do it. This is a travesty. It injects a whole new version of government intervention in the marketplace. Bottom line, this legislation is far less about taking care of Main Street than it is about insuring the votes of those on Easy Street.

There are several good points to this legislation. The good is that:

1. In the short term, this legislation might reopen the credit arteries of our nation and settle the markets. With most of the poison pills removed, that really is the alpha and omega.

2. The limitations on executive compensation and golden parachutes in Section 111 are far less onerous than they might have been. They are carefully circumscribed and limited in time. I cannot see them driving financial institutions out of the U.S.

3. I appreciate the market transparency required by Sec. 114 of placing all transactions on the web accessible to the public. It certainly will be a major step towards minimizing fraud and providing public accountability.

4. By Sec. 117, The Comptroller General is required to do a "study to determine the extent to which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis." This is actually far too limited in scope, but it is all we will get out of Congress.

5. Possibly the best thing to come out of this legislation is found in Sections 132 and 133, suspending the year old Mark to Market accounting rules that have contributed so heavilly to the current fiscal crisis. These sections also direct a study of the impact of the Mark to Market accounting rule.

Now for the bad - and it is bad:

As a threshold matter, this legislation should be designed simply to purchase distressed assets, get them off of the books, establish a value for them, and then resell them, all with the intent of protect the financial health of our nation with, in the end, as little harm to the taxpayers as possible. This legilation goes far beyond that. If you are a subprime borrower and Treasury purchased your loan - hey, its Christams time.


(a) RESIDENTIAL MORTGAGE LOAN SERVICING STANDARDS.— To the extent that the Secretary acquires mortgages, mortgage backed securities, . . . the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Home
owners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.
. . . .
(c) CONSENT TO REASONABLE LOAN MODIFICATION REQUESTS.— Upon any request arising under existing investment contracts, the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications.

(emphasis added)

This is nothing more than one more massive Democratic giveaway to buy their constituency. Allowing Treasury to work with existing homeowners on the margins is one thing. Making allowances for actual cases of fraud is one thing. Directing Treasury to become a super-subprime mortgage broker of the first resort is quite another. At best, this will cost the taxpayers dearly and further skew the housing market, lengthening the crisis and the shakeout from the housing bubble. At worst, this could become another economy threatening beast all on its own, though it would be with printed money and thus threaten inflation more than anything.

In case you do not understand where Democratic priorities lie from the above provisions, you can also take note of the Oversight provisions at Section 116. The first thing to which the Comptroller General is directed to examine in its inspection of the Treasury program is "foreclosure mitigation."

Section 125 might be entitled the Protect Democrats Act, the legislation establishes a Congressional Oversight Panel with unequal, weighted representation towards majority party. Thus we will have the same people who brought us the subprime debacle overseeing this massive program. Worse, the legislation authorizes the Democratic controlled panel to make recommendations for large scale reform of the regulatory system. These are the same people who refused to regulate Fannie Mae because they did not want to disturb "affordable housing," regardless of the cost. And as the above should make clear, their priorities have not changed.

Section 134 is the baby of Speaker Nancy Pelosi. Thus, not surprisingly, it is an abortion. It provides that, if in five years all funds are not recouped by the Treasury for this bailout, then the President "shall" submit legislation providing for a tax on the financial services industry. Its hard to enumerate all of the facets of the glaring stupidity of this one. For a start, it punishes the entire financial sector - who will merely pass through the taxes to any taxpayers foolish enought to use such arcane things as banks, S&L's, or have 401k's, etc. Two, how much of the shortfall will be due to the insane insistence of the left of preventing foreclosures on subprime loans. All of the taxpayers get our pockets picked a second time to cover Democratic largesse to their base. And three, this interjects uncertainty into the U.S. financial system both today - when we need it the least - and in the long term. This Pelosi abortion will assuredly effect foreign investment in our financial sector.

Would I vote for this bill if I were in Congress? Probably, because I believe the markets will fail without it. That said, I would get every one of my objections on record before taking that vote. Then, with the better part of a fifth of Wild Turkey coursing through my veins, . . . .

That said, this legislation goes nowhere near far enough. I will repeat the recommendations that I made in an earlier post:

I. We need a true non-partisan, non-Congressional commission to investigate the causes of this meltdown. This crisis begins and ends with the socialist left in Congress. In the middle are mortgage brokers and Wall St. The story needs to be told from beginning to end. It will not happen under Congress, but there is nothing stopping President Bush from appointing such a commission the day after the above legislation is passed.

This is a crisis that, on a fiscal scale, dwarfs 9-11. And it exposes fundamental problems in both our political and financial worlds that we fail to identify at our own peril. How our best financial minds ended up purchasing this toxic debt needs to be thoroughly investigated. The system used by Wall St. to analyze and value the now worthless securities needs to be pulled apart with the detail a post mortem. And our regulatory scheme needs to be overhauled. Treasury Secretary Henry Paulson has been calling for this for some time. Now seems an opportune moment to redo and streamline a regulatory system built for the last century. I have no faith, however, in the current Democratic Congress to carry this out in good faith.

II. The Community Reinvestment Act and all Clinton-era rules relating to subprime borrowing need to be revised to end government mandates for this scourge. There is nothing wrong with a government program to work with low and middle income folks to repair any credit problems. And I would support a program for such people to invest in a tax free fund in order to build up funds for a down payment. That is a market based approach. We know how the socialist approach works.

III. Fannie Mae, Freddie Mac, and indeed, the whole concept of Government Sponsored Enterprises (GSE's) that so distort the marketplace need to be scrapped.

IV. There needs to be criminal investigations of those involved in the Fannie Mae, Freddie Mac fiasco. This has begun - years too late. Nothing is clearer than the individuals who ran these institutions cooked the books. Franklin Raines should still be in jail following his conviction in 2004. His cell mates should be Chris Dodd, Janet Reno and Jamie Goerlock.

V. And lastly, I think that we really should seriously consider Charles Krauthammer's suggestion of public executions as regards this subprime crisis.

Other posts related to Subprime Crisis (from oldest to newest):

1. McCain, The Fannie and Freddie Crisis, and Obamafuscation - Obama and the entire Democratic Party are trying to blame Republicans for the subprime crisis. But this crisis was created by Bill Clinton and protected against Republican efforts to reign it in over a decade – until it failed, nearly pulling out entire economic system into a depression.

2. A Washington Post Front Page Hack Job - The Washington Post does a hit job on McCain, grossly distorting his record on regulatory matters and ignoring his cosponsoring of legislation to establish much stronger regulation of Fannie Mae and Freddie Mac.

3. Dodging a Depression - The NYT and WSJ document just how serious is the subprime crisis. Quite literally it brought us to the point of a complete and catastrophic stoppage of our financial systems. This was not a stock market crash, it was a lending and credit crash. The WSJ describes the events of the week leading up to the crisis point.

4. Obama & The "Family" Of Fannie Mae - Documenting Obama’s relationship to Fannie Mae.

5. The Origins – And Foreseeability – Of the Subprime Crisis - A 1999 article in the NYT describes the Clinton Administration forcing subprime loans onto America and also forecasts that this will create a house of cards that will fall apart in a down market.

6. Covering The Left’s Fannie - The NYT tries to play up old ties of a McCain campaign worker with Fannie Mae while minimizing the fact that McCain himself, in 2005, co-sponsored legislation that may well have prevented the fiscal crisis we are in now.

7. The Left’s Subprime Meltdown - A post by the Anchoress discusses this subprime crisis as a creation of the left and a system that was protected to the end by the left. She adds additional sites, quotes and links to explain the mosaic.

8. Fannie & Freddie, McCain & Obama, Subprime & Wall St.The WSJ discusses both how the subprime loan market came about and how Democrats, including Obama, were both the cause of the problem and the roadblock to a solution that would have averted this catastrophe. Dafydd at Big Lizard's explains how Mortgage Backed Securities worked on Wall Street.

9. A Doddering Fool & Charlatan - Chris Dodd is up to his ears in the subprime crisis. With our economy teetering on an actual depression due to the Fannie/Freddie/subprime loan crisis, it was not merely surreal to watch Senator Chris Dodd chair an emergency hearing of the Senate Banking Committee to evaluate the Treasury's proposed rescue plan, it was obscene.

10. Finally – Oversight - The FBI has finally announced criminal investigations at Fannie and Freddie.

11. When Will They File As A 527 – The NYT continues its wholly biased reporting on the subprime crisis, refusing to report on the genesis of the crisis and instead, reporting on the relationship between Fannie Mae and Rick Davis of McCain’s campaign team.

12. McCain The Chessmaster - Opining on the potential risks and rewards of McCain's decision to cancel campaigning, return to Washington to take part in negotiations over a response to the subprime crisis, and tentatively cancel the Friday debate.

13. The President Addresses The Nation - Bush explains the stakes involved for America with the subprime crisis.

14. McCain The Chessmaster Part II - McCain was responding to a 3 a.m. phone call in returning to Washington. He is given political cover and support by Bill Clinton.

15. A Spotlight On The Left's Subprime Crisis - A video summary of the origins of the subprime crisis with lots of footage of Rep. Barney Frank and others protecting Fannie Mae from regulation by the Bush Administration and McCain.

16. WaMu Swallowed Up In The Left's Subprime Swamp - Washington Mutual goes under because of toxic mortgage debt.

17. Great Moments In Leadership - Obama phones it in on the subprime crisis.

18. The "No Deal" - McCain Responds - The left is blaiming McCain for failure of a deal on the subprime crisis. McCain answers in a memo.

19. Dodd, ACORN, and the Penultimate Screwing of the Taxpayers - The left, the people responsible for the subprime crisis, proposed a deal that would have used the return on rehabilitated investments not for the benefit of taxpayers but to fund progressive advocacy organizations that are fundamentally corrupt.

20. Krauthammer On The Subprime Crisis: Time For A Return To Public Executions - America is livid over this fiscal crisis and wants a pound of flesh to satiate its cravings before beginning the job of putting our financial house back in order. Krauthammer things we should give it to them and suggests a return to the auto de fe, this time as a reality show.

21. The Subprime Crisis, Dems, Obama & McCain - a great video giving the history of the subprime crisis.

22. Subprime Crisis: Spin versus C-Span - a video of 2004 hearings in which the House Democrats heaped scorn on the idea that Fannie Mae and Freddie Mac were a disaster waiting to happen and fighting tooth and nail to preven any further regulation of Fannie and Freddie.

23. Thomas Sowell On The Subprime Crisis & Proposed Bailout - Economist Thomas Sowell weighs in on the need for the proposed bailout to stabilize the market and the politics at the root of this fiscal crisis.

24. Resolution of the Initial Subprime Crisis - Time For Investigation - A first look at the draft legislation and an outline of what else needs to happen to resolve this crisis.

1 comment:

Dinah Lord said...

It is a travesty, indeed.

More free riding for the free loaders...

Thanks for wading through the bill and breaking it down so succinctly.