Big Bailout (4) Government Fixing The Crisis Government Caused

Can politicians reach an agreement on how to fix the crisis?

In a nation where the people are supposedly free and masters of their own destinies, are hopelessly ensnared in the government’s web of corruption, hubris and stupidity.  We powerless citizens are now reduced to watching Senators, Congressmen, and Candidates, who will decide our fate, gather around a White House conference table and pose for video fragments and photos.  We get no hard information and can only wonder what’s happening.

Following is the Agreement on Principles that was given to the Press by Democrats who claim they have Republican support as well.  There are now some reports that Republicans aren’t at all satisfied and are not willing to vote in favor of the Bailout.

The Agreement language is in black print; my comments in blue print.

Agreement on Principles

1. Taxpayer Protection

    a. Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies.  This is meaningless.  The Secretary could set any “standards” allowing any compensation.

    b. To minimize risk to the American taxpayer, requires that any transaction include equity sharing. 

    This is huge.  The Treasury has proposed no-strings-attached purchases of mortgage assets from troubled banks, to help those banks avoid insolvency.   The asset purchases would be at a very substantial discount to original value, resulting in significant losses to the banks.  This provision would require the bank that sells the mortgage securities to issue stock to the government at no charge, in addition to suffering the loss.  This could make the whole effort unworkable, or it could result in the only the very weakest, nearly insolvent banks participating. If the banks did go under, the stock would, of course, be worthless.  If this Bailout really is needed to prevent Financial Armageddon, then this provision should not be included.

    c. Requires most profits to be used to reduce the national debt. 

    Utterly meaningless language designed to deceive voters.  Any money applied to the national debt on Monday can be borrowed back on Tuesday.  Congress can not be trusted to have the discipline to apply profit from the sale of these assets to the deficit.  The political pressure to spend those revenues on new projects and handouts will be enormous.  When the time comes, this language will mean nothing.

2. Oversight and Transparency

    a. Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law.

    The Administration’s proposal IS fundamentally inconsistent with existing law.  That’s why new legislation is needed. This clause is meaningless because passing the required legislation would make it inoperable.

    b. Establishes strong oversight board with cease and desist authority.

    A board that permits the Secretary to use his best judgment is superfluous.  A Board that uses cease and desist authority could derail the whole enterprise, resulting in wasting money buying some but not all the toxic securities and not preventing the financial catastrophe we’re warned is imminent.

    c. Requires program transparency and public accountability through regular, detailed reports to Congress disclosing exercise of the Treasury Secretary’s authority. 

    Innocuous provision.  But the reports will become the fuel of political attacks.

    d. Establishes an independent Inspector General to monitor the use of the Treasury Secretary’s authority.

    If all the IG does is “monitor,” then this language is meaningless.  It’s hard to tell what the politicians have in mind with this one.

    e. Requires GAO audits to ensure proper use of funds, appropriate internal controls, and to prevent waste, fraud, and abuse.  

    GAO doesn’t “ensure” proper use of funds.  It conducts audits after the fact and reports its audit findings.  Some government programs have failed GAO audits several years in a row, with no effect. This provision adds nothing of significance.  Apparently, it’s purpose is to mollify voters who oppose the Bailout.

3. Homeownership Preservation

    a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure.

    b. Requires loan modifications for mortgages owned or controlled by the Federal Government.

It makes sense to modify mortgages if a foreclosure is inevitable and the modified mortgage will net more value to the lender, the government, than a foreclosure.  Foreclosures hurt the owners of nearby homes, who aren’t behind on their mortgages by lowering the market value of their properties.

It appears that in the past two years hundreds of thousands of homes have been foreclosed when loan modification that lowered borrowers’ monthly payments could have been a better alternative, for the lenders.  But because the mortgages were included in these incomprehensibly complex securities the Treasury now proposes to buy, there was no individual or corporate entity that could be identified as “The Lender,” with authority to negotiate the modification.

If Treasury has the power to modify loans it could reduce losses to taxpayers.  Consider a hypothetical $200,000 mortgage that the borrower can no longer afford.  In the current Real Estate Market foreclosure is likely to net less than $100,000, after legal expenses, sales commissions, closing costs, local taxes and maintenance.

If the Treasury purchased the loan for it’s current “market value,” in the “frozen” mortgage market, it might pay as little as $50,000 – $75,000.

    Suppose that if the loan balance were reduced to $125,000 or $150,000, the borrower could afford the payments.  It would make sense to modify the loan instead of foreclosing and, after the borrower established a track record of on time payments for a year or two, Treasury could sell the loan for a fat profit.
    c. Directs a percentage of future profits to the Affordable Housing Fund and the Capital Magnet Fund to meet America’s housing needs.

    This is the kind of government intervention in the market that brought us to this crisis.

4. Funding Authority

    a. Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed

    b. final $350 billion is subject to a Congressional joint resolution of disapproval.
    These provisions will be the fuel of future political acrimony.  But there probably is no way to avoid future political acrimony.

1 Comment so far

  1. aaa again on September 26th, 2008

    The politics of this are disgusting. A few factoids:

    1) The entire origin of the current mortgage mess derives from HUD (Housing and Urban Development) efforts during the Clinton Administration to loosen the credit standards of Fannie Mae and Freddie Mac in an attempt to promote low income housing. (See New York Times article titled: “Fannie Mae Eases Credit to Aid Mortgage Lending dated September 30, 1999. In the most telling quote from that article: “From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. “If they fail, the government will have to step up and bail them out the way it stepped up and bailed our the thrift industry.”

    3) Factoid #2: Efforts to reform the system were squashed by Democrats. In 2003, the Bush Administration recommended what the New York Times called “the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis…” The changes were generally opposed along Party lines, with Democrats opposing……Said Representative Barney Frank, Democrat from Massachusetts: “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis, the more people exaggerate these problems, …..the less we will see in terms of affordable housing.”

    This is not complicated. Political correctness lead to loosening of mortgage lending credit standards………..and, presto, you have bad loans. All that came after it: securitization etc was set into motion by these loans. And by the way, the first securitized loan? In 1997 by Bear Stearns. That would be in 1997 when Bill Clinton was in office. And oh, also by the way, with the political contributions Barney Frank, Chris Dodd, and yes, Barack Obama have gotten, do you think they wanted to do anything about this, or cop to reality now???

    This is a Democrat cover up. Will the media give us truth??

    I’m not holding my breath