Big Bailout: Government To Fix The Crisis Government Caused

Do you want to help fix the mess in Washington?  Earn your  masters in public administration and take a personal role in getting the government and the country back on track.

Now we are told the Government will “solve the problem” by purchasing all the bad mortgage-backed securities held by Wall Street institutions.  Today, the price tag is set at $700 Billion.  But Government’s record in estimating such costs leads to the expectation of an…um… upward adjustment in the coming months.

This scheme is somewhat similar to the structure of the Resolution Trust Corporation, a government agency created in the late eighties to acquire and then sell the assets of failed savings and loan institutions, another crisis caused largely by government.  Much of the cost of the Savings and Loan debacle was recovered in the early nineties when those assets were sold to the public.  In the same way some, or perhaps even most of today’s bail out cost may eventually be recovered.

What led to this crisis?

It was not what Obama and Co. want you to believe, too little regulation of a too-free market.  While politicians love to insulate themselves from accountability with the tired old slogan “there’s plenty of blame to go around” government, whose immense power has been hijacked to serve the agendas of well organized political factions and pressure groups, is at the center of the blame orbit.

The real problem is a combination of too much regulation, and gross malfeasance within two entities partially owned by government, managed by government appointees, supervised by a special government regulatory agency, and overseen by the Senate and House of Representatives.  Fannie Mae and Freddie Mac, are not the “free market.” They are creatures of government.

Yesterday, John McCain did a pretty good job of identifying and summarizing government’s starring role in the spectacle that ended in the crisis that government will now attempt to resolve, at enormous expense to taxpayers:

The financial crisis we’re living through today started with the corruption and manipulation of our home mortgage system. At the center of the problem were the lobbyists, politicians, and bureaucrats who succeeded in persuading Congress and the administration to ignore the festering problems at Fannie Mae and Freddie Mac.  These quasi-public corporations led our housing system down a path where quick profit was placed before sound finance.

Using money and influence they prevented reforms that would have curbed their power and limited their ability to damage our economy.  and now, as ever, the American taxpayers are left to pay the price for Washington’s failure.

Through a vast network of brokers and intermediaries Fannie and Freddie made deals with millions of borrowers that an objective review of their individual finances would have indicated they could not afford.  Fannie and Freddie then packaged these shakey loans toghether with sound loans into bonds and sold them to the financial institutions that are now ailing and making headlines.

As too many of the individual mortgages within these bond packages defaulted, and real estate values declined, the market value of the bonds dropped dramatically.  Currently, there are virtually no buyers for these mortgage bonds because it isn’t possible for a potential buyer to assess the quality of all the underlying mortgages.  Thus, it could be said they have little or no market value.

Compounding the problem was an accounting rule imposed by government regulators in the wake of the last “crisis” the crash of 2000 – 2002 that politicians blamed on “wall street crooks like Enron.” Nicknamed “mark to market,” this rule required financial institutions that own the mortgage bonds to – on paper – “mark down” the value of the bonds to a theoretical market value, much lower than would have been justified by the actual deterioration of the underlying individual mortgages.

To understand mark-to-market, consider a hypothetical package of mortgages.  In the worst case scenario anyone anticipates, a third of the mortgages have or will end up in foreclosure, and selling the foreclosed homes will yield a third of what was owed against them, leaving a smaller package of “good” loans which, over the long term, will yield 70% – 80% of original, purported of all the loans in the package.  But due to fear and uncertainty in the market, nobody is willing to purchase those bonds for 70% of their face value.  Recent offers have been in the 25% to 35% range.

Following the “mark to market” rule, holders of these bonds have had to mark them down several times over the past year, to a level way below what they will turn out to be worth, long term. Other government regulations require them to replace the lost value with other assets.  If they cannot, they are insolvent. this process led directly to firms like Lehman Brothers and Bear Stearns becoming insolvent.

So now we taxpayers have no choice but to hope the appointed wizards of Washington, Treasury Secretary Paulson and Federal Reserve Chairman Bernanke have properly assessed this crisis, and really do know what they’re doing.  We can only hope they’re right when they warn that the cost of not implementing their massive bail-out would be catastrophic losses and insolvencies throughout the financial sector, resulting in massive economic misery, afflicting almost all Americans.

As usual, here comes government, under red light and siren, skidding up to the curb to rescue us poor saps from an impending calamity caused by government.  And as usual, the accountable politicians are talking furiously, hoping we’ll believe they aren’t to blame.

In our next post we’ll compare the records of John McCain and Barack Obama to determine who is more likely to make the future better than the present.

2 Comments so far

  1. […] A few days later, Matt Lauer was interviewing Barack Obama about his plan to make hard-working taxpayers responsible for bailing out AIG, an insurance company that failed in large part due to the result of government intervention. […]

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