Bailout Nation: Freddie, Fannie, and more

[editor]

Thank goodness the markets are closed on Monday. A nice three-day weekend may help cure the headache.

[Subdude]

Will Morgan Stanley Survive the Weekend?

http://blogs.abcnews.com/moneybeat/2008/10...morgan-sta.html

There are stories out there now that Morgan Stanley and Goldman Sachs will be nationalized this weekend.

That's exactly something I was starting to think -- that things might smooth out after the election uncertainty has passed. The markets hate uncertainty. Maybe if Obama or McCain would pull ahead by 20 points in the polls it would be helpful.

This is really an international problem though, so I'm not sure uncertainty about the American election is much of a factor.

[editor]

For a long time Europe has been trying to pretend this isn't their problem. Now they're starting to wake up to it. Asia will probably be next.

[Subdude]

For a long time Europe has been trying to pretend this isn't their problem. Now they're starting to wake up to it. Asia will probably be next.

Ain't that the truth.

The rest of the world acted like all this was somehow an American problem, but when things go bad everyone rushes off to switch their investments into what? American Treasuries.

[N Judah]

There are stories out there now that Morgan Stanley and Goldman Sachs will be nationalized this weekend.

I have heard Morgan Stanley is on the ropes. If it just leaves Goldman, that would be pretty interesting. Paulson and Kashkari are both former Goldman execs so there could be a conflict of interest.

This topic has been mentioned before -- within the context of collateralized mortgage securities, no less:

http://www.nytimes.com/2007/12/02/business/02every.html

igniting a very, very suspicious firestorm:

http://www.portfolio.com/views/blogs/marke...h-the-aftermath

[Subdude]

Perhaps I was dropped on my head as a child, but I'm actually fairly optimistic about the upcoming week. Surely the odds of another week like the last are small. Stock prices aren't just going to fall to zero, and some people are going to be sniffing out buying possibilities. A lot of the government rescue plans are starting to come together with more or less a common framework, so the panic might start to fall off.

[RedScare]

Perhaps I was dropped on my head as a child, but I'm actually fairly optimistic about the upcoming week. Surely the odds of another week like the last are small. Stock prices aren't just going to fall to zero, and some people are going to be sniffing out buying possibilities. A lot of the government rescue plans are starting to come together with more or less a common framework, so the panic might start to fall off.

This reminds me of the optimistic quote of the week, heard on CNBC. A CNBC host, commenting on a 600 point drop that took the Dow to about 8500, asked how much longer this freefall could go on. The expert replied, 'We won't have more than 14 days like this".

[Mark F. Barnes]

With all that's been going on, this three day weekend has been a blessing. Read Obama's Book,"Dreams of my Father". Got it for $10.17 from Amazon last week. Good read, well written. Learned a few things about the man I didn't know. But I have spent much of the past two days dwelling on this economic free fall we've been in, because I've lost my share amount, upwards of $600K, so it hits home with me pretty good.

Just curious with all this finger pointing and accusations of who did what, why Andrew Cuomo got a pass on all of this. Haven't heard his name come up until I did a little digging. Some interesting stuff has his hands all over it. In his press release he made live on every network on 4-6-98, he spoke directly regarding this very issue. Housing and Urban Development Secretary to slick Willie. Clinton's HUD secretary made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. Among those decisions were changes that let Fannie and Freddie get into subprime loan markets in a big way. (here's some very interesting reading LINK) Other rule changes gave Fannie and Freddie extraordinary leverage, allowing them to hold just 2.5% of capital to back their investments, vs. 10% for banks. Why are they getting such and easy road? Hmmm perhaps Barney Frank, Chris Dodd and company are getting paid? Perhaps, perhaps not. Let us look into this a little further. Since Fannie and Freddie could borrow at lower rates than regular banks due to implicit government guarantees for their debt, these government-sponsored enterprises boomed like they were on fire. Hell with those kind of incentives in place, all the banks poured billions of dollars of loans into poor communities, often no documentation and no income loans that required no money down and no verification of income. WTF? Why in the world would you do that, unless you knew that they would be bought up by Fannie and Freddie, whose got their get out of jail free cards sitting in congress. In fact sitting in the Chair of the House Financial Services Committee. Helps to have friends, it's better than an American Express, don't leave home or give a loan without it. Remember these words by Barney Frank, (and please don't ask to repost the video, everyone has seen it a thousand times in the past few weeks.) "These two entities... are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." These words were in direct opposition, in 2003,to the Bush administration's proposals for creating a new agency to oversee Fannie Mae and Freddie Mac. This is a key point in time, five years prior to what we have today. Even in July of 2008 Frank said "Fannie and Freddy were essentially sound and in no danger of collapse, and promised action to improve their prospects." Looking pretty good there Barney, promises, promises. If you can Ignore all of O'Reilly's ranting and antics long enough to listen to the BS Frank spews when he's directly confronted, he says now that, "I've always felt two things about Fannie Mae and Freddie Mac, that they had an important role to play, but that the regulations should be improved." Hmmm not what you said in 2003. Then he says, "The fact is, it was 1994 that we passed a bill to tell the Fed to stop the subprime lending. We tried to get them to do it." , what the hell was he talking about there, so I had to do some looking. The Bill he's talking about was the Homeowners Equity Protection Act. It was supposed to empower the Federal Reserve to set the rules on mortgages. Problem was, the Clinton administration had its own ideas of what the rules should be. This laid the ground work for the Clinton revisions of The Community Reinvestment Act, passed in 77 under Jimmy Carter, see how all of this comes a vicious circle.

That's too far back. Subprime mortgages were just a blip a few years ago (2 percent in 2000). I'm sure ACORN's people were waiting in the wings for 30 years to take advantage of this.

Oh but not too fast there Westguy. The CRA '77 just laid the foundation. It laid dormant until a few tweaks were made to make it a little easier to use. You see, in the '70s and '80s, banks could get away with showing that they were trying to comply with the CRA by advertising in minority newspapers and having representatives sit on the boards of local minority organizational groups. In other words, they were being rated on the effort they made in trying to promote the CRA and not on the results they actually achieved. Back then creditworthiness still mattered. And don't get me wrong, though the CRA was well-intended I'm sure, the problem was that Congress was about to change hands in the mid 90's, from the Democrats to the Republicans. Rather than submit a bunch of legislation that the GOP-led Congress was almost sure to reject, Clinton ordered Robert Rubin's Treasury Department to rewrite the rules of the CRA in 1995. The rewrite made getting a satisfactory CRA rating harder. At first glance it appears to be more regulation, when in fact it forces the banks to actually deregulate to get their approval rating. Banks were given strict new numerical quotas and measures for the level of "diversity" in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another. Loans started being made on the basis of race, and often little else. In steps ACORN to use this as the point in fact of putting pressure on banks to lowering the credit threshold of loans even lower. Comply or else type of "direct action", and having the correct connections in Washington, puts pressure on from the administration (legislative) side. Deny it all you want, but it's right there in front of you. Everybody wants to blame Bush first. Well just being President, doesn't make you guilty of everything that ever happens wrong in the government. By 2007, Fannie and Freddie owned or guaranteed nearly half of the $12 trillion U.S. mortgage market, think about how staggering a number that is and how much exposure there is to failure. I've yet to find the exact study yet, but somewhere there's a Harvard study that shows that minorities made up 49% of the 12.5 million new homeowners. Just google the phrase, and you get a million hits, everyone referring to it, but no direct link yet. If I had it I'd post it. Want to know what happen in the past two months there is a big part of it. Just plain old exposure to liability of failure. Worse still was all the cronyism with in Fannie and Freddie. When Clinton left office Fannie and Freddie became home to out-of-work politicians, mostly Clinton Democrats some directly from his cabinet. An quick google of their top officials shows a roughly 2-to-1 dominance of Democrats over Republicans. Then there were the campaign donations, and we've all seen the list. From 1989 to 2008, some 384 politicians got their tip jars filled by Fannie and Freddie. There has been so much damn who shot Jim finger pointing and back biting back and forth, that the fact gets spread around so much, it takes time to sit back and piece this whole thing together to get a the root of the problem. Not to dismiss one S.O.B. that took money from Fannie and Freddie, for favorable approaches to how they do business, Democrat, Republican, whatever. The whole bunch is guilty as hell. But to dismiss this all as just a Bush Administration failure is absolute crap. This thing goes deep into the hollows of our government. And if you look at all those donations from Fannie and Freddie, not one person has bothered to mention one name that's no where on any list. George W. Bush. Why is that? Is it the fact that he has not received on cent from the banking giant? Or was he purposely omitted for some reason. You think with all this blaming going on, some blogger or some so called investigated reporter, would have a money trail linked to GWB. Haven't seen it yet. I know he's not running for election, so he's not on point for attacks, but everyone seems to blame Bush, but can't really say exactly why that is, other than being President. It can be shown where he tried to address this very issue in 2003, only to be argued down by Frank and company. But how is it he's directly responsible? Oh yeah and we also have Phil Graham being hung in public in another thread, for this issue. But no callings for Frank, Dodd, or any of the other's involved.

From the Great Democratic God Himself, the cornerstone of the Party, with Teddy incapacitated.

Clinton said he has two regrets: First, not pursuing more aggressively an aborted attempt to provide stricter oversight of Fannie Mae and Freddie Mac. According to Clinton, the move was stymied by Democratic and Republican members of Congress and by mayors, who saw the lending giants as "the New Jerusalem" and "pure" because of their role in increasing home-ownership to historic levels. But "it just didn't feel good," Clinton said of Fannie and Freddie's outsized political influence.

Clinton also said he should have subjected derivative trading to more public oversight. "We would have failed, but at least we could've sounded the alarm."

One policy Clinton said he doesn't regret is his repeal of the Glass-Steagall Act in 1999, which, for the first time since the Depression, allowed commercial banks to engage in investment banking activities. Clinton said the commercial banks were an important moderating force on the risk-taking of the big investment firms that collapsed this week. "In the case of the current crisis, I believe the bill I signed allowed Bank of America to take over Merrill Lynch," he said.

http://economistsview.typepad.com/economis...clinton-re.html

Now to those who want Phil Graham hung in front of the Courthouse, think about this. If Glass-Steagall were still law, a troubled Bear Stearns would not have been allowed to merge with JPMorgan and would have either failed or we'd bail them out. Chase and WAMU, same story. Also, Goldman Sachs and Morgan Stanley would not have been allowed to become commercial bank holding companies (that actually could be a double edged sword). The repeal of Glass-Steagall has been in some ways a savior, not a villain. Just a thought.....

[RedScare]

Why Mark's continued blame of minorities for this crisis is bull____.

[westguy]

The CRA '77 just laid the foundation.

Subprimes were smaller and manageable. Now bring them into a brand new unregulated market that has nothing to do with CRA...

From Red's link:

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

If you want us to blame the Bush administration for this, then I nominate Alphonso Jackson from HUD. They're the ones who decided that high-risk loans could count towards affordable lending goals. (link)

[Mark F. Barnes]

Why Mark's continued blame of minorities for this crisis is bull____.

Red what makes you think that I blame minorities for the crisis? I do believed they were a tool used in the scandal to fill the pockets of the heads of these failed banks we are bailing out. The only people that aren't losing their asses in this entire deal are those very heads and quite a few politicians (on both sides mind you). You are looking to the race card too quickly my friend, but think of it as I am trying to explain to you. The CRA was 100% used to favor minorities, it's in the actual wording of the Bill. That doesn't make it the minorities fault. Put the Rum and Coke down for a minute, and pay attention. If you don't think that the higher ups didn't take full advantage of minorities to get thier agendas done, I really need for you to explain to me how.

Like I said before the CRA was written in good intentions. Your boy Obama has said that very thing in interview, but it has been so bastardized, that it's original intent is no longer even in sight. Even your own editorial you posted mention the sub-prime loans were used for cover.

Investment banks created a demand for subprime loans because they saw it as a new asset class that they could dominate. They made subprime loans for the same reason they made other loans: They could get paid for making the loans, for turning them into securities, and for trading them

[RedScare]

Whatever works for you, Mark. I am quite sure that there is a receptive audience for your argument. However, I am not among them. I know where the blame belongs for this crisis.

I have great fear for the country right now. Not only is a presidential candidate whipping crowds with violent rhetoric, now my moderate friends are going there. I have listened to no less than 3 people become apopleptic this weekend trying to blame Obama, minorities, Democrats...ANYONE but the people they have trusted and supported for the last 28 years...for the implosion of that great American creation, unbridled deregulated free market capitalism. I fear that there will be gut-wrenching adjustments and some violent backlash before Americans come to grips with the fact that the excesses of the last 28 years must be paid by someone, and their free market heroes will not be writing the check.

[Mark F. Barnes]

Perhaps there is or perhaps there isn't Red, but the more I look at it, the more facets I find. And it's not along party lines. It is along financial and social status lines, neither of which you or I fall into. Have a couple of million dollars in the bank and owning some stock doesn't even get you a down payment on a membership card to that group.

Just like your Article said:

Look: There was a culture of stupid, reckless lending, of which Fannie Mae and Freddie Mac and the subprime lenders were an integral part. But the dumb-lending virus originated in Greenwich, Conn., midtown Manhattan, and Southern California, not Eastchester, Brownsville, and Washington, D.C.

My daughters new Father-in-law may well be in the club. I hate to think of it, but he may well be. He's pretty far up the food chain at Morgan Stanley.

[RedScare]

http://www.msnbc.msn.com/id/27121535/

Article from Business Week. It seems the investment banks found it easier to simply own Washington DC, and simply let the feds do their leg breaking for them. We'll find out after the elctions next month whether ownership of DC has changed hands. I am not optimistic. Perhaps after the 2010 elections, but not next month.

EDIT: Where were all of these articles BEFORE the meltdown?

[TheNiche]

Whatever works for you, Mark. I am quite sure that there is a receptive audience for your argument. However, I am not among them. I know where the blame belongs for this crisis.

I have great fear for the country right now. Not only is a presidential candidate whipping crowds with violent rhetoric, now my moderate friends are going there. I have listened to no less than 3 people become apopleptic this weekend trying to blame Obama, minorities, Democrats...ANYONE but the people they have trusted and supported for the last 28 years...for the implosion of that great American creation, unbridled deregulated free market capitalism. I fear that there will be gut-wrenching adjustments and some violent backlash before Americans come to grips with the fact that the excesses of the last 28 years must be paid by someone, and their free market heroes will not be writing the check.

I have great fear for the country myself, but it is rooted in the fear of partisan extremism altogether. ...on both sides.

On the one hand, an economy devoid of regulation is anarchistic. It cannot be developed because promises are not binding; nobody can be trusted; there is little recourse when agreements are not held. Our legal system is our comparative advantage over other nations. When McCain says that the fundemantals of our economy are strong, he's referring to those things about our country that make us different from Sub-Saharan Africa. That is what is fundamental. In that context a banking crisis is only a footnote in the grand scheme of things. But even the most rabid Republicans or Libertarians must conceed that the less government is better mantra has its limits.

On the other hand, even intelligent, well-educated people often lack long-term perspective when faced with short-term crisis. And such people do not even comprise the majority of voters. We are no Plato's Republic, and even if we were--thankfully making the likes of Sarah Palin obsolete--I sincerely doubt that it would offset the risk of desperate overreaction. Watching Bush, Bernanke, Paulson, Pelosi, etc. at work, I detect that this is already occurring. I detect that they are all acting and negotiating such action as will have many unforseen consequences, be they good, bad, or fugly. And as the situation looks increasingly bleak (during an election cycle no less), it seems like they only administer more exotic pharmacopia to a patient--fed a diet of pork and sugar--whose system is perhaps not as desperately ill as it may appear, but whose blood is already a teeming cocktail of bailout packages--whose mind is apprehensive, concerned as much as for the illness as for the cure(s). All this, and the hospital has some big HR problems with lots of turnover.

My gravest concern is not one rooted in partisanship, quite frankly. We're short on leaders in either the legislative or executive branches of government that are able to act with a steady hand. Financial markets do not have the capacity to predict what will be the outcome of such a confused and volatile political environment. They can neither see whether government or the Fed will ratchet up its intervention, what the cutoff will be, when that will be, or whether perhaps we are destined for crippling gridlock. I am concerned that faced with political gridlock but a panicked population that demands action, we may witness contrived legislation chock full of pork projects and without substance. Government spending may spiral out of control (in a way as surpasses Republican rhetoric to that effect), and perhaps regulations will be passed that dramatically change the rules with far-reaching consequences. We may very well witness the dissolution or realignment of political parties (seems like the action and rhetoric lately favors a populist Republican party and a more libertarian Democrat Party, but it could go the other way too).

Red, you and others seem to be deeply concerned with placing blame. I would invite you to look around. Is there a politician or a party or a branch of government that is without blame? Is there any element of the financial or homebuilding industries that are without blame? Are the consumers without blame? It is all too easy to reckon that if only one link in a chain had not been so strong, then the chain would've been broken, and that therefore it is that link (take your pick) that is to blame. I would submit to you that assigning blame is irresponsible. I believe that it is a scapegoating tactic that is being utilized by special interests to influence diverse constituencies...and scapegoating has more than a few undesireable historical precedents associated with it. Personally, I want a sober review of how the system is set up and what led to this. I want a realistic, straightforward, no-frills plan (perhaps agreed to multi-nationally) that is implemented to the exclusion of other plans for three to six months at a time. And coming out of all this, I want to see some new regulation, but at the same time, I fear crippling regulation...basically I'm seeking a feasible optimal. And while perhaps a month ago I perceived that there may be hope for split control of congress and the executive branch, hence gridlock, leading to many infeasible or perhaps more moderate proposals (as opposed to sweeping overregulation)...I'm now almost as concerned that split control could be even worse because the American people are demanding action and because we might end up with more negotiated bills such as H.R. 1424 which are a confused cocktail of such things that might have the slightest bit of promise but are also a dangerous policy cocktail destined to incite the next crisis.

These are truely confusing times and like yourself and no doubt the majority of people, I am deeply concerned. But I think that the cause for concern goes beyond the traditional talking points or party affiliations, beyond archetypes of free marketeers or socialist radicals that promote fundamentalism over realism; we have a broken system. And I want to seek a politically-feasible policy optimum, but I don't know how.

[RedScare]

I agree with most of what you say, Niche. I especially agree that there are precious few leaders in Washington. As for blame, you should read my posts a bit closer. I spread the blame all around. I blame the ignorant borrower, the greedy lender and the legislators. I blame an entire mindset that we could have it all with no downside. I have attacked those posts that attempt to blame one small group while letting others slide. We all caused this, either by being greedy and selfish ourselves, or by voting for enabling politicians. You will not find my posts defending one party's elected officials over another, as both sides were bought and paid for.

What you may be quick to call blame casting is actually a call to all to recognize that no one has been looking out for our interest. While the political parties have successfully employed a divide and conquer strategy against the voters, the voters were too busy mortgaging their futures to notice. As we watch our 401k's vanish before our eyes, perhaps some will recognize this. I don't expect it to happen immediately. Old habits die hard. But, perhaps eventually.

[Mark F. Barnes]

Weekend futures trading gave us a much need kick start this morning, but with the Treasuries markets closed for the holidays, volumes are down slightly. I am sure all the rumors about banking being propted up soon by part of this bailout funding, aren't hurting either. Aisian markets came on strong, which always helps. Still a banking holiday keeps it low stress today.

[editor]

And Japan's closed today, too, which helps a little.

[Subdude]

Markets worldwide today jumped up. What'd I tell you? A little confidence!

[Mark F. Barnes]

Oh baby I'd say, breathing much better today.............

[TJones]

OK, Dow up 930 today, probably be another 200 to 300 tomorrow. Then perhaps a steady trend of climbing maybe 100 a day for the next week, at least this is what I am hoping for. That will get us back on track. Morgan Stanley gets infused by $9B of Japanese money. Perhaps others will take their initiative ?

[Mark F. Barnes]

Even Yahoo tried to come around today. Volumes were above average also (396.88M) really good trading today. People just took a deep breath and started buying again.

[BryanS]

Markets worldwide today jumped up. What'd I tell you? A little confidence!

I think (over) "confidence" is a part of what got us all into this mess. We need transparency. We need to see the real balance sheets of all traded companies. We need to get rid of all these fancy derivatives that are based on nothing. We're just building more castles into the air... It's like giving a drunken person who careens off into a ditch more to drink, without suspending their license, making them go to AA first...

[RedScare]

Even Yahoo tried to come around today. Volumes were above average also (396.88M) really good trading today. People just took a deep breath and started buying again.

I think the margin calls slowed up. That's what killed the oil stocks last week. Once margin calls eased, eliminating forced sales, bargain hunters could come in. This is still only an eye of the storm, though. Stocks will get hit several more times before they calm down.

[crunchtastic]

This is still only an eye of the storm, though.

hunker down!

Sorry. Just couldn't resist.

[RedScare]

hunker down!

Sorry. Just couldn't resist.

I miss Ike.

[Mark F. Barnes]

I miss Ike.

So does Anna Mae Bullock, but she just doesn't talk about it.

[sifuwong]

I see ups and downs till end of the year. Also, people selling during this time for holiday and revamping their portfolio positions regarding tax purposes.

[Subdude]

Government spending may spiral out of control

"May" spin out of control? Good grief, the liabilities the US government has taken on in the last month would be more than enough to pay for two Iraq wars.

Stocks will get hit several more times before they calm down.

I wasn't saying that everything would be beer and skittles from now on. The market may have a while to go, but it takes a day like yesterday to stop the panic, and that is what needed to happen first.

[westguy]

"May" spin out of control? Good grief, the liabilities the US government has taken on in the last month would be more than enough to pay for two Iraq wars.

That would be two trillion dollars. Has it been that much already?