Who's Responsible for the Financial Meltdown: Fannie and Freddie, or Congress?
Reader Comments
Peter Bailey and his Savings and Loan
Peter Bailey was an independent business man running a business with no government help or interference. He was a free marketer. When his company got in trouble, it was the investors who got them through the crunch, not the taxpayer. There is no comparison to the mortgage crises now going on in the U.S. Nobody forced people to invest in the savings and loan, they freely made their choice to do so. Not so for taxpayers who are now being forced to subsidize people who can't be pay their bills.
Who's Responsible For The Financial Meltdown
The blame can be spread around pretty widely but some of it should accrue to at least two members of Congress: Barney Frank and Chris Dodd. Both these individuals refused to accept the fact that there was insufficient oversight being of the lending industry being conducted. In fact they went so far as to help block legislation that would have created greater oversight of the industry.
Who's Responsible For The Financial Meltdown
The blame can be spread around pretty widely but some of it should accrue to at least two members of Congress: Barney Frank and Chris Dodd. Both these individuals refused to accept the fact that there was insufficient oversight being of the lending industry being conducted. In fact they went so far as to help block legislation that would have created greater oversight of the industry.
the fat cats that stole all the cheese
these fat cats should all be put in a bag and thrown into the river to drown like the poor people they shindled
the fat cats that stole all the cheese
these fat cats should all be put in a bag and thrown into the river to drown like the poor people they shindled
Obama's Leadership (Sarc), Pelosi's Disgrace
That's what I titled this post:
http://www.letfreedomringblog.com/?p=3277
That pair should be pushed as far away from leadership ASAP.
Financial Crisis
HERE IS A QUICK 10 MIN VIDEO THAT IS FACTUAL AND VERY EASY TO UNDERSTAND ABOUT HOW WE GOT IN THIS MESS. IF WE UNDERSTAND THE CAUSE WE WILL UNDERSTAND WHICH MEMBERS OF CONGRESS ARE REALLY ACTING IN OUR BEST INTEREST WITH THIS VOTE..... PLEASE WATCH THIS http://www.youtube.com/watch?v=H5tZc8oH--o
Who's Responsible -- The Buyer or the Seller?
Unfortunately, the referenced articles beg a very big question. The statement in Hasset's article that Fannie Mae and Freddie Mac "fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools", completely ignores the other half of the equation. Someone had to invent and sell those subprime-mortgage pools, and it wasn't Fannie Mae and Freddie Mac. To put all the blame on them is like blaming the buyer of a lemon of a used car on the buyer instead of the unscrupulous used car salesman who characterized the piece of junk as a jewel. Or better yet, blaming the drug addict and exonerating the drug pusher. Was the buyer totally responsible for the junk CDOs? Perhaps "caveat emptor" does apply here to some degree, but plenty of blame can be laid at the feet of Wall Street and the Republicans, whose rash deregulation of the financial industry unleashed man's wanton, ingenious greed and ultimately led to
the astonishing array of exotic financial instruments -- inscrutable even to the world's sharpest financial minds -- which are at the heart of the current financial crisis. Sadly, it rings of the same folly that led to the 1929 Crash and the Great Depression.
High gas prices are the ultimate cause of meltdown
Before we even look at the entities loaning money to home buyers we need to look at what caused the contraction in home prices, because this is the key factor in the meltdown. So what if Bob can't make his mortgage payment, as long as real estate prices are stable, the bank will suffer only a minor loss. The serious problem occurs when real estate prices fall significantly as we have seen, this is where the major losses have come from. With a stable real estate market there would have been no melt down. The meltdown occurred because hundreds of billions of dollars were sucked out the economy as the price of gas went to unprecedented levels. When President Bush took office in 2000 gas was $1.46/gallon. Over the last 8 years the price of gas has climbed continuously, peaking at about $5.50/gallon this summer. And I voted for the guy, at least the first time around. Ok , so gas had a big run up, so what, it's only an extra $3 or $4 a gallon. The problem is for every $.01 (yes that is 1 penny) the price of gas rises, it takes $1 billion out of the economy. That is 1 penny rise in gas = $1 Billion out of economy. So, doing the math, the $3 to $4 run up has resulted in $300 to $400 Billion being sucked out of the economy. We are talking about 1/3 of a Trillion dollars. Is there any wonder why we have suffered such a serious contraction. This has resulted in not just Bob that can't make his mortgage payment it has resulted in mass numbers of homeowners that can't afford to keep their homes and need to sell now. And they are not selling to buy another home, they are selling and will most likely not be buying for a while. All these sellers have put serious downward pressure on the price of real estate. This has been further compounded by the inability of home buyers to get loans to buy homes. The fed has brought down rates significantly, however, if the banks are so stringent that money is just not available as has happened, the pool of buyers is now a fraction of the size and you end up with a disproportionate balance of supply and demand pushing Real Estate prices even lower causing tremendous strain on the banking system hence our meltdown.
The Solution: Stabilize the banking system so it can make loans, infusing money into the economy and stabilizing the real estate market. This is very important or the banks will just have more problems with more and more real estate loans going bad. Second, if the Senate could look into exactly who was buying up the oil futures recently pushing the gas prices significantly higher this would be great. An unprecedented $60 Billion was used to buy oil futures. If this was an interested party, i.e. Exxon, Mobil (you get the idea) there should be harsh penalties. Either way we need to get the price of gas back down to give everyone some relief. So let's sell off some of the "strategic reserves" that are at 100% capacity and do everything we can to get the price of gas back down. It has caused a major world recession.
Who's Responsible for the Financial Meltdown: Fannie and Freddie or Congress
As an ex-mortgage trader, I am very familiar with both housing agencies and the structured securities markets, like CMO's, which are responsible for AIG's portion of the crisis.
I predict they will find no evidence of massive problems or fraud at either agency. What they will find is that loss reserves were inadequate to cover the magnitude of the Housing Market Price Adjustment (referred to as the "bubble bursting").
In fact though, if these agencies or AIG had tried to establish reserves of a size necessary to cover this large of a market adjustment, there would have been massive outcrys by the shareholders, and likely the IRS, who would have accused them of sheltering and under-reporting income by padding their loan loss reserves. Three or four years ago, would anyone have thought them prudent to set up reserves of 30-40% of their portfolio? The mention of it alone would have been indicated as a sign of incompetence or potential fraud.
Models for Structured Securities cash flows, like CMO's, were designed, tested and re-tested with the most syringent computer modeling, audited for accuracy, and deemed correct, the main flaw being that no one anticipated the likelihood of a price drop of this size and severity, and AIG was one of the few insurance companies with a high enough rating to provide adequate security to achieve a AAA rating.
I have a little trouble understanding why this "Bailout Plan" is not modeled after the Resolution Trust Corp, which was created during the S & L crises of the 80's, to essentially become the holder of the problem assets of the failed institutions of that era. Many of those assets ultimately provided value back to the RTC, and did not become 100% losses, as many of them were strictly valuation problems - institutions could not "Mark-to-Market" the securities without taking fatal hits to their capital position.
The real problem today is the worldwide crisis of confidence in the credit markets, and the interconnection of the worlds credit and financial markets. The situation needs to be addressed immediately, to restore confidence and liquidity. It is not only our economy and financial system, but the worldwide system breaking down. Failure to act promptly enough will cause credit markets to virtually shut down, inability to finance housing, auto, or any major consumer purchases normally done through credit, and hugh resulting economic recession and job losses.
While I have to agree that companies taking advantage of a "Bailout Facility", once established, should have threshholds of "restitution" (such as providing common stock to the government for the ability to offset certain percentages or amounts of assets), we should remember that many of these assets too have some ultimate value, which will be recouped. Funding it is cash flow - not permanent losses. In a market with no liquidity, like now, current values cannot be established. But neglect causing a meltdown would be criminally stupid.
