Uncle Sam Nears a Massive Banking, Housing Bailout
Of course, the irony of today's Federal Reserve bailout of investment bank Bear Stearns is that the firm has a reputation as being among the most free-market loving on Wall Street—and that's saying something about a company located smack in the middle in America's financial capital. But just as there are no atheists in foxholes, there are no libertarians during financial crises, at least not if it's their dough at stake. And while there are plenty of economists out there who are advocating a hands-off approach to the credit crisis and housing implosion—echoing Andrew Mellon's infamous advocacy of "liquidate...liquidate...liquidate"—they will be disappointed. Uncle Sam will probably continue to intervene during this financial turmoil.
And not just the Fed. More and more, it looks as though Congress, followed by a reluctant White House, will move ever more boldly to stop the hemorrhaging in housing and unfreeze the credit markets. Richard Bove, banking analyst at Punk Ziegel, says in a note this morning that it's "more certain than ever" that there will be a housing bailout to stop the increasing rate of foreclosures and the continuing drop in home prices. And political analyst Alec Phillips of Goldman Sachs says that he sees "a high likelihood that some type of housing measure is enacted this year." Most of the legislative energy seems to be swirling around a plan put forward by Democratic Rep. Barney Frank. The plan, as outlined by Bove:
• FHA provides up to $300 billion in new guarantees to help refinance at-risk borrowers into viable mortgages.
• The terms of the first mortgage are set at a level that the borrower can afford.
• A second mortgage is put in place, which pays off on sale of the house and allows the government to recover the losses absorbed by creating the first mortgage at below market rates.
• The existing lender agrees to accept a reduced payment, which could be substantial since the new loan is based on the house's current appraised value.
• Gets the existing lender free of all obligations and exposure to the borrower.
• Refinance between 1 and 2 million homes.
• Provide funds to refurbish empty homes and put them back on the market.
Phillips thinks that while President Bush might prefer a more free-market approach, the White House is "not likely to come out strongly against the proposal initially. Given our expectation for Democratic gains in the upcoming election, such proposals are likely to become law by mid-2009 in the event that they fail to gain support this year. For this reason, Republicans may seek a compromise in 2008."
Indeed, President Bush has almost gone out of his way not to rule out a bailout. Nor did he do so in a speech to the Economic Club of New York this morning. And in an interview on CNBC today with Lawrence Kudlow, the president basically said that in extraordinary situations, extraordinary action is required.
Now, don't expect a financial miracle or a relaunch of the housing boom here. Instead, a bailout would give clarity to investors by shifting the price and foreclosure risk of the tumbling housing market to the government and taxpayers. Bove, who has been advocating a plan like Frank's, thinks passage would be great news for homeowners and the credit markets:
This program will work. It makes sense. It penalizes the bad lenders. It allows the householder to stay in the home and forces him/her to pay the government at the time of sale for its initial losses. It allows the holders of structured financial securities to be paid off and reestablishes the credibility of these securities. It cleans away the financial garbage that is now depressing the markets. It provides a solution to the empty housing dilemma. Plus, and this is important, it creates a format that can be used by the private sector to rid itself of the troubled loans without government getting involved. Big banks can do this without the government's aid. This idea is as brilliant as the Fed's securities swap idea. Clearly I am biased in reviewing this proposal because it is one that I have been advocating for months in almost the exact same format. If this gets through Congress the financial crisis is definitely over.
And there are other ideas floating around as well. Nobel laureate and financier Myron Scholes wants the government to inject capital into the banking system by investing in debt and stock. International Monetary Fund official John Lipsky, a Wall Street veteran, also thinks the government may need to put taxpayer money directly into banks. And Vincent Reinhart, the Fed's former chief monetary economist, told Bloomberg that the Fed is inching closer to buying up those beaten-down mortgage-backed securities.
Are any of these suggestions likely to happen? Today's move by the Fed, using a little-used Depression-era provision of the Federal Reserve Act, makes previously unlikely actions seem far more possible.
Tags: economy | Federal Reserve | housing market | banking
Tools: 
Share
|
| Comments (33)
Reader Comments
Sure, bail out the institutions, we need them to work. But penalize the people who made bad decisions and made huge salaries. Take away their big homes, their summer homes, their enormous savings. Let them send their kids to public schools like everybody else. Why should they live like princes while we pay for their mistakes? I live in NYC and see how these people live.
Quite an outrage
"The terms of the first mortgage are set at a level that the borrower can afford."
---
Way to reward the irresponsible morons who bought homes they could not afford, while keeping housing prices inflated to the stratosphere so responsible people who did not speculate on "perpetual appreciation" are forced to remain on the sidelines, priced out of the housing market.
The market needs a massive cleansing, home prices need to return to their historic relationship with incomes.
The housing "crisis" was that people were 'forced' to pay 6X and 8X incomes for shelter. Let the housing correction (as opposed to a "crisis") continue unabated, all these gimmicks and government meddling only make the problem worse.
Not acceptable
All of this is unnecessary. Free market capitalism already provides a method of cleaning up these kinds of messes. It is called liquidation. It works in any other industry. Why should the finance industry be exempt?
I think anyone even suggesting that tax payers' money should be used to bail these people out should simply be dragged out into the street, drenched in gasoline, and burned alive on national television.
More of what you subsidize
You always get more of what you subsidize. From the S&L bailout to now, our society has increasingly signaled there is no penalties for taking wild risks, skirting or even crossing the edge of legal play. As "gasu" said, some means of salvaging institutions has to be found, but heads need to roll in a number of sectors before people learn you don't just play fast and loose then hide behind Aunt Sam's skirts when the clearly forseeable consequences emerge. www.jemisonthorsby.blogspot.com
The problem is that the existing lender probably doesn't own mortgages that it can restructure and subsequently write down. It owns a claim on the cash flow of a tranche of a basket of mortgages. Other lenders own claims on other tranches of the same basket of mortgages. Apart from the the other problems this creates, the lenders in each tranche have competeing interests in any restructuring. Good concept, won't work
Military Get Screwed Again
This bailout needs to have extensive curbs. All bailouts should be for primary residences only. All bailouts should be tied to a square footage/resident limit. All bailouts should be limited to people with homes that had purchase prices that did not exceed a certain percentage (150%?, 200%?) of average home prices in the area over the last few years.
People like me, a soldier that has to purchase a home wherever the Army send me, no matter what the current market pressures are, and needs to sell the home whenever the Army tells me to go someplace new, no matter what may be depressing the market, gets screwed by this bailout. I've had to buy two homes now over the last three years that were wildly inflated because of the retards that are now screaming for help. I will need to sell my current home in another year, at whatever price I can get. I've been paying my mortgage, so I don't get any help here, only pain.
Any senator or representative that votes for this bullsh*t can count on never getting my vote.
Curious
I'm a private trader, and been doing it a long time. I remember a few years ago when I started to hear about these mortgages and thought too myself these things are gonna crack and blowup.
A fellow I know in california even closed his business after 30 some years
and became a Mortgage broker. I thought he was a fool it was going to be a disaster.
How can banks, brokers who spend hundreds of millions on research hire the best minds in the world not see this comming.
Yet I did in my little office at home.
Remember last December
Remember that these same investment bankers who are now crying the loudest for a government (that is, you and I) bailout are the same pricks who made damn sure of receiving their bonuses back in December, right before all of this came crashing down. Do remember that last Dec's Wall Street bonuses were among the largest on record.
Thanks Barney!
I did it right and now I need to pay for those that did it wrong. I love it. I just love it. We're already wasting $200 billion for a "fiscal stimulus" now we are going to spend more to protect fat cats who screwed up and dumb people who thought they could afford a $250K house for $1000 per month.
We need to let it run it's course. Take the pain and go forward. Otherwise we are just going to drag this out. I'm getting visions of the 70's all over again.
Sub Prime Loans 2005-2006
Ordinarily I would say to hell with all of the suckers who took out bad sub prime loans. In this instance though, the lenders intentionally obscured the readjustment aspect of these loans. People who thought they were getting reasonable loans were tricked into signing for scam loans. The lenders sold these loans knowing full well that these loans would bankrupt most of the people they sold them to. This was not capitalism at play, this was a criminal scam being plaid out on unsophisticated people. And for those who say the borrowers should have read their loan agreements before signing, I say bull. The loan agreements were often the thickness of the Manhattan phone book. They were intentionally expanded in size to further obscure the true nature of these loans. The sub prime loan industry in 2005-2006 were nothing short of Nigerian con men out to make a fast, sleazy buck.
A solution suggests itself
The housing bubble depended on all of the mortgage holders fulfilling their obligations. If any one mortgage holder refused to pay, he would face the full penalty of the law. But apparently enough of them defaulted all at once to render the government powerless to do anything about any of them.
The bailout plan depends on taxpayers fulfilling their obligations....
Attach some strings
In general I think it is a terrible idea for the Feds to bail these guys out. But if they are going to do it, at least some heads should roll as a condition of the bailout. No golden parachutes, just a simple pink slip and a guard to lead them out of the building.
But no doubt these weasels will keep their cushy jobs despite their terrible job performance.
Let's all stop paying..
About 5% of mortgage payments are late these days. What if it was 15% for a couple months? What if us responsible borrowers went "on strike," or just pledged to in large enough numbers. Could we put a stop to this unfair bailout?
Where's my bailout?
Hey, I invested money in real estate funds and now my retirement fund value has gone down. Nobody told me real estate values wouldn't expand indefinitely! Where's my federal bailout?
"I think anyone even suggesting that tax payers' money should be used to bail these people out should simply be dragged out into the street, drenched in gasoline, and burned alive on national television."
- - - -
Given the gas tax proposals currently being considered, if you're serious about this course of action, you need to do it soon. Wait too long and you'll just look silly stacking dried corn cobs up against the person and trying to light them.
Hooray!
This is exactly what people like us need. Bail us out! Send us more money!
(Hint: www.fxnetworks.com/shows/originals/theriches/)
Homeowners screwed
The culpirt is the Fed for enabling this assest bubble with cheap money. Home builders, lenders, realitors, and speculators engaged in a virtuous cycle of profits from 2001-2007 until the bubble burst. I don't pity the big players - they made a lot of easy money of the first half of this decade.
It was so easy that the market mispriced risk. The bag holders were the home owners who had to live the bubble because you don't have to own tech stocks but you must live somewhere.
Dittos
...to Kurt9 of WA. This is an example of decades of teaching our toddlers that there are no consequences, and all mistakes are erasable as if they never happened; too many people in Congress played video games where one receives as many lives as necessary to finish a game. And our educational system teaches no one can fail or should be allowed to, so they don't. And they're the ones pushing all of this, especially the ignoramouses who write for the mainstream media. The media, and liberals, can't get enough victims to focus on and root for. Let's see, there are skin color victims, the poor, the digital divides, the terrorists who might be waterboarded for vital info, and oh yes, the entire world due to global warming, the ultimate scheme to label everyone a victim to be saved by the elite left. I'm so sick of not allowing failure except only to those who do it quietly and pick themselves up without whinning for some grant or handout.
Pain
Capitalism functions on the pain/reward system if you disrupt the system, as the government has been doing for generations now by promising the ponzi no pain retirement plan known as social security, by urging the populace to be "consumers" by selling the tax system to the highest bidding lobbyist. You get mindless "Eloi" hurrying to buy whatever they can however they can. Without thought of any consequences at all. This is true for individuals as well as institutions. Everytime Bush exhorts us to more mindless consuming to prop up the economy I marvel at the teetering, tottering edifice that our economy must be at heart. Shouldn't the people who supposedly have America's best interest at heart be urging saving, prudence, and frugality right before what promises to be the mother of all recessions?
Instead we are being told to go out and spend that check and all will be well. The Banks are being told the same thing we'll bail you out just make sure you keep that free and easy credit flowing. Capitalism
doesn't florish under a rewards only system. You need the pain of failure to spur prudence, wisdom, and living within your means, whether you are an individual, small business, institution, or nation.
As the owner of a small business, and a small house who has practiced prudence, I resent to the bottom of my soul the free ride ( at my and the other prudent taxpayers expence) the morons are getting to take just because there is a huge glut of morons with friends in the government. By the way just what is that check from the government supposed to cover anyway? The congress reminds me of the king throwing pennies to the poor saying that'll buy bread for the poor buggers for a year. Once the 600.00 check is gone in 60 seconds then what? ( Of course in those days the pennies were real copper, and probably did buy bread for a year unlike the ever multiplying, but ever deflating paper dollar.)
Best and the Brightest!
"How can banks, brokers who spend hundreds of millions on research hire the best minds in the world not see this comming."
Because they DO NOT hire the best minds in the world. The best minds in the world belong to doctors and professional bioscientists, with engineers next, then maybe lawyers. Banks, brokerages and other purveyors of greed simply need the best salespeople in the world and managers who believe their own BS. The people who run these shows don't need to be educated; anyone can learn how to play the game and master it.
The "best minds" would know better than to rely on people who have no business purchasing homes for five times their annual income - or more. The greediest would, of course, but not the best. Every now and then you get a brilliant greedmonger, like J.P. Morgan or Andrew Mellon, but these days, feh, no one in power knows how to do much of anything, while the "rest of us" either are smart with our money and resist buying at outrageous prices, or simply have plenty of money already.
No subsidy of monopolies
These ideas will be the final death knell of the American economy. The government is getting ready to bail out huge institutions that are basically monopolies (which is ironic considering the leftists promoting this usually rail against monopolies) that need to fail. Bear Sterns needs to fail, City probably needs to fail, and so do a lot of other big institutions that ran themselves into the ground. But no, instead it is going to be the United States that fails when we kick the can down the road a little bit by injecting the government into a place it has no business being, further increase our national debt, and create massive inflation the likes of which we only used to see in despotic economies like Russia or Mexico. The market cannot be fooled with tricks because the real economy isn't numbers on paper or consumer confidence, it is the hard assets. Assets that have been squandered on disposable houses that no one can afford, consumer debt on frivolities, and what amounts to Las Vegas gambling on Wall Street that has now gone bust.
The government can't save an economy, it has no money except that which it steals from the people and everytime it steals our money it hurts the economy far more than it can do any good by injecting some of it back in.
More Bail outs
Wouldn't it be great to call your bank and tell them that I can't afford my car loan, so I'll send you something I can afford instead. The same for my student loan and my cable bill.
We can stop this!!!!
It seems to me that most of the American people are AGAINST a bailout. Its the politicians pushing this (and the bankers).
We need a movement to stop the bailouts. I know that there will be two new websites soon with more information on this:
stopthehousingbailout.com and stopthemortgagebailout.com.
Also, there are these two petitions.
http://www.petitiononline.com/bailout/petition.html
http://www.petitiononline.com/Bailout/petition.html (pledge not to contribute to politicians supporting a bailout)
Don't just complain; do something!!!!!!!
Government Stupidity
Bailing out the stupid, the venal, and the ignorant will only encourage more stupidity, venality and ignorance. Our tax dollars at work. I guess the wall street types only believe in free markets when their pockets are full. No Government bailouts! Let them bleed. Our economy will be better off in the long run.
BOHICA
For the past decade and more the financial press has regaled readers with the tremendous bonuses paid to Wall Streeters and fund managers, yet it always seems that those bonuses are really back-stopped by the full-faith-and-credit of the American tax payer who is about to get screwed - once again - in order to keep the financial markets from collapsing. Isn't this getting a little old? I think its high time for a little welfare reform for the hedge funds and investment banks: let them drown in their own red ink.
lose-lose
There is one thing that stands out like the proverbial dogs ba@@s: the market failed and the regulators failed. The losers are not merely those who lose their houses or the retirement incomes; they include all other home-owners who are seeing the value and marketability of their houses evaporate; and all kinds of borrowers - from individuals to large cities - who have to pay more to get loans, regardless of their credit history.
The authorities deserve an enormous kick for failing to stop this long ago.
when has this ever worked?
This can't be good any way you look at it. If a bailout does eventually come and prices stabilize, the government will be so deep in our pockets that home prices will stagnate for years to come. Either they will let prices fall and the market will rebound or they will price fix and we are doomed. Can you imagine a government that we pay our mortgage to? In another time we would be throwing tea in the harbor to protect our freedom, now we just roll over and ask for more.
The federal Reserve Should Be Abolished
In Article I, Section 8 of the U.S. Constitution, the people of the United States granted Congress the power "to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” The people never gave congress the constitutional power to delegate this money-creating and regulating responsibility to any private group. Yet this is exactly what the Federal Reserve Act of 1913 did. The bill was publicly promoted as a plan to reform the nation's monetary system and stabilize the currency by taking control of it out of the hands of big bankers. In reality, of course, the Federal Reserve Act was written by the big bankers for the purpose of solidifying their control over our currency.
Many Americans today wrongfully believe that the Federal Reserve is somehow part of the federal government, possibly even the Treasury Department. Many do not know that the Federal Reserve is actually a cartel of private banks that was given the power to be the sole issuer of U.S. money, with full control over its quantity and thus its value. Since this group of private bankers (the Fed) provides credit to the U.S. government when we spend money we don’t have, the Fed also is able to profit handsomely from the ever-increasing national debt. Because the Fed makes more money when the country goes deeper into debt, there is no incentive for the Fed to support any reductions in federal deficit spending. The more credit we need, the more money this cartel of private banks will make.
The actions the Fed takes can drastically affect the economy simply by making decisions about the money supply and interest rates. The president, congress, big business, investors, home buyers and anyone else with an interest in our economy waits with baited breath every time the Federal Reserve Board meets. If they decide to raise interest rates, politicians and industries could fall, homes might not be purchased and jobs could be lost. If the Fed decides to lower the interest rates, politicians, industries, investors and consumers may prosper. There is too much power vested in a handful of people whose names would not be recognized by most Americans.
Why do we allow such a small group of people on the Federal Reserve Board to wield so much power over our country’s economic well-being? As average Americans strive to earn a living, cope with rising costs of food, fuel and hopefully save or invest for the future, Congress and the Federal Reserve Bank are working insidiously against them. On a daily basis, every dollar they have is being devalued.
Even though most Americans seem unaware of the current plight of the US dollar, especially in relation to the Euro, there is definitely a dollar crisis in the world economy because of the immense size of the international debt of America. America has now become the largest debtor in history, owing somewhere between $70 and $100 Trillion. The reckless deficit spending by our government, coupled with Federal Reserve currency devaluation, has become one of the greatest threats facing America today. Because Congress is routinely spending more than it can tax or borrow and the Fed is routinely printing “Fiat Money” (Dollars backed by nothing) out of thin air to make up the difference, this classic “one-two punch” threatens to further destroy the value of our dollars.
The actions of both major political parties would seem to indicate that they want the Fed to print more “Fiat Money” to support their extravagant and unchecked spending habits. Most politicians want the printing presses to run faster and faster, create more credit, issue rebate checks, etc., so that the economy will somehow be magically healed by this dangerous financial potion, or so they believe. The President and members of Congress may love a system that generates more and more money for their special interest projects and earmarks, but the rest of us have good reason to be concerned about our monetary system and the future value of our American dollars.
Issuing “Fiat Money” has allowed our government to live well beyond its means, but that practice cannot continue much longer as it is slowly destroying the value of our dollars. History shows us that when the destruction of monetary value becomes rampant, as the actions of our congress and the Fed would indicate, nearly everyone suffers and both the economic and political structure becomes unstable. The Federal Reserve System has been the tool used by the major bankers to allow them to gain control over the smaller regional and local banks. The Fed has also acted as the financing agency for Congress' unprecedented deficit spending on an ever growing, more intrusive federal bureaucracy and the expansion of the welfare state. Some people believe that the private bankers in the Federal Reserve wield so much power that they can intentionally manipulate the economy in order to influence the results of our presidential elections.
Our government and the American people do not need the help of any private banking cartel to manage our monetary system. We need to repeal the Federal Reserve Act and return control of our currency to Congress where it belongs, as was the intent of our Founders. We also need to have a serious national discussion about how real currency reform can be achieved. As long as the private bankers in the Federal Reserve have control over our nation's money, Congress' control of the purse-strings will not have the benefits the country’s Founders intended.
I support legislation introduced by Congressman Ron Paul, of Texas, entitled “Federal Reserve Board Abolition Act (H.R. 2755) that will restore financial stability to America's economy by abolishing the Federal Reserve.
REF: H.R. 2755: Federal Reserve Board Abolition Act
http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.2755:
By:
JOHN W. WALLACE
Candidate for Congress
New York’s 20th Congressional District
www.FreedomCandidate.com
Fed Mortgage Bailout (Cop-out)
Just great. The concept of entitlement has become so entrenched in the national psyche that we're now faced with bailing out homeowners who made poor decisions and rewarding lenders who made stratospheric profits. It's insane. Where does it end?
I took none of the risks, got none of the rewards and now I and every other hard-working, and in many cases, struggling taxpayer, am expected to pay for it all? It's b.s. and a system that isn't sustainable. It is truly crazy.
Let the chips fall where they may. We need to get back to higher savings rates, spending within our means and taking the long view toward sustainable growth. No country in history has ever 'spent' its way into prosperity. And we won't either.
Add your thoughts
Your comment will be posted immediately, unless it is spam or contains profanity. For more information, please see our comment guidelines.advertisement
I am going to need a 3rd job
just to Pay the $^##$% taxes my government is going to request of me to payoff other folks bad financial decisions.
Mar 14, 2008 14:59:30 PM [permalink] [report comment]