Pin the Tail on the Other Guy

Probably one of the most interesting side-show phenomenon of this whole Economic Meltdown Mess is the intense scrambling by many to pin the blame on somebody else (particularly someone who is on the ‘other side’). Depending on whom you hear from it’s the fault of:

1. President George W. Bush

2. Former President Bill Clinton

3. Wall Street Brokers

4. Alan Greenspan/Henry Brennacke/Henry Paulson

5. Fannie Mae and Freddie Mac

6. Congress

7. Banks

8. Countrywide

9. People who borrowed more than they can afford

10. Real Estate Marketers

11. Liberals

12. Conservatives

and so on…

What’s interesting is that there is no one smoking gun – no Ken Lay for Enron as the Bad Guy, no Michael Milikin for Junk Bonds, no Osama Bin Laden for 9/11 or Saddam Hussein for WMDs. No one whom everyone can drag out into the Village Square and throw tomatoes at because ITS THEIR FAULT WE’RE IN THIS MESS.

This would be especially convenient for those who are running for office, as having a scapegoat would conveniently absolve them of any responsibility.

The truth here is that we are all responsible –

from the person who borrowed way more than they knew somewhere in their heart they could not afford but did so because the bank said it was OK to the bank who lent that person money even though they knew in their heart that this loan would not be paid out because hey the computer models said it was OK and besides prices are going up up up

to the reseller who bundled loans and labeled them improperly even though they knew in their hearts that this was not good because hey, history says that most of these loans won’t go bad to the rating entity who labeled these loans without thoroughly checking them to the purchaser who knew in their hearts these were too complex to verify but did so because they didn’t want to be ‘left behind’

to the Wall street Broker who sold these bundles knowing in their heart they were not as good as they were purported to be to the investor who knew in their hearts that the market was way, way, overheated and based on no real wage growth but bought these securities anyway because they couldn’t resist the profits and hey Moodys said it was OK

to Congress and the President who knew in their hearts that this market buildup was not based on real sustainable growth but allowed it anyway, even to the point that they pressured lenders and purchasers of mortgages (that would be the Banks and Fannie/Freddie) to make those loans and buy them to sustain this ‘growth’ because they and their rich constituents were making money and they desperately did not want the house of cards to fall ‘on their watch’ and because ideologically they believed that more regulation was bad and the market corrects itself always.

The truth is we are all to blame, even those who did not gorge themselves on the feast, because we are all part of the system that created this. Failure to act does not absolve oneself of responsibility to act.

You see, we really can’t say we didn’t know what was going on. At least five years ago we knew, in our hearts, that something was wrong with our economy. When banks offered us loans without reason or rationality. When housing prices when insane. When our paychecks stopped getting bigger but we could still ‘afford’ so much thanks to mortgages and equity loans and credit cards.

The truth is that the “average” American trusted our leadership, the Really Smart People Whom We Elected, to take care of us, to protect us, and to help us live better lives. After all, they saved us in the Great Depression, right? They know best so we should let them Do Their Jobs.

Those Really Smart People Whom We Elected took that trust in their large, comforting hands, wrapped it in the American Flag and the rhetoric of good times, God, the American Dream and Patriotism, and then they promptly screwed us all.

Fool me once, shame on you. Fool me twice, shame on me.


Ben Stein and I

I surely never thought I’d see the day when I, Liberal Patriot, would ever agree with anything Ben Stein, Arch-Conservative Patriot (yeah, I’m calling him a Patriot just like me…stunning) would write. So his article published in today’s NY Times is something of a surreal moment for me…one where I’d have to say right friggin on, Ben.

It also tells me that the Neo Cons (who are neither Neo or Con) are in more serious trouble than they may have previously thought.

From the article:

IMAGINE, if you will, that a man who had much to do with creating the present credit crisis now says he is the man to fix this giant problem, and that his work is so important that he will need a trillion dollars or so of your money. Then add that this man thinks he is so indispensable that he wants Congress to forbid any judicial or administrative questioning of anything he does with your dollars.

You might think of a latter-day Lenin or Fidel Castro, but you would be far afield. Instead, you should be thinking of Treasury Secretary Henry M. Paulson Jr. and the rapidly disintegrating United States of America, right here and now.

But I am getting ahead of myself. First, I am furious at what the traders, speculators, hedge funds and the government have done to everyone who is saving and investing for retirement and future security. Millions of us did nothing wrong, according to the accepted wisdom of the age. We saved. We put a large part of our money into the stock market, as we were urged to do. Because the market wasn’t at ridiculously high levels, it seemed prudent to invest in broad indexes, foreign indexes and small- and large-cap indexes.

Now we have had the rug pulled out from under us.


Then this:

Almost no one (except Mr. Buffett) saw this coming, at least not on this scale. But let’s get back to the man of the hour. Why didn’t Mr. Paulson, the Treasury secretary, see it? He was once the head of Goldman Sachs, an immense player in the swaps world. Didn’t people at Treasury have a clue? If they didn’t, what was going on in their heads? If they did, why didn’t they do something about it a year ago, when saving the world would have been a lot cheaper?

If Mr. Paulson and Ben S. Bernanke, the chairman of the Federal Reserve, didn’t see this train coming, what else have they missed? What other freight train is barreling down the track at us?

All of this would be bad enough. But by far the most terrifying item I read in my morning paper last week was this: Mr. Paulson demanded that Congress forbid judicial review of his decisions on use of the money in the mortgage bailout. This would amount to an abrogation of the Constitution. Not only would his decisions be sacrosanct and above the law, but so would the actions of his pals in the banking world in connection with this bailout.

The people whose conduct got us into this catastrophe have not only taken our money, hopes and peace of mind, but they apparently also want a trillion or so more dollars to put into their Wall Street Buddy System Fund. This may be the most dangerous attack on the law in my lifetime. What anarchists even dared consider this plan? Thank heaven that minds more devoted to the Constitution on Capitol Hill are questioning this shocking request.

Exactly!  Woo hoo!

Finally, this (read the whole article, it’s really great….and I’m still in shock that I’m calling anything Ben Stein writes ‘great’).

Then there was Mr. Paulson’s insistence that there be no compensation caps for executives of companies being bailed out by the factory workers, the farmers, the schoolteachers and the medical doctors. He told a skeptical Congress on Tuesday that if these caps were put into place, bank executives simply wouldn’t participate in the bailout or sell us suckers their debts. Fine with me. If the banks are in good enough shape so that petulant executives can simply opt out rather than live on a few million a year, maybe we don’t need the bailout at all. Maybe we would be better off if those executives simply bailed out and were replaced by people with more sense and more patriotism.

One final little thought bubbles into my mind: Maybe the bailout should not be of the banks at all, but of homeowners themselves. Maybe if we make the government the buyer of last resort of homes, we will stabilize the markets, stabilize the debt associated with the markets and take the gain out of the credit-default swaps for the speculators. Yes, price would be a huge issue, but so it is for Mr. Paulson’s plan for buying debt from banks.

Why not? We do it for farmers. Why not for the individual homeowner? Oh, right. Because Treasury secretaries don’t know any of those people.

Game, set and match.  Thank you Ben (again, WOW!) for speaking truth.  Now let’s hope America hears it.

Want to REALLY Fix the Mortgage Crisis? Fix the Homeowners

Okaaay….so you big Wall Street Fat Cats have screwed the pooch (for lack of a better term) by lying and cheating so you could make huge profits and salaries.  Now that you’ve been caught,  rather than fix it you’re flapping around crying for a ‘bail out’ otherwise the World Will End.

But will the ‘bail out’ fix anything except P & L sheets of big investment funds and banks?  Interestingly, more and more I’m hearing that it won’t, because there’s still the fundamental problems out there:

1. The investment vehicle called a mortgage-backed security was sold as highly safe because Americans have a long history of always paying their mortgages, even when they didn’t pay other debt.   Now that, thanks to irresponsible loan origination (because it made tons in the resale market) and gross breach of fiduciary and shareholder responsibility (lying about the quality of mortgages being resold), there’s a trust issue in the market.

2.  Mortgages are being defaulted on (because people can’t afford the loans primarily and investors are walking away from investment properties they are under-water on) because of irresponsible loan origination (because it made tons in the resale market) and gross breach of fiduciary responsibility.

So how would taking these securities off private companies’ ledgers and putting them on the taxpayer’s fix either of the underlying causes?

Think about it.

OK if you’re thinking:  Uhhh…it won’t, than your right. And you’re not alone.  From the WSJ article linked here:

Congressional Budget Office Director Peter Orszag told lawmakers on Wednesday “that loss of trust has sharply increased the cost of raising capital and rolling over debt, which threatens the solvency of all financial institutions.”

But Robert Shapiro, a former Clinton economic advisor and the chairman of the globalization program at NDN, a Washington think tank, said the program outlined by the administration aimed at the wrong target. Rather than buying assets, he says, the government should provide money to people facing foreclosure, which would prevent the assets from going sour in the first place.

“This crisis will continue until the housing market stabilizes and as increasing foreclosures reduce the value of more mortgage-based securities,” Mr. Shapiro said.

Hmmm…. and more. This plan doesn’t actually reward or help those who responsibly made mortgages and held them, rather than repackaging them and selling them:

Much of the focus has been on mortgage-backed securities, not on the so-called whole loans that reside on the books of smaller lenders.

Cynthia Blankenship, chairman of Washington-based trade group Independent Community Bankers of America, said the government’s $700 billion fund won’t help smaller lenders unless it accepts whole real-estate loans, which bankers say is unlikely to happen, at least in the early stages of the program.

Ms. Blankenship, who runs Bank of the West in Irving, Texas, said struggling community banks in such once-hot but now sagging real-estate markets as Florida, California and Arizona would be eager to unload distressed mortgage or commercial real-estate loans. “It’s vitally important because it allows these banks to have some relief, as well as some big banks,” she said. “It’s just a matter of fairness.”

“We will not benefit from any of the programs that the federal government is proposing,” said J. Downey Bridgwater, CEO of Sterling Bancshares Inc., a Houston-based banking company whose $4.9 billion in assets don’t include any toxic mortgage-backed securities. But Mr. Bridgwater said the government’s efforts will “hopefully ease any concerns depositors may have about financial institutions across the country.”

So, it would seem to me this is a bailout for those who took the risks and lied, instead of even for those who are holding their loans and taking a lump where they have to.  Huh.

Now, seeing as how the underlying problem is that people can’t afford their mortgage payments, undermining both the note itself and the security it’s traded within, wouldn’t it make more sense just to funnel that $700 Trillion to the homeowner themselves in the form of either an increase in real wages or an ‘economic stimulus’ package or something like that?

Yeah, I get that it’s rewarding irresponsibility – I’ve gone on the record as saying that I think if you’re dumb enough to borrow more than you can afford, you should lose your house.  The way I see it though, bailing out large investors (who can afford it) is doing the same thing – rewarding them for irresponsibility and, worse, letting them off the hook for gross breach of trust and fiduciary responsibility.

So, if we’re going to bail out anyone, it should really truly be the little guy with the mortgage they can’t afford. Make them do it through the courts who can be sure the money gets funneled, make the banks refinance the loan to a reasonable amount, do all those things you need to do, but fix the problem. Then those securities will stabilize in value, investors can understand their true worth, and the markets go back to some semblance of normal.

(Come to think of it – this is not far off from how FDR pulled us out of the last Great Depression – by putting money in everyday people’s pockets via the WPA and other work programs and putting stricter regulations on both banks and the stock market…..)

What I see coming through Congress now does none of that.

Between a Rock and a Voting Booth

Oh I nearly died laughing when I saw an ad by McCain claiming that Obama would mean Big Government and he wouldn’t. What he heck do you call creating a new oversight to bail out your rich friends and spending to the high heavens in debt the likes of which we’ve never seen in the history of our country?  Government is gigantic and getting bigger.  Really funny.

What’s really interesting is the bind our Congress is in. On the one hand, they REALLY want to adjourn so they can all campaign for the upcoming elections.  On the other hand, they ‘get’ that if they don’t fix this the right way, it could mean their heads.

And there’s lots of tricky questions. Like:

1. What mortgage backed securities will we buy?  There are literally thousands of configurations out there.

2.  For how much?  Remember, we have no idea how much many of the notes packaged are worth since, well, um, the people who wrote the paper lied so much.   Many are worth zero, so why would anyone pay anything for them?  Capital markets won’t.

3. From whom?  Investment Banks (oh yeah, aren’t any now).  Standard banks?  Hedge funds?  Foreign banks? Foreign funds?  Pension funds?

3.  What do we get in exchange (note: Rich guys do NOT want to give up any ownership stake, control, stocks, etc. to the taxpayers).

4.  How would this stop any foreclosures and should it?  What will the taxpayer do with a bunch of bad debt and the properties used to secure the debt?

5.  Where in the Constitution or the current code can we draw power from (hint: Nowhere) in managing the affairs of the private marketplace?

6.  Will this actually calm the markets and allow capital to flow again?  Right now the crux of the problem is that because there’s so much garbage and gross breaches of fiduciary responsibility mixed with lies that nobody trusts anybody.   So nobody’s lending anybody money, and without that most of the markets can’t survive long.

7. How do we spin this to our political advantage so we don’t get fired in 6 weeks from our jobs by the very taxpayers we wish would just shut up and trust us even though we may not have their best interest at heart? (Maybe we should just say 9/11 and that Osama Bin Laden is behind the mortgage meltdown)

The real risk here is that credit won’t free up by this action, meaning we really have thrown good money after bad.   Worse, that if credit doesn’t free up, that this ‘crisis’ really will begin to affect the average American.  Because so much of our capital infrastructure relies on credit – retail stores borrow to buy inventory, sell for a profit, then pay back the retail loan.  Farms borrow against future crop revenue to purchase capital equipment.  Governments borrow against future tax revenue.  Businesses ‘sell’ their future revenue in exchange for cash infusions needed for operations and improvements.  If that system isn’t restored to health, we will see potentially catastrophic job loss as businesses collapse.   Then we really do have the Great Depression all over again.  Except this time with Medicaid and Medicare and Unemployment Insurance and Social Security and food stamps and other safety-net programs which would be accessed by more and more people (all of which are funded by taxpayer dollars, of which there’d be fewer because of the collapse).

For once, I’d rather they not rush this so they can get back to politicking. I believe it may be the only way to really potentially save their own skins.

Cash for Trash, or Save the Loan Holder…I mean Home Owner!

I’ve got to agree with Krugman on this one – this ‘rescue’ deal is throwing good taxpayer money after bad. I especially don’t like that the taxpayer doesn’t gain ownership over anything in the deal – just bails out those who should rightfully lose their shirts based on the risks they took. That means both the investors in mortgage-backed securities AND the people who borrowed more than they could pay back.  Krugman writes:

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

Another interesting tidbit – now Morgan Stanley and Goldman Sachs, the other two investment banks, get to become holding banks (i.e. banks like BofA and Wachovia). Lucky them! This gives them access to the discount rate that banks borrow from. The bad news for them is that they’re more highly regulated. The good news? They don’t go under.

Now this sweet deal which will be packaged to “Save the Homeowner!” when in reality the market does not give a crap about the homeowner, they care about the loan holder – or the holder of that mortgage backed security that’s tanking. Those holders would be primarily large investors, who would lose all their investment.

But, to get the TAXPAYER (who will not make a dime off this ‘rescue’ in it’s current form ) to buy it, they’ve got to position this in more populist terms = Congress doesn’t want you to lose your house because some mean old bankers made a bad loan to you. So we’re going to give them a pile of your money to go away so you can keep your house. That’s on top of the pile of money they already have. Oh, and your taxes are going to have to go up and that whole healthcare business? Yeah, don’t have any money to fix that, we know we said that before we ‘found’ $700 billion extra but hey, now we really mean it. Until the next time our rich friends need a bailout. Except since we’re already in the largest debt ever thanks to Iraq, this is just going to add to the multi-trillion dollar credit card bill (i.e., the federal deficit) we have going here that your great great grandchildren will pay off.

Thanks, but I’d rather just lose my house, deal with a bad credit report (hey, everyone will have one now!) and go rent and maybe have a shot at decent Veterans benefits and healthcare packages for everyone. Let the big investors take the hit. They did, after all, take the risk.

How We Got to the Second Great Depression…

I actually don’t think that people overextending themselves in debt is the core issue. The core issue is that the debt itself became a financial instrument that was traded for profit. Here’s how it went:

First, came the concept of a Home Equity Loan, back in the early 80s – a way to ‘tap into’ the ‘equity’ (i.e. paper profit) in a home. Hey, what a great way for Seniors and others on a fixed income to profit from their house without selling it! We can make some money on the interest too. Hey a new concept!  A house as an investment vehicle, not a place to live.  Not bad, in fact it’s kind of nice….

Better yet, what about the debt itself as an investment vehicle?   After all, people always pay their mortgage, and their second mortgage.  Hey, we’ve got this debt here, paying steady returns, let’s treat that like a stock or a bond (but without all those pain-in-the-butt regulations surrounding stocks and bonds) and trade it.

Wow. We can make money on this. Better yet, we can ‘bundle’ mortgages and trade them as a group. We can also sell insurance policies so if the mortgages don’t perform like they were supposed to (i.e. people don’t pay their mortgages on time) we’re protected still!

We’re making more money! Let’s make more mortgages that we can trade. Uhhhh….well, we’ve got to loosen some standards here, but that’s OK because we’ll make more money selling the debt, so make that loan! We’re not going to get stuck with it, and really if only a few in the bundle go bad it won’t matter.

Wow! Housing prices have gone insane now that we’ve loosened our standards! That means more debt to sell! Hooray! More money! Let’s loosen our standards even more so we can make more debt to sell and get really rich! We’ll just mix up more of these ‘loose’ loans into the ‘good’ loans. It’ll be fine.

Uh oh. Housing market is beginning to stall. I think we’ve reached our limits. And, uh, some of those not-so-good loans (“subprime”) are failing. And, uh, we may have not been completely honest about some of the mortgages we were bundling together. So people might be a little upset to find out the ‘good’ debt they bought wasn’t as ‘good’ as they thought it was. Errr…That’s OK, housing will stabilize, and we’ll be fine.

Uh…more housing falling…people are starting to walk away from their houses….uh-oh. And, er, more loans are going bad, even ones that were supposed to be OK. People don’t seem to like paying more for their house than it’s actually worth in a down market. Those who thought they could ‘flip their house’ (like on TV!) for a profit, well, they can’t. Oh, yeah, and they’re not making as much money as they thought they’d be since real wages aren’t growing.

Oh, man, housing is NOT coming back. Jobs are starting to disappear as the engine that was fueling them (housing) is shutting down. More and more people are walking away, becoming renters, and we’re stuck with these bad notes and houses we’ve got to maintain. Heck, we don’t even know in some cases who owns the dang house so we can try to sell it and get some of our money back because we’ve sold the loan so many times.

Oh, geez…. Now we’ve got a crisis of confidence – if we lied about this debt, what about other debt we trade? How could auction rate securities fail? We only lied a little bit, why should others be worried?

Bear Stearns got saved! Maybe Paulson didn’t mean it when he said once in a lifetime though…that was nice of Bush to Save! His! Friends! so they can go back to their yachts in the Hamptons and stick it to the taxpayers while still looking good to the little guys we don’t care about. We’re going to be OK. Never mind.

Oh BOY – FNMA “Fannie Mae” and FRMA “Freddie Mac” are in trouble! Why? Got caught up in the loosey-goosey find some money game as well. Seems they’re supposed to guarantee that a loan is good, and, well, they didn’t do their homework as well as they should have. Made a lot of money servicing all those loans, and they felt their guarantee from the Feds would protect them. And now Paulson’s got a spine, making their shareholders eat the deficit and not making the taxpayers. Yikes! Rich people are losing money and poor people aren’t? What’s wrong here?!

What? They’re not saving LEHMAN? Hmm…must have meant it! Or the guys at Lehman pissed off Bush at the Country Club. Oh, man, Merrill sold themselves. EEEEEE….

Oh, geez, now it’s hitting even non-investment banks. AIG is flailing because of those insurance policies they sold (and made tons on) to guarantee those mortgage debt packages are now having to pay out because more packages failed than they thought. And why are the taxpayers loaning them money to bail them out when the other financial institutions wouldn’t? Lucky them!

Oh, well, let’s hit up our buddies in the Fed and Congress and let them fix it all by creating a new place for taxpayers to buy the bad debt we made fortune off of AND we get to keep the fortune. Yay! We love Republicans!

Don’t get me wrong here. I think if you overextend yourself to the point that you’re in bankruptcy and/or you lose your house, you should in fact lose your house and all your stuff and have to pay it back. Anyone dumb enough to take on that much debt should have to feel pain to learn that you don’t take on more debt than you can handle. You’re grown up, you should know your limits. Yet so many times we hear “But the bank wouldn’t give us the money if they didn’t think we could pay it back.” That USED to be true.

At the core there was some misplaced trust, or rather an abuse of trust here on the part of the financial system. Remember, it used to be that your bank (or anyone else who wasn’t the mob) wouldn’t lend you money unless they really thought you could pay it back. And that was true. Then banks and other lending entities decided that your ability wasn’t so important because they weren’t going to make money on the loan interest you’d pay them. No, they were going to make far more money selling your loan to someone else than they ever would holding your note and just receiving a po-dunkey 5% or 6% return. So they breached their fiduciary responsibility to their shareholders and the public in making that loan, and that is far more serious to me than the actions of the person receiving the loan. Then, on top of it, when they bundled and resold these loans, they lied about the likelihood of loan repayment, making the loans seem more stable than they really were.

And that’s what we should really be pissed off at. Not the people getting the loans, whose credit is now ruined and are not becoming renters again. The people who breached their responsibility and made the loans they should not have, and then lied about the quality of the debt they were selling to make money. And those that let them.

Oh, and I think those CEOs, CFOs, COOs, all the Executive Leadership of the companies getting help (Bear, AIG, Lehman, others) should have to give the Government (i.e. the taxpayers) ALL THEIR BONUSES and SALARIES beyond, say $500,000 – what a CEO SHOULD MAKE – to pay for the mess they led their company in to. They should be made to give back their past earnings plus a % of future earnings.

Lastly, if you think McCain (who was part of the administration that LET THIS MESS HAPPEN) and Palin (who got her own town of Wasilla in a mess building a sports arena in the middle of nowhere on land they might not own) can fix this, then you’re a fool.