The Insanity Of The Bailout Plan
July 28, 2016 at 4:25 p.m.
By Gary [email protected]
That's pretty much the way I see this bailout of financial institutions.
See, I am a big proponent of free markets. So the thought of the government having such a huge stake in investment banks really rubs me wrong.[[In-content Ad]]And I really can't take what I'm hearing from Barack Obama. He keeps blaming John McCain, the GOP and deregulation.
Well, yeah, he is a deregulator. He, like me, believes in free markets. He, like me, believes that bad decisions are punished in the marketplace.
But when you fiddle with the marketplace, the punishment is abated, or as in this mortgage mess, delayed.
It wasn't government deregulation that got us into this mess, it was the government poking its nose into free markets.
Back in the '90s, government got it in its head that everybody in America should own a home.
During the '90s, changes were made to the Community Reinvestment Act. The CRA, originally passed in 1977, forced banks and other lenders to offer credit throughout their entire market area. It prohibited them from servicing only wealthier neighborhoods.
Basically, it gave loans to people who probably wouldn't qualify under pre-existing norms in the industry. The act was mandatory. Banks are evaluated and feds look at the evaluations when considering applications for deposit facilities, including mergers and acquisitions. It's the classic carrot-and-stick approach the government takes to make sure its rules get followed.
In 1995, during Bill Clinton's administration, the act's regulations were strengthened. Basically, the feds became more focused on making sure these lenders were lending to people who couldn't afford the loans. (That's my interpretation. It may be hyperbole, but I believe it's essentially true.)
The result was a big increase in the number of loans to small businesses and to low- and moderate-income borrowers for home loans, and the birth of several players in the secondary mortgage market - outfits like Ditech, Countrywide, Quicken, Lending Tree and others.
It's called secondary because these guys don't hedge against risk with assets like traditional banks do. The only collateral they have is the property they mortgage.
Another revision to the CRA brought to us in 1995 - and this was huge - allowed the public securitization of loans made under the CRA.
Securitization means the loans are pooled and repackaged into securities that can be sold to investors.
The first public securitization of CRA loans was in 1997. I think that's where the problem started to snowball. Since these loans were pooled, that means the good loans were lumped in with the bad.
One bad apple spoils the whole barrel, so to speak.
I'm not sure how all this qualifies as "deregulation."
The Clinton-appointed head of Fannie Mae from 1998 to 2004 was Franklin Raines. He made it his mission to make mortgages easier to get for people who had poor credit, very little money for a downpayment and virtually no assets.
(Remember that "community organizing" Barack Obama was doing on the south side of Chicago? Helping people get these loans was a big part of that.)
So Fannie Mae bought up the bad loans, bundled them with good ones, securitized them and sold them to Wall Street firms. The Wall Street firms weren't particularly worried about it because, after all, Fannie Mae was giant and government-insured.
In 2003, perceiving trouble could be brewing in these risky mortgage markets, the W administration recommended an overhaul in the housing finance industry. The legislation would have moved governmental supervision of Fannie Mae and Freddie Mac under a new agency created in the the Treasury Department.
Could this have staved off the crisis? We'll never know. The changes were opposed on party lines and never happened.
Here's Rep. Barney Frank, (D-Mass): "These two entities - Fannie Mae and Freddie Mac - 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."
Good call, Barney.
In 2005, John McCain sponsored a bill to blunt what he called "the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
McCain and a couple of other Senate Republicans sought to reform government's involvement in lending after W's attempt died two years earlier.
McCain spoke forcefully on May 25, 2006, on behalf of the Federal Housing Enterprise Regulatory Reform Act of 2005.
In this speech, McCain predicted the collapse that is now upon us. He decried the falsification of financial records to benefit executives, including Raines and Jim Johnson. (By the way, Raines and Johnson both worked as advisers to Obama.) He also hammered away at the power of lobbyists to forestall needed reforms.
Of course, McCain's legislation went nowhere. It never even made it out of committee. Demo Christopher Dodd, then the ranking member of the Banking Committee and now its chairman, made sure of that. You may remember, Dodd was in the midst of receiving preferential loan treatment from Countrywide at the time.
Check out a list of Congressmen who have benefited most from Fannie Mae/Freddie Mac since 1989. After serving less than four years in the Senate, Obama is in the No. 2 spot. Only Dodd got more than Obama.
And that Raines character? He got himself a $90 million compensation package.
Now, you know darn good and well Obama is fully aware of all of this. If a dumb Hoosier newspaper guy can figure it out, so can he.
Here's Obama's current take on all this:
"The fact that we have reached a point where the Federal Reserve felt it had to take this unprecedented step with the American Insurance Group is the final verdict on the failed economic philosophy of the last eight years. ...
"This crisis serves as a stark reminder of the failures of crony capitalism and an economic philosophy that sees any regulation at all as unwise and unnecessary. It's a philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people; a philosophy that says we should give more and more to those with the most and hope that prosperity trickles down to the rest.
"Despite his eleventh hour conversion to the language of reform, Senator McCain has subscribed to this philosophy for twenty-six years in Washington and the events of this week have rendered it a colossal failure...."
Really. McCain's the problem, eh?
Seems to me McCain was the one working for change. He saw this coming. He warned about it. He tried to legislate against it.
It was Dodd, Frank and guys like Obama sucking up lobbyist money from Fannie and Freddie who stood in the way.
Obama couldn't be more disingenuous on this issue.
(By the way, Barack, it's American International Group, not American Insurance Group.)
So here's the insanity part.
These guys had a chance to get it right. They blew it. So now they want to do the big bailout. Same guys, different result? Not likely.
Problem is, we don't really have a choice, do we?
That's pretty much the way I see this bailout of financial institutions.
See, I am a big proponent of free markets. So the thought of the government having such a huge stake in investment banks really rubs me wrong.[[In-content Ad]]And I really can't take what I'm hearing from Barack Obama. He keeps blaming John McCain, the GOP and deregulation.
Well, yeah, he is a deregulator. He, like me, believes in free markets. He, like me, believes that bad decisions are punished in the marketplace.
But when you fiddle with the marketplace, the punishment is abated, or as in this mortgage mess, delayed.
It wasn't government deregulation that got us into this mess, it was the government poking its nose into free markets.
Back in the '90s, government got it in its head that everybody in America should own a home.
During the '90s, changes were made to the Community Reinvestment Act. The CRA, originally passed in 1977, forced banks and other lenders to offer credit throughout their entire market area. It prohibited them from servicing only wealthier neighborhoods.
Basically, it gave loans to people who probably wouldn't qualify under pre-existing norms in the industry. The act was mandatory. Banks are evaluated and feds look at the evaluations when considering applications for deposit facilities, including mergers and acquisitions. It's the classic carrot-and-stick approach the government takes to make sure its rules get followed.
In 1995, during Bill Clinton's administration, the act's regulations were strengthened. Basically, the feds became more focused on making sure these lenders were lending to people who couldn't afford the loans. (That's my interpretation. It may be hyperbole, but I believe it's essentially true.)
The result was a big increase in the number of loans to small businesses and to low- and moderate-income borrowers for home loans, and the birth of several players in the secondary mortgage market - outfits like Ditech, Countrywide, Quicken, Lending Tree and others.
It's called secondary because these guys don't hedge against risk with assets like traditional banks do. The only collateral they have is the property they mortgage.
Another revision to the CRA brought to us in 1995 - and this was huge - allowed the public securitization of loans made under the CRA.
Securitization means the loans are pooled and repackaged into securities that can be sold to investors.
The first public securitization of CRA loans was in 1997. I think that's where the problem started to snowball. Since these loans were pooled, that means the good loans were lumped in with the bad.
One bad apple spoils the whole barrel, so to speak.
I'm not sure how all this qualifies as "deregulation."
The Clinton-appointed head of Fannie Mae from 1998 to 2004 was Franklin Raines. He made it his mission to make mortgages easier to get for people who had poor credit, very little money for a downpayment and virtually no assets.
(Remember that "community organizing" Barack Obama was doing on the south side of Chicago? Helping people get these loans was a big part of that.)
So Fannie Mae bought up the bad loans, bundled them with good ones, securitized them and sold them to Wall Street firms. The Wall Street firms weren't particularly worried about it because, after all, Fannie Mae was giant and government-insured.
In 2003, perceiving trouble could be brewing in these risky mortgage markets, the W administration recommended an overhaul in the housing finance industry. The legislation would have moved governmental supervision of Fannie Mae and Freddie Mac under a new agency created in the the Treasury Department.
Could this have staved off the crisis? We'll never know. The changes were opposed on party lines and never happened.
Here's Rep. Barney Frank, (D-Mass): "These two entities - Fannie Mae and Freddie Mac - 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."
Good call, Barney.
In 2005, John McCain sponsored a bill to blunt what he called "the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole."
McCain and a couple of other Senate Republicans sought to reform government's involvement in lending after W's attempt died two years earlier.
McCain spoke forcefully on May 25, 2006, on behalf of the Federal Housing Enterprise Regulatory Reform Act of 2005.
In this speech, McCain predicted the collapse that is now upon us. He decried the falsification of financial records to benefit executives, including Raines and Jim Johnson. (By the way, Raines and Johnson both worked as advisers to Obama.) He also hammered away at the power of lobbyists to forestall needed reforms.
Of course, McCain's legislation went nowhere. It never even made it out of committee. Demo Christopher Dodd, then the ranking member of the Banking Committee and now its chairman, made sure of that. You may remember, Dodd was in the midst of receiving preferential loan treatment from Countrywide at the time.
Check out a list of Congressmen who have benefited most from Fannie Mae/Freddie Mac since 1989. After serving less than four years in the Senate, Obama is in the No. 2 spot. Only Dodd got more than Obama.
And that Raines character? He got himself a $90 million compensation package.
Now, you know darn good and well Obama is fully aware of all of this. If a dumb Hoosier newspaper guy can figure it out, so can he.
Here's Obama's current take on all this:
"The fact that we have reached a point where the Federal Reserve felt it had to take this unprecedented step with the American Insurance Group is the final verdict on the failed economic philosophy of the last eight years. ...
"This crisis serves as a stark reminder of the failures of crony capitalism and an economic philosophy that sees any regulation at all as unwise and unnecessary. It's a philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people; a philosophy that says we should give more and more to those with the most and hope that prosperity trickles down to the rest.
"Despite his eleventh hour conversion to the language of reform, Senator McCain has subscribed to this philosophy for twenty-six years in Washington and the events of this week have rendered it a colossal failure...."
Really. McCain's the problem, eh?
Seems to me McCain was the one working for change. He saw this coming. He warned about it. He tried to legislate against it.
It was Dodd, Frank and guys like Obama sucking up lobbyist money from Fannie and Freddie who stood in the way.
Obama couldn't be more disingenuous on this issue.
(By the way, Barack, it's American International Group, not American Insurance Group.)
So here's the insanity part.
These guys had a chance to get it right. They blew it. So now they want to do the big bailout. Same guys, different result? Not likely.
Problem is, we don't really have a choice, do we?
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