The Crap Sandwich Has a New Flavor

It seems that the Troubled Asset Relief Program or TARP has now turned into a TRAP for our tax dollars.  Treasury Secretary Paulson recently acknowledged that the Bailout is no longer going to purchase Troubled Assets with the money in the Troubled Asset Relief Program.  What???!!!???  If we were forced to mortgage our future to bailout lending institutions from variable loans, on homes with inflated prices, and with owners who should not have been able to purchase the house in the first place then why aren’t you doing what you promised?  Where is this money going to go?  Did we even need $700 Billion?  Can I get some of that money?  We should be outraged.  Who will be our voice? Just as MM suggests Paulson has become the Naked Emperor, and no the sky was not falling.

Today, three senators wrote to Secretary Paulson with their concerns.  At least there are 3 out of the 535 who are willing to ask questions.  Here are excerpts from the letter:

November 13, 2008

Dear Secretary Paulson:

We are writing to express our deep concern over your announcement this morning that the Department of the Treasury will halt all plans to purchase trouble mortgage assets through the Troubled Asset Relief Program (TARP). We are concerned that the program has been fundamentally changed from its original intent and worry that continued changes may erode the structures of accountability put in to protect taxpayers.

…

The primary reason for this course of action, we were told, was to assist the market in discovering the price of these assets and to return liquidity to the financial markets.

…

This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.

…

Although the legislation was passed on October 3, the program was never implemented and now has been officially abandoned in favor of alternative plans after little more than a month. Such a rapid reversal raises questions about the TARP’s original design as well as the propriety of future plans.

…

Sincerely,

U.S. Senator Tom Coburn, M.D., U.S. Senator Richard Burr, U.S. Senator David Vitter

We should all write to these senators and let them know how much we appreciate their intelligence.  We do not need Government spending the money where they see fit.  It is our money they are borrowing, and there needs to be some oversight and transparency in order for the taxpayers to know where are money is going.  Let us hope that Congress can get this together before it is too late, or I want a refund.  Like a huge check in the mail.

-reagan21

Deregulation Argument is Nonsense

Liberals have been arguing that the root of the financial crisis is the repeal of the Glass-Steagall Act of 1933 by the passage of the Gramm-Leach-Bliley Act which they allege led to masssive deregulation which they say caused the mortgage crisis. We, on the other hand track this mess back to the Carter Administration and the Community Reinvestment Act which forced lending institutions to lend “equitably” to those in their communities. The lending standards were lowered during the Clinton administration. Sebastian Mallaby writes in WaPo 

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University‘s Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn’t been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

Fannie, Freddie, Worldcom, Enron…

From Hotair, via Taxpayers for Truth

Wolf: On the Suspension of Mark to Market

Leon H. Wolf of Redstate:

One of the items in the proposed bailout that a number of Republicans seem to be insisting on is either a suspension or outright end to mandatory mark to market accounting rules. It is supposed by many people that this will somehow aid the unfreezing of the credit markets and/or provide liquidity to the market. Count me among those who are not so sanguine about the long-term prospects of suspending MTM; in fact, I suspect that it may make the situation worse.

In the very, very short term, the suspension of MTM may help certain companies who have built in balance sheet triggers in contracts, credit agreements, or corporate charters and/or bylaws to avoid immediate catastrophic consequences. But as a systemic matter, the suspension of MTM would seem to inject more uncertainty into the market, which is frankly the very last thing the market needs right during the middle of a crisis of confidence.

To review, the accounting fiascos of 1999-2002 that brought us mandatory MTM accounting taught us that traditional accounting methods make it easier for a company – through “aggressive” accounting – to appear solvent for much longer than the company actually is solvent. Everyone in the lending world remembers this. To further review, a large part of the genesis of the current crisis is a widespread fear that certain assets are toxic, and that it’s impossible to identify the toxic assets from the good ones. So… I guess we’re supposed to assume that allowing a change of accounting rules which leads the credit markets to believe that companies might be (but no way to tell for sure) faking solvency is a good thing?

If we suspend MTM in the current climate, what exactly is supposed to happen? Will companies hire accountants to come in and hastily rewrite their accounting books? If they do, will any lender actually extend them credit without forcing them to crack open the old MTM books instead? And if they can’t force that, will they lend at all? Like I said, the market will go from widespread uncertainty about certain classes assets to having widespread uncertainty about every company, especially in these uncertain times. I fear that this may make the credit markets freeze even tighter than they are, even if we inject a bunch of liquidity into the system.

 

Interesting take as I have hear mixed things on both sides about mark to market

Senate Passes Crap Sandwich 75-24

Yahoo News reports that the Senate just passed this 700 billion dollar turd with the three senators in the race voting for it. Interestingly though, it is unclear whether or not the House will pass this bill. Jake Tapper reports that neither Steny Hoyer or Roy Blount, in the House, signed off on the bill.  They only need to switch 11 votes.  As you may recall, the failout failed 205–28 on Monday. The bill, which last week was 3 pages, ended up being almost 500 pages and loaded to the gills with “tax extenders“ and pork barrel projects. There is a chance that 17 democrats may switch their yea votes to nays.

WSJ: Bill Educates Barack

From today’s WSJ:

A running cliché of the political left and the press corps these days is that our current financial problems all flow from Congress’s 1999 decision to repeal the Glass-Steagall Act of 1933 that separated commercial and investment banking. Barack Obama has been selling this line every day. Bill Clinton signed that “deregulation” bill into law, and he knows better.

In BusinessWeek.com, Maria Bartiromo reports that she asked the former President last week whether he regretted signing that legislation. Mr. Clinton’s reply: “No, because it wasn’t a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter.

“But I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”

One of the writers of that legislation was then-Senator Phil Gramm, who is now advising John McCain, and who Mr. Obama described last week as “the architect in the United States Senate of the deregulatory steps that helped cause this mess.” Ms. Bartiromo asked Mr. Clinton if he felt Mr. Gramm had sold him “a bill of goods”?

Mr. Clinton: “Not on this bill I don’t think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can’t possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence.

“But I can’t blame [the Republicans]. This wasn’t something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.”

We agree that Mr. Clinton isn’t wrong about everything. The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, including 38 Democrats and such notable Obama supporters as Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle — oh, and Joe Biden. Mr. Schumer was especially fulsome in his endorsement.

As for the sins of “deregulation” more broadly, this is a political fairy tale. The least regulated of our financial institutions — hedge funds — have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren’t diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

Meanwhile, commercial banks that had heavier capital requirements were struggling to compete with the Wall Street giants throughout the 1990s. Some of the deposit-taking banks that were allowed to diversify after 1999, such as J.P. Morgan and Bank of America, are now in a stronger position to withstand the current turmoil. They have been able to help stabilize the financial system through acquisitions of Bear Stearns, Washington Mutual, Merrill Lynch and Countrywide Financial.

Mr. Obama’s “deregulation” trope may be good politics, but it’s bad history and is dangerous if he really believes it. The U.S. is going to need a stable, innovative financial system after this panic ends, and we won’t get that if Mr. Obama and his media chorus think the answer is to return to Depression-era rules amid global financial competition. Perhaps the Senator should ask the former President for a briefing.

Liberal friends of mine point to “deregulation” and the GLB as th reason for our financial crisis.  The article makes a great point about the lack of regulation in hedge funds and the success they have had.

“Week” – Great New McCain Ad

Courtesy of HotAir. I like these ads, but I fear that J-Mac may come off as a used car salesman or look like he is doing an infomercial. Senator McCain, I do need a Shamwow!

Jay Cost on the Volatility of the Race

Jay Cost of RCP breaks down the polling data:

Immediately prior to the start of the Democratic National Convention, Obama led in the RCP average 45.5% to 43.9%. In June, he had an average lead of 47.1% to 42.4%. So, from June to the beginning of the conventions, McCain whittled down Obama’s lead from 4.5 points to 1.6 points. The Republican National Convention put him ahead of Obama, but recent events have wiped that lead away. Currently, the race stands roughly where it did in June, though McCain is in a slightly better position.

It stands to reason that the financial situation has been a campaign “moment” that has favored Barack Obama. So far, its effect is similar to him winning the nomination in June or heading to Europe in July.

A additional few points are worth noting.

First, the number of undecided voters has increased in the last three weeks, from a low of 6.3% of the electorate on 9/8 to 8.8% last night.

Second, the polls themselves have been very volatile this month. The Gallup tracking poll had a crazy week last week, and individual pollsters are disagreeing with each other quite a bit. Much of the disagreement has to do with McCain’s share of the vote. The standard deviation of McCain’s share in the current RCP average is 2.8%. Obama’s is 2.0%. [The standard deviation is the average distance between an individual poll’s result and the average of all polls.] By comparison, the final RCP average in 2004 had John Kerry’s standard deviation at 1.7% and Bush’s at 1.3%. This is a sign of volatility in the current race. Pollsters are finding fairly divergent results.

Third, there is a good subset of the electorate that claims to make up its mind in October or November. That might be hard for political junkies who have been following every twist and turn for 18 months to believe – but it’s true! In 1996, 30% of respondents claimed to make up their minds a day to a month before the election. In 2000, that number was also 30%. In 2004, 21% of the public made that claim.

If anything, the chart and Jay’s analysis indicate that gloom and doom is not what we should be feeling… yet.  This race is far too volatile and the increase in undecideds is a good thing.  More than a few undecideds will base their choice not solely on the economy but on a myriad of possible future circumstnaces. There is a giant Russian gorilla waiting in the back of the room.  While the financial crisis is first and foremost on people’s minds, defense should not be too far behind.  When McCain looked into Putin’s soul, he saw KGB. If Putin has to look into Obama’s soul, he’ll see “puff pastry”

Financial Crisis in Bullet Points

Found this linked from Redstate. It is pretty much a verbal distillation of what went wrong. From the adam smith blog: 

• Anti-redlining laws in the US, passed in 1977 and strengthened in 1995, forced lenders to give mortgages to people they knew might not be able to afford repayments. People who haven’t had a full-time job in years were lent six figure sums.
• In order to manage the risk this exposed them too, lenders packaged these sub-prime mortgages up with other ones and traded them as derivatives (collateral debt obligations, or CDOs).
• People start to default on mortgages, but because the CDOs are so opaque, no one knows how much liability they, or others, are exposed to. So the banks stop lending to each other and the credit crunch begins.
• Now the banks which have overextended themselves – lending far more money than they have in deposits, and relying on being able to borrow cheaply to finance their business model – are in serious trouble. Ultimately, it’s a cash flow problem.
• Word gets out and Britain witnesses the first run on a bank in over 100 years. Confidence evaporates on both sides of the Atlantic. Share prices plummet, as one bank after another is infected. Investment banks, which do not take deposits and therefore rely most heavily on the ability to borrow, are hardest hit.
• Two possible policy responses emerge. One, motivated by the idea of moral hazard, says that banks must be allowed to fail. If government bails them out, they’ll behave even more riskily in future. Plus, why should the taxpayers fund a welfare state for bankers? The other school of thought stems from the idea of systemic risk, that allowing banks to collapse would endanger the entire financial system (and, by extension, the capitalist economy).
• Fears about systemic risk win out. Governments intervene to try and restore confidence. In the US, the Bush administration attempts to buy up all the bad debt, aiming to get banks lending to each other again.
• This what happens when a bubble bursts. For years, the availability of cheap consumer goods from emerging economies like India and China kept down inflation. This meant governments and central banks thought they could flood the market with liquidity (i.e. cheap credit) and get away with it. They couldn’t. With too much money chasing too few goods, an asset bubble built up. House prices, in particular, were hugely over-inflated. It got worse after 9/11 when, facing an economic downturn, the US and the UK both pumped even more liquidity into the market. With breathtaking arrogance, politicians claimed to have abolished the economic cycle. In reality, they had simply swapped an immediate and relatively minor readjustment for a much harder landing several years down the line.
   

The Messiah Right Before He Hits the Lottery on the Taxpayer’s Behalf

This 2005 video confirms the connnection between the One and Fannie Mae. 

Some funny coincidences:

In 2005– Senator John McCain partnered with three other Senate Republicans to reform the government’s involvement in lending, after an attempt by the Bush administration died in Congress two years earlier.
Democrats blocked the reform.

In 2005– Barack Obama and the Congressional Black Caucus met with Fannie Mae for a “family” event. In 2005 Democrats also blocked reform of Fannie Mae:

 – R21 – https://trustbutverify.wordpress.com