THE AMERICAN SISYPHUS ...

Remember the story of Sisyphus? He was the king in Greek mythology who was punished by being forced to roll a boulder up a hill, only to watch it roll back down. He was to repeat this activity throughout eternity.

If you recall this story then you'll understand why this piece from Mother Jones makes the U.S. taxpayer out to be little more than an American Sisyphus ...

First you bailed out Fannie and Freddie. Now you're paying their legal bills.

Taxpayers have covered $434 million in legal fees for Fannie Mae, Freddie Mac, and their highly-paid executives since the federal government took over the wounded housing giants in September 2008, according to data (PDF) provided to Mother Jones by a congressional source.

In case you forgot, Fannie Mae and Freddie Mac were privately managed, government backed, institutions who were used to absorb corporate America's toxic mortgage loans. They then bundled them up and dumped these contracts (CDOs) on gullible market players (like union and state pension funds), who ended up taking huge hits when the market collapsed in 2008.

After the American taxpayer bailed out Fannie and Freddie, and backstopped all the toxic loans for Wall Street's wage and bonus bonanza in 2008 and 2009, we're now paying to defend their incompetence too. Great.

I don't know about anyone else, but I'm beginning to feel like the American Sisyphus ... condemned to bailout out Wall Street and corporate America's incompetence into eternity.

- Mark

FORECLOSURE MILLS WIDESPREAD?

Check out nakedcapitalism.com's review of the "nastygram" sent by Representatives Barney Frank (D-MA), Alan Grayson (D-FL), and Corrine Brown (D-FL).

They're "disturbed by the increasing reports of predatory ‘foreclosure mills’ in Florida working for Fannie Mae servicers." These foreclosure mills specialize in speeding up the foreclosure process which, as you can imagine, puts even greater pressure on homeowners trying to stay in their homes.

- Mark

WHY WALL STREET IS TO BLAME

So I'm sitting in the barber's chair and getting my hair cut this morning. The talk turns to what's happening in the markets, and who's to blame. The standard Fox News meme emerged: "It's the fault of everyone who couldn't afford to buy a home."

My, my, where to begin ...

Why Wall Street Is At Fault ...
Let's start with this. The money had to come from somewhere. Fox News and their Republican friends may get political mileage pointing at irresponsible borrowers and Fannie Mae as the problem. But the real issue lies with people in the private sector who were creating and insuring shady mortgage contracts, as I've posted on here and here.

On this front, Wall Street knew what they were doing. Their models told them they would make money on their activities, so they pushed for more mortgages. Ability to pay wasn't really an issue. Creating marketable securities that they could bet on was.

Irresponsible borrowers? No doubt there was a problem. But we have to ask ourselves, Why was Wall Street and their financial mandarins so eager to lend to "irresponsible" borrowers?

The simple answer is that Wall Street's market players were becoming irresponsible lenders. They became irresponsible lenders because they had created a sweet ponzi mortgage scheme, built around a fraudulent insurance system.

In the first part of the scheme, as Nomi Prins outlined, between 2002 and 2008 about $1.4 trillion in subprime mortgages were issued. Out of these mortgages Wall Street created ("derived") about $14 trillion in securitized bets. In part because the underlying contracts were subprime mortgages, Wall Street needed insurance for their bets.

I'm over simplifying, but the second part of the scheme worked something like this.

* I tell you I will provide insurance for your mortgage backed securities.
* You must pay me premiums for my insurance.
* If the market collapses, "tough goat cookies ... we won't pay" (this wasn't actually said).

An illusory sense of security (insurance) plus record profits (for Wall Street) made for a euphoric market mood. So more mortgage contracts were sought, written up, and sold off to security slavery. Wall Street created it's own demand. It didn't matter who the mortgage holders were. As long as they could fog a mirror they were going to get a mortgage contract, which was going to be insured (wink, wink) somewhere down the line.

(At the time no one really knew or cared whether the insurer had the money to pay out claims. There were three reasons for this. First, Wall Street's market models said everything was OK. Second, the insured mortgage contracts were labeled as "derivative" contracts which, at the time, were largely unregulated. Finally, everyone was making lots of money).

Ben Bernanke Feeds the Fire
It was like handing the car keys to a teenager, and then being assured that everything will be fine by their loser friends, who are all carrying bottles of booze out the door as they wave good bye.

And why not? Ben Bernanke (the trusty father of the "loser friends" in this scenario) was confident that "market fundamentals were strong" and that bank regulators were doing the right thing. And, besides, national housing prices don't fall, right? Here's Bernanke making these claims before the market collapsed ...




A Ponzi Insurance Scheme + the sage (albeit, wrong) words of Fed Chair Ben Bernanke  =  a sense of market security.

This market chemistry was so soothing that Wall Street and the financial titans of America actively went out and looked for more home mortgages to issue, bundle up (CDOs), and then insure (CDSs) right up to when the market collapsed. Bonuses, sweet fees, and juicy commissions made this a win-win for everyone involved, but especially Wall Street.

"Don't Blame Me ..." Wall Street's Lack of Accountability
At the end of the day, as I pointed out here, when people stopped paying their debts and mortgages - which once gave value to the market securities that Wall Street created - what should have happened is that those who insured the securities should have paid up. Instead, they blamed irresponsible borrowers for ruining their ponzi-scheme.

Let me be clear here. When people stopped paying the debts and mortgages that made security contracts worth something, the people and institutions who provided the insurance for these contracts should have paid up.

But they didn't have to. The American taxpayer did, and will continue to do so long into the future.

MORAL OF THE STORY: Don't count your chickens before they hatch.

MORAL OF THE STORY, II: But especially don't blame Main Street for your own stupidity and greed when you create and feed a mortgage and insurance ponzi-scheme that produces profits for you but undermines the integrity of the market.

- Mark

Addendum: Congress held hearings on Fannie Mae and Freddie Mac today. It was covered by C-SPAN. As expected there were Republicans who wanted to direct blame away from Wall Street. So they tried to blame Fannie Mae and Freddie Mac for the market collapse because of how they backed reckless borrowers. Fortunately, Congressman Brad Miller (D-NC) was there to set the record straight.

He reminded Republican committee members that they once praised subprime lending as the type of innovative lending that comes from deregulated or "unfettered" markets, and because of how it contributed to a spike in home ownership. Among the points Congressman Miller brought up included:

1. When Republicans criticized Fannie Mae and Freddie Mac after 2003, they were essentially using the talking points of Fannie and Freddie's unregulated private insurer competitors (AIG, Goldman Sachs, Lehman Bros., Merrill Lynch, etc), who had financial axes to grind.

2. The private insurers were "running rings" around Fannie and Freddie in lending to and insuring affordable - or "subprime" - housing mortgages (which the data makes clear).

3. The Bush administration pressured Fannie and Freddie to purchase and insure the toxic assets of the private insurers (which constitutes a market subsidy).

There's more, but you get the point. While Wall Street is to blame, Congress had a helping hand in making the mess worse than it should have been. Miller's comments, and the complaining that led to Miller's comments, begin at 1:42 and 15 seconds here.

AGAIN, IT'S NOT FANNIE OR FREDDIE'S FAULT ...

I've posted on this before, but since the far right lunatics like to demonstrate their ignorance by telling lies about the issue (yes, it's a lie if you know the truth and purposely ignore it), I'm posting the information again.

Again, Fannie Mae and Freddie Mac DID NOT cause the market meltdown. Click here to see the data.

Then go out and share the news with your clueless and ignorant friends. Not that it will help ... 

The Kool-Aid drinkers, after all, are self-medicated zombies.

- Mark

MARKET DELUSIONS RUN DEEP, II

A couple of days ago a friend sent me this market analysis, written by two economists, who explain why Wall Street wanted to suspend market prices on certain products. This practice, which suspends the "market-to-market" (MTM) accounting method, essentially allows market players to reprice an asset that they hold if it's generating income, even if the underlying asset is under water (akin to a homeowner making payments on a house that is not worth what they owe on it).

The logic behind suspending market prices is to help keep those who "own" the product from having to provide more cash or collateral to backstop the asset. The idea is to prevent fire sales on Wall Street. All things being equal, this is a good idea.

But all things aren't equal.

I wrote about this on Friday, and made it clear that the suspension of MTM effectively allows the financial sector to suspend reality. Among the many concerns I have is that suspending MTM is being done for the wrong reasons, with virtually no strings attached, and with plenty of government guarantees. It virtually invites another market collapse.

MARK-TO-MARKET’S A RED HERRING
As Bloomberg’s David Reilly points out, MTM is little more than a diversion employed by America's biggest financial institutions “to dodge two big issues -- their reckless use of borrowed money to boost returns and their inability to make sound loans and investments.” According to Reilly, of the $8.46 trillion in assets held by the 12 biggest banks before the meltdown, only 29% of it was something that could be marked to market. In some cases it wasn't even that at that level. General Electric Capital - which is similar in size to the sixth-biggest U.S. bank - said that just 2 percent of it's assets could be marked to market.

What’s really dragging down the banks? According to Reilly, its loans made to consumers, businesses, and other institutions. Because loans for cars, credit cards, and other activities are held at their original cost, when they fail to pay out they act as a drag on the banks. When this happens they need to come up with more collateral, or loan loss reserves. The banks didn't have the money. This is what banks were up against.

Put another way, MTM is a red herring that diverted attention form the bad loans banks made.

Real investors know this. They’re worried about the loan portfolios and the bad investments of the biggest banks. Simply put, they didn’t trust what the biggest banks were doing, and where they were lending their money. As Reilly points out,

… the Big Four have a higher percentage of tough-to-value assets due to their investment- banking activities. In many cases, losses that stemmed from those holdings reflect banks’ decision to enter risky transactions or markets. In that case, mark-to-market simply recognizes the reality of those missteps.

The biggest banks were being dragged down by their short-sighted lending decisions and their own stupidity. Mark-to-Market helped expose this.

DUMPING THEIR STUPIDITY ON THE AMERICAN TAXPAYER
Apart from transparency, and exposing the short-sighted decisions of America's financial institutions, why should we continue to use market prices to gauge what a product is worth? Because suspending MTM effectively allows financial institutions to reprice toxic securities. This, in turn, allows them to tell their creditors, their customers, and the government “Look at how much our securities are worth now … we don’t need more collateral or loan reserves … And besides, based on our magically repriced asset, if we want we can get a government guarantee or a government backed loan (through Federal Reserve and Treasury Department sponsored programs).”

I won’t go into the details how this happens (take a look at TALF and Maiden Lane programs to get an idea). Still, it's says much that Bank of America is shoving more and more of it’s “nonconcurrent” (and probably most toxic) loans on to the backs of the American taxpayer.

Consider the following. Last year, only 2.7% of BofA’s failing loans were backstopped by the American taxpayer (student loan guarantees, etc). Today over 20.5% of BofA’s $61 billion bad loans are now the responsibility of the American taxpayer. Take a look at the numbers.

I can't tell (yet), but it seems to me that BofA is doing this because they’re now able to tell the government, “These loans aren’t really bad because the underlying asset is still worth $100 million. See, we just repriced the asset.”

Yeah, and watch me pull a rabbit out my hat … nothing up my sleeve. 

At the end of the day, MTM is not the real problem. The problem is how much banks borrowed against assets whose prices have collapsed. I'm not sure, but it seems to me that suspending MTM was just another way for America's biggest financial institutions to reprice assets so they could dump them on the government through taxpayer funded guarantees.

OK, SO WE SUSPENDED MARK-TO-MARKET
OK, so the Financial Services Accounting Board (FASB) suspended MTM last April (2009). This could be a good thing. Franklin D. Roosevelt did it, so it can't be all that bad, right?

What we've forgotten is that FDR backed away from MTM because he had other programs and regulations in place (or being put in place) to help insure that suspending MTM wouldn't get out of hand ... or lead to excessive borrowing, inflated books, or wild speculation in other areas. What this tells me is that if we're going to take market prices out of the market, as FDR did, we should also reinstate the 1933 Glass-Steagall Act, which kept commercial banks, investment banks, and insurance companies away from each other's business.

While we're at it we should also repeal the Federal Reserve's 3-2 decision in 1987 that allowed commercial banks back into the securities' market in a big way. We should also put some teeth into the Securities and Exchange Commission, pare back FDIC guarantees, limit brokered deposits, do something about credit default swaps, repeal FANNIE MAE's privatization, and put some teeth into limiting GSEs. And, for good measure, we should have brought back HOLC (instead of President Obama's disasterous, and bank-driven Making Home Affordable Program) and bolstered the hand of labor.

The point is, FDR suspended MTM only because there was a regulatory framework in place to help insure the stupidity we saw in the run up to meltdown in 1929 (and 2008) did not occur.

CONCLUDING COMMENTS ON MARK-TO-MARKET
At the end of the day, the market analysis from the two economists got it wrong. Bringing MTM back in 2007 didn’t cause the market to collapse. It simply exposed the market stupidity that was going on after we deregulated the markets.

Look, I have no problem with suspending MTM, like FDR did. But if we're going to suspend MTM, and channel the legacy of FDR in the process, we should also bring back FDR-like programs which worked to insure that bubbles and other market stupidity didn't get out of hand in the post-war era.

We want to keep in mind that one of the reasons that market players were able to create such fabulous "wealth" over the past 20 years was because no one really knew how much some of the instruments they created were worth. But their computer models did. This helps explain why so much toxic, over-leveraged, debt was created. Market players were living in a market world governed by computer models rather than the logic of the market. MTM helped expose this fairytopia.

Simply suspending MTM, without calling for the regulatory infrastructures (especially related to over leveraging) that helped make our economy such a success in the post-war era, is like throwing a group of kids into a candy store and saying "Do what you want, but don't eat too much". Without rules, things will get out of hand.

What many ignore in all of this is that if our financial institutions hadn't borrowed and lent so much against shady assets - or if they had kept enough capital reserves - they wouldn't be worried about MTM valuations. Hyman Minsky has much to say about this (I'll leave Minsky alone for now; you can read about Minsky in my book, or in the labels below). But in a deregulated environment, where the biggest market players are borrowing and/or betting on assets of dubious value, well ...

Banks and other financial institutions have been making stupid decisions for years. The series of bailouts and subsidies for industry is long and sobering (for my money, much of it starts with the bank bailouts in 1982, and the S&L debacle). What happened in 2008 should have been a wake up call for the industry.

If market players don’t like what they saw once MTM exposed what was happening after 2007 they should act like real market players. They shouldn’t be getting so deep into products that create such a big mess for them, and the American taxpayer. That’s the way real market players deal with uncertainty.

Pretty simple if you ask me.

- Mark

EXPLAINING FANNIE & FREDDIE

Over the past year I've been asked about the role of Fannie Mae and Freddie Mac in the housing market collapse many times. It's obvious from the discussions we see in the media that there are not too many people that understand what either one does. I discuss their history and describe what both do in my book.

Still, this brief overview of both entities from Richard's Real Estate (hat tip to Economist's View) is about as succinct and on point as I've run across.

Back in 1987, when I started working on housing finance issues, I wondered this very thing. So I spoke with the person in charge of secondary market business for a Wisconsin Savings and Loan called First Financial (I wish I could remember his name now).

He had a crisp explanation: Fannie Mae was a Savings and Loan for Mortgage Bankers ... This was in fact the reason for their original existence. Fannie has been around since 1938, and it became private in 1968, and its purpose was to raise money from capital markets to fund mortgages originated by mortgage bankers. Between 1938-68, its business was entirely FHA and VA loans; thereafter it could fund private sector loans.

Freddie was chartered in 1970 at least in part in response to regional differences in the availability of mortgage credit. At that time, around 60 percent of mortgages were held by Savings and Loan Associations. These S&Ls were local businesses, who could not lend outside of their communities (I will need to double check, but my recollection is that they could not lend more then 150 miles away from their front door).

As young people migrated from the Northeast and Midwest to the sunbelt, leaving their parents and grandparents behind, there was a geographic mismatch between the location of deposits and the demand for mortgage credit. Freddie was invented to buy loans from S&Ls, turn them into securities, and sell them in the secondary market. This allowed money to flow where it was needed.

The distinction between the two institutions disappeared in 1992, with the passage of the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA). I am guessing that the reason we kept two around was to have some competition in the MBS issuance market.

I'll discuss this on the program after our discussion with Professor Thoma.

- Mark

LEAVE THE POOR OUT OF THIS ...

OK, this is probably the thousandth time I've seen or heard this nonsense repeated, so let's set the record straight (again).

MYTH: Making home loans available to poor communities and poor people created toxic mortgages and caused the financial markets to collapse.

REALITY: Only the morally bankrupt and the truly clueless make this argument.

Here are the goods on the poor-people-caused-the-meldown myth, as drawn from Media Matters:

On MSNBC, Pat Buchanan perpetuated the myth that government efforts to expand affordable housing to underserved communities caused the financial crisis, a charge that has frequently taken the form of attacks on the Community Reinvestment Act. In fact, as Fed chairman Ben Bernanke has stated: "Our own experience with CRA over more than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties."

Got that? Poor people did not cause the market meltdown!

If you want to know what caused financial markets to collapse look no further than (1) the the financial sectors willingness to lend to anyone with a heartbeat, (2) their efforts to package and sell these loans to anyone looking for a quick buck (which generated significant fees), and (3) their decision to "insure" these packaged loans with "insurers" who had neither the means nor the intention of following through if the market collapsed (this is what happens when you have no one regulating "insurers").

In real simple terms, it was greed and stupidity on the part of the financial sector that got us into this mess. Conservatives need to leave the poor out of this ...

- Mark

UPDATE: As if on cue, here's former Senator Phil Gramm blaming the poor for the market meltdown in the Wall Street Journal. The deregulation policies he spearheaded, incredibly enough, had nothing to do with the market collapse. Imagine that ...

THE FACTS ON THE MELTDOWN

Conservative pundits want you to believe that Fannie Mae, Bill Clinton, and Democrats are to blame for the current financial crisis. This fits in with the McCain-Palin narrative that we should fear people who aren't one of us ... they'll eventually cause trouble. The problem, according to McClatchy news, is the data (from the Federal Reserve) doesn't support the rhetoric:

More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

Simply put, the institutions making the risky loans were from the private sector. Worse, the institutions buying up all the bad mortgages in the secondary markets also turned out to be from the private sector.

According to data from Inside Mortgage Finance, between 2004 and 2006 (when subprime lending was exploding) "Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent."

One of the reasons the private sector institutions were able to make so many bad loans - and then buy them from each other - is because of deregulation that occurred in the securities and banking sector since the early 1980s. The President's Working Group on Financial Markets chimed in when they issued a statement saying the turmoil in financial markets "clearly" was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004.

No wonder the McCain-Palin rallies have taken such a hateful turn. With John McCain showing no understanding of economic issues, there are no "teachable" moments for him. Ignorance has been allowed to trump the facts. It's all they have now. Well, that, and the hate-filled rallies.

- Mark

THE BAILOUT MESS AND ... A MUSEUM?

So I've been thinking about the best way to explain this financial mess so that the average person can understand what's happening. I'm not sure this is the best way to do so, but I think I'm on to something ...

Imagine you're going to a Museum. Let's call this museum the Wall Street Museum of Debt and Deregulation. The museum is made up of several rooms with assorted themes. In one room, THE PANIC ROOM, we see paintings of horizons with fine details of assorted scenes in the foreground. Incredibly enough, in each painting we can see both the forest and the trees. Each forest represents No Credit / No Financing / Stupid Decision-Making. These are the broad strokes of collapse.

But if we really want to appreciate the painting we need to look a little closer at the trees. In our museum the trees are represented by Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., Merril Lynch, etc.

As we look even closer at each painting we can discern rolling meadows before the trees, barns and farm animals, lakes, etc. These scenes, however, are not so bucolic in our museum, as they are represented by the invidual instruments and activities of each institution that has been bailed out.


In the foreground of the Fannie Mae/Freddie Mac Painting, aptly titled "The Tower of Babel," we see a picture of people purchasing highly toxic CDO products, when they should have been focused on government sanctioned products. For contrast, also in the painting is Fannie Mae's heavily regulated side-kick, Ginnie Mae. She is sitting alone, but content. She may not have gotten the sudden high from big toxic profits, but she did not purchase toxic garbage either.

In the foreground of the Lehman Brother's painting, "Operation Rolling Blunder," instead of rolling hills in the foreground we see rolling debt. But we also see that those who are continuously lending and rolling money over for Lehman are worried. Lehman Brothers is shifting their investment and debt instruments so many times they have become a financial chameleon. Their risk levels shift every month. Lenders are worried because Lehman is borrowing too much each month ($100 billion) and decide they can't risk more money. As panic hits the market, lenders get cold feet, and Lehman is forced to declare bankruptcy.


Then we have insurance giant AIG. In the foreground we have people selling insurance. AIG thought they could sell insurance for markets filled with toxic instruments like they sold insurance for houses. Instead, they were insuring a house of cards, which is captured in the painting. In the painting's foreground we see the owners of houses bemoaning collapsing home values. We also see the holders of these mortgages asking AIG insurers to demonstrate they can cover the written value of their mortgages. AIG can't do this. Panic hits. An $85 billion bailout loan is organized by the federal government.

There are additional rooms in our museum. But no one seems interested in THE ROOM OF BAILOUTS PAST, where we find paintings of "The Mexico Bailout" (1982), "The Continental Illinois Affair" (1984), "The Savings & Loan Debacle" (1989-1990), "The Asian Currency Reclamation Project," "The Fed Organized LTCM Bailout" and the list goes on.

Making mattes worse, no one wants to go into THE GALILEO ROOM, which helps museum goers see ... we'll discuss this on the program this afternoon.

- Mark

MARKET WOES DEEPEN

With the recent bailout of Fannie Mae and Freddie Mac, more trouble is coming around the corner. The NY Times is reporting that Lehman Brothers, Merrill Lynch, Washington Mutual, and insurance giant, American International Group (AIG), are primed for collapse or bankruptcy as well.

There's a reason why this is happening. And it's all tied to deregulation (thank you Ronald Reagan) and artificially cheap credit (thank you Alan Greenspan). And while analysts are hoping takeovers, or a sudden influx of funds are around the corner, they really have no plan for dealing with the steady drip of institution collapse in the economy.

With more collapses are around the corner you would think John McCain would want to tout his economic policy proposals. Oh, yeah, I forgot. He has none, other than more of the same. Tax cuts.

No wonder all he wants to talk about is lipstick. His world view and economic policies represent the Mother of All Pigs.

- Mark

PALIN: WAR, A "TASK FROM GOD"

If Jeremiah Wright was fair game, so is Sarah Palin's association with the Wasilla Assembly of God. Through their leaders, the Wasilla Assembly of God tells people that curses can be intergenerational (which could explain the Cubs' drought), that cities and regions can be possessed by demonic powers (no word on whether this applies to the White House, or its occupants) and, as you will see, that cell phone annointments are possible (brought to you by Verizon?).

It appears that the rationale of Palin's church is tied to feeding a culture of fear that we've seen before, and from which many Conservatives seem to draw their sense of self.

The real zinger in this clip, however, is Sarah Palin telling the gathering that her son, who deployed to Iraq this weekend, was about to engage in a "task from God." Great, another dominionist who thinks the U.S. military is God's military. If you don't want to watch the entire clip (which seems like a "Jesus Camp, II" promo), Palin's "task from God" comment is 8:45 into this clip.



If Palin would do a little more secular research rather than stumping for a Jesus Camp, II promo she might know that the Freddie Mac abd Fannie Mae aren't publicly owned entities, as she suggests here.

No wonder Team McCain won't let her out to speak on her own - she might be Dan Quayle with lipstick.

- Mark

WHY I LOVE GEORGE BUSH, II

I love George Bush because he makes me look like a prophet ...

The Bush administration, who talks a big game about accountability and market fundamentals, is going to bailout FANNIE MAE and FREDDIE MAC. You and I will will pick up the tab, which should cost us billions more than whatever the Bush administration says it will.

I began writing about this back in April. In spite of what the Bush administration said at the time, I wrote that the American Taxpayer - you and me - were going to pick up the tab caused by deregulation, cheap money, and industry stupidity in the housing market. If you're curious what this is all about, here's one of my earlier posts on the topic (or click on one of the labels below).

I'll have more to say about this during the week.

- Mark

AND IT BEGINS ... FANNIE MAE LOSES $2.3 BILLION

Remember when Treasury Secretary Henry Paulson told Congress and the American people that granting the Bush administration the authority to inject billions of dollars into Fannie Mae and Freddie Mac was all about "restoring confidence" and that he "doesn't expect to have to use taxpayer funds"? Well, guess what? It looks like he's going to have to start using taxpayer funds pretty soon.

Fannie Mae just posted $2.3 billion in losses, for its 4th quarterly loss in a row. But don't worry, Fannie Mae's Chief Executive Daniel Mudd is on top of things. He said that their problems are caused by "volatility and disruptions in the capital markets" which have become "even more pronounced in July." Huh?

Why doesn't Mudd just come clean and say:

"We became stupid and greedy, and allowed our brokers and agents to sell us loans and contracts that were poorly vetted and driven by assumptions that we should have known were implausible ... Like the levees in New Orleans, who would have foreseen that not verifying income or assets was a bad thing?"

To deal with it's losses Fannie Mae said it "would slash its dividend more than 85 percent and take other steps to shore up its capital position." Translated, this means shareholders will still get some cash, and that Fannie Mae will start looking for lines of credit.

Hmmm, I wonder which (cough, cough ... taxpayer funded ... cough, cough) line of credit Fannie Mae will eventually have to dip into to ...

Stay tuned. There's more around the corner.

- Mark

UNDERSTANDING THE FANNIE MAE BAILOUT

It looks like the Bush administration is pushing hard to get Congress to support Bush's bailout of Fannie Mae and Freddie Mac. He's got the Federal Reserve inspecting their books, from which they will reveal ... well, whatever the Bush administration wants them to reveal.

Seriously, there's no secret to what the Fed's inspectors are going to find. Fannie and Freddie are deep in debt. They owe $1.5 trillion. They "own or guarantee more than $5 trillion in mortgages" - which may not be saying much given the state of many of those mortgages (see previous post).

And that's that, so lend them some money.

For those of you who are unsure why any of this is important, consider this. Fannie Mae and Freddie Mac are government-chartered, but privately held, companies that purchase mortgages. Together they own half of America's mortgages. By purchasing mortgages from the mortgage industry Fanny Mae and Freddie Mac help pump money back into the industry so that mortgage companies can loan more money for housing purchases.

The arrangement is supposed to be a win-win situation for both consumers and the industry. The problem is Fannie and Freddie are so big that if they go under it is widely suspected that mortgage lending in this country will come to a virtual standstill.

And that's the rosy scenario.

Problems for the mortgage industry began when they started relaxing standards with "No Doc" loans, NINJA (no income, no job, no assets) loans, and the Pick Your Payment plans (noted in the previous post) at the same time that Alan Greenspan lowered interest rates. And, in a brilliant stroke of genius, Fannie Mae and Freddie Mac kept on purchasing these and other "innovative" loans.

But here's the funny part.

With so many potentially bad loans on the books, the Bush administration is arguing that the bailout is necessary because, well, Fannie Mae and Freddie Mac don't really need the money. Huh? Here's Treasury Secretary Paulson's rationale for the bailout:

The more flexibility we have on the credit facility, the more confidence you have in the market and the greater protection to the taxpayer because the less likely it will be used.

Seriously, Secretary Paulson is arguing that Congress should provide the administration with "open-ended authority" to make investments and loans to the two giant companies because the Bush administration wants to send a strong signal to the markets that they have plenty of financial muscle behind them.

He'd be better off telling the truth. The Bush administration doesn't want the economy collapsing on his watch.

Incredibly enough, Paulson added that the American taxpayer shouldn't be worried because both firms have "strong collateral" to back what the government makes available. And that "strong collateral"? One has to assume it's all the mortgages they own.

So this is what we have. The Bush administration wants to make about $25 billion available to two private firms, who are sitting on a pile of mortgages that may be toxic and ready tank. And it's because they want to send a strong signal to markets.

Hey, I have an idea. Why not let them go under. This will send a better signal: Don't make stupid business decisions, and expect the American Taxpayer to bail you out.

- Mark

P.S. I understand that letting Fannie and Freddie go under is not responsible, and probably even dangerous. However, if the federal government is going to provide the confidence that market players clearly cannot, we need to start looking at new regulations, including those listed in the Robert Reich post listed below.

AMERICAN CAPITALISM AT WORK ...

There's an excellent article in today's NY Times that discusses the "great divide" between bankers and borrowers in America.

The article points to two developments that are contributing to this divide: (1) Borrowers who are in trouble on their mortgages are offered little or no relief from their government, while (2) Banks and the executives who ran them into the ground are quickly deemed worthy of taxpayer bailouts. More specifically, the American taxpayer is being ...

... asked to stand by with money to inject into Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants, should they need propping up if loan losses balloon.

The message in this disconnect couldn’t be clearer. Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.

So, this is what we're moving to in America: The homeowner-taxpayer has to suck it up and bear personal responsibility for their actions. The "too big to fail" crowd, who signed off on the shady loans and contracts, gets the government to save them from their poor decisions. And the homeowner-taxpayer pays for it at both ends.

There's something about personal responsibility that's not right here.

- Mark

ENDING SOCIALIZED CAPITALISM

Former Labor Secretary Robert Reich has an excellent idea for ending "creeping socialism" for the private sector that's occurring during the Bush administration. Responding to the bailouts proposed for Fannie Mae, Freddie Mac, and IndyMac, Reich suggests the following.

... When taxpayers insure a giant entity against loss -- as we now are with Freddie, Fannie, and Wall Street investment banks -- those entities must agree that:

(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and

(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) -- so that if and when the entities become profitable again, taxpayers are compensated for the risk they've taken on.

I would probably add another ...

(3) Money, salaries, and bonuses above and beyond what the President of the U.S. makes, from the 3 years prior to the bailout, must be paid back by the top executives.

My thinking is this: If the executives ran the company into the ground, Why should they be allowed to be compensated like corporate champions for doing so?

- Mark

P.S. The president makes $400,000 per year.

BUSH AND MARKET SOCIALISM IN AMERICA

President Bush spoke yesterday at an unscheduled press conference. His hand was forced by increasingly bad news coming out of markets, and declining consumer confidence. How bad is it, you ask? Bad enough for President Bush to say with a straight face that providing bailout money to Freddie Mac, Fannie Mae, and IndyMac did not constitute a break from free market principles.

So let’s take a look at what President Bush increasingly believes a free market economy looks like.

GOVERNMENT INSPIRED CONFIDENCE … After telling us throughout his increasingly torturous tenure as president that the government is the problem President Bush told America yesterday they didn’t have to worry about losing their money to the problems that plague America’s largest banking institutions, like IndyMac. Why? Because the financial institutions adhere to sound business practices? Nope. Americans can remain confident about their money because “their deposits are protected by our government …”

GOVERNMENT SUBSIDIZED INVESTMENTS … And what about President Bush’s assertion that poor market performance and incompetence would eventually lead market players to discipline bad behavior? Forget about it. The president wants Congress to give the Treasury Department the authority to lend money to Freddy Mac and Fannie Mae which, together, hold or guarantee almost half of America’s $12 trillion mortgage debt. That’s the easy part. Then he wants to bailout private stock holders by having the American taxpayer purchase their collapsing stocks (presumably at “fair market” price).

FAVORABLE LEGISLATION … Then we have Sen. Richard C. Shelby (R-AL) claiming that there is a silver-lining because the banking system entered “into this episode extremely well-capitalized” and “extremely profitable.” Nowhere did Shelby mention that part of the reason for their healthy portfolios is that Congress long ago wrote the banking industry very favorable credit card and bankruptcy legislation that has worked to keep consumers on a debt-laden treadmill. And let’s not forget how abolishing the Depression Era Glass-Steagall Act in 1999 allowed private investors to get into the insurance and housing industries.

GOVERNMENT PROVIDED CAPITAL … Oh, and let’s not forget that the federal government made over $100 billion in credit and loans available to our nation’s financial institutions over six months ago, which they drew upon (at rock bottom interest rates), but neglected to lend out.

Let’s recap. When things go bad, the government (1) provides the security, (2) subsidizes investments, (3) will write favorable legislation that generates and props up profits, and then (4) provides capital to troubled financial institutions.

Somehow “market socialism” doesn't seem strong enough. With market bailouts, and the fact that President (Comrade?) Bush seems bent on tearing down our Constitution (with his FISA legislation), he and his republican friends in Congress seem hell-bent on creating another U.S.S.R. that only they benefit from … The United States of Socialist Republicans.

Bring your own Vodka. But don't worry. In Bush's U.S.S.R. the government will eventually subsidize the purchase.

- Mark

"TOO BIG TO FAIL" & BAILOUTS

Here we go again …

According to an April 14th Standard & Poor’s Report, two enterprises with nominally public missions, Freddie Mac (the Federal Home Loan and Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) may have to be bailed out to the tune of roughly $5 trillion if the economy slides into a deep recession. The rationale is that these for-profit enterprises are seen as too big to fail because of their potential impact on the national economy.

Let’s make this real simple. “Too Big to Fail” is slowly becoming a nice prelude, and euphemism, for industry bailouts. In a darker corner some might call it what it looks like – another form of corporate welfare.

So, the question remains, How did two for-profit enterprises like Freddie Mac and Fannie Mae get into the position where the feds (i.e. you and me) may have to bail them out in the future?

Real simple (actually, I'm oversimplifying here). Both enterprises purchase a bundle of home loans and use the proceeds, plus fees, to guarantee that home loans will be processed and made in a timely manner. They then sell these products to others, who like to be called "investors" (I say this because the "investors" will be at the forefront demanding a bailout should everything fall apart). Freddie Mac and Fannie Mae then use the proceeds to buy more mortgages from the mortgage industry. In doing so Freddie and Fannie (1) create a new class of “mortgage backed securities” that (2) returns money to mortgage lenders, who then (3) make more loans to consumers.

This arrangement facilitates a transfer of funds from Wall Street to Main Street. But it also allows Wall Street and unscrupulous lenders to get off the hook when they push products they know are shady. You know, the "no doc" loans, the Ninja (no income, no job, no assets) loans, and the "liar" loans we saw over the past 5 years. Why worry about them when everyone's bought into the cycle of deception?

Problems also arise when you have companies like Countrywide Financial who go to Freddie Mac for more than $50 billion in loans, and then put up virtually worthless (or soon to be worthless) subprime loan contracts as collateral. This helps to explain why Freddie Mac and Fannie find themselves in trouble today. They’ve gotten wrapped up in a lot of “toxic” loan contracts.

There’s more to this story, but I’ll make this simple: This is what happens when government enterprises, with legitimate public missions (homeownership), underwrite an industry that then gets caught up in a euphoric web of deregulation, easy money, and greed. The taxpayer picks up the tab, while the "investors" lose little to nothing.

These dynamics not only gives legitimate government activities a bad name, but undermines the integrity of the market.

- Mark

COUNTRYWIDE & "SLEAZE CAPITALISM"

After driving Countrywide Financial to the brink of financial ruin (in part by issuing $40.6 billion in subprime contracts), former president Stanford Kurland was recently named chairman and chief executive of Private National Mortgage Acceptance Co. (PennyMac). In his new position Kurland will help PennyMac buy loans "from financial institutions seeking to reduce their mortgage exposures.”

Cutting through the jargon, this means Kurland will take his knowledge of "which mortgaged-backed securities are toxic" and will help his new company pick out the ones with real value (we can all guess who's going to pick up the tab for the worthless stuff, right?). Putting Kurland's charmed financial life in perspective, MoneyNews.com reports ...

... If Kurland thrives at his new venture, he certainly won’t be the first person in the investment world to cause huge losses and then rebound ... Victor Niederhoffer, who first made his reputation as a partner of the legendary hedge fund mogul George Soros, has apparently made and lost at least two fortunes through his investments ... There is a difference between Niederhoffer and the Countrywide crew, however ... Niederhoffer’s mistakes hurt himself and his clients. Countrywide’s mistakes helped push the economy into what probably is a recession and the financial system into a serious crisis ...

As MoneyNews.com pointed out, while many people are to blame for the subprime mess, "the leaders of Countrywide ... played a role."

No doubt considering the recent billion dollar Countrywide bailout engineered by the government, consumer lawyer Irv Ackelberg told The Wall Street Journal, "The whole subprime mortgage fiasco was built on sort of Wall Street’s snake-oil salesmen convincing America this is a can’t-miss scheme.” Nouriel Roubini was even more blunt: "The lesson of this sad and sleazy episode is that when profits are privatized and losses are socialized we get sleaze capitalism ..."

- Mark