Wednesday, October 1, 2008

An Honest Democrat Speaks Out...

While thugs like Chris Dodd and Barney Frank continue to insist that “the current financial crisis” is a “failure of the market” and that “loaning money to high-risk, low-income borrowers is sound policy,” there are at least SOME Democrats willing to look at things honestly.

After earlier defending Fannie Mae and Freddie Mac, Rep. Artur Davis of Alabama recently said;

“Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie Mae and Freddie Mac. I defended their efforts to encourage affordable homeownership, when in retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly, I wish my Democratic colleagues would admit that when it comes to Fannie and Freddie, we were wrong. By the way, I wish my Republican colleagues would admit that they missed the early warning signs that Wall Street deregulation was overheating the securities market and promoting dangerously lax lending practices. When it comes to the debacle in our capital markets, there is much blame to go around for both sides.”

Rep. Artur Davis (D-AL)

The current crisis is NOT a “Wall Street crisis,” or a “bank failure,” it’s a “short-term credit market crisis.”

The crisis itself is NOT a banking crisis it’s a credit crisis that was brought on when the housing bubble burst, and that bubble was brought on by abuses of the CRA (the Community Reinvestment Act), which were exacerbated by the GSEs (Fannie Mae and Freddie Mac) which both issued tons of "bad," or high-risk loans, bought up more (much of that mandated by the abuses of the CRA that morphed from its original intent in 1977 to the monstrosity it's become) and then fraudulently re-packaged that bad debt as “government-backed mortgage securities” and sold them to various Capital Markets around the world, including, of course, by far the largest such market – Wall Street.

The exposure of our financial institutions (from banks to insurers to brokerage houses) to those toxic loans, spurred some savvy investors (including lots of Hedge Fund portfolio managers) to short-sell (bet on or "take the position that the stock price of that entity would go DOWN") those financial stocks, which in turn kept those companies, many, like Merril Lynch and AIG, with limited exposure to the “subprime debacle” from getting the short-term credit (loans) they needed to operate, as no one would lend to companies as their stock prices fell due to the “feeding frenzy” of short-selling that surrounded their stocks.

What BOTH Conservative Democrats and Republicans have supported, in defeating the original Paulson plan, is limiting taxpayer exposure to all this bad debt. While Fannie Mae and Freddie Mac probably shouldn’t have existed, in fact, Barney Frank is certainly right about the fact that “If it were up to Republicans (actually Conservatives, in general) Fannie Mae and Freddie Mac probably wouldn’t have survived,” AIG is a very different story.

AIG didn’t really have all that much exposure to the bad debt, but they had some and they got caught up in the short-selling feeding frenzy. The government has no plan to run AIG and seeks to divest itself of its current 70% share of that company.

Do we need to fix the short-term credit markets?

Do we have to do it by foisting reems of bad debt onto the taxpayer’s backs?
It doesn’t seem likely. Reducing the Capital Gains tax and a proposal for a one-year reduction in the taxes on foreign profits, a plan that supporters say would help the economy by bringing a flood of investment back into the United States are both seem like better alternatives than a straight taxpayer funded bailout.

The current crisis can really be summed as “Enron Comes to Washington” with Barney frank as Jeff Skillings and Chris Dodd as Ken Lay.


Rachel said...

Hey, give him credit. A great deal. If more Dems "come out" maybe people will get a more honest view of the crisis. They are not getting it from the media

If you don't mind me asking, what does your wife think of all this. Doesn't she work in stocks.

JMK said...

I DO give him a lot of credit Rachel.

It's not easy to change one's mind on anything.

I believe a lot of Democrats and many Moderate/Liberal Republicans were sold a bill of goods with the re-tooling of the CRA and their being told their were "no abuses at Fannie and Freddie."

Rep Davis did something very few people on EITHER side often do, acknowledge some political culpability.

And you know what? As much as government failed in all this, so did WE the people. There was no public outcry when the efforts to rein in Fannie Mae and Freddie Mac were blocked by their lobbying efforts in 2003 and 2005.

Actually my wife audits Hedge Funds for a major accounting firm...she's looking at the entire financial sector and doesn't like the way things look.

Even with the bailout to restore the short-term credit markets, there's already been dangerously too much consolidation among the major banks and it looks as though there'll be a good deal of down-sizing" with layoffs coming.

I think like most people she still doesn't know what to think (she's not like me, with an opinion on everything) about all this and probably like most, she's hoping for the best.

On that score, my major concern is that we don't recognize what got us here.

This crisis is not a "failure of the markets" OR a "private sector crisis," it's really a government creatd one. Using the CRA to, in effect, create credit out of thin air was a foolish idea and both extending credit to those who were too high-risk and extending too much credit to others was reckless and irresponsible.

That's why I really respect Rep Artur Davis of Alabama and have no use for Barney Frank and Christopher Dodd.

Avatar said...

To keep up with Wall Street expectations, Fannie Mae held onto more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s. Once again it was spared in 2008.

Rachel said...

This should put a smile on your face - at least a little bit
Herald Readers put blame on Barney Frank

the herald also was the one who exposed Obama's failure to maintain housing for his constituents. He got them built, but never checked on the upkeep, even when the citizens were protesting him

Tom said...

How do you feel the Commodity Futures Modernization Act of 2000 played into the current credit crisis? The act specifically banned regulation of credit default swaps. Seems like the problem was created back then to me. The efforts in 2003 and 2005 seem more like treating symptoms of that cause. What do you think?

JMK said...

You’re right Tom, the Commodity Futures Modernization Act of 2000 did indeed specifically ban regulation of credit default swaps and those unregulated instruments, which are, in effect, insurance policies against default on risky investments like mortgage backed securities, did ultimately necessitated the government bailout of insurer A.I.G. and probably precipitated the failure of other “otherwise healthy companies” that had “only limited exposure” to the “subprime” debacle.

Most CDS’s are bought and sold as speculative derivatives contracts.

Warren Buffet, among others, has been extremely critical of CDS’s. He’s called derivatives bought on spec as "financial weapons of mass destruction." In Berkshire Hathaway's annual report to shareholders in 2002, he said, "Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them.”

Peter S. Cohan notes that, “there were "only" $1.3 trillion worth of subprime mortgages and the CDS market is 48 times bigger than that -- and more than four times bigger than U.S. GDP. And since nobody has ever had to deal with this volume of CDS unwindings, it is impossible to calculate how much they will cost.”

The vast majority (over 95%?) of the defaults are among those “subprime mortgages,” so they’re restricted to that $1.3 trillion in high-risk debt...and even among those “subprimes,” the majority are not in default, at least, “at this time.

So yes, the CFMA does play a large part in all this, but, blaming deregulation for our current troubles is pretty much arguing, “Well the people pulled their pants down, I COULDN’T HELP myself from kicking their ass.”

And yes, that’s EXACTLY the argument that all too many investor pigs and politico pigs are making’s pretty much the same argument the so-called “victims” of these “subprime mortgages” make – “I COULDN’T HELP but take all that easy money offered to me.”

Look, all those subprime mortgages (and for those, who aren’t as into all this as Tom, and for dummies, like myself – “subprime loans” refers to the borrower being “SUBPRIME” or NOT “creditworthy” under traditional lending criteria, NOT the instrument/loan itself) were ultimately HIGH-interest rate mortgages, despite whatever “teaser rates” were front-loaded onto them.

Arguing that such buyers were “hoodwinked” or “didn’t know what they were getting into,” (the terms, including, in many cases, clauses that barred re-financing at better rates and pre-payments...note to prospective borrowers, NEVER take a loan with prepayment penalties OR ones that limit your re-fi options) is as absurd, at least in my view, as arguing that investors “COULDN’T HELP THEMSELVES from taking advantage and recklessly abusing deregulated markets because EVERYONE’S DOING IT.”

This is, sadly, the part in all this, where most people’s eyes glaze over. Bottom-line, THIS is what the American people seem to object to most – they seemingly have little sympathy or patience with nimrod “subprime borrowers” who now claim they were “taken advantage of,” just as surely they have none for investors who “couldn’t help but take advantage” – they don’t see those folks as “victims,” like myself, it would seem that many, if not most Americans see those folks as predators, or “VICTIMIZERS” of the rest of us, who played by the rules.

The lack of sympathy comes from this whole thing smacking of, “Hey suckers! I screwed all of you, and now I’m busted and broke. How about bailing me out, whaddaya say?”

So far, the people say Nay!

We’ll see what the House says tomorrow on what is basically the same Bill, only with a few tax-incentives built-in.

JMK said...

"To keep up with Wall Street expectations, Fannie Mae held onto more mortgages and mortgage-backed securities for investment purposes." (Avatar)
This time there were other reasons as well, Avatar.

The re-tooling of the CRA back in 1994 forced banks to "expand their lending criteria" (in other words, offer loans to people who weren't creditworthy under normal conditions), which is the same as mandating retailers to sell their products at below cost, while whispering to them ("Don't worry, we got your back with a bailout, if necessary.")

Fannie Mae and Freddie Mac, not only serve no useful purpose in the current housing market, they work against traditional market forces.

The apparent "malfeasance" at Fannie and Freddie surrounds their creating many of these new "subprime" vehicles and then buying them back...and THEN, when faced with over $1 TRILLION in bad debt that the government couldn't possibly back...they went ahead and re-packaged all that bad debt as "government-backed mortgage securities" and sold that to various Capital Markets around the world, including the largest such market - Wall Street.

Did investors and CEOs of major financial institutions act like pigs in "Not being able to help taking advantage of a situation that offered the promise of easy money"?

Yes, they DID.

Did armies of "subprime borrowers" act like pigs in "Not being able to help themselves from taking advantage of all that eaasy money offered to them"?

Yes, they did, as well.

Now the whole scam has collapsed and the vast majority of Americans who derived no direct benefit from any of this are left holding the usual.

You think Rep Barney Frank and Sen. Chris Dodd didn't know this "subprime" set-up was a scam?

You think Jim Johnson and Franklin Raines didn't know?

THEY KNEW...and that's why I believe all those (and others) are guilty of gross "abuse of governmental authority" and "malfeasance."

JMK said...

THANKS Rachel!

It DID make me very you can see from the above post.

conservative brother said...

At least not all democrats are scummy just most.

JMK said...

The ONE bright spot for Conservatives Tyrone has been the rise of Conservative Democrats.

I KNOW they don't hold many leadership positions in the Democratic Congress YET, BUT they are almost 25% of the Democrats in Congress, with most of them being elected SINCE 2006.

American Ideas Click Here!