For the Congress to vote for a bill which abrogates the constitutionally mandated separation of powers is prima fascie treason.
 

The causes of this current financial crisis may be many, but is difficult to see how a "deregulatory philosophy" is one. Is there a particular deregulatory action taken that you have in mind, or were we to skip right over the mechanism, blame having been properly assigned?

The suggestion that the Wall Street investment houses form a part of the Republican base, but not the Democratic base, isn't supported by the record of campaign contributions. Goldman Sachs, one of the two remaining independent investment banks and the former employer of Sec. Paulson, is, through its employees, the largest donor to Obama's campaign.

In the end, once one works past the hand-waving and partisan attacks, one is left with a lawyer's complaint: the process this proposal would establish doesn't leave enough room for lawyers to run. The rule of law would be satisfied by the grant of authority that the Treasury Dept has requested, but the rule of lawyers wouldn't.
 

Is there a particular deregulatory action taken that you have in mind, or were we to skip right over the mechanism, blame having been properly assigned?

No skipping necessary. The dominant mechanism I've been hearing about is the Gramm-Leach-Bliley Act.
 

The current administration is nothing but a crime syndicate. If they really want to help the nation, let them resign the office they have digraced right now.

And any bill that is passed should include srict oversight.
 

Marty:

1) Once again, neither this administration, nor the previous Clinton administration when most of the deregulation occurred, changed or removed a single statute or a regulation which would have prevented this event.

2) Instead, deregulation SAVED tax payers money by allowing Treasury to arrange for private sector solutions. The 1999 Clinton era Gramm-Leach-Bliley deregulation statute eliminating the New Deal prohibition keeping banks from owning investment firms allowed the mergers rescuing Bear Stearns, Merrill Lynch and very shortly Morgan Stanley.

3) It is doubtful that proactive regulation could have addressed the primary problem being addressed by the proposed legislation. The problem is that we invented novel financial instruments that no one was able to value when they went partially insolvent. There was no problem to address until this event actually occurred.

4) The other major problem was that Fannie and Freddie were extending mortgage credit to those who were not credit worthy. Mr. Bush and the Senate with McCain in the lead each offered legislation to clean up Fannie and Freddie, and in both cases the Dems and some GOP opposed tightening up credit standards because un-credit worthy Dem constituents would have been cut off.

To the extent that added regulation would have helped prevent this problem, it was the Dem Congress who stood in the way.

5) This bill DOES NOT offer unreviewable power to the Executive. This new entity will be authorized, funded and is fully reviewable by Congress. This is not a case where Congress is exceeding its Article I power to interfere with the President's Article II. Instead, we are dealing with an area completely within Article I and the Executive only has as much power to administer the program as is granted by Congress.

6) This bill is nothing novel. It is modeled after the legislation enacted by the previous Bush and the previous Dem Congress to dispose of the assets of failed S&Ls.

7) Marty, put your pathological hatred of all things Bush to the side for a moment, imagine that a President Kerry was in office and ask yourself seriously whether you would want resolution of what we agree is the worst financial crisis since the Depression bank failures to be delayed for months if not years under normal public contract regs? This is not the time for partisan BS. If the Dems in Congress during an election year can put this crap aside for the greater good, can you?
 

Just to pick up from the previous threads on this subject, I trust people are beginning to get the message about the scale of the problem. This article in the UK Daily Telegraph Financial crisis: Default by the US government is no longer unthinkable is worth a read. Two points from the 'doom and gloom':-

"Nothing better reflects the amount of fear among banks in America - banks everywhere - than the sky-high rates they're continuing to charge when lending to each other. Ordinarily, inter-bank (or Libor) interest rates are only slightly above base rates. But with so much uncertainty remaining about the scale and occurrence of "sub-prime" - and with desperate bank executives still so reluctant to "fess-up" their losses - the US Libor rate on money to be paid back in three months is now a staggering 1.5 per cent above base. In recent weeks, Libor rates have shot up in other countries too. Paulson's latest liquidity injection has lowered over-night Libor rates for now. But, despite the torrent of cash the US has directed at the credit markets, longer-term inter-bank rates have stayed stubbornly high, and some have gone up further. In other words, even the banks themselves don't think the rescue plan will work. Expect more - and bigger - liquidity operations in weeks to come."...

"But, in the run-up to the US election in November, Democrats in Congress - and even some Republicans - may decide they're simply not having it. How much more can the US taxpayer take? It sounds insane, but the liabilities being taken on by the Fed and the US Treasury are now so enormous that the government itself could default. No? Check out the chart showing the recent spikes in the US 10-year credit default swap [up from 8 to 26 basis points]. In other words, the market is now pricing-in the genuine possibility that the US will struggle to pay-back some of its long-term T-bills. That possibility is still deemed to be quite low. But the ultimate financial question - until recently, unthinkable - is now being asked. Yes siree, the mighty US government could default. That's how much the world has changed."

The political climate is also delicate - this from the Independent on Sunday: US $1 trillion bailout is under threat from political skirmishes:-

"But leading Democrats said a Bill focused on Wall Street would be unacceptable unless accompanied by more help for homeowners. Barney Frank, chairman of the House Financial Services Committee, said the measures should include a second economic stimulus package with funding for infrastructure. A first stimulus package, containing $150bn (around £80bn) of tax rebates, buoyed consumer spending over the summer and kept the US out of recession. Other Democrats have called for measures to prevent more home foreclosures. The leader of the Senate's Democrat majority, Harry Reid, said: "We must not forget Main Street as we address the crisis on Wall Street."

With Mr Paulson spending the weekend contacting chief executives across the banking industry to discuss a mechanism for the government to buy toxic assets, aides remained positive that a deal would be reached. Last night, however, he was also facing anger from some within his own Republican Party, as a number of congressmen questioned the cost of a taxpayer-funded rescue that some estimates suggest could run beyond $500bn. The Republican presidential candidate John McCain has strongly criticised the state's role in salvaging the US financial system. On Friday, he said: "The Federal Reserve should get back to its core business of managing our money supply and inflation. It needs to get out of the business of bailouts."

The lobbyists are aready in there according to the WSJ:

House Republican staffers met with roughly 15 lobbyists Friday afternoon, whose message to lawmakers was clear: Don't load the legislation up with provisions not directly related to the crisis, or regulatory measures the industry has long opposed. "We're opposed to adding provisions that will affect [or] undermine the deal substantively," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, whose members include the nation's largest banks, securities firms and insurers. A deal killer for the group: a proposal that would grant bankruptcy judges new powers to lower the principal, interest rate or both on a mortgage as part of a bankruptcy proceeding."

There is perhaps one thing now certain: the Reagan/Thatcher model of free market capitalism is today like Kim Jong Il - dead for all practical purposes - what is required is a decent legislative burial. That requires the democrats in congress to close their ears to the industry lobbyists and, if necessary, to have the cojones to insist there be changes.

I note that Bart (of all people!) is now calling for a bipartisan approach - a sure sign that the USA is in "deep doodoo".

Beware the croak of the Loathsome Spotted Reptiles, people. There is absolutely no reason why the ordinary tax payer should commit to a liability for up to US$1trillion of debt without far-reaching changes.

The primary deregulation culprit which must be remedied is not, Gramm-Leach-Bliley, as Bart would have it, but the Commodity Futures Modernization Act which Senator Gramm slipped as a 262 page amendment into the omnibus spending bill rushed though congress during the Clinton/Bush transition. The essence of the act was the deregulation of derivatives trading. Unsurprisingly, the legislation was lobbied for by Enron, a major campaign contributor to Gramm, and it exempted energy trading from regulatory oversight. That was the root cause of the Enron collapse as well as of the current poisoning of the financial system with toxic paper. Incidentally, I believe Gramm's wife was on the Enron board at the time.

But even pending the election, there are some urgent necessary reforms. One most certainly top of a sensible wish list is a provision to empower US bankruptcy judges to halt foreclosure proceedings on terms which are just and equitable. I would suggest another which would be a return to a cap on interest rates for consumer lending whether by way of credit cards or otherwise. 25%+ default rates are obscene.

Finally, pace Bart on another thread, I do think that when all this comes to be paid for, those who had unearned income by way of dividends supposedly paid out of profits which in fact were not profits at all should now bear some of the pain. I see no reason why Congress should not provide for the burden of this rescue to fall primarily on large corporations, the top 10% of taxpayers and those who have pre-retirement unearned income.

Since Bush has provided for a nationalisation programme which puts the post-war Labour Government to shame, perhaps the time has also come to "soak the rich" instead of the Reaganite formula of "soak the poor" in order to pay for it.
 

The internet seems to be awash with suggested names for the new institution to be created to hold the securities no-one else wants. Perhaps readers might like to think of some.

How about First Toxic Texan Bank? Or Securities Holdings Interim Trust?
 

"But leading Democrats said a Bill focused on Wall Street would be unacceptable unless accompanied by more help for homeowners. Barney Frank, chairman of the House Financial Services Committee, said the measures should include a second economic stimulus package with funding for infrastructure...

This fool is one of the most vocal Dems who opposed Bush's attempt to clean up the Fannie and Freddie mess back in 2003:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

It would be twice as foolish to listen to these people a second time around.

Bush needs to be assembling a coalition of Blue Dog Dems and GOP to pass a clean version of this bill without any riders or threaten to hang any failure to pass the bill on the Dem leadership's efforts to larder up the bill.
 

Apart from the impossibility of having a Dem Congress slow down the growth entitlements to fund this, the bill should initially be paid for with debt and then the profits from sale of these assets should be used to pay down the debt, which is how normal businesses would handle this.
 

Bart De Palma wrote:-

"The bill should initially be paid for with debt and then the profits from sale of these assets should be used to pay down the debt, which is how normal businesses would handle this."

Before calling the Chairman of the House Financial Services Committee "this fool", Bart should try to get through the very thick hide characteristic of all loathsome spotted reptiles and into his rudimentary brain the following simple fact:-

"Normal businesses" cannot handle this - in fact the world's biggest institutions cannot handle this. If they could, they'd be doing so and making profits.

That is why a taxpayer bail-out is necessary in the view of the very people responsible for the system which has been in Republican hands for the last 8 years. Those people were either asleep at the wheel, or were hoping the vehicle would not run out of gas before the November elections.

The present worth of the sub prime toxic paper is at best the value ascribed to it in the books of the various institutions holding it. For most of the sub-prime derivatives that is between 10 and 50 cents on the dollar.

The A+ derivatives are also at that kind of level or worse (those are the ones were no income verification was made).
 

Eric, I don't doubt that people on the left are talking about GLB. They think that tying this mess to Phil Gramm will somehow tarnish McCain. But, again, why do you think that GLB caused this problem? People like Tyler Cowen don't think that. They don't think that because its the pure investment banks that have run into trouble, not commercial banks with investment banking arms.
 

Well the clearest thing about it is that the Bush administration is one of the lamest ducks in our history, and the Congress shouldn't do anything major on this stuff until the next administration takes office.
 

Bart said:

This fool is one of the most vocal Dems who opposed Bush's attempt to clean up the Fannie and Freddie mess back in 2003:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

The subprime mortgage crisis began in 2007. (Wikipedia) 2003 does not equal 2007. The bubble burst in 2006, not 2003.
 

Not only will the Secretary be figuring out appropriate compensation for these people, he will also to a certain extent be deputizing a number of them to carry out a wide range of functions for the government.

Put differently, the Administration wants the Secretary to take over a sizable chunk of the nation's capital and insurance markets, and run them as a firm.

I think Balkin may be misunderstanding the proposal. The idea is to buy troubled assets off the firms' books, not to buy equity in the firms, as we did with AIG. So I don't think the Secretary's figuring out appropriate compensation for anyone, or running a sizable chunk of the nation's capital and insurance markets. Of course, I may be completely wrong, but I'm pretty sure about this.

Meanwhile, Obama's top economist (the one who went to Canada and assured the Canadians that we wouldn't really bail out of NAFTA) had this to say on CNN:

There is more information on the back of a box of Froot Loops than on what they've presented.

It would be nice to think that this remark reflects Obama's own position, but I doubt it.
 

I think of W. C. Fields looking in the bible for "Loopholes, Loopholes!" when I read of Treasury's proposal. Think of the Patriot Act, the Homeland Security Act, and other acts rammed (or is it reamed?) through Congress on the guise of patriotism and the need for immediate action, like "The sky is falling, The sky is falling." All members of the House are up for reelection and one-third of the Senate. Only a few weeks before the November elections. Based upon past performance, can we expect to be able to repent at leisure or will we be stuck? I'd like to hear the secret rumors on Wall St. of the potential gravy train - making lemonade out of the Treasury's proposal. Who besides Lisa's bro has confidence in Treasury's attorneys? Is John Yoo on Treasury's legal staff?
 

Tray is right about the way the press has reported the proposal, but the language of the statute gives far broader powers, including deputizing private entities to act on the government's behalf:

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
 

So there may be some deputization going on, although I'm not sure where the need for it would arise, but is it correct that "the Administration wants the Secretary to take over a sizable chunk of the nation's capital and insurance markets, and run them as a firm"? (I should note that Doug Elmendorf at Brookings says this is what we should be doing.)
 

mourad:

1) The banking system is in an unusual Catch 22. Unlike most businesses, Banks need daily large scale loans to operate. In order to get these loans, they need to use these novel assets as collateral. Thus, unlike most other businesses, the banks cannot hold onto the assets long enough to value the assets themselves.

2) Blaming the GOP for this fiasco will not hunt. This has been a Dem only show that has been brewing since Carter, was accelerated during Clinton and was Dem filibustered when Bush then McCain tried to clean up the Dem mess.
 

2) Blaming the GOP for this fiasco will not hunt

Bart, you are absurdly unqualified for this discussion. You chime in with ignorance and the extent of your contribution is worse than nothing at all.
 

It sounds like the Secretary is slated to become the Jerry Bremer of the U.S. financial system.
 

I think I see the problem, when our resident expert says "Unlike most businesses, Banks need daily large scale loans to operate."

And the solution is obvious. The banks should just borrow money from all the other businesses, who apparently have it in sackfuls.

That remark was -- inadvertently -- Stephen-Colbert-quality funny.
 

It would be twice as foolish to listen to these people a second time around.

With Dubya in thw Whote House for these last seven beleaguered years, and the Republicans in control of Congress a majority of that, and the House for six of those seven, not to mention for many years before that, why should we let the Republicans get a hold of anything sharper than a butter knife, much less hand them $600 billion to play with, unreviewable by the courts or anyone else?

Yes, past record is evidence of future performance. Throw the bums out.

Cheers,
 

As someone who has run securitizations (though not, I'm proud to say, of mortgages), who served on a bar association committee in the field, who took part in presentations on derivatives, and who has read the Commodity Futures Modernization Act with an eye to its many loopholes, I find the untruths being spread about the mortgage crisis to be deplorable and sickening. There are technical matters that one is either right or wrong about, and no talk will change any of that. What's worse though is to see the falsehoods spreading from the political campaign to this site.

Here are a few observations:

1. Fannie and Freddie, the quasi-govenmental entities that are being predictably flogged by John McCain, have next to nothing to do with the subprime crisis. In his June 14 op-ed Paul Krugman made this clear enough for a baboon to grasp, though only a baboon who wants to understand what went wrong, a variety as mythical as bigfoot.

2. Subprime loans proliferated out of a series of winks and nods among mortgage lenders, investment banks, rating agencies, lawyers good at looking the other way and sweet-talking their opinion committees, and time-serving employees of institutional investors good only at ticking off checklists. Once fees, relationships, and bonuses are dangled in front of the noses of such folks, nothing short of what we're now seeing can stop the partying. Some of this was brought out vividly on an episode of This American Life, but none of it will surprise a transactional lawyer.

3. Alan Greenspan was warned about the housing bubble yet did nothing to prick it. Far be it from him to stop a free-market party while the barf is just ankle-deep. To assign blame anywhere else within what passes as our government without understanding his role is to rewrite history without giving the ink a chance to dry. I used to think revisionism presupposed an initial version. No longer.

4. When I read the Paulson/Bernanke proposal I couldn't believe my eyes. As Jack and others here have noted, it is an invitation to another scandal. Could they at least have provided that consideration paid for toxic assets not include cocaine and sex, that institutions that benefit not be picked on political grounds? That the revolving door offer hydraulic resistance? Are we so panicked that we forget who these people are? If you are, I have a $700 billion bridge to Brooklyn that's the only way to escape another 9/11 for sale through this website.

5. Glenn Greenwald in a post on the crisis links to a 2002 discussion of derivatives by Warran Buffett to his investors. It concludes:

"In our view, ... derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

Anyone who thinks that as a general proposition these improvised time bombs with fuses of undetermined burn rate and length can be priced needs to lift their head out of their copy of Atlas Shrugged and have it examined.

6. There are myriad ideas in the air about solving the problem from below (for the people who only have one roof to live under); about freezing dividends, requiring equity infusions, and capping severance packages for the beggared firms; and about specifying the use of proceeds. But even within its four corners the proposal looks fishy. Krugman sees it as next to certain that assets would be bought up for more than their (overstated) book value if the aim is to rehabilitate the beneficiaries. In other words, the scheme is roundabout and hare-brained. The only thing it does is make a splash that might just convince the capital markets that something huge is being done and that any firm, however beleaguered, stands to be in on the take.

Here is my modest proposal: Appoint a task force to be chaired by Sarah Palin whose sole function is to post the troubled assets on ebay.
 

Observer, when you say that Fannie and Freddie had "next to nothing" to do with the subprime crisis, I assume you mean that, other than investing in hundreds of billions of dollars of subprime assets, the values of which declined so that the taxpayers needed to bail them out, Fannie and Freddie had next to nothing to do with the crisis. Not everyone means the same thing by "next to nothing", obviously.

For the others, I'd ask how the bill--this horrible, horrible bill that must be opposed because it doesn't give lawyers enough to do--compares to the New Deal-era legislation relied on by the Fed last week to bail out AIG.
 

Bored again:

2) Instead, deregulation SAVED tax payers money by allowing Treasury to arrange for private sector solutions. The 1999 Clinton era Gramm-Leach-Bliley deregulation statute eliminating the New Deal prohibition keeping banks from owning investment firms allowed the mergers rescuing Bear Stearns, Merrill Lynch and very shortly Morgan Stanley.

However, the GLB removal of the separation between various types of financial service institutions helped fuel the situation that required the "rescue" mergers in the first place.

3) It is doubtful that proactive regulation could have addressed the primary problem being addressed by the proposed legislation. The problem is that we invented novel financial instruments that no one was able to value when they went partially insolvent. There was no problem to address until this event actually occurred.

Of course, someone could have created a regulatory scheme in place that required financial services companies to actually value their "novel" instruments in a rational fashion, as opposed to creating scads of off book "value" and risk.

Ponzi schemes are never a problem until new investors don't pony up to pay off previous investors, also.

4) The other major problem was that Fannie and Freddie were extending mortgage credit to those who were not credit worthy. Mr. Bush and the Senate with McCain in the lead each offered legislation to clean up Fannie and Freddie, and in both cases the Dems and some GOP opposed tightening up credit standards because un-credit worthy Dem constituents would have been cut off.

To the extent that added regulation would have helped prevent this problem, it was the Dem Congress who stood in the way.

Of course, it really wasn't just Fannie and Freddie. The whole scheme, as many other financial transactions, requires a certain level of trust between the various partners. If the banks tell Fannie and Freddie that the loans they are underwriting fit within their criteria, to a large extent F&F trusted the banks. Then the banks trusted the brokers who were setting up these loans that the information they were providing to allow the bank to underwrite the loans was valid. And of course, there was a perversely high incentive for the brokers and banks to churn loans, because they could receive high commissions and sell "novel" financial instruments for huge cash liquidity, respectively (not to mention the executives who received enormous bonuses for creating high income streams, investment banks with significant payouts for shilling these instruments, et al.)

Oh, and by the way, don't pay attention to the man behind the curtain....

5) This bill DOES NOT offer unreviewable power to the Executive. This new entity will be authorized, funded and is fully reviewable by Congress. This is not a case where Congress is exceeding its Article I power to interfere with the President's Article II. Instead, we are dealing with an area completely within Article I and the Executive only has as much power to administer the program as is granted by Congress.

Unless of course Bush adds a signing statement saying that such oversight does not fit with his concept of Article II powers, so he can ignore it if he chooses.

6) This bill is nothing novel. It is modeled after the legislation enacted by the previous Bush and the previous Dem Congress to dispose of the assets of failed S&Ls.

Which is not exactly true, as that legislation was only used on failed banks, where the stockholders and executives already suffered from the moral hazard of a bankrupt company; the new legislation allows those who profited the most from the failure to stay on and on and on, apparently.

7) Marty, put your pathological hatred of all things Bush to the side for a moment, imagine that a President Kerry was in office and ask yourself seriously whether you would want resolution of what we agree is the worst financial crisis since the Depression bank failures to be delayed for months if not years under normal public contract regs? This is not the time for partisan BS. If the Dems in Congress during an election year can put this crap aside for the greater good, can you?

Bart, put your pathological hatred of all things Democratic to the side for a moment, and imagine a President Gore or Kerry who would not have appointed SEC choices who relaxed capital requirements and neglected oversight duties for the last 7 years. This is not time for partisan or class based BS. Banks and regulators screwed up in order to reap enormous profits, and the people hurting the most are not the stockholders and executives that are helped by this plan, but the consumer and mortgage holder who are trying to keep the house and middle class lifestyle that they have been told by both parties that they have earned and deserved.
 

fraud guy said...

BD: Instead, deregulation SAVED tax payers money by allowing Treasury to arrange for private sector solutions. The 1999 Clinton era Gramm-Leach-Bliley deregulation statute eliminating the New Deal prohibition keeping banks from owning investment firms allowed the mergers rescuing Bear Stearns, Merrill Lynch and very shortly Morgan Stanley.

However, the GLB removal of the separation between various types of financial service institutions helped fuel the situation that required the "rescue" mergers in the first place.

How do you figure? Be specific and do not follow the Obama nonsense about the "philosophy" of deregulation caused this.

BD: It is doubtful that proactive regulation could have addressed the primary problem being addressed by the proposed legislation. The problem is that we invented novel financial instruments that no one was able to value when they went partially insolvent. There was no problem to address until this event actually occurred.

Of course, someone could have created a regulatory scheme in place that required financial services companies to actually value their "novel" instruments in a rational fashion, as opposed to creating scads of off book "value" and risk.

These instruments had a market value and were bought and sold. Once again, the problem was valuation after they went partially insolvent.

BD: The other major problem was that Fannie and Freddie were extending mortgage credit to those who were not credit worthy. Mr. Bush and the Senate with McCain in the lead each offered legislation to clean up Fannie and Freddie, and in both cases the Dems and some GOP opposed tightening up credit standards because un-credit worthy Dem constituents would have been cut off. To the extent that added regulation would have helped prevent this problem, it was the Dem Congress who stood in the way.

Of course, it really wasn't just Fannie and Freddie.

F&F are involved in 90% of the mortgage market.

If the banks tell Fannie and Freddie that the loans they are underwriting fit within their criteria, to a large extent F&F trusted the banks.

F&F were not bystanders. They were very large and very corrupt financial entities equal to the largest banks and drove this train.

BD: This bill is nothing novel. It is modeled after the legislation enacted by the previous Bush and the previous Dem Congress to dispose of the assets of failed S&Ls.

Which is not exactly true, as that legislation was only used on failed banks, where the stockholders and executives already suffered from the moral hazard of a bankrupt company; the new legislation allows those who profited the most from the failure to stay on and on and on, apparently.

The companies and their stock holders have been financially decimated and their management teams have been getting canned. This purchase will at most allow them to stay in business - maybe.
 

Bart says,

"This bill DOES NOT offer unreviewable power to the Executive. This new entity will be authorized, funded and is fully reviewable by Congress."


This is from Section 8 of the proposed bill:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

This appears to contradict Bart's assertion, but perhaps it doesn't. What does the quoted section mean? If "no court" may review the Secretary's decisions, may the Congress? How can a law be passed that prohibits one part of our tripartite government from participating in the review of decisions or policies that flow from that law? Does this section mean Congress and the Executive may enact oversight over the Secretary's decisions, or only the Executive? Or not even the Executive?

Frankly, whatever it may actually mean, any provision of law that prohibits the courts from enacting their appropriate function where otherwise they would customarily do so seems to be illegitimate on its face, and certainly seems an attempt to claim unfettered power. Any proposed law that explicitly excludes an arm of our government from its customary role conveys more than anything else its ill-intentions.
 

Those interested in the role of Fannie and Freddie can see Brad Setser's analysis here. Bottom line? It was pretty small.
 

Robert

Congress may not strip itself of power via legislation that it can revisit and change any time it pleases.
 

Bart,

Well, how can Congress exclude the Courts from their proper role? How can a law be passed that will be impregnable to oversight by the courts, where appropriate? Why would a law be written that would attempt such a claim of imperviousness to oversight by the courts? What does this imply?

It tells me that those writing the law are attempting to put the fix in. It's a law written by crooks for crooks.
 

Corrections needed:

BD: Instead, deregulation SAVED tax payers money by allowing Treasury to arrange for private sector solutions. The 1999 Clinton era Gramm-Leach-Bliley deregulation statute eliminating the New Deal prohibition keeping banks from owning investment firms allowed the mergers rescuing Bear Stearns, Merrill Lynch and very shortly Morgan Stanley.

FG: However, the GLB removal of the separation between various types of financial service institutions helped fuel the situation that required the "rescue" mergers in the first place.

BD: How do you figure? Be specific and do not follow the Obama nonsense about the "philosophy" of deregulation caused this.

Strawman, Bart. Did I say the philosophy of deregulation caused this? Please cite an example.

BD: It is doubtful that proactive regulation could have addressed the primary problem being addressed by the proposed legislation. The problem is that we invented novel financial instruments that no one was able to value when they went partially insolvent. There was no problem to address until this event actually occurred.

FG: Of course, someone could have created a regulatory scheme in place that required financial services companies to actually value their "novel" instruments in a rational fashion, as opposed to creating scads of off book "value" and risk.

BD: These instruments had a market value and were bought and sold. Once again, the problem was valuation after they went partially insolvent.

Actually, their valuations were basically rigged from the beginning; most of the CDOs were sold in tranches, with the purported values of each tier based upon the creditworthiness of the underlying mortgages. However, those assumptions of creditworthiness seemed to be based on an ever growing housing market and economic growth, and once those assumptions were shattered, the valuation of any of the tranches became suspect, especially as the various financial institutions involved in selling, managing, and insuring these instruments realized that with the huge leveraging they had done (30-1 plus), that there was no way they could cover up anything that went wrong (for a humorous look at this, please go here).

And again, a Ponzi scheme works fine until the money runs out.

BD: The other major problem was that Fannie and Freddie were extending mortgage credit to those who were not credit worthy. Mr. Bush and the Senate with McCain in the lead each offered legislation to clean up Fannie and Freddie, and in both cases the Dems and some GOP opposed tightening up credit standards because un-credit worthy Dem constituents would have been cut off. To the extent that added regulation would have helped prevent this problem, it was the Dem Congress who stood in the way.

FG: Of course, it really wasn't just Fannie and Freddie.

BD: F&F are involved in 90% of the mortgage market.

FG: If the banks tell Fannie and Freddie that the loans they are underwriting fit within their criteria, to a large extent F&F trusted the banks.

BD: F&F were not bystanders. They were very large and very corrupt financial entities equal to the largest banks and drove this train.

Mark already covered this.

BD: This bill is nothing novel. It is modeled after the legislation enacted by the previous Bush and the previous Dem Congress to dispose of the assets of failed S&Ls.

FG: Which is not exactly true, as that legislation was only used on failed banks, where the stockholders and executives already suffered from the moral hazard of a bankrupt company; the new legislation allows those who profited the most from the failure to stay on and on and on, apparently.

BD: The companies and their stock holders have been financially decimated and their management teams have been getting canned. This purchase will at most allow them to stay in business - maybe.

But in a free market, do they not have the right to fail, also? And didn't many of these management teams earn bonuses (IIRC, over $5B last year) for creating this situation?

Again, the Brad Setser blog covers what the US and the rest of the financial community said after a previous big crisis. Bottom line, we used to think we shouldn't save investors who got themselves into such a mess, as opposed to small individuals who were caught up in bank failures (i.e., FDIC) .

But if Paulson's alma mater Goldman Sachs is involved, I guess it's OK.
 

Thomas,

I recommend to you (and "the rest of you" too) an article titled "Going Subprime" by Allen J. Fishbein (http://www.nhi.org/online/issues/125/goingsubprime.html).

In it the author describes how the two government-sponsored entities (GSEs), Fannie and Freddie, missed out on the subprime action throughout the 1990's but now should gear up to enter the frenzy. It is dated September/October 2002. If you can still find the investment banks' boasts about the year-to-year volume of their mortgage securitizations, you'll see that by that time the financial product was already in full swing, issuing the now-troubled paper in vast quantities. That was the article's point.

I have no interest in absolving the GSEs. They feasted on the carcass. I never said otherwise. But they are more hyenas than lions if we think in terms of a food chain. Krugman maintains that the GSEs collapsed not from their own sins but from the bursting of a bubble created by the backlog of subprime loans, which hit them particularly hard because their equity capitalization was unusually thin. This is not something we have to debate because the issue is not what happened to the GSEs but what happened to our nation's indebtedness for housing those who live within its borders. And what happened is that it got issued for bad reasons and then passed along, bundled up, and turned into collateral for paper that is now all over the lot and next to impossible to value.

This is not a schoolyard debate. There are indications that the risk of a US default is already being priced into US 10-year credit default swaps. That means it is now a betting proposition that our nation will default on its treasuries. What accounts for this, from top to bottom? What sort of things do we have to do about it? These are the questions.

The fact is that nothing passed through either GSE that a rating agency couldn't, and if honest wouldn't, have marked to market instead of marking it "to model" or, in Buffett's sobering phrase, "to myth." And had the agencies been engaged by those who paid for the paper instead of by the bankers, they might have done just that and issued something free of toxins. The conflict of interest is clear by now, though of course we'll never hear about it so long as the free-marketeers keep kicking up the dust. And that was among my points: people who've made off like bandits like things just the way they are, and so the easiest thing for them to do is find something that sounds vaguely governmental and regulated and then pin the blame on it. But what went wrong has nothing to do with the government.

Unless that is you mean the Fed Chairman Whose Name Must Not Be Mentioned (FCWNMNBM). The housing bubble reached the bursting point on his watch, and he let it happen despite all the warnings that came his way from those around him, who were hardly communists. There is no point wasting time on Barney Frank. He has been in the majority for all of two years, and even that perch has no power comparable to that of the FCWNMNBM.

Naturally no amount of information will change minds locked into the myth that market forces can do no evil unless somehow or other the government can be brought into the picture, even if all that distinguishes the GSEs from the run-of-the-mill private firm is an implicit federal backstop.

But I priced such stubbornness into my comment. I stand by what I said.
 

I think it is funny that in the a week the government will take 700 billion or more of new debt to buy things no investor truly understands and have suddenly and collectively realized have a likelihood of being almost worthless. Even the natives thought those glass beads might be valuable.

It's also amusing that the government is utterly paralyzed and doing far, far less than necessary about worldwide climate, energy and food crises which are only getting worse, but it's willing to commit many times more resources it spends on those obvious problems to a problem nobody knows how to properly define. There was a hurricane that's decimated Haiti and Cuba: I don't even see the destruction much played on the news. There is no serious discussion of lifting the US embargo on Cuba to help it, even though it asked, and the west is doing little, as usual, to help Haiti. But we'll quickly spend money buying "confidence" like some dork would for herbal viagra.

This crisis isn't like the dirty thirties either. There is no malnutrition in America, like then. There is no dust bowl. There are no mass suicides. Until there is a similar panic, I fail to see why such an enormous obligation should be shouldered by the American citizen and future generations which will almost surely severely constrain their ability to spend money on far more serious looming crises.
 

I've been a long-time reader and lurker but never a poster on this blog. I've been an investment banker for over 15 years.

occasional observer is 100% spot on.

Freddie and Fannie had little or nothing to do with the problems we're facing in the structured debt market.

Jeez, it's supply and demand -- there was so much demand for MBS the wildest of wild west mortgage companies were pumping out product as fast as they could get homeowners to sign the stack of paperwork. Millions of loans. Why? Because there were ready buyers, all the time, every minute of the day. THAT'S subprime. Heck, that's Alt-A.

At least Freddie and Fannie had SOME underwriting standards.

Because of the high demand for raw materials (mortgage loans) to manufacture products (RMBS), some of the investment banks actually vertically integrated, acquiring mortgage originators and servicers. For instance, Goldman Sachs owns one of the more predatory lenders/servicers of subprime/Alt-A out there, Litton Loans.

Now they're putting a gun to the head of Congress and demanding the Treasury sign a deal that they would never, and I mean NEVER, advise a client to sign. If they did, they'd be sued for gross negligence and they would lose.
 

I've been thinking about it and I say, contrary to Bart's confidence in our power to oversee, if necessary, the activities of the Secretary relating to the bailout, the language barring "any court of law or any administrative agency" from reviewing the actions of the Secretary in carrying out the bailout decreed by this law is, in essence, if not explicitly, an attempt to claim unilateral power, and to exclude the American people from the deliberative process guaranteed us by the Constitution, (virtually a dead letter at this time).

Bart says "Congress may not strip itself of power via legislation that it can revisit and change any time it pleases."

However, Congress does not customarily involve itself intimately with the everyday implementation and enforcement of law and policy. It is left to "administrative bodies" such as the FCC, the FTC, OSHA, FEMA, HUD, HEW, and so on to oversee the implementation of laws passed by Congress. So, while technically perhaps, this law is not "unreviewable" per se, (although, to reiterate, it does attempt--unConstitutionally--to exclude any courts of law from the review process), in practical fact, we know Congress will not be closely (or at all) overseeing the decisions and activities made in carrying out the bailout under this law.

This law hands practical unitary power to the person or persons who will be acting to carry it out, and this alone is reason enough to say no to the bill.
 

Let's go back to October, 2002, and George W's National Security Strategy that I have summarized on several occasions as follows:

"We're No. 1 military, No. 1 economically and No. 1 politically and we'll do whatever it takes to maintain these positions."

This from a Yale grad who majored in cheerleading and minored in history, and later at Harvard got an MBA while listening forelornly while in the Boston area to "Hillbilly at Harvard" on WHRB as he missed his Texas roots, after he bowed out of the Texas Air National Guard pre-emptively.

Young George played "King of the Hill," daring all to challenge him. He caused Congress to cower as he challenged members' patriotism. Yes, his facade has been finally exposed by Woodward (and others). (What took them so long?) But here he is defending America's No. 1 economic position with his "The Sky is Falling" mantra. Will Goldman Sachs benefit from Treasury's proposal? Will Paulson return to Goldman after January 20th? What directions are the lobbyists moving in to cash-in? This is the time for Congress to dig in its heels and seriously debate Treasury's proposal - actually read the proposal. Damn the November elections. Damn George W and all his accommodators. This may be the constitutional crisis that Sandy has alluded to. Lisa's bro will probably invest in lemon futures, hoping for lemonade. But pucker up, we're in for a long ride - and don't forget to spit out the seeds.

But don't worry, our cheerleader-in-chief is still here to rally us for the next 4 months. Let's see, where will the ball be spotted and how much time is left on the clock?

Meantime, we've got to listen to "Johnnie Walker (Red-state)" McCane [sic, sick, sicker] and Sarah "Blubba" Palin, the new reality show "The Old Man and the She" or "America's Got Political Talent." Sure, Palin is prettier and smarter than George W back in 2000, 2004 and currently. But can she field dress a Washington lobbyist? (She can practice with McCane's [sick] advisors.)
 

As we all know, all banking is based on the principle of taking in deposits (usually demand or short-term) on which little interest is paid and lending out those deposits long term (on which greater interest is paid). The bank makes its money (i) from the service charges it imposes and (ii) from the difference between interest received and interest paid (iii) less operating expenses.

The problem is that the taking of demand or short term deposits and lending them long involves making a representation to the depositor that the deposits will be repaid on demand (or when due) and that representation only remains truthful as long as only a few depositors ask for their money back at the same time. Hence the need to have a lender of last resort, and prudential requirements so as to avoid runs on individual banks.

In the good old days some of the very longest term lending (mortgage finance) was not financed not exclusively by banks but much more by mutuals called 'building societies' in the UK and, I think, 'savings and loans' in the USA.

I don't know about the USA, but when I got my first mortgage (1970's) I was required by my building society first to become a saver - I had to save up 20% of the deposit I was going to need with the building society I wanted to get my mortgage from. That took me 18 months or so. Then I had to prove income and ability to repay. Even then, I could not get a mortgage straight away, mortgage funds were rationed and I had to go in the queue. The whole process took about 2.5 years in order to get a 75% mortgage over 25 years. And I also had to pay up front the legal costs, stamp duty and survey fees.

In those days the building societies kept the mortgage deeds in their head office vaults. Sure, a society could borrow against the security of the deeds - but it was actually quite a complex process. If the sum to be borrowed was significant, the lender would want to actually do "due diligence" on the mortgage book - check what percentage were in arrears etc. Usually the building society would have a line of credit with a major bank and the bank's auditors would go into the head office of the building society once or twice a year and do their checks and the line of credit would be adjusted accordingly.

For me the problems both in the USA and the UK have their origins in the Reagan/Thatcher philosophy of deregulation coupled with the antipathy of both leaders to 'social housing' for those who could not afford to buy their own homes. That has, unfortunately been coupled with a nationwide philosophy of instant gratification - in the USA and UK people no longer save up for the new car or the new TV, they buy on credit. Thrift is no longer a virtue which is rewarded.

If you look at Europe as a whole, the percentage of home ownership - and credit card debt - is much higher in the UK than in the rest of Europe and in the USA it is highest of all.

In both the USA and the UK the political desire to turn both our countries into nations of homeowners involved putting pressure on the 1st tier lenders to make mortgage finance more accessible.

In the UK an initial part of the solution was encouraging building societies to package mortgage protection insurance into the process. Such insurance would cover a borrower's repayments in case of sickness or unemployment for up to one year. Thereafter the social security system would cover the interest payment on the loans but not the capital repayments. That enabled building societies to offer a higher proportion of the purchase price and reduce their prudential criteria somewhat.

In the USA Fannie Mae and Freddie Mac were developed. The first tier lenders were told - if your mortgage paper qualifies by meeting certain minimum criteria, we will guarantee you against the possibility of default. That guarantee enabled the first tier lenders to lower their prudential standards for the granting of mortgages. Nothing in principle wrong with that (except that by by the time mortgage papers were securitised and held world-wide, Fannie Mae and Freddie Mac were considered obligations of the US government itself. That is why the Administration had to bail out these guarantee institutions when the present crisis came).

In both the USA and the UK, the Reagan and Thatcher 'conservative revolutions' involved breaking down the barriers which prohibited the formation of multi-product financial services conglomerates. In the USA that brought Gramm-Leach-Bliley and we had similar legislation in the UK. That did not contribute directly to the present problems.

However, instead of the desired objective of increasing freedom of choice to consumers, it often had the opposite effect: instead of getting the different products needed on house purchase: mortgage, building and contents insurances, payment protection insurances, life insurance - all from different and competing entities, the mortgage providers put the purchasers under pressure to buy all the products from "their" insurance division - often on significantly worse terms than were available if the services were bought separately. The conglomerates got bigger, with a consequent increased regulatory risk.

In 1995 the G-8 and the IMF set up working groups to see what lessons could be learned from the Asian banking crisis. There was an October 1998 reportReport of the Working Group on Strengthening Financial Systems. It noted that:-

"The BCBS [Basle Committee on Banking Supervision] is engaged in monitoring the implementation of the Core Principles, undertaking work on enhancing bank transparency, updating supervisory guidance on banks’ derivatives and trading activities, providing guidance on loan valuation and provisioning, and investigating new techniques for constructing capital standards for credit risk. It is also engaged in several initiatives to strengthen corporate governance and risk management practices, especially credit risk management and internal controls.

So the great panjandrums of international banking regulation knew at this time there was a need for better banking supervision of derivatives and trading in them.

At this point the story of the USA and the UK diverge: the UK had two housing market and banking corrections and this led to the development of a much tougher regulatory regime with a single regulator - the Financial Services Authority. The big US legislative mistake was the Commodity Futures Modernization Act which Senator Gramm slipped as a 262 page amendment into the omnibus spending bill rushed though congress during the Clinton/Bush transition. It received no legislative scrutiny at all. It meant there was no regulatory oversight at all for derivatives trading. That, coupled with the absence of a single regulator, is the single biggest source of the toxic paper now infecting the system.

According to the British Bankers' Association, the credit derivatives market, which had just US$1 trillion in outstanding notional in 2001, quickly shot up to become an unregulated OTC market worth as much as US$20 trillion notional in just 7 years.

It was, of course, a housing bubble, that has caused the problem. The housing sector is inherently cyclical even if there is no interference in it. But when lenders reduce their criteria for mortgages to keep housing sales going during what is in all practical terms a recession, there is bound to be trouble. Lenders were still writing mortgage papers on dubious candidates for credit at a time where defaults on credit card receivables (also securitised these days) were rising. Prudent banking principles would have signified that at such a time one raises the criteria for long term credit. But no - improbable paper continued to be written and passed up the chain. And it has all been securitised and traded internationally: Prime, Sub-Prime, Alt-A, backed by credit default swaps (hence the need to bail out AIG).

At this point, virtually no banker trading internationally knows what these assets are worth (if anything) -and because their regulators are saying - don't lend any more until you recapitalise, credit in the international banking system has virtually dried up. And since the USA lives on foreign credit (and there is no prospect of a sudden surge in domestic savings deposits) there is a crisis. It was totally foreseeable. It could have been foreseen with proactive regulation - but the sector was deregulated.

I still think the Federal Authorities read the warning signs some time ago, but were just hoping to survive until a change of administration - indeed they almost made it - but the market caught on as well and moved quicker than the Administration had hoped.
 

1. Fannie and Freddie, the quasi-govenmental entities that are being predictably flogged by John McCain, have next to nothing to do with the subprime crisis.

Which makes perfect sense, since subprime mortgages are those that do NOT adhere to Fannie/Freddie's underwriting standards. Thank you, OO, for bringing some reality to the discussion.

Sometimes it seems that an entire layer of lenders is forgotten in these conversations. I admit they've mostly gone under and are therefore difficult to blame, but it would be a shame to ignore their role in the current lending situation.
 

robert cook said...

Bart, Well, how can Congress exclude the Courts from their proper role?

I noted in an earlier thread that the Courts will ignore any restriction which infringes upon their constitutional powers.
 

robert cook said...

However, Congress does not customarily involve itself intimately with the everyday implementation and enforcement of law and policy.

They do not need to do so. Congress simply needs to investigate this mess and order the Executive heads to report on their plans and progress.

If your Dem Congress does not want to take on this responsibility, I assure you that a GOP Congress would love to troll through the Dem corruption in Fannie and Freddie.
 

I think it is funny that in the a week the government will take 700 billion or more of new debt to buy things no investor truly understands and have suddenly and collectively realized have a likelihood of being almost worthless.

On Saturday night I had dinner with my best friend, who happens to have retired this year from a high position with a firm that most people would recognize. That firm owns (of course) a good amount of this paper. FWIW, his view is that the underlying loans will eventually pay off. For all the problems in housing, especially in certain areas, most people still pay off their mortgages. That makes this, in his view, a liquidity problem rather than an insolvency problem.
 

Bart, it is not "my dem congress." I certainly abhor George Bush and Dick Cheney, et al, for their criminal rampage of torture and mass murder abroad and mass spying domestically, but I equally abhor Nancy Pelosi and her Democratic peers who collude with the White House Gang in their evisceration and evasion of the law.

Neither do I conclude corruption in the financial markets is of either Democratic or Republican provenance; it obviously is a problem of bipartisan rot and subservience to corporate favors.

Frankly, we need a clean sweep of virtually all sitting Senators and Representatives, as well as prohibition against all corporate lobbying in Washington. It may not bring us better government, (in fact, I think it's too late to save our Republic or our "freedom;" I think we're done), but at least the scoundrels will be cast out.
 

Thanks, "S," for the additional details.

As I mentioned, This American Life had an account of the genesis and metastasis of the crisis. It gives the listener a guided tour through the sausage factory. It's the very antithesis of a screed and can't get enough circulation as far as I'm concerned.

The episode, aired on May 9, 2008, is titled "The Giant Pool of Money." It can be heard by clicking "Full Episode" at http://www.thislife.org/Radio_Episode.aspx?episode=355.
 

Bart tried to say...
2) Blaming the GOP for this fiasco will not hunt.

Neither will blaming everything and your halitosis on the democratic party.

This has been a Dem only show that has been brewing since Carter,

Just keep ignoring those silly facts getting in the way of your recreational politicking.
 

What's wrong with letting the idiots go bankrupt?

Sure there would probably be some liquidity problems in the short term, but the long-term effects on corporate risk management would be salutary. These crooks couldn't be trusted with investors' money, why should the taxpayers be any different? If Paulson et al. had wanted to be viewed as trustworthy, they would have taken steps to avert this crisis upon taking office.
 

What's wrong with letting the idiots go bankrupt?

Because it's kind of like letting that idiot Samson pull the temple down on his own head.

Credit is like the oil in your car. The rest of the vehicle may be sound (pace John McCain), but if you're leaking oil, you won't be driving very long.
 

The country is currently enmeshed in a very serious financial crisis, one of the most serious since the Great Depression. The causes of this crisis are many, but one of the most important is the deregulatory philosophy that has suffused this Administration.

Uhhmmm...what?

You do yourself a huge dis-service and make yourself look like a nut when you write stuff like this. You were on a roll, then I hit this and said, "Okay, and ignoramus who is clueless as to the when all this deregulation started."

Hint: It has been a bi-partisan effort. Don't let your partisanship blind you.
 

2) Blaming the GOP for this fiasco will not hunt.

In a shocking twist, Baghdad Bart is wrong again...

By a 2-to-1 ratio, Americans blame Republicans over Democrats for the financial crisis that has swept across the country the past few weeks, a new national poll suggests.
 

The Justice Department is balking at the request so far, administration officials said, arguing that the legal opinions would add little to the public debate because the administration has already laid out its legal defense at length in several public settings.
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