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The Bailout Bill: What Should Congress Do?

There are two reasons to hate the Bailout bill. One is that it does the wrong thing; the other is that it gives the Treasury Department too much discretion. One internally consistent view is that nothing should be done. Another view, internally inconsistent but much more popular, is that the Treasury should be given even more power but that it should have less discretion. Not only should Paulson have the power to buy up mortgage-related assets; he should also have the power to make equity investments in distressed firms. Yet at the same time these critics—Paul Krugman is just one of many—say that the Bush administration is a bunch of clowns who can't be trusted. Paulson seems like a smart person but so did Rumsfeld and Cheney. How will he resist the temptation to pay too much for mortgage-related assets, so as to give a big windfall to millionaires? A good point. So then why give the Bush administration even more power than it is asking for?

Well, there is a way to square this circle. We give Treasury unlimited power but then we insist that it be subject to checks and balances. At this point, critics become vague. What are these checks and balances to be? We could imagine that whenever Paulson buys an asset or an equity interest, affected parties could challenge the purchase in court. Litigation would ensue, with the judge trying to determine whether Paulson paid too much. For equity investments, the inquiry would be even more complicated, with judges needing to determine whether an entire firm is a good investment rather than a more-or-less fungible asset. Judges are hopeless when it comes to making pricing decisions like these. Other types of review mechanisms could be imagined; perhaps they will be staffed with independent experts. But as oversight mechanisms are piled on, the flexibility needed to restore confidence will be lost. Perhaps there is an optimal tradeoff between flexibility and review but I have seen no serious discussion of this issue by proponents of alternative plans.

Meanwhile, the Democrats have good reason to worry. Under the current plan, if Paulson pays too little for an asset, he won't stop the business from going under. If he pays too much, he enriches its shareholders. He has every incentive to pay too much and generate a class of grateful investment bankers when taxpayers won't be able to tell in any event, in the process avoiding a financial crisis but generating large costs way down the line and considerable distributive unfairness in the short term. Democrats in Congress are responding not by making it impossible for Paulson to pay too little or too much --- as I have said, it simply has no way of doing that by statute because the pricing decision is a seat-of-the-pants judgment that can't be dictated in advance and can't be reviewed by courts after the fact. Instead, Democrats are preemptively playing the distributive game that they fear that Paulson will be tempted to play, and ensuring that their constituents will get a piece of the pie —- so far the idea of restrictions on foreclosure has been advanced, as has a "stimulus plan" which will presumably pay out cash to moderate- and low-income people whose votes Democrats want to lock up. In effect, the Democrats are willing to swallow the agency costs of the plan but ensuring that transfers to Republican constituents will be balanced by transfers to Democratic constituents.

wm13:
The shareholders of financial institutions are not, in general, investment bankers, so the claim that funneling too much money to financial institutions will create a class of grateful investment bankers is a little confusing to me. A little more analytic precision would be appropriate.

Once upon a time, someone could have pointed out that a high percentage of the stock of Bear, Lehman et al. was owned by its employees, who were investment bankers. As of this morning, however, there are no more investment banking firms.
9.22.2008 10:02am
veteran:
courtesy of URBANSURVIVAL.COM where full article and financial insights can be viewed


As you know, the current plan proposed by the Treasury - and now being rushed through approval is designed as follows:

*

Financial Institution with 'bad paper' will be able to sell their paper to the government.
*

The government will then sell this paper to other investors at whatever discount they need to in order to 'keep the system alive'.
*

The buyers of this paper from the government have no incentive to bid up prices because the farther the asset valuation falls, the more money the bankers will make.
*

Ultimately, the public will fund the difference between the current valuation of the instruments and however low these same investment bankers can drop their bids.


The new deal structure would look like this:

*

Financial Institution with 'bad paper' will still be able to sell their paper to the government.
*

But because the government will sell only a maximum 10% private share (the rest being the public's skin in the game) the markdowns would likely be less.
*

The public would retain a 90% ownership position. Thus any profits made by the paper vultures would be diluted 10:1 and the public compensated for its risk.
*

In this way, the public would make back much of its initial cost and the debt load on the American financial system would be lessened dramatically - reducing the ultimate cost of the bailout dramatically.
9.22.2008 10:16am
MR:
Related, but overlooked:

How come more people (especially you Libertarianly-inclined folks) aren't upset about the SEC's ban on short-selling of 799 financial companies? Such a ban ensures that the financial market is an inefficient market. See, e.g., In re Polymedica Corp. Securities Litigation, 453 F. Supp.2d 260, 278 (D. Mass. 2006) (refusing to find efficient market--in context of securities fraud class action--where defendant demonstrated significant barriers to short selling). To me, that kind of restriction is more infuriating than the type of broad market intervention above where the government at least pretends to operate as any other (deep-pocketed) investor.
9.22.2008 10:22am
erp:
"The Bailout Bill: What Should Congress Do?"

Congress has already done as much damage as they can possibly do and now it's time for them to go home and let those who know how clean up their mess.
9.22.2008 10:28am
Gabriel McCall (mail):
Judges are hopeless when it comes to making pricing decisions like these.

So are Congress, the Federal Reserve, the Treasury, and any other third-party oversight bureaucracies. Pricing is such a difficult, fluid, and subjective subject that the only people who are adequately incented and qualified to make pricing decisions are the people who actually succeed or fail based on the outcomes of those decisions. The government has no incentive for and no expertise at getting pricing right; only private investors do.

In other words, if profit-seeking investors are unwilling to buy an asset, the government should not either. And if those investors are willing to buy it, then there's no need for the government to get involved anyway.
9.22.2008 10:30am
Gabriel McCall (mail):
How come more people (especially you Libertarianly-inclined folks) aren't upset about the SEC's ban on short-selling of 799 financial companies?

Oh, we are.
9.22.2008 10:37am
Benjamin Davis (mail):
I still think government would do better to make mortgage payments for mortgage owners for a period of time. Even though the owners in the program lose a decent credit rating, they stay in their house until they get their act together which keeps neighborhoods stable. As to the folks on Wall Street - the flow through from this stability would help to make these same mortgages more liquid so that the market can find its price for the risk on the future stream of payments for the mortgages. But hey this involves helping out people who are not rich - I guess that's a bad idea.
Best,
Ben
9.22.2008 10:39am
Craig Oren (mail):
My understanding of the proposed legislation is that it bars judicial review of any decision made by the Secretary pursuant to the Act. So we won't have claims in court that, "the Secretary paid too much."
9.22.2008 10:45am
wm13:
Gabriel McCall: Huh? The Treasury and the Fed buy and sell securities every day. No one has ever suggested that they don't get fair prices.

In general, government agencies sell securities by auction, and, as several commentators have noted, the bailout agency would probably buy securities by reverse auction. Competition among sellers should generally assure fair prices.
9.22.2008 10:52am
BruceM (mail) (www):
If the government can prevent a financial depression by spending a crapload of taxpayer dollars in a way that will provide no other tangible benefits to the country, its citizens, or its infrastructure, does the government have the duty to do so? Does the government have the power to do so?

It seems to me that keeping the DOW up is not an expessly enumerated power of any branch of the US government under the Constitution.

Capitalism means companies will fail. It even means big companies will fail. We The People decided that we no longer wanted rules and accountability to get in the way of our realization of short-term gains, and now we're paying the price of that decision. We should have to pay it. The American People get what they deserve. We get the government we deserve and we get the economy we deserve. Nothing more, nothing less. And this will all continue under non-black McCain.
9.22.2008 11:09am
Connecticut Lawyer (mail):
First, congrats to Eric for an informative and interesting post. This is much better than most of the stuff in the financial press.

Second, from what I understand, the Paulson bill would leave him with complete pricing discretion. As a savvy old I-banker, that's undoubtedly what he thinks he needs. Why signal to your customers what you are willing to pay?

From my perspective as a taxpayer, though, I would be disheartened in the extreme if the Government were planning to take any losses at all on these loans. I can understand the Government stepping in to provide some liquidity, in order to unfreeze the credit markets. But it should not pay a dime more for any of these loans than it can recover, either by reselling, if the market for them recovers, or by holding to maturity. Indeed, the Government should be planning to make money on this program, not lose it.

Merrill Lynch sold its portfolio of mortgage backed securities for 22% of face value. That's a lot less than you would recover if you held to maturity, considering that only about 10-20% of the underlying mortgages are in default. So maybe Paulson ought to be paying a bit more, maybe 50% of face value.

I don't know what the right price is, but if Paulson can't figure out what to pay that won't require me, the taxpayer, to subsidize the bad business decisions made by the banks, then this program should not be put in place.
9.22.2008 11:17am
Lakini (mail):
These National Socialists banned short selling prior to the Great Depression, and it led to widespread starvation. These fools never learn, they just think they have and make matters worse. Ron Paul! :o)
9.22.2008 11:20am
Gabriel McCall (mail):
The Treasury and the Fed buy and sell securities every day. No one has ever suggested that they don't get fair prices.

No one? Really? I'm pretty sure that somebody, somewhere, might have suggested that underpriced fiat securities are actually a fundamental factor leading to this sort of mess.
9.22.2008 11:20am
Andy Freeman (mail):
> Merrill Lynch sold its portfolio of mortgage backed securities for 22% of face value. That's a lot less than you would recover if you held to maturity, considering that only about 10-20% of the underlying mortgages are in default.

Don't you wish that you could have gotten in on that deal, even at 25-30%?

> So maybe Paulson ought to be paying a bit more, maybe 50% of face value.

No. If "the market" will only pay 22%, the govt shouldn't pay more.
9.22.2008 11:25am
veteran:
Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power: Benito Mussolini
9.22.2008 11:58am
J. F. Thomas (mail):
Remember, Paulson, as the former CEO of Morgan Stanley is one of the "geniuses" who created this mess. Giving him a $700 billion blank check to fix something he is partly responsible for breaking is a profoundly bad idea.
9.22.2008 11:58am
PLR:
Paulson seems like a smart person but so did Rumsfeld and Cheney.
Has their intelligence been quantified to be lowish?
Remember, Paulson, as the former CEO of Morgan Stanley is one of the "geniuses" who created this mess. Giving him a $700 billion blank check to fix something he is partly responsible for breaking is a profoundly bad idea.
Never mind. Too easy.
9.22.2008 12:33pm
Elliot123 (mail):
"Yet at the same time these critics—Paul Krugman is just one of many—say that the Bush administration is a bunch of clowns who can't be trusted. Paulson seems like a smart person but so did Rumsfeld and Cheney."

Remember, a few months ago Krugman told us Fannie Mae and Freddie Mac were solid institutions and didn't have any subprime paper.
9.22.2008 12:35pm
Cleanthes (mail) (www):
People who presently own stock in financial companies want to sell them. So do short sellers. If the short sellers are prohibited from selling, then the plutocrats I mentioned in my first sentence will get a higher price.
Aha. Follow the money.

Meanwhile, vast numbers of dollars are going to be allocated to an opaque market. If all the credit default swaps and stinky mortgages were liquidated, that would cut down dollar supply to a large degree. If the plan, by whomever and however managed, erases the decrease in dollar supply exactly, then there should be little overall effect on the world market. A deflationary effect will be balanced by an inflationary effect.
Balancing the inflation with the deflation will require financial acumen greater than the acumen of a gymnast performing triple twisting leaps on a balance beam. How many gymnasts can fit on a balance beam and still do triple leaps?
Paulson and Goldman Sachs and the Chinese government are already on this balance beam and leaping like crazy. But, hey, lets add some more folks. An inflationary explosion or a deflationary split-S are only theoretical, if high probability risks.
9.22.2008 12:38pm
Francis Marion (mail):
If Congress does not pass Secretary Paulson's proposed legislation ASAP, there will be a global wide Great Depression. Period. This isn't about bailing out Wall Street, this is about preventing the fatal seizure of credit extension that keeps our economy alive. If Paulson's legislation is not passed, then all major financial institutions will cease to extend credit to anyone, including Main Street financial institutions. This means that Main Street businesses will not be able to obtain the short term credit necessary to meet basic recurring obligations such as payrolls. (For you law professors, this means that your students will not be able to renew their loans.) Car loans will cease to be extended to any potential car buyer. Any Main Street business that is seeking to obtain a new loan to payoff an existing loan that is coming due will be unable to do so. In short, unemployment will skyrocket into double digits and there will be a new wave of mortgage defaults just in time for Christmas. The foregoing will commence a death spiral where financial institutions are forced to recognize more bad debt as a result of the new wave of defaults. The stock market will be virtually wiped out as investors seek to liquify assets by selling stocks (in 1929 the stock market declined 89% when all was said and done) thereby further reducing household wealth.

Critics on the left and right can whine all they want about Paulson's proposed plan, but I have yet to see anyone step up to the plate and propose a better idea that can be enacted within days because days is all this economy has to survive. Congress has had all summer to debate various proposals and hold hearings but now is the time to act instead of engaging in cheap election year posturing. There is plenty of time for academics to engage in Monday Morning Quarterbacking but right now everyone needs to quit running around pointing a finger and either become a part of the solution or get out of the way.
9.22.2008 12:42pm
PC:
If Congress does not pass Secretary Paulson's proposed legislation ASAP, there will be a global wide Great Depression. Period.

So on the precipice of a global catastrophe we should rush to pass legislation offered up by the people who had no idea this catastrophe was going to occur. Why is this a good idea?
9.22.2008 1:06pm
Eli:
Prof. Posner,

"transfers to Republican constituents will be balanced by transfers to Democratic constituents" - I presume this means that the investment bankers are the Republican constituents and the moderate- and low-income people are investment bankers

No need to get caught up in inaccurate Democratic party rhetoric . . . most investment bankers on wall street are liberal Democrats
9.22.2008 1:19pm
Andrew Hamilton (mail):
How will Treasury know how to price the assets it buys? Will there be a market for these assets?

The focus of the Paulson plan is said to be on "illiquid assets." Buy buying unmarketable securities, Treasury will "unfreeze" a market that has ceased to work.

Under current "mark to market" accounting rules, such illiquid assets must be marked on balance sheets as having no value. But while "toxic" in the sense that no one knows how much risk the assets bear, they are clearly not of zero value. Some fairly high percentage of the mortgages backing these securities will remain sound. The payment streams will be reduced, but not to zero.

Treasury would buy the securities at the lowest price on offer. Institutions that need to clear their balance sheets will bid to sell to Treasury. As the perception spreads that these assets are no longer illiquid, two things will happen. Accounting rules will begin to rate the assets at the market price, improving balance sheets of all institutions that hold them. People who see an opportunity to make money by purchasing the securities either from Treasury or from other offerors will begin bidding. The market will again be setting the price. Treasury can now bow out, selling its stock of assets as their values improve.
9.22.2008 1:53pm
J. F. Thomas (mail):
No need to get caught up in inaccurate Democratic party rhetoric . . . most investment bankers on wall street are liberal Democrats

I doubt that there has been a poll of investment bankers on wall street, but I find this assumption to be highly dubious. More likely they are traditional (as in pre-Reagan) Republican--socially liberal yet fiscally conservative.

Critics on the left and right can whine all they want about Paulson's proposed plan, but I have yet to see anyone step up to the plate and propose a better idea that can be enacted within days because days is all this economy has to survive.

If we are going to bail out Wall Street, we deserve an equity stake in these firms. Nothing less is acceptable. Giving a blank check to Hank Paulson, who is partially responsible for this mess, so he can unilaterally, without any checks or balances, decide who gets billions of dollars in taxpayer dollars, is madness. It makes him above the law and turns this country into a Kleptocracy.
9.22.2008 1:58pm
wm13:
In my experience, Jewish investment bankers probably run about 90-10 Democratic, of the Clinton Democrat variety, i.e., socially liberal and economically conservative, whereas Christian investment bankers run about 60-40 Republican, of the Rockefeller Republican variety, i.e., socially liberal and economically conservative.
9.22.2008 2:27pm
Francis Marion (mail):
I've renewed my contacts with certain Congressional staffers. If Paulson's legislation does not look like it is going to pass by Thursday evening as proposed, I'm cashing out my modest six figure investment portfolio. I know how this train wreck is going to end if Congress doesn't act expeditiously.

For those critics complaining that Congress should not be rushing, Congress has had all summer to get its act together, hold hearings, etc. The clock has simply run out on any better alternatives and I have yet to see someone step up to the plate and offer a better alternative that can be passed within the next three business days.
9.22.2008 2:39pm
Elliot123 (mail):
"So on the precipice of a global catastrophe we should rush to pass legislation offered up by the people who had no idea this catastrophe was going to occur. Why is this a good idea?"

Thursday morning wasn't a precipice. It was real. The sell orders were in prior to the open. There was no time to sit around and talk. There are no time-outs in this game. Nobody is going to wait.

Actually, the administration did submit a bill to Congress several years ago that would have taken over management control of Fannie Mae and Freddie Mac. The knew it was coming. McCain also sponsored a bill to do the same. Warren Buffet told everybody it was coming.
9.22.2008 2:43pm
Andy Freeman (mail):
> More likely they are traditional (as in pre-Reagan) Republican--socially liberal yet fiscally conservative.

Would it be poor form to point out that the vast majority of their political donations go to dems?
9.22.2008 3:27pm
PLR:
I've renewed my contacts with certain Congressional staffers. If Paulson's legislation does not look like it is going to pass by Thursday evening as proposed, I'm cashing out my modest six figure investment portfolio. I know how this train wreck is going to end if Congress doesn't act expeditiously.

Nobody cares if you do that.

Maybe if you threatened to move to Canada and cease paying taxes to Uncle Sucker Sam ...
9.22.2008 3:49pm
Rob M.:
Assuming that we're painted into this corner as some people imply. I'm all for averting financial Armageddon and all that. But I would like to see one amendment before congress turns over the checkbook.

1) 90% of the entire congressional pension plan is to be allocated into the "investments" that Paulson makes. Proportioned according to the amount of taxpayer money used.
9.22.2008 4:23pm
PC:
If Paulson's legislation does not look like it is going to pass by Thursday evening as proposed, I'm cashing out my modest six figure investment portfolio.

If Paulson's proposed legislation is so critical, why did he say a "limiting executive compensation" component was added to the bailout bill it would be a "poison pill?" If this situation is so dire that we have to act now I don't see how limiting executive pay would be worth spiking the entire bailout.

So is the situation not that dire? What other reason would Paulson have for saying this? Why should we trust the former CEO of Goldman who was part and parcel of this mess? How much stock does Paulson have tied up in Goldman? Would there be any conflict of interest in handing a blank check to someone with a vested interest in making sure his former (and possibly future) employer does well?

If taxpayers are going to pay for this mess, taxpayers deserve some questions answered. If the questions don't get answered then I say no bailout and let it burn.
9.22.2008 5:16pm
Randy R. (mail):
I have no absolutely no idea why Paulson would consider the limiting of executive pay to be a poison pill. What exactly is he protecting here? The right of a very few number of people to earn tens of millions instead of hundreds of millions?

Perhaps someone can explain why it is so necessary that we allow people -- who are running a gov't institution at this point -- to such disproportionate profits. Or else what? What is the downside to limiting executive pay?
9.22.2008 6:06pm
Ed Unneland (mail):
It seems to me (though I could be wrong) that the reason for eliminating judicial review in the bailout bill is the ongoing (!) Winstar-related litigation in the Court of Federal Claims over aspects of the Savings and Loan cleanup. I wonder if anyone else has tied Winstar to Section 8 of Treasury's proposal.
9.22.2008 6:44pm
CiarandDenlane (mail):

We could imagine that whenever Paulson buys an asset or an equity interest, affected parties could challenge the purchase in court. Litigation would ensue, with the judge trying to determine whether Paulson paid too much.


What "affected parties" would have any incentive to say Paulson paid "too much"? Taxpayers? Competing buyers disappointed that they didn't get to scoop up the assets for less? It doesn't strike me that either group would frequently have both standing and a practical incentive to sue, and I'm not familiar enough with high finance to know who else you might be referring to.

Litigation would probably be pretty much a one-way ratchet to pressure Paulson to pay more, turned by folks who would still have had the option not to sell to him at all.

Granted, I can see the potential for unfairness, favoritism, and a whole lot of other bad things. But I don't think transaction-specific judicial review will be a solution.
9.22.2008 9:23pm
Big Jake:
I don't think many of you understand the nature of our economy. We're all screwed. Here it is plain and simple.

IF BAILOUT BILL IS PASSED: 700 Billion debt dollars added to economy. Goodbye dollar value, hello massive inflation. And in about 15-20 years we'll have another massive credit bubble, and we'll be in the situation again and proposing the same solution. Its a vicious cycle.

IF THE BAILOUT IS NOT PASSED: the economy will collapse on itself. An implosion if you will. This will last for however long it takes human beings to produce enough goods and services to catch up with all the dollars we printed from thin air. 3 - 5 - 10 years, lot of hard work but when's done we'll have a fresh start and the chance to give the power to print money back to Congress instead of placing it in the hand of bankers.

Look guys, you have to understand banking history and monetary theory. We are preserving a system that is destined to die. We are living on borrowed time and borrowed money as long as we continue to engage in this foolishness.
9.22.2008 10:30pm
fishbane (mail):
Competition among sellers should generally assure fair prices.

Which is why we never had to bail out financial firms to go tits up, given that they're Smarter Than That.
9.23.2008 12:28am
MY02Worth (mail):
If Congress does not pass Secretary Paulson's proposed legislation ASAP, there will be a global wide Great Depression.

Much of the legislation fostered by the current administration is dependent upon this "fear-mongering" hype. We've allowed unfounded drama to force us to accept whatever extreme can me imagined. We give up our rights and surrender to the prevailing "voice" that without "insert panic legislation here", we're doomed!

I find it ludicrous that so many of those imploring us to swallow this ill-conceived legislation are the same ones that were emphatic that there was LITTLE wrong with the greed and short-sightedness of Wall Street.

I also like that everyone has their own crystal ball and can assuredly say, that without passage of the bill, world-wide collapse is imminent. But, when Secretary Paulson (and I'm sorry, but I don't find him the brilliant man that he's been accredited with by some), was asked about this bill working, his comment was, after stuttering around without an ounce of confidence, that it "had to work." Not a very persuasive selling feature.
9.23.2008 11:46am
CuriousBystander (mail):
Can someone please tell me what happens when rest and the majority of the (more costly) mortgages held by struggling middle-class America default? Do we do this again six months or a year from now?

I say let these banks pay the piper... that's what we have to do when we screw up.

This is not going to end well.
9.23.2008 8:32pm
AllenCharles (mail) (www):
A better plan to stabilize the financial markets is to simply let the Federal Deposit Insurance Corporation take over the insolvent companies and form a holding company and reopen as one large institution. Just as when the FDIC takes over smaller banks the same rules should apply here. The new holding company can then operate the new banks keeping the good accounts and spinning the bad ones to a second operating company to work through them eventually restoring some of them and liquidating the rest. If any legitimate debt holders are established then stock could be issued to these legitimate debt holders ( likely bond holders). After a period of time this new company could do a stock offer selling the entire company back into the private sector. Problems solved, seven hundred billion of tax payers money would be saved. The cost of the new company would be returned back to the taxpayers from proceeds of the sell of the stock at the return to the private sector from government operation. The fat cats on Wall Street could be returned to work for the new company but like all reorganizations at a lower cost to the new company allowing it to return to health much faster.

The Federal Reserve System looks at all the deposits at all the banks as one total, so this new bank would not alter the loan patterns from what it would be with if all these various banks that would be part of the new holding company were operating separately. All the bad things being claimed by Mr. Paulson would be avoided with this plan and the best part of this plan are NO TAXPAYER costs beyond the administrative cost of the new bank holding company.

AllenCharlesReport
http://allencharlesreport.blogspot.com/
9.24.2008 5:31am
accountant:
I could do without anarky comments on Palin in this context. Anyone who can negotiate a pipeline deal has sufficient economic vocabulary. None of the other presidential and vice presidential candidates have ever negotiated or approved a large multi-year contract or had budget responsibility for anything as large as the State of Alaska.

In general, I'm in favor of statutes that can be readily understood by reasonably intelligent taxpayers and whose merits can be reasonably debated by the folks we've elected to represent us. Honestly, I'd rather have the opinion of Sarah Palin than the opinion of a guy who thinks Roosevelt was president in 1929.
9.24.2008 7:30pm
Mac (mail):
I have heard that one reason the "deal" has fallen apart is that the Democrats want a 20% payout of the 700 billion to go to Acorn, a Liberal Democrat housing/community organizing group who has been repeatedly involved in voter fraud. (Caught red-handed). Has anyone else heard this? The voter fraud part are my words based on prior events.
9.26.2008 12:34am
Mac (mail):
Honestly, I'd rather have the opinion of Sarah Palin than the opinion of a guy who thinks Roosevelt was president in 1929.

What is scarier is that Biden thought FDR went on national tv to give a speech in 1929.
9.26.2008 12:35am
CountryGent (mail):
Let's look at the root cause - if we want to find out what has happened we have to look for the root cause.

In 1977, the Carter Administration (with a Democratic congress) passed the Community Reinvestment Act, which was either a well-intentioned attempt to allow people who could not afford to buy homes a chance to get loans anyway, or more likely an attempt at social engineering. The Act was strengthened by the Clinton Administration in 1995. In no small way, this revised Act created the market for subprime loans; the first securitization of (subprime) loans based upon the revised Act, was done by Bear Stearns in 1997.

Note who it was who then went on to manage Fannie and Freddie right into the ground. Since these institutions were also required to make a certain percentage of their loans to people who otherwise would not have qualified, and since they lobbied Congress to allow their executive compensation to be based upon the amount of assets they held - regardless of the quality or actual worth of those assets - these institutions went heavily into the subprime market. Since everyone thought that Freddie and Fannie were backed by the full faith and credit of the US Government, nobody questioned whether the collateral was worth what the originators of the loans said it was. Freddie and Fannie inflated the balloon...to the point it popped. And it was no accident who was running them.

But...still, the root cause is the Act. Who were the people behind it?
Barney Frank?
Chuck Shumer?
Who else in the current Congressional leadership?

And we should go along with what they want to do now?
9.26.2008 10:59pm
Fred Psimas (mail):
It is troubling to me that the best investment the federal government can find to spend 750 billion dollars they do not have is non performing foreclosed homes that willo be worth 50% of what they pay for them the day after they buy them. A better investment would be to buy 750 billion dollars worth of nuclear powerplants, windmills, and solar farms. These assets produce energy and jobs and would probably a return on investment of less than 10 years. Maybe if 866 billion dollars was not leaving the country every 12 months in the form of dollars for imports, US incomes would be high enough that people could actually afford to buy homes. If citizens are not making money, guess what, they cant buy houses. When is someone in Washington going to realize that the root cause of the current economic issue is the trade deficit? Take a look at the last page of the economist magazine. You can see the countrys that have positive and negative trade deificits. Our trade deficit of 866 billion is 4 times worse than any other country.
9.29.2008 11:15pm
Joy (mail):
I thought congress was suppose to represent the people. From what I see Most american people are against this bill. I think we should show them who really is in control and pull all our money out of the banks.

Since congress wont do their job correctly. We need to do it for them. We have the right to take our money back from those who caused this in the first place.
10.3.2008 2:58pm
Smells like class warfare (mail):
Wow... CountryGent is incredibly misinformed.


In no small way, this revised Act created the market for subprime loans; the first securitization of (subprime) loans based upon the revised Act, was done by Bear Stearns in 1997.

LOL... loans have been securitized forever. http://en.wikipedia.org/wiki/Mortgage-backed_securities


Since these institutions were also required to make a certain percentage of their loans to people who otherwise would not have qualified, and since they lobbied Congress to allow their executive compensation to be based upon the amount of assets they held - regardless of the quality or actual worth of those assets - these institutions went heavily into the subprime market.

1. FNMA and FHLMC don't even make loans.
2. What FNMA and FHLMC do is buy conforming (as in non-subprime) loans.
http://en.wikipedia.org/wiki/Conforming_loan

Did you know loan sharks make loans at usurious rates to members of minority groups? I guess they're motivated by the desire to serve minority groups too, right? Or maybe, just maybe, it's the case that both loan sharks and subprime lenders lend money to members of minority groups (at higher rates) because they think they can make money by doing so. Bottom line, subprime lenders (which Fannie Mae and Freddie Mac were not) wanted to make money, not serve some higher social goal.
10.3.2008 3:44pm
Ebenezer Addy (mail):
As a concern lawful permanent resident, I believed, those wall street CEOs are fully responsible for the downturns. Therefore, if one CEO have four(4) houses, two or three must be seize or freeze and put up for sale as a way of generating income for tax payers dollars lavish for bailout.
Thanks, E.A
10.24.2008 3:59pm

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