The American Spectator

Indiana Alex| 1.14.09 @ 9:17AM

By buying preferred stock in banks with much of the first $350 Billion at least Paulson, despite his many failures, ensures there will be some return on an actual investment.

Obama and the left now seem content throwing the rest of the $350 Billion out of hellicopters, proving that they really aren't seriously interested in "stimulus" so much as income redistribution.

Bob| 1.14.09 @ 9:31AM

Doug, it would be nice if you could deal with the real world here. While I believe in individual responsibility, that goes two ways -- to the purchaser and the seller. I was part of the sub-prime mortgage industry in the 90's and early 2000's. Let me tell you how these mortgages were sold. A sub-prime customer would come in and would be asked about their income. After seeing what they could afford on a monthly basis, the sales person would put them into the biggest variable mortgage they could find that had its initial rate within what they could afford. If the customer asked about the increases in the future, the sales person would say that you do expect to earn more in the future. And if you don't, given that housing prices always rise, you can just sell the home for more money than you paid and you'll be just fine. If the customer balked, the sales person would just say that people like them received mortgages every day, and they've done just fine.

Remember that the sale was high pressure and the sales person received commission on their sales. Since these mortgages were securitized, the company did not care if the limits were pushed because they would pay none of the price.

So Doug, when you talk about individual responsibility, you must talk about BOTH sides of the deal, not just one. Most low income people I've talked with do not understand mortgages, much less variable rate mortgages. All they understand is if they can afford the initial monthly payment and are so happy to get into a home -- especially for their children -- that they take the word of the sales person that they will be fine.

Of course you can take the low road and demonize Barney Frank, but the true conservative solution to this is to let the market work, insure that you regulate sales practices, only use the TARP for tax incentives for saved mortgages, and make sure that mortgage originators retain a good portion of the risk.

This type of AmSpec boogeyman rhetoric is beneath what conservatives should be doing. They should be promoting solutions and the leaders who present them. It is small of AmSpec to make as many personal attacks as they do.

Thomas| 1.14.09 @ 11:04AM

Bob,

It is nice to know that you were out there helping people who could not afford to buy a home buy one by selling them variable rate mortgages that, sooner or later, they could not afford to buy. Thank you.

And while it is true that there were many very aggressive lenders in the market, it is strange that you fail to mention the role of the Federal government in the sub-prime mess.

The sub-prime mortgage fiasco began with the over-zealous application of the Community Reinvestment Act by the Clinton Administration. During which time established banks were pressured lend according to the new, extremely low standards set by Fannie Mae and Freddie Mac. The Clinton Administration can not be held totally to blame for this, as certain "grass roots" groups had been engaging in tort backed blackmail of financial institutions to make similar loans for a number of years. To provide the banking industry some cover, all of these loans were to be backed by Fannie and Freddie. They were, in essence, government debt securities. Because of that, they were turned into financial investment instruments by the investment banking industry and peddled around the world. Unfortunately when the bubble burst, it was discovered that Fannie and Freddie could not cover the mortgages in default and the crisis was born.

Now there were a number of people in Federal Office who share the responsibility for this mess. And Barney Frank and Chris Dodd rank right at the top of those responsible. They were in the vanguard of those who protected the status quo at the two mortgage agencies, even while mismanagement, bordering on if not in fact criminal, was underway. Therefor, they are fair game for any recriminations as they were specifically hired to safeguard the interests of all of the American people.

Now, the whole point of the support of Franks, Dodd and many others, for TARP, was to cover their own posteriors. The program was sold as a means to buy up the bad debt instruments and make the Federal government responsible for these bad debts. Hank Paulson, once he was given the money and authority, changed course immediately and embarked upon his own program. Whether it is going to be effective or not has yet to be seen. The fact remains that, once again, the American people were lied to without apparent consequence to those doing the lying.

One thing that may surprise you is that I agree that the United States government should buy up all the delinquent mortgages that were made by financial institutions that made them in good faith following the direction of the federal government and the rules set down by Freddie and Fannie. There was a promise, by the Federal government, that these mortgage instruments would be insured by the quasi-public mortgage entities, Fannie Mae and Freddie Mac, and the government has, so far reneged on the contract. Now, as unpalatable as it may be, we, the people of the United States, hired [elected] the Congress to represent us as our agents and we are bound by their promises.

As for other aspects of the "bailout", most of those should be rejected out of hand. The increased meddling in banking practices should be discouraged, as that was what got us into this mess to begin with.

Just a thought.

Bob| 1.14.09 @ 11:40AM

Actually, Thomas, the branches did not report to me as I served an ancillary function. But I never supported many of the methods that were used in the branches and spoke out against them. It did not make me popular in the company.

I totally agree that the Federal government should hold some responsibility including the CRA which was also heavily supported by Bush. Where I disagree is putting primary blame on the CRA. In my opinion, the primary blame is the unregulated presence of securitization and allowed leverage in investment banks of 30 or more. If lenders were required to keep much of the risk, these types of loans would never have been made notwithstanding the CRA. The lenders knew (and I know as a fact) that there would be problems with many of these loans. When the CDO's became security instruments, the capital requirements supporting them were virtually non-existent.

True analysis, then, would not blame the CRA, but would blame ineffective regulation to force mortgage originators to keep some of the risk. Believe me, if a company knows they must keep the risk, they will be far more careful in who to loan to.

I agree with you on the bailout. I was against the TARP and against the auto bailouts. I am for a pragmatic, non-ideological stimulus plan, however.

ruth| 1.14.09 @ 12:55PM

Should have known: Bob was a CRA facilitator. 'Splains' a lot.

Sean| 1.14.09 @ 1:02PM

The conservative solution to this problem is to keep the government out of this. These banks deserve to fail. These people deserve to lose their homes. Why keep these home prices artificially high?

ruth| 1.14.09 @ 1:19PM

Liberal low-income home ownership policies led to this meltdown. They are to blame for our bankruptcy. Who will stop them? Especially when they work hand in glove with thug groups like ACORN who blackmailed banks into making bad loans. Corrupt demos like Barney Frank own this mess, just watch him weasel out of it. Bob helps him all he can.

Thomas| 1.14.09 @ 4:13PM

Bob,

The allowable leverage limits had to be lowered or the institutions that were being "encouraged" by the Clinton administration to make questionable loans would have been unable to make as many as the government wished. Likewise the securitization had to be allowed or the banks could not divest themselves of the debt and write more. These relaxations encouraged predatory lending companies, some of whom were banks themselves, to enter the market whole hog. As for the CDO's becoming unregulated security instruments, they were believed to be guaranteed by the federal government through Freddie and Fannie. When that turned out to be untrue and the government shrugged and said tough, this caused the now famous economic meltdown.

The CRA was not the culprit here, rather the use of it by the Clinton administration to essentially strong arm the banks into making loans that they would otherwise not have made. The Clinton team re-wrote the rules of the lending game with the support of certain members of Congress.

The point is simply that the federal government directly and indirectly encouraged this situation to develop and then simply walked away when the crash came. And someone in government besides the American taxpayer has to pay. Yet government justice is prevailing once again. Because guess who is paying, "just us".

Bob| 1.15.09 @ 8:58AM

Thomas, you are wrong about lower leverage limits. I worked at AIG in the early 2000's and there was no pressure to increase leverage. Given a rising housing market, everyone in the business wanted to leverage their capital against this market. To believe otherwise is to rewrite history. There was no regulation limiting leverage in the first place so the leverage was not "lowered".

You are also wrong about securitization. We were doing securitization as early as the late 80's. They didn't morph into derivatives until the power of computers enabled that in the early 2000's. It is important to get history and the facts correct when doing this analysis.

Therefore, the federal government didn't have to encourage this situation, they just had to continue down the path of deregulation that started in the early 80's. Those are the facts. I just wish more people would learn what the facts really are rather than recreating boogeymen and a false history.

The government should have recognized the problem starting in the early 90's and regulate the investment houses and securitization limits. This is not to say that the government didn't make the problem worse by NOT acting. But there was no constituency that wanted changes.

jsmee| 1.15.09 @ 9:28AM

Thomas,

The CRA was isnt' the entire problem, simply the equivalent to letting the genie out of the bottle. The overwhelming amount of subprime mortgages weren't originated simply to comply w/ CRA but instead to allow people to buy what they can't afford and rack up large fees. When mortgage bankers and banks no longer kept skin in the game, they issued the most profitable mortgages they could (aka risky). Banks borrowed more not to comply w/ regulations but since leverage makes returns even bigger (oh, and losses even larger, but ignore that- we're playing w/ house money).
As for CDOs, there never was an understanding that Fannie and Freddie would save the day. Agency backed MBS were not pooled into CDOs, since CDOs retranche risky assets. Since by their definition agency MBS are guaranteed by Fannie / Freddie, there is no credit risk, only prepayment risk which is averted by CMOs which aren't at the heart of the problems. The problem w/ CDOs were the unquestioned reliance on rating agencies, thinking that mortgage prices only go up, and because they only go up, you don't have to worry about correlation converging to 1 when they all come crashing down. Now, the one place people relied on were insurance wraps (aka the monolines, MBIA, AMBAC, XL, etc...), but that is entirely independent of the fannies and freddies.
End of the day the real issue though was the consumer. Even if this technology made the stuff available, it was their fault for taking. My girl friend sums it up best by sayingif you try on a new dress, of course the salesperson will say you look great in it. The difference is housing represents just a little larger percent of our income, and thus bad decisions that much worse.