Posts filed under “Bailouts”

Plan “B”

Markets are looking ugly around the globe. Investors are voting on the bailout plan with their feet. The crisis is now accelerating.

This is a speech I’d like to hear either one of the candidates give. The man who expresses these views (or something close to it) gets my vote:


My fellow countrymen:

These are indeed extraordinary times. The country is in an economic crisis, housing has been in freefall, we are clearly in a recession, and now credit freeze is  worsening. We are living through what future historians will call The Great Financial Crisis of 2008.

Times such as these call for extraordinary leadership. Unfortunately, such leadership has been in precious short supply in Washington D.C. Our government has been reacting to events, rather than pro-acting. Its been all crisis management — putting out fires rather than preventing them. We have been on our heels, playing defense. That is not leadership; that is not considering possible events, and planning accordingly.

It is time for this leadership vacuum to be filled.

We have made some positive steps: A $700 billion-dollar bailout plan was passed by Congress last week, and while flawed, it is a first step. It is the biggest bailout bill in America’s history. But now is not the time to sit back and wait for results. We need to consider the next steps that must take place as a follow-on to this rescue plan, as well as contingency plan in case things do not go as we hope. Pray for the best, but be prepared for the worst.

We need a "Plan B."

I propose the following: As of this morning, I have sent invitations to our nation’s brightest financial and economic thinkers. It doesn’t matter if they are in academia, or the private sector, or in government. It matters not to me if they are a Democrat or a Republican or Independent. Your country needs you, and I hope you will answer the call.

It is time for us to get on the offense.

What is needed now is for the intellectual capital in this country to be put to good use. We have many of the world’s finest universities, we have unparalleled genius amongst our populace. Rather than merely rely on a hastily crafted on-the-fly  plan, improvised in response to the eruption of crisis, its time we used our brains. We need to be both optimistic, and at the same time, we must always have a contingency plan. A great nation such as ours deserves at least that much.

What we need is our generation’s economic equivalent of the Manhattan
project. That’s what helped the United States and her allies develop
the A-bomb and to win WWII.

For the past 8 years, we have ignored our greatest strengths. We have disdained reason and science. We have lived in an imaginary fairytale land, where home prices never went down, where inflation and unemployment were low, and economic growth was strong.

That turned out to be a phantom dream, based upon an illusion.

We now know that much of the growth of the past few years was based on these faulty premises: That we could borrow our way to a better lifestyle, that our financial institutions could speculate their way to profits, that we could deficit spend our way to prosperity. My friends, that is not how you achieve economic greatness. We need to strengthen the economic engine of the United States in every way we can. To do that, the president of the United States needs to take counsel from the wisest men and women in the land.

I invite my opponent to participate in this, to sit side by side with me, and receive counsel from these experts together with me. Whichever one of us win this election next month, he will need to hit the ground running. This crisis is bigger than the election, it’s more important than either one of us. It’s of great significance to the country, indeed, to the world. (Far greater importance than you would have guessed from the response from the present White House).

In the absence of leadership from the White House, it is incumbent upon the two men seeking that office to show the economic leadership that has been missing.

We are challenged to rise to this occasion. When presented with great challenges, America has always responded with greatness of our own — and this is one of those times. We are being tested, and we must succeed — not with just a barely passing grade, but with flying colors and honors appropriate for a great nation.

Given the extent of the financial crisis, and the extraordinary amount of resources that we must bring to bear upon this, in order to prevent this recession from spiraling into something far, far worse, we must leave no stone unturned, no idea unexplored, no action unconsidered.

As a nation, we have weathered terrible crises before: The Depression in 1929, World War 2, Recessions and economic disruption, the attacks of 9/11. The United States has been tested, many times in her past, and has always risen to the occasion every time. The Great Financial Crisis of 2008 is merely another one of those tests that allows the country to demonstrate what its people are capable of — what we are made of — what makes us Americans.

This will not be easy. Sacrifices will have to be made. For a period of time, we must put aside our our own self-interest and work together as one nation. There is no room for partisanship. There is no time like the present to embrace our future. And there is no country like the United States of America.

God bless you, and God bless America.

Category: Bailouts, Credit, Politics, Taxes and Policy

Stephan Roach: Huge Setback for US-style Capitalism

Part I

click for videos


Part II


Part III


Category: Bailouts, Credit, Currency, Video

Fannie Mae and the Financial Crisis

The Sunday New York Times has a very interesting article on Fannie Mae and the current financial crisis. They do a decent job at delving into the complexities of the GSEs, and the many factors that went into the decision making at the senior level of the company. This includes pressure from clients such as Coutrywide CEO Angelo Mozilo, pressure from Congress, and the demands from investors for the company to be more aggressive. Most of all, it looks at the ongoing competitive demands of the market place that Fanny was in.

The key to understanding the GSE story is grasping their role within the bigger picture of the economy and housing sector. While there are some pundits who prefer talking points over reality (Charlies Gasparino, Lawrence Kudlow, James Pethoukoukis, and Jeff Saut all toed the GOP line) I prefer to keep all of my analyses based on the data and facts. Rather than creating historical revisions for partisan reasons, I prefer to keep it reality based. (I’m an independant, and that’s how I roll).

The current housing and credit crises has many, many underlying sources. Its my opinion there were two primary causes leading to the boom and bust in Housing: A nonfeasant Fed, that ignored lending standards, and ultra-low rates.

This nonfeasance under Greenspan allowed banks, thrifts, and mortgage originators to engage in all manner of lending standard abrogations. We have detailed many times the I/O, 2/28, Piggy back, and Ninja type loans here. These never should have been permitted to proliferate the way they did.

The most significant element were the 2/28 APRs, and their put back provision. Just about all of these gave the securitizer/repackager the right to return the loans within 6 (or 12) months if they went into default. Hence, our proposition that the 2002-07 period was unique in the history of finance. If any of these mortgages went bad within 6 months, the undewriter was on the hook.


In a rising price environment, 99% of the mortgages were not returned by the securitizers to the originator. From 2001 to 2005, the mortgage firms thrived. However, once prices peaked and reversed, things changed. From 2006-08, Wal Street began putting back mortgages to originators in greater numbers. This led to nearly 300 mortgage firms imploding.

We can blame the lenders, the securitizers, the borrowers, and Fannie/Freddie, but it doesn’t matter much. By the time Fannie and Freddie began changing their mortgage buying rules, the Housing boom was already in full gear, and the crash was all but inevitable.

Some people (especially the political hacks) are focusing their energies in the wrong places. According to a recent investigation by Barron’s, Fannie’s biggest problem was not the subprime mortgages they bought  — it was the better quality Alt A mortgages that caused their demise:

“As Freddie Mac Chairman and CEO Richard Syron recently put it, the GSEs have been hit by a “100-year storm” in the housing market, accentuated by some higher-risk mortgages that they were forced to buy to meet government affordable-housing targets.

The latter contention is more than disingenuous. A substantial portion of Fannie’s and Freddie’s credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers’ income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers.

In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.

Only pure partisans take as gospel the statements of an embattled CEO whose own words are belied by the firm’s balance sheet and P&L statements.

What about the ultra low rates? Consider that the Greenspan Fed maintained a 1.75% Fed fund for 33 months (December 2001 to September 2004), a 1.25% for 21 months (November 2002 to August 2004), and lastly, a 1% Fed funds rate for 12+ months, (June 2003 to June 2004). That was fuel for the fire, and fed the boom even more, sending prices skyward.

And not just here . . . As the central bank for the largest economy in the world, the Fed’s rate action had repercussions in Housing markets everywhere. Rate cuts here richocheted around the world, sending home prices upwards globally.

Read More

Category: Bailouts, Federal Reserve, Real Estate, Short Selling, Taxes and Policy

Did JPM Cash Call Bring Down Lehman ?

Winston Munn

Category: Bailouts, Credit, Finance

Graphic Depiction of Finance Crisis

Nice collection of charts and graphics over at the BBC.  These two are my favorite: > ~~~   > > Source: Finance crisis: in graphics BBC, Friday, 3 October 2008

Category: Bailouts, Financial Press

The CRA: Its a Racial Thing . . .

Georgetown University’s legal and finance scholar Emma Coleman Jordan, and Bill Moyers look at the noise machine, which seems to be operating at full tilt:

BILL MOYERS: There’ve been a lot of voices on cable channels recently blaming this bubble, this crisis, the cause of all of this catastrophe we’re in right now, on poor people who took out mortgages that they couldn’t afford to buy home they wanted. They shouldn’t have. Watch these clippings and tell me what you think about them.

LAURA INGRAHAM: 1995 when Bill Clinton decided to tell, you know, Robert Rubin to rewrite the rules that govern the Community Reinvestment Act and push all these institutions to lend to minority communities, many very risky loans, that was a noble idea, perhaps, but that certainly wasn’t following free-market principles.

NEIL CAVUTO: I don`t remember a clarion call that said, Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.

LARRY KUDLOW: It’s time for the Congress, Republicans and Democrats, to stop encouraging, exhorting, and forcing banks to make low income loans with no documentation. Stop that. The community reinvestment act which was passed in the mid nineties, which was extended in the early 2000s, literally pushed these lenders to make low income loans.

BILL MOYERS: Lending to minorities and risky people. Do you see this, are they seeing this as issues of race and class?

EMMA COLEMAN JORDAN: Absolutely. And it’s a cynical manipulation. It’s reprehensible. And, in the worse tradition of Lee Atwater and the Willie Horton ad, to use race as a wedge issue to make people who pay their mortgages believe that the people who are getting the benefit of the 700 billion dollars, that we’re being asked to pay, are poor, minority people who caused the crisis.

This is unconscionable. This problem is not a problem that was caused by the Community Reinvestment Act. The data is very clear that the Community Reinvestment Act loans were being offered in a way to people that were much more responsible and had none of the characteristics of default that are being attributed in this discussion. And what this does is to say, this problem is a problem that was caused by black people.

And it means that it gives an opportunity to bring up that old wedge. But I think the people in the country are smarter today. I just don’t think it’s going to fly. I think that people understand that the enemy is not a person who got a home loan and was tricked into getting that loan by a fast-talking broker who originated the loan but that the problem was the securitization process, the high leveraging that Wall Street was doing, the lack of regulation.

Click for video:


Emma Coleman Jordan
October 3, 2008

Category: Bailouts, Credit, Real Estate, Video

So Much for the Bailout Rally . . .

Category: Bailouts, Markets, Psychology

SEC Deregulation Let Banks Leverage Up

We’ve discussed this extensively over the past few weeks, but its now on the front page of the NYTimes: “Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April…Read More

Category: Bailouts, Corporate Management, Credit, Derivatives, Taxes and Policy

Cato on the Financial Crisis and the Bailout

Cato, the right leaning think tank, rails against the bailout.   I am not sure Cato fully understand how the crisis came about, as indicated by their ongoing emphasis deregulating Wall Street. 

Still, this is well done and interesting . . .

Category: Bailouts, Video

Casualties of the Financial Crisis

October 1, 2008
The U.S. Financial Crisis Is Spreading to Europe

WASHINGTON — Barely a week after Europeans rebuffed American pleas to join in their bailout of the banking system, Europe now faces a financial crisis almost as grave as that in the United States — demonstrating how swiftly this contagion is spreading around the world.

In the last two days, governments from London to Berlin have seized or bailed out five faltering banks. In Ireland, where rumors of panicked withdrawals from banks spooked the stock market, the government has offered a two-year blanket guarantee on all deposits and bank debt.

Asia has been less buffeted by the turmoil, though a brief run on a bank in Hong Kong last week brought back dark memories of June 1997, when speculation against the Thai currency sparked a financial crisis that fanned rapidly across Asia, and later to Brazil and Russia.

Economists see a parallel between these two crises a decade apart: once creditors panic and begin to pull out their holdings, the underlying health of banks — or entire countries — no longer matters a great deal. In a global financial system, national borders are porous.

“In this day and age, a bank run spreads around the world, not around the block,” said Thomas Mayer, the chief European economist at Deutsche Bank. “Once a bank run is under way, it doesn’t matter anymore if you have good loans or bad loans. People lose confidence in you.”

In a sign of how vulnerable Russia remains to contagion, officials halted trading on the Moscow stock exchange for two hours on Tuesday morning, fearing investor reaction to the House’s rejection of the Bush administration’s bailout plan. Trading resumed, and after President Bush vowed to win approval of the package, shares bounced back.

“People ask, ‘What on earth is happening with Russia?’ ” said Roland Nash, chief analyst at Renaissance Bank in Moscow. “Russia is reacting to the unprecedented size, complexity and danger coming out of the U.S.”

The shock waves could reverberate to the United States, experts said, since Russia has plowed its oil wealth into American debt, including Fannie Mae’s. Russia has additional problems, including unstable oil prices and a newly assertive foreign policy that is unpopular with many investors.

The trigger for the loss of confidence in Europe, Mr. Mayer and other experts said, was the Treasury Department’s decision two weeks ago to let Lehman Brothers fail. That ricocheted through European markets, hurting banks and retail investors with exposure to Lehman.

It took a few days longer for Europeans to digest the implications of the collapse. But now that they have, they are turning a remorseless eye on other institutions they suspect of being vulnerable.

As the White House scrambles to retool its rescue plan for the financial system, the global creep of the crisis has far-reaching implications, administration officials and outside experts said.

It is likely to move Europeans to mount a more coordinated effort to shore up banks, a move that the Treasury secretary, Henry M. Paulson Jr., pleaded for last week. President Nicolas Sarkozy of France is calling for a minisummit of leaders in Paris on Friday.

“We all agree that the method by which everyone comes up with ad hoc solutions in his corner the moment a crisis starts in a financial company isn’t a systematic enough method,” said Prime Minister Jean-Claude Juncker of Luxembourg, chairman of a group of European finance officials.

On Tuesday, France and Belgium threw a $9 billion lifeline to Dexia, a Belgian-French lender — a day after Belgium, the Netherlands, and Luxembourg cobbled together $16.2 billion to rescue another bank, Fortis.

Europe’s woes could place additional burdens on an American plan, as more banks fall into distress. If the Treasury wins Congressional approval to buy mortgage-related securities from banks, how it prices those assets will affect the solvency of European institutions.

Some of these banks suffer a form of guilt by association by being in the home lending business. Others, like Fortis, lack a strong base of deposits, which acts as a buffer against credit-related jitters.

Countries that suffered housing bubbles — like Ireland, Britain and Spain — are especially vulnerable, as are several Eastern European countries and other emerging markets, which are running steep current account deficits and low foreign currency reserves.

Ireland’s finance minister, Brian Lenihan, traced his country’s predicament back to Lehman Brothers, saying that the American authorities “were mistaken in permitting that bank to go to the wall because it has had very serious consequences for the world financial system.”

The Irish plan guarantees bank deposits and debt for customers and creditors of six banks. That makes the government responsible for $400 billion, twice the country’s economic output.

Experts predict a rash of bank failures in Europe, though some say the process may prove less politically fraught than in the United States, given the tradition of nationalization there.

So far, the hurdle to a broader plan has been the European Union’s legal and political restrictions that require burden-sharing and consensus. “The Europeans are more rigid and rule-based than the Americans,” said Simon Johnson, a former chief economist at the International Monetary Fund. “But when things get bad enough, they’ll find the flexibility.”

One red flag, he said, is UBS, the giant Swiss bank that is heavily exposed to mortgage-related securities and is headquartered in a small country that is not a member of the union. “Opinion is divided as to whether Switzerland could bail out UBS,” Mr. Johnson said.

Beyond individual banks, the United States has to worry about the health of major holders of American government debt, from Russia and China to oil-producing states in the Middle East.

Russia is a particular concern, experts said. With oil prices swooning and its own banks in crisis, it is coming under financial strain. If the Russians were to sell off their American debt holdings, it could depress the dollar and multiply the cost of a bailout.

Russia has already begun whittling its vast foreign reserves to finance an aid program for its banks. American officials said shifts in foreign holdings of American debt were not great.

Other big creditors, like China, are in better shape financially, according to experts. But even there, growth is slowing, as trans-Pacific trade dries up. Should that contraction be traumatic and cause a banking crisis, it could lead the Chinese to sell their American holdings, these experts say.

The dollar has also remained remarkably stable, given the turmoil on Wall Street and in Washington — another sign, economists said, that foreign investors have not yet lost faith in the United States. Partly, though, that reflects a paucity of other safe places to invest money.

“We would run into a huge problem if foreigners lost confidence,” said Kenneth S. Rogoff, an economist at Harvard. “The rest of the world will give us several swings at the ball before they give up on us.”

Carter Dougherty contributed reporting from Frankfurt and Andrew Kramer from Moscow.

Category: Bailouts, Credit, Taxes and Policy